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X` hp x (#%'0*,.8135@8: (h  p k`G 1  1 y!h'TTLddXh'y  1 ! 1 A,&L9&dd,& W X` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:#$A\VTRONICS  K:  $#,: qP; ,P#Professional Court Reporting $& Transcription $Phoenix, ArizonaX` hp x (#%'0*,.8135@8:6uC;,;/3Xu&_ x$&7XX8wC;,'[hXw P7XP2Jd"Sh ^;C]ddCCCdCCCCddddddddddCCȲY~~wCN~sk~CCCddCYdYdYCdd88d8ddddJN8ddddYYdYddddddCCCCYddddddddd8YYYYYY~Y~Y~Y~YC8C8C8C8ddddddddddYdddddsdddddddd~d~d~d~ddddddddd8ddddoddd~d~d~8~8vddddddkNkdkd~d~d~dddddddYCdddCC/NdddCYQQddddddFddddFCdhhd44ddzzdddwooChF"Ȑdhd岲dCCȐzȲCddodȐȅdCdYdsȐ`ȐȐȮzȐUwŐdȐYYCCCCŐz~ozoY~NYYYC8YooYdYzsdzdd~YYzozzz~CdzYzzzzCCdddddddzCzdYC  ӆbs "  \,  \,\\ #_ p^7#IFEDERAL COMMUNICATIONS %COMMISSION #  P7G P#   y %\> dddyb   \\ y %\dddy  k  # _ p^7D #HERITAGE REPORTING CORPORATION  W ! #Xu&_ x$&7/3XX#Official Reporters#Xw P7[hXP# 1220 L Street, NW, Suite 600 "Washington, D.C. #r(202) 6284888In Re:` `  hh# ` `  hh# En Banc in Connection with Report to Congress on Universal Service Pages:` ` 1 through 106 Place:` ` Washington, D.C. Date: ` ` March 6, 1998 0*ZZ     X` hp x (#%'0*,.8135@8:0*H&H&@@ includes the current highcost fund, DEM weighting and LTS. That should continue, with the exception that the existing 114 million for highcost for large LECs, major LECs, should be withheld. ` `  Thank you very much. ` `  MR. KENNARD: Thank you, Mr. Lubin. Mr. Smiley. ` `  MR. SMILEY: Good morning, Mr. Chairman and Commissioners. My name is Jim Smiley. I am Regional Vice President for US West, with responsibility for four western and midwestern states. I have been involved with universal service both in and outside the beltway, and I can tell you, the further you get from Washington, the more real and difficult the problems of universal service become. ` `  I would like to commend you, Mr. Chairman, for taking the time recently to travel to North Dakota to see and hear firsthand the unique universal service issues that we face in the west. Our territory is a land of extremes. And while the monthly cost to serve customers in downtown Fargo is in the $20 range, the average cost to serve customers in our Wyndemere, North Dakota exchange is $170 a month. And there are even further examples, as Mr. Hagen mentioned earlier. ` `  In fact, in our 14state territory, US West has over a quarter of a million customers a quarter of a million customers who cost in excess of $100 a month to%?0*H&H&@@ serve. ` `  In spite of these extremes, US West customers receive almost no support today from the universal service fund. And how can this be? Well, the reason is simple. Customers in Fargo subsidize customers in Wyndemere. Business customers subsidize residence customers. And intralata toll and access services subsidize basic resident service. ` `  Congress, we believe, correctly recognized that this implicit support was not sustainable in a competitive marketplace, and called for a system of specific, predictable, and sufficient explicit support to be developed by this Commission. ` `  US West believes that the proposed 75/25 plan does not meet this requirement. And we are not alone in this belief. ` `  Attachment one to my exhibit summarizes what others are saying. Members of Congress from all 14 of the states in which US West operates have written, pointing out that the shortcomings of the 75/25 plan and calling for a national commitment to universal service. ` `  Public utility commissions, state legislators, economic development organizations, and other representatives of rural America have spoken loud and clear about the need for a comprehensive national plan.%@0*H&H&@@Ԍ` `  When you file your report to Congress in April, you must address these concerns. Otherwise we will be faced with a system of information haves and havenots, based solely on where people live and the size of the telephone company that serves them. ` `  Mr. Chairman, in your speech to NASUCA last month you suggested that all implicit support currently in the intrastate rate structures must remain within each state. The chart and the words that Mr. Hagen used earlier clearly illustrate the wide disparity that this would create. ` `  There have been other suggestions about how to address this problem. The ad hoc NARUC plan would base funding on statewide averages of costs. A 100percent national fund, in our mind, clearly the best solution, faces the problem that lowcost states may seek a court challenge that would delay muchneeded explicit funding. And we absolutely, positively cannot delay the new fund beyond 1/1/99. ` `  To form an equitable and workable plan, some way must be found to lighten the load on the states with the most extreme situations. To address this need, US West today is proposing an alternative plan that assigns all customer costs above a higher superbenchmark to the interstate fund, leaving the remaining universal service costs for recovery under the 75/25 formula.   <This has been%A0*H&H&@@ referred to as the 30/50 plan in previous conversations. ` `  When these superhigh costs are removed from the intrastate equation, the extreme differences between states are greatly reduced. And we believe that the states can then solve the remaining problems themselves. >>Our specific proposal is summarized in my exhibit. ` `  Congress directed the FCC to develop a plan to ensure the provision of affordable service in all regions of the nation. It is universal service. And we believe that our proposal can accomplish this goal. US West would be pleased to work with you and your staffs to further develop such a middleground plan. ` `  Thank you. I look forward to your questions. ` `  MR. KENNARD: Thank you, Mr. Smiley. Mr. Griffin. ` `  MR. GRIFFIN: Thank you. I'm Haynes Griffin, Chairman of Vanguard Cellular. Thank you very much for inviting me to speak at this En Banc hearing on behalf of Vanguard. ` `  Vanguard is a large independent cellular provider, and provides service to more than 685,000 customers in 29 markets in the eastern part of the US. ` `  As you know, Vanguard has been an active participant in the Commission's universal service proceedings. I have been asked to speak today about Vanguard's position on the allocation of universal service%B0*H&H&@@ funding between the FCC and state regulators. At the outset, I should note that Vanguard, like many other providers of wireless service, believes that commercial mobile radio services are subject only to FCC universal service funding requirements, not to state requirements. ` `  No matter how that question is resolved, however, the allocation of financial responsibility for universal service between the federal and state jurisdictions is important. The FCC and the states should focus on the fundamental purposes of the new universal service requirements in Section 254. These purposes do not include shifting funding responsibility to the federal level. ` `  There is also no evidence at this time that there is any need to create new subsidies at the federal level for what are now intrastate costs. Section 254, together with amendments to Section 214, creates a new universal service regime. There are there key elements to this regime, one of which the funding for schools, libraries and rural health care is outside the scope of today's discussion. ` `  The second element of the new universal service regime is expanding eligibility for universal service funding so all competitors have an equal incentive to serve all subscribers. Vanguard, which serves a significant rural population in many of its service areas, expects that this element of the universal service program will give it the%C0*H&H&@@ opportunity to meet the basic communications needs of many customers who are now underserved. ` `  The third important element of the new regime is that it replaces the old system of implicit subsidies with explicit subsidies. Eliminating the implicit subsidies removes an important barrier to fair competition. ` `  One thing, however, the new regime does not do is to require the FCC to create new subsidies for basic telephone service, or to provide subsidies at the federal level for intrastate services. There is nothing at all in section 254 that suggests, let alone requires, that the FCC change the current balance between federal and state recovery of the costs of providing telephone service. ` `  I'd like to turn now to the effects of maintaining the current balance between federal and state recovery of the costs of providing telephone service. As the Commission has recognized, the key regulatory issue in both federal and state universal service proceedings is how to recover the costs of providing telephone service. ` `  Historically, interstate revenues have been targeted to recover approximately 25 percent of the total costs of providing landline service, and intrastate revenues have been targeted to recover the rest of these costs. ` `  While some carriers actually recover more than 25%D0*H&H&@@ percent of their costs from interstate sources, 25 percent is a reasonably accurate approximation of the cost assigned to the interstate jurisdiction. ` `  As a practical matter, however, there is little evidence that 25 percent actually represents the best allocation of costs. For instance, when Vanguard prepares its own universal service and telecommunications relay service filings, using the Commission's methodologies, only about 15 percent of Vanguard's revenues fall into the interstate category. ` `  Although interstate costs generally are recovered through the Commission's access regime, it does not matter whether a cost is characterized as a local cost or an access cost, so long as all costs are recovered. Under today's regime, all local exchange carriers recover all of their costs through revenues through interstate access, intrastate access, intrastate toll, and local service, based entirely on the current jurisdictional allocation. ` `  In other words, if the interstate charges continue to recover costs at the current level, there is no hardship on the states. Today, all the jurisdictionally intrastate calls are recovered through existing intrastate charges, and rates generally are reasonable. In fact, rates often are lower in rural areas than in urban areas. ` `  In practice, any increase in the interstate%E0*H&H&@@ portion of universal service funding caused by shifting costs out of the intrastate jurisdiction and into the interstate jurisdiction would be a new subsidy, in addition to those that already exist. In this case, more densely populated areas would provide additional subsidy funds through less densely populated areas. ` `  The real problem faced by the states is the same problem that the Commission has had to confront in its own universal service proceedings. The states have to eliminate implicit subsidies and replace them with explicit subsidies. ` `  Vanguard believes that it is best for the Commission and the states to do what the statute requires: make subsidies explicit, make them available to incumbents and competitors alike, and that the Commission should not try to readjust a jurisdictional balance that has worked well for so many years. ` `  Thank you. ` `  MR. KENNARD: Thank you very much. I am going to do a little switchup on my colleagues here, and go in reverse order this time, starting with Commissioner Tristani. I am sorry to surprise you like this, but you are always prepared. ` `  MS. TRISTANI: Mr. Chairman. I would like to ask all of the panelists if you could comment on an issue I think you were all here before, I hope you were. But do you%F0*H&H&@@ read the Act and I know some of you may not think this is relevant, but it's very relevant to me. ` `  Do you read the Act to say that universal support, I mean universal service is a federal responsibility, or a state responsibility? And I guess, primarily, whose responsibility is that? Mr. Tauke? ` `  MR. TAUKE: I think that the Act is very clear that it is a federal and state responsibility. Section 254(b)(5) says there should be specific predictable and sufficient federal and state mechanisms to preserve and advance universal service, federal and state. ` `  If you look throughout section 254, there are references to federal and state. ` `  In section 214(e), there is an well, 254 references section 214(e), and 214(e) gives the states the job of determining who qualifies as an eligible telecommunications for a service area, telecommunications provider for a service area. And it has the states' designating service areas. ` `  So it occurs to me that throughout the Act it is very clear that there is a partnership between federal and state. ` `  As we look at the Act, it is fairly clear to us that the states that have very serious highcost problems need help from a federal fund. And so, and it seems to us%G0*H&H&@@ logical to assume that above a certain benchmark, if a state has average costs above a certain benchmark, that they should be able to get all of that money out of a federal fund. ` `  On the other hand, within the state, below that benchmark, the state has to figure out how to distribute funds, how to ensure that there is a fair and equitable distribution of costs across the state, and if necessary set up additional funds in order to lower that cost if they choose to do so. ` `  MS. TRISTANI: Ms. Mandeville. ` `  MS. MANDEVILLE: I think that the federal jurisdiction has the primary responsibility to implement universal service. The Act did not say that ` `  MS. TRISTANI: this entire equation. As you have been putting together your benchmarks, I think you have recognized that states may have some restructuring to do on their own, and set your benchmarks to look at that. I think that's within your jurisdiction to do. ` `  And then states, probably because of competition, are going to have to take that and perhaps restructure rates below or above and beyond that, perhaps using the universal service fund on their own. ` `  But I think that, if you will, push comes to shove, it is a federal responsibility to make sure that the%H0*H&H&@@ mandates of the Act are carried out. ` `  MR. LUBIN: Here is the dilemma that I see. If I read 254, it's clear that they are talking about a federal fund that needs to be explicit. They are talking about a state fund that needs to be explicit. ` `  If I listen to what Tom Tauke referred to, he talked about looking at creating the fund using an average cost. And I'm not going to debate whether that's good or bad. But he looked at it with regard to an average cost. ` `  When I think I heard Jim say, when he talked about his plan, he talked about, well, let's figure out based on he didn't use these words, but I presume deaveraged cost, based on either serving wire center or whatever he's looking at. ` `  And so, from my point of view, there's a huge spectrum in terms of how you conduct the studies, at what level of disaggregation you conduct the studies. From my bottomline point, clearly I believe the law is talking about a federal and state fund. But I will also tell you, today I see, across the country, roughly 25 states have just one rate for an unbundled loop. No geographic deaveraging. Maybe there's four states that have some geographic deaveraging of up to four unbundled loops. ` `  Well, my point to you is, you know, if we don't see significant geographic deaveraging of the unbundled loop%I0*H&H&@@ where the big cost driver is associated with rural America, then why are we talking about creating a fund using significant geographic deaveraging? ` `  If you look at the Hatfield tool, or the HAI tool, or the BCPM tool, you see serving wire center disaggregation, maybe 10,000 serving wire centers. I don't know what the number is. If you look at census block group, there's a multiple of 10,000. ` `  I just see that personally as insanity when I look at only one unbundled loop rate in 25 states. And so the point of does the law create pressure overnight associated with universal service for rural America, given the prices of unbundled network elements, I say absolutely not. And that's why I say, when you start looking at a different geographic area, you know, to Tom's credit, I mean, he said let's look at the average per state. My view is, you know what? I would delay the whole proxy thing because we don't have local competition. ` `  But if you are forced to address that issue, and you looked at a forwardlooking economic costing methodology for the average for a state, consistent with those 25 states that have only one unbundled loop, you are basically going to find that there is no need for an explicit subsidy. Because there is sufficient revenues to cover the cost. ` `  MS. TRISTANI: Mr. Smiley.%J0*H&H&@@Ԍ` `  MR. SMILEY: I think the Act is very clear. I think the Act is clear that the federal fund should be augmented by a state fund. And in practicality, that's how the states in which I'm familiar are allowing this to play out. They are all watching you. They are all waiting to see what you all do, the ones that I am familiar with, in terms of a national fund. And they will work on the individual state funds to supplement that. ` `  You know, when the Act said that implicit subsidies must be made explicit, certain areas, certain states are going to have affordability problems. And I think the states know and recognize that. It is due, as Mr. Hagen said, to a very small number of lowcost customers. And what we are going to be faced with ultimately is today's interstate rate structure loads the subsidy on longdistance axis and others, we know we are going to have to deal with those issues. ` `  And what we think with this plan that we proposed today, removing the top end of the subsidy or removing the top end of the highcost customers, allows the states to adequately deal with what's left. ` `  MR. GRIFFIN: I agree that the section 254 gives a very, very clear answer I think to this question. It gives the FCC and the state independent authority to preserve universal service. And I think it also suggests that the%K0*H&H&@@ funding mechanisms should be limited to their area of jurisdiction. So that the FCC should obtain funding from interstate carriers, and the states from carriers of any specific state. ` `  But clearly, it gives the responsibility to the FCC and the states jointly to accomplish the universal service goal. ` `  MS. TRISTANI: Thank you, Mr. Chairman. ` `  MR. KENNARD: Mr. Powell. ` `  MR. POWELL: As representatives of institutions that are either competing or preparing to compete, both in existing markets and new markets, I'd be interested in hearing some elaboration from the perspective of each of your companies what the ultimate impact of the outcomes of these decisions will have on your relative competitive advantages or disadvantages. Both in terms of local competition. In the case of AT&T, how it affects its ability to enter new markets. Long distance companies. Local exchange companies who, how it will affect their ability to compete in long distance. ` `  And just as importantly, how you think it impacts your ability to innovate and compete in new and emerging markets that aren't normally the subject of the discussion in these sorts of things. Because money coming out here is not used somewhere else. And I'd be curious to hear your%L0*H&H&@@ perspectives on all three of those markets. ` `  Do you want to start, Mr. Lubin? ` `  MR. LUBIN: Sure. The reason why I said what I said in terms of my opening comments is that I am going to back us up to the FCC's order on access reform, where it looked at the prescriptive approach, it looked at the marketbased approach. And it came in, and asked a series of questions of, how can we do prescriptive, how can we do the marketbased. ` `  And I remember there were certain key paragraphs that I always looked at that says, hey, we have unbundled elements. They are deaveraged. We have forwardlooking economic pricing for the setting of the unbundled network elements. And if you get that or the combination thereof, you don't pay access. And there was a wonderful paragraph that said, and by the way, you've got to make sure that these operating support systems are truly operational. And the next sentence was, and can carry significant volumes. ` `  And when we looked at that, we obviously wanted a prescriptive approach. But we saw at least intellectually that that could work. The problem is it was an intellectual solution, which effectively has not been operationalized. And because that is not operationalized, we see access prices that are inflated. We see the fact of trying to deaverage the subsidy for universal service. They call it%M0*H&H&@@ March Madness, in terms of trying to figure out how do I solve the universal service problem when loops are not deaveraged? ` `  And so from my point of view, adding on top more costs to me, and then I have to pay 92 percent of the LEC assessment in terms of the access that they float to me that I then recover from my customers, our bottom line is we are going to have great difficulty. ` `  And right now we see a size of a fund at 4.9, assuming schools and libraries go to where it may maybe it doesn't, but if it does. And then on top of that, we are seeing more high costs coming to us. So our bottom line is, yeah, we have a real problem in terms of trying to figure out how to come into this market. ` `  My view is and I'll just take, you know, 30 more seconds we have a real opportunity to try to create competition. Unfortunately, you have an IXZ and a local exchange carrier both touching the same customer. Both touching the same customer. And when they are ultimately meeting the checklist, and in the intralata marketplace competing against us, if we do not have a mass offer to offer customers in a profitable way into the residential marketplace, my view is we will not be an effective party into that residential marketplace. ` `  And so what I call March Madness is the concept of%N0*H&H&@@ deaveraging this subsidy to either wire center or below. And again, I don't know, there are thousands and thousands of wire centers. But I'm only seeing 25 states with one unbundled loop, and maybe four or five with four deaveraged loops. ` `  So the logic construct is just not there. I don't understand it. And my bottom line is, yeah, you have people at AT&T very, very concerned that this isn't working. The market base clearly is not working. And so we see a significant dilemma when access prices remain high. Maybe they come down somewhat because of USF reform. But from our point of view, if that isn't working, why are we fixing USF? ` `  MR. SMILEY: Let me talk about this from US West's point of view. One of the things that will happen in the rural areas if the universal service fund is not sufficient to support the rural areas, you will see what happened when the interstate highway system went in. ` `  You can look at population density maps. And you can plot the interstate highway systems by the color codes for where the densities are. You can actually go through a state like North Dakota or Wyoming or any of these states, and where the population centers, small as they may be, in those states are is right along the interstate highway system. There are some anomalies, but not very many. ` `  Our concern is that whether it's us providing the%O0*H&H&@@ service, whether it's the small telephone companies providing the service, or whether, to your point, Commissioner Powell, competition will ever exist in the rural areas, without an adequate fund you won't see the competition develop in those areas. ` `  We will not invest. Others will not invest. And competition will not become robust. And you will see the same density maps for the information superhighway that you see for the current highway system. ` `  And that's why federal support from all 50 states is necessary for each and every state, not have it confined to the boundaries within the state. ` `  MR. GRIFFIN: From the perspective of the wireless industry, we have one primary goal, which is access to the subsidy so that we can go in and try to be the provider in some of these areas. And in fact, there are a number of instances where, with access to the subsidies and even without, that we're able to come in and provide, in unusual situations, the very best service. ` `  And if the Commission can do that and can, the other goal, just to add that the wireless industry has for the Commission is the implementation of if we can do that, that would really put us in a position to be an effective provider of local telephone service, and go a long way towards helping to create competition with the benefit%P0*H&H&@@ of explicit subsidies that, in fact, are portable. ` `  MR. TAUKE: On your question about how this affects competition. If I am a local exchange company serving a community where the average cost of service is $50, and I can get a $30 subsidy out of, some from someplace, and my competitor cannot, obviously the competitor is never going to offer service in that community. ` `  So it's essential, if there is a support mechanism that is flowing into a company from outside, that that support mechanism be explicit. And I think Congress intended that, and made that clear in the Act. ` `  I think it's also important to note, however, that Congress didn't say that if you are charging three dollars for voicemail today, that you have to lower that to 10 cents, and make the $2.90 part of the cost of local service. ` `  I think Congress recognized that in a competitive market, when you price, you have the story sometimes like the razor and the razor blades. Dial tone is often like the razor, and it will become more so as we move to a competitive marketplace, where the price of dial tone will go down because that's the access that the company has to the customer. And the price of other enhanced services the vertical services and other things will be held at%Q0*H&H&@@ their current levels in order to make money off that customer. ` `  So I think the key is not looking at each element of the price of the service that the provider offers to the customer. The key is looking at what kind of money that company or provider gets from somebody other than the customer in order to support service to that customer. And that source of funds ought to be explicit. ` `  So I think that's how it affects competition in the local exchange market. ` `  When we look at other markets, a company like Bell Atlantic, let's say, is going into the PCS business through Primeco. If this fund becomes so large that a company like Primeco has a substantial economic burden to support the universal service fund, without any realistic expectation of being able to collect money from the universal service fund in the foreseeable future, that's going to be a deterrent to the ability of the PCS company to survive and grow. And also, parenthetically, compete effectively with the wire line company. ` `  So you have to make certain that we don't have a fund that becomes so heavy, if you will, or expensive that it thwarts the development of the new alternative services that are out there, and supports too greatly the existing wirelinetype technology that's already in place.%R0*H&H&@@Ԍ` `  So I think that's how it would affect the competition for new services. ` `  MS. MANDEVILLE: As I mentioned, we are headquartered in Missoula, Montana, which is, from a Montana perspective, an urban area; it has about 50,000 people. And we are looking at competitive ventures in that area. ` `  And I think, like so many competitors out there, it is not that structure today does not create competitive opportunities, because it does. Certainly there is a decent amount of uncertainty as to the pace of change or sudden changes that may come up. ` `  Montana is one of the states that has a single unbundled network element for loops. It is not the average. And yet, business rates are also at about two and a half or three times residential rates. That creates enough space between the unbundled network element and the business rate of US West to offer alternative services. ` `  If suddenly the state would restructure the business rates, and not restructure the underlying network elements, it would suddenly create a problem. So many of our answers are in keys to timing. Each time carriers don't pass through carrier access charge reductions into long distance services, it creates a new competitive opportunity. I think those are out there today. They'll get skinnier and skinnier as time goes on, and we reflect in the rate%S0*H&H&@@ structure the actual cost of each service. ` `  MR. POWELL: Well, just to sum up, I mean, it probably states the obvious. But what you hear in what everyone says is that, at bottom, these things are the imposition of costs. And those costs will have consequences. And we are balancing two places where those costs hit. When they hit the consumer directly. But when they also hit those who provide the services to consumers in a way that ultimately can, if not done carefully, frustrate the ability for those companies to get to a position in which they can offer those customers not only new services, but competitivelypriced services. ` `  And I suppose the other theme for me that I hear in everyone's words are that we have to be very careful that no matter what costs we pose, they don't provide competitive advantage and disadvantage to companies who historically have been separated from competing, but now are looking to each other as opportunities. Though they have historically paid in in different ways, there will need to be a greater rationalization of the way and manners they pay in order to put them on similar competitive footing. ` `  So thank you. And I just have one very simple question, Ms. Mandeville. You talked a little bit about what you anticipated to be the impact of rates on a customer. And I assume that to not include what may even be%T0*H&H&@@ additional costs to the consumer were the state to begin to have a stateoperated universal service fund that will impose also costs on existing competitors in your community, and then find its way back on the bill, as well. ` `  MS. MANDEVILLE: That's true, it doesn't include those costs. But I would also say that those customers, if that state restructuring is done, should be the big winners. Long distance customers in the state, if carrier access charges fall drastically, which would create a need for a universal service fund, their total bills should go down. ` `  Business customers that today pay two and a half times the cost of residential, yes, they may pay more universal service funds. But they'll be a big winner. TMRS providers have been a big winner in some of these areas. ` `  The urban areas should be the big winners in this area. And contributing to universal service is an offset to that. ` `  MR. POWELL: Thank you. ` `  MR. KENNARD: Commissioner FurchtgottRoth. ` `  MR. FURCHTGOTTROTH: Thank you, Mr. Chairman. I'd like to follow up on a question that Commissioner Tristani asked about federal and state responsibilities under 254. ` `  I would like to get your opinion specifically on how that applies to 254(h), which is rural health care and%U0*H&H&@@ schools and libraries. Is there both a state and a federal responsibility for that, as well? I would just like to ask if any of the panelists have a different view than what they said about 254 generally. ` `  MR. SMILEY: I think they are all intended to be a national fund supplemented by state. ` `  MR. FURCHTGOTTROTH: Mr. Tauke. ` `  MR. TAUKE: I think that there is a difference in the statute between schools and libraries in the highcost fund. Clearly in both cases there is an anticipation of a partnership. I believe that in the case of the highcost fund, and from what we've learned already from the schools and library fund, that there is a need for the Commission to just look at the political and legal risks. ` `  And if you start moving into the intrastate funds, or monies, if you will, for purposes of collection, or if you use intrastate for purposes of allocation, it seems to us that you are opening yourselves to greater legal challenge. And that is a very serious problem. ` `  I might just say parenthetically, we are concerned about the fact that the funding mechanism, the very Act itself, the funding mechanism in the Act is being challenged as an illegal tax in the courts. We are concerned that the administrative structure has been labelled by the GAO as illegal. We are concerned that politically there are%V0*H&H&@@ challenges to all parts of universal service. And all of us have an interest in certainty. ` `  So whatever you can do in order to sort of reduce the risk that this is going to be subject to legal and political challenge, the better off we are. And that's one of the reasons why we have concluded that you should focus on the money that is moving from one state to another in order to help the highcost states, and try to collect those funds on the basis of interstate revenues. ` `  MS. MANDEVILLE: Commissioner, I have not looked into the specific legalities of that question. I can tell you what Montana is doing. ` `  We have a state small, what we call a universal access fund that picked up what we thought may be some gaps in the federal education and health care fund. It funds, for instance, tribal community colleges and some of the tribal schools that we thought might not be picked up. It specifically says it cannot duplicate the federal mechanisms. And that seemed like a good separation, and certainly within the intent of the Act. ` `  MR. LUBIN: I don't have anything. ` `  MR. FURCHTGOTTROTH: Twofiftyfour (h) specifically says that the discount shall be an amount that the Commission with respect to the interstate services, and the states with respect to the intrastate services,%W0*H&H&@@ determines the appropriate and necessary. Mr. Tauke, if the discount for intrastate services is to be set by states, how is that done without a state collection of the funds? ` `  And secondly, is internet access an interstate service? ` `  MR. TAUKE: You are putting me on the spot. As you know, our company has tried to work with the Commission to establish a schools and library fund. And we've tried to support the Commission's efforts in that arena because of the desirability of the goal. ` `  And having said that, however, I think it is clear that there are some statutory questions about some of the steps that have been taken. And some of those now are being aired out in the courts. We have not chosen to make those legal challenges, because we are trying to look at the larger good here. ` `  But I do think that it is, the statute does seem to suggest fairly clearly, as you point out, that the states are the ones that would determine the discounts for intrastate services. ` `  In our view, having made that point, I guess on the second question about what is the internet, our view essentially is that the internet is an interstate service. We wish the Commission would make that clear, parenthetically. However, as you know, I think about 17%X0*H&H&@@ states now have declared it an intrastate service for purposes of reciprocal compensation. ` `  Somewhere along the line there has to be a clarification of what the jurisdiction is, or what classification should be provided to that service. And that may be done, not only for purposes of this, but for other purposes, as we go forward. ` `  MR. FURCHTGOTTROTH: Does anyone else have any comments on those questions? Mr. Lubin? ` `  MR. LUBIN: The comment that I have is simply a bottom line. And the bottom line is no matter how you cut it, when you have schools, libraries, or rural health care, and it's been cut back, with the expectation that it could rise, and it could rise a fair amount, and that a way to finesse the issue was to put it on intrastate and interstate, which made sense. ` `  But when the Commission then, bottom line, says to the incumbent LEC, your assessment can be recovered back into the interstate jurisdiction. And when you look around in the interstate jurisdiction to see what tariffs are available, and they are only access tariffs. The bottom line is, even though we're recovering, we're assessing it on total revenues, the bottom line is that all not all, 93, 92 percent flows back into interstate access tariffs. ` `  And so, for me, simply a bottomline question is,%Y0*H&H&@@ I don't see that as competitively neutral. And somehow, some way, there has got to be a way to fix that. What we have said in various reports, to you and to Congress, is that the way to fix that and I think one of the Commissioners implied it this morning is simply you call it for what it is, and you put it on the bottom line of the bill. And, you know, you don't make it explicit here, and then funnel it into a tariff over there. ` `  And by the way, when you do that, back to Commissioner Powell's earlier question, there are competitive implications. Competitive implications with unbundled network elements or total service resale, and I won't bore you with all of that. But somehow, some way, that's got to get fixed, from my point of view. ` `  Thank you. ` `  MS. MANDEVILLE: Commissioner, I think that the internet problem points out the, I guess, ultimate inability to clearly distinguish between interstate and intrastate. Data shopping today is fairly blatant between jurisdictions. ` `  I think states probably threw up their hands and said, "If it's not access, it must be local, so it's subject to reciprocal compensation." Not that they wouldn't like it to be access. But that is the fundamental problem that we will see with more and more services, if we try and make a clear distinction between interstate and intrastate.%Z0*H&H&@@Ԍ` `  MR. LUBIN: One other thing to your question, Commissioner, which I really didn't respond to. And that is, it's our position that we think the internet, with regard to telephony, should pay the assessment taxes, or the assessment rates for the various universal service funds. ` `  Thank you, Mr. Chairman. ` `  MR. KENNARD: Thank you, Commissioner. Commissioner Ness. ` `  MS. NESS: Thank you, Mr. Chairman. Mr. Tauke, I agree with you that regulatory certainty and certainty in all of these different intertwining areas is critical in order for us to get on with competition. You know, it's just crazy how all of these companies, in every single area, keep filing in court, including challenging as unconstitutional 271. But that's the way of life here. And it's a pity that that's the case, but that is the case, and we have to deal with it. ` `  At times I figure that, I mean, I sort of feel like deja vu. I've been hearing these same arguments, and each time that we've done a forum it's been helpful, but it still goes round and round and round. Part of it is perhaps that the Act, in its eloquence, creates simultaneous equations, where some of the too many of the elements are defined. And thus, trying to put the pieces together makes it extremely difficult.%[0*H&H&@@Ԍ` `  Having said that, I would like to go back a little bit to what was discussed in the first panel. And that was the ad hoc proposal. And see if any of you had thoughts with respect to the pros of such a proposal, and the negatives of such a proposal. Beginning with you, Mr. Tauke. ` `  MR. TAUKE: I think this panel has highlighted one of the problems we have had in discussing the universal service issue. ` `  A number of the participants I think have operated from the context that we are talking about the models. And we, at Bell Atlantic, spend a lot of time on models. ` `  Our belief is, certainly my personal view is, you cannot come up with a model that is fair, equitable, and will withstand legal challenge. ` `  And also, when you go back and read the Act, you don't need a model. And in fact, the models historically dated from preAct days. They were created for, they were being developed prior to the enactment of the Act to deal with the universal service system as it existed at that time. ` `  So I would like to suggest, first, that we should ignore for a moment the models, and then try to figure out what the Act requires. ` `  We believe that the Act suggests, as the ad hoc%\0*H&H&@@ plan suggests, that the FCC, the national fund, focus on the transfer of monies between, or I should say among, the states, and not focus on the amount of money being given for a given company or a given wire center or a given customer. But the national fund should focus on the transfer of monies among the states. ` `  Then the states would deal with the second layer of issues. So in that sense, I believe that our comments would be consistent with the comments of the ad hoc group. ` `  The ad hoc group, I think, has, in determining what monies should go between the states, has looked at the models, and they looked at the existing system. That may be appropriate. I think that how you determine exactly what goes between the states is, in a sense, a somewhat arbitrary decision, although you have to have justification for it. ` `  We believe a better approach is to use a mechanism, whether you use one of the models, a combination of the models, or data you already have on hand, but use some mechanism to get a fair and equitable assessment of costs. And the important thing here is the relative nature of the cost from state to state. ` `  And if you determine that on an average basis, then you determine how much money has to flow from one state to another. ` `  So I think that the basis of the model is correct. %]0*H&H&@@ We would probably have some suggestions relating to details. ` `  MS. NESS: If we were to go with the statebystate approach, that's based on the costs as assessed by the state, where is the incentive for the state to cut down on costs? To squeeze out additional costs? ` `  MR. TAUKE: I don't think you should rely on the states to make the cost assessment. Because obviously each state would have a huge incentive to inflate their costs in order to get more money out of the federal funds. ` `  You do need some kind of a mechanism that would use the same standard for assessing costs in Vermont as they do in New York, in California as they do in Iowa. And so you need to get a common standard for assessing costs in order to have fairness and equity. ` `  MS. NESS: Ms. Mandeville. ` `  MS. MANDEVILLE: I would agree with the last points made there, that you may not be able to rely on that to cut costs. - ` `  I would also say that, just looking at it, it appears to say that your responsibility is to states and not to customers. And I think your responsibility under the Act is to customers. ` `  If a state decides to take all that support and give it to US West, I don't think that my customers are going to let you off the hook.%^0*H&H&@@Ԍ` `  I very much respect what they have tried to do. One of the key indications was this takes a great deal of compromise. I may sit here and agree with you to trade some of my universal service support for getting out a 251 mandate. I think anyone who came in and said, "I want a section 251 resale agreement," would say that you did not have the ability to negotiate that away. ` `  And so I think that same thing exists. You don't have the ability to negotiate away the universal service requirements. ` `  MS. NESS: Can you tell me how much, on average, your customers pay for basic telephone service? ` `  MS. MANDEVILLE: It varies from a low in some of our small exchanges of about $10, up to a high of about $20 in some areas. And depending on how far out of town they are. We have some zone charges. ` `  MS. NESS: Mr. Lubin. ` `  MR. LUBIN: With regard to the ad hoc proposal, I only have a highlevel knowledge base, so I can only comment relative to that. ` `  But the significant concerns that I have with it are the concept that there is roughly about $600 million more needed. And it isn't clear to me why there should be $600 million. And again, it gets back to what level of disaggregation was used. So that, to me, is a big issue.%_0*H&H&@@Ԍ` `  Conversely, if the plan were, and which I thought was the original plan, but I realized they are talking with a lot of different people and plans evolved, the original plan was it was roughly not an increase; it was roughly taking the existing dollars, and then redistributing them amongst the parties. That has a better attribute, from my point of view, especially if you remove the dollars, which is about $114 million for the existing major ILECs. ` `  The second concern that I have is that, with the number that I heard this morning from Chairman Welch, the $600 million, my understanding is that is new money entering into the system, but would not be used to lower interstate access. It would presumably be used to lower intrastate rates, is my understanding. But not interstate access. And not necessarily intrastate access. 3So, to me, that is a significant concern. ` `  The third concern, which I will say, but I will also say I'm not totally sure, but at least some people have implied to me, that the money is not competitively neutral distributed. So I have one question, in terms of how does it get distributed amongst the parties; namely, the incumbents. But then the second question is, you know, is it competitively neutral if somebody else enters into the market. And if somebody knows the answer to that, I'd appreciate hearing it.%`0*H&H&@@Ԍ` `  MS. NESS: I will go back to your first point. And I thought that Chairman Welch did an excellent job of pointing out that you can distinguish between disaggregating cost and disaggregating the price to the consumer. And that your point about not having deaveraged rates for unbundled elements is a very good one. ` `  Mr. Smiley. ` `  MR. SMILEY: Like Mr. Lubin, I have only a highlevel knowledge of the ad hoc plan. But from what I understand, even the modest increase that they would see in the overall size seems, to me, to be shortsighted. ` `  I think most of the money that today is in the fund goes to small companies. Interstate access provides about $18 billion in support. And if the new fund is created to the size of the old, then it seems to me that the FCC will not be able to reduce access charges to the way that they had intended. And ` `  MS. NESS: Mr. Smiley, can I ask you, have you deaveraged the cost of your unbundled network elements? ` `  MR. SMILEY: As you know, we serve 14 different states. We have cost dockets in various proceedings. Some states have, and some have not. So it is a mix. ` `  In Minnesota, we have not concluded the final cost docket. AT&T, for instance, has proposed nine separate zones. And the final decision is not in.%a0*H&H&@@Ԍ` `  MS. NESS: But you would argue, though, that the cost does vary loop to loop, area to area. ` `  MR. SMILEY: Yes, it does. ` `  MS. NESS: And therefore, that you ought to be able to receive funds where the cost is greater in a particular area. Even though, if you look across all of those loops, the average for you might work out ` `  MR. SMILEY: Might be X. ` `  MS. NESS: to be X. ` `  MR. SMILEY: You know, I think the issue is that if you're going to get into a wholesale deaveraging, or deaveraging of loops, you also need to deaverage your prices at the same time. Because one without the other just won't work. ` `  MS. NESS: Mr. Griffin. ` `  MR. GRIFFIN: Well, as a wireless carrier, I would say I have not even a highlevel understanding of the ` `  MS. NESS: Fair enough. ` `  MR. GRIFFIN: ad hoc proposal. For which I can probably report that I'm pretty pleased. ` `  I will say that just conceptually and we are, from the wireless perspective, we are looking at these things perhaps more broadly than some. To the extent that the ad hoc proposal is suggesting that there are new funds added to the total, it seems to me, as I said in my earlier%b0*H&H&@@ remarks, that that goes beyond the concept of simply making implicit subsidies explicit. Because you clearly don't create a single new dollar by converting from implicit to explicit. And you have now quickly moved into a whole new area of regulation when you begin to add monies to the funds. ` `  MS. NESS: It's a bit like a shell game, where you are trying to find where the pea is. And certainly, you are correct that if right now one can argue that there are affordable rates across the country, one would wonder, at the end of the day, why additional funds would be added. Maybe there needs to be a recalculation making some explicit less making funds explicit, but adding new funds will, has to certainly be justified, based on where we are. ` `  I think my time has gone, and I think folks are probably going to be interested in going to lunch. So Mr. Chairman, let me pass it back to you. ` `  MR. KENNARD: Okay. Thank you, Commissioner. I have outlined publicly some principles which I believe should govern reform of universal service. ` `  And one of those principles calls for the states to reform their own universal service funding mechanisms as a condition to additional federal support. ` `  And I'd like to know your views on that. And I'd like to start with you, Ms. Mandeville. Because I noticed%c0*H&H&@@ in your testimony, you said that federal support cannot be conditioned on restructuring or reforming the intrastate system. And, one, I'd like additional comment from you on that. ` `  And second, I'd like to know, from you and the other panelists, if you believe that there should be additional federal support to the intrastate jurisdiction. How can we incentivize the states to use that additional funding efficiently, and ensure that there is some reform at the state level before additional funding is made? ` `  MS. MANDEVILLE: Mr. Chairman, we do believe that you cannot condition universal service support on state actions. In Montana it takes the Legislature to give the State Commission authority to do a universal service fund. ` `  If the State Legislature chooses not to do that and they do have some temporary stopgap authority that sunsets at the beginning of '99. If they choose not to do that, then Montana simply would be without a universal service fund. ` `  I think that doesn't say you can ignore the universal service mandates of the Act. ` `  Having said that, we have great discussions going on in the state about a state universal service fund, and pricing reform, not having to do with what you are doing, but having to do with state needs. We have state carrier%d0*H&H&@@ commonline charges. We have margins built into state carrier access rates. We have business and residence rates that probably won't work longterm. And if anyone comes into one of our exchanges and takes your five biggest business customers, you better be able to deaverage your rates within an exchange. ` `  I think the market is going to solve most of those questions. As I mentioned, my company is becoming a competitive carrier in Missoula. I think that those actions will start driving those price structures to cost, having nothing to do with where the statutes are, but having simply to do with how the market works. ` `  MR. KENNARD: Well, putting the legal issue aside, some incentive from the federal jurisdiction to accelerate reform, wouldn't that be a good thing in accelerating a state action to reform universal service? ` `  MS. MANDEVILLE: I think there is incentive to reform state charges, if the interstate charges change. It is definitely not in Montana's best interest to have carrier access rates that are two or three times as high as the interstate rates. What that does is it drives carriers out of the state, it drives carriers to be perhaps less than totally accurate with their usage that they tell us is intrastate versus interstate. And it creates some real problems with us.%e0*H&H&@@Ԍ` `  We cannot explain to people in Montana why it costs more to call 90 miles across the state than it costs to call New York. Those do create immediate customer incentives to do things with the state structure. And we are very sensitive to that. ` `  We have tried to bring our carrier access rates down to interstate levels, and have actually accomplished that, to make sure that those kinds of arbitrage abilities are not there. ` `  MR. KENNARD: Do you have any sense of how long it would take for a state like Montana to move from an implicit subsidy system to an explicit subsidy system? It is a tough question; I won't hold you to a precise ` `  MS. MANDEVILLE: It's a tough question. And typically the states have not done as many transitions as the federal jurisdiction has. I would hope that they would look at transitions in this kind of a really major restructuring. You know, theoretically, it could happen in a year. ` `  There are so many large winners and losers in a total restructuring that I think the state will probably be somewhat cautious and try and do it as competition develops. ` `  MR. KENNARD: Anyone else care to comment? Mr. Lubin? ` `  MR. LUBIN: My reaction is that, when I read those%f0*H&H&@@ principles, for me, anyway, it was a paradigm shift, a little bit. A little bit. And I saw potential merit. But what was driving me, in terms of trying to figure out how this would work, was the economic incentives. ` `  And I was trying to figure out, is there a way to create an economic incentive for the state to do what you want, but not to gain the system that says, hey, this system over here is going to try and figure out to do it in such a way follow all the rules, follow all your criteria that you laid out but do it in such a way to drive more costs into the federal jurisdiction. ` `  So the question and to me, it is kind of what you just asked is, is there a way to create the economic incentive to do what you suggested without creating the opportunity to do more cost into the interstate. ` `  The other thing I had observed, and it's why, quite candidly, I think, at least from my perspective, there is some, it's worth investigating, is that there are some states that are looking at this very question. And when they look at it, they are looking at it and maybe it's because they have one unbundled loop in the state, I don't know why. But they're looking at it, and saying, okay, I'll use these proxy tools. And then they look at the revenue generated. And what they say is, you know what, I don't need a universal service. I've got enough here without%g0*H&H&@@ having explicit fund. And by the way, some of the states do that, and don't include access. Some do include access. ` `  So my point is, that's an interesting one, because that state may come along and say, hey, I don't need a lot of dollars, or maybe it's very small. And if that state were to do that, what would they do at the federal level, because that would assume that they don't need anything at the federal level. ` `  But anyway, my bottom line to you is, you know, what we've been trying to do is take the principles and say, is there a way to create an economic incentive to eliminate the concern that I articulated. ` `  MR. KENNARD: Mr. Tauke. ` `  MR. TAUKE: First, I do think that you do have the ability to place some conditions on the distribution of dollars that would come from a federal fund to states. And I think, as a matter of judgment, you would probably want to give the states some time to react to that. So I'm not sure that you should require them to meet it immediately. ` `  But one of the reasons that you may want to consider doing that is because I think there is also a need to have a general sense among the public that this is a fair system. And whether it is accurate or not, I think there is some perception now that the universal service system isn't fair.%h0*H&H&@@Ԍ` `  In some of our "lowestcost" states, in places like Baltimore and Buffalo and Boston, we have telephone rates for basic telephone service that are higher than many of the rates mentioned this morning, that are and we are, in essence, asking our customers to pay a little more to send the money to those places that are now paying substantially less. ` `  Now, part of the reason for that is because the way in which prices have been structured. But what has been happening in our larger, lowercost, and ironically, or I should say not surprisingly more competitive states, is that the access rates have been coming down. And as we go to oneplus dialing, the intrastate toll rates are coming down. And that has meant there has been some relative increase in the dial tone rates. ` `  But it is hard to explain to people in Boston who are paying $19 a month, or Buffalo who are paying $30 a month for telephone service, why it is that they are going to send more or pay more in order to send money to people who are paying eight or nine dollars a month for telephone service. ` `  And so I think having some, you know, effort here to encourage the a different pricing model in some cases, or taking other steps would be helpful in subsidies out of the rates, and to move this toward the competitive model. %i0*H&H&@@ I am very uncertain. As a matter of fact, I think I would be almost oppositional to providing some sort of a federal hurdle that they must go through if that's what the suggestion is, similar to what is being done on a 271 basis today. And I'm not sure exactly, you know, I don't have all the specifics exactly of what's behind your eight principles. ` `  But to me, qualifications for added federal support I think ought to be clear to the states today. It ought to be a national fund today. And we ought not set up an additional federal process to have states go through to qualify for that, for that support. ` `  MR. KENNARD: Well, I see that we have gone almost an hour over our time this morning. And I think that that's a result of the not only how interesting these issues are, but the quality of the panelist we had today. ` `  So I wanted to thank you all for being here today. And unless there are any closing comments from the bench okay, very good. ` `  MS. TRISTANI: I talked at the beginning of how wonderful, how important universal service is. And how this country is in an enviable position. ` `  We have 94percent telephone penetration. You all know that. But you know, we're not there yet. In my state of New Mexico, it's about 87 percent. In Puerto Rico, which%j0*H&H&@@ is a territory in part of the United States, it's about 74 percent. And those of you that know the states that have large Native American reservations, know that on some of their reservations it varies between 30 and 50 percent. ` `  So we're not there yet, with universal service for all Americans. ` `  I wanted to remind us all of that. And stress again that I think it's very, very, very critical that this Commission makes sure that whatever we do at the end of the day doesn't make any American get off the network. ` `  Thank you. ` `  MR. KENNARD: Thank you, Commissioner. Well said. With that, I'd like to again thank our panelists, and also thank the hardworking FCC staff that put together this panel today. Lisa Gelb, Melissa Waxman, Jonathan Raydin, Cheryl Todd, Chuck Keller, Maureen Peritino, Rivera Marshall, Pam Gallant, Macauley Sallas, and of course Richard Metzger and Bob Pepper. Thank you all very much for being here. ` `  And these issues obviously are of great importance to this Commission and the country. And you have my commitment that we will continue to focus on them and get them resolved very, very quickly. Thank you. ` `  (Whereupon, at 11:53 a.m., the hearing was concluded.)%k0*H&H&@@ (! k   ` X 1V2]Heritage Reporting Corporation &(202) 6284888V"REPORTER'S CERTIFICATE  FCC DOCKET NO.: N/A CASE TITLE: En Banc in Connection With Report to   Congress On Universal Service HEARING DATE: March 6, 1998 LOCATION:  Washington, D.C.  I hereby certify that the proceedings and evidence are contained fully and accurately on the tapes and notes reported by me at the hearing in the above case before the Federal Communications Commission. Date: __________ ___Peter Shonerd_____________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005 <!TRANSCRIBER'S CERTIFICATEă  I hereby certify that the proceedings and evidence were fully and accurately transcribed from the tapes and notes provided by the above named reporter in the above case before the Federal Communications Commission. Date: __________ _Melissa Canning______________ Official Transcriber Heritage Reporting Corporation <!PROOFREADER'S CERTIFICATEă  I hereby certify that the transcript of the proceedings and evidence in the above referenced case that was held before the Federal Communications Commission was proofread on the date specified below. Date: __________ ______________________________ Official Proofreader Heritage Reporting Corporation