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A. 1. a.(1)(a) i) a) 1. 1. 1. a.(1)(a) i) a)+ Before the w QFederal Communications Commission  X2Washington, DC 20554#XN\  PynXP# ă In the Matter of) )  Xv2FederalState Joint Board on)ppXCC Docket No. 9645 Universal Service)  X12 ^ NINTH REPORT & ORDER AND EIGHTEENTH ORDER ON RECONSIDERATION  X 2  X` hp x (#%'0*,.8135@8:"(#p 1  X2XxII.EXECUTIVE SUMMARY p>"(#p 6  X2XxIII.BACKGROUND p!(#f 12  X2XX` ` A.` ` Historical HighCost Universal Service Support ` p!(#f 12  X2XX` ` X ,` ` 1. ,Explicit Support p!(#f 13  X|2XX` ` X ,` ` 2. ,Implicit Support p!(#f 15  Xe2XX` ` B.` ` Universal Service Principles Stemming From the 1996 Act ` p!(#f 17  XN2XX` ` C.` ` Actions by the Commission and the Joint Board to Reform HighCost Universal Service Support Pursuant to the 1996 Act ` p!(#f 19  X 2XX` ` D.` ` Opinion of the Fifth Circuit Court of Appeals ` p!(#f 29  X 2XX` ` E.` ` Response to the Fifth Circuit's Opinion ` p!(#f 31  X2XxIV.ORDER p!(#f 34  X 2XX` ` A.` ` Introduction ` p"(#k 34  X!2XX` ` B.` ` Federal and State Roles in Providing Universal Service Support for Intrastate Rates ` p!(#f 36  X#2XX` ` C.` ` New ForwardLooking HighCost Support Methodology ` p"(#k 39  Xh$2XX` ` X ,` ` 1. ,Area Over Which Costs Should Be Averaged p!(#f 43  XQ%2XX` ` X ,` ` 2. ,National Benchmark p!(#f 53  X:&2XX` ` X ,` ` 3. ,Support for Costs Above the National Benchmark p!(#f 60  X#'2XX` ` X ,` ` 4. ,Elimination of the State Share Requirement from the ForwardLooking Support Methodology p"(#k 64  X(2XX` ` X ,` ` 5. ,Targeting Statewide Support Amounts p"(#k 68  X)2XX` ` D.` ` Interim HoldHarmless Provision ` p"(#k 77"),**``'"Ԍ X2XX` ` E.` ` Portability of Support ` p"(#k 89  X2XX` ` F.` ` Use of Federal HighCost Support by Carriers ` p"(#k 93  X2XX` ` G.` ` Assessment and Recovery Bases for Contributions to the HighCost Support Mechanism ` pv!(#\ 111  X2XX` ` H.` ` Adjusting Interstate Access Charges to Account for Explicit Support ` pv!(#\ 113  X2XX` ` I.` ` HighCost Loop Support For Rural Carriers ` pv!(#\ 114  Xv2XX` ` J.` ` Lifting the Stay of the Commission's Section 251 Pricing Rules ` pv!(#\ 119  XH2XxV.PROCEDURAL MATTERS pv!(#\ 121  X12XX` ` A. ` ` Regulatory Flexibility Act Certification ` pv!(#\ 121  X 2XX` ` B.` ` Effective Date of Final Rules ` pv!(#\ 123  X 2XX` ` C. ` ` Paperwork Reduction Act ` p!(#a 124  X 2XxVI.ORDERING CLAUSES p!(#a 125 Appendix A Parties Filing Comments Appendix B Parties Filing Reply Comments Appendix C Final Rules"y,')')``"  X2 I.XINTRODUCTION (#  X21.` ` In the Communications Act of 1934 (Act),R_ {OK(ԍ47 U.S.C.  151, et seq.R as amended by the  X2Telecommunications Act of 1996 (1996 Act),dZ_ {O(ԍSee Pub. L. No. 104104, 110 Stat. 56 (1996).d Congress codified the Commission's historical policy of promoting universal service to ensure that consumers in all regions of the nation  X2have access to telecommunications services./_ yO* (ԍAccording to the Joint Explanatory Statement, the purpose of the 1996 Act is "to provide for a procompetitive, deregulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition . . . ." Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 458, 104th Cong., 2d Sess. at 113 (Joint Explanatory Statement)./ Specifically, in section 254 of the Act, Congress instructed the Commission, after consultation with the FederalState Joint Board on Universal Service (Joint Board), to establish specific, predictable, and sufficient mechanisms  XH2to preserve and advance universal service.I^H_ {O(ԍ47 U.S.C.  254(a), (d). See also FederalState Joint Board on Universal Service, CC Docket No. 96 {O_(45, Notice of Proposed Rulemaking and Order Establishing Joint Board, 11 FCC Rcd 18092 (1996) (Universal  {O)(Service NPRM).I  X 22.` ` Based on recommendations from the Joint Board in the Second Recommended  X 2Decision, _ {Ox(ԍFederalState Joint Board on Universal Service, CC Docket No. 9645, Second Recommended Decision,  {OB(13 FCC Rcd 24744 (Jt. Bd. 1998) (Second Recommended Decision). and building on the framework the Commission set forth in the First Report and  X 2Order _ {O(ԍFederalState Joint Board on Universal Service, CC Docket No. 9645, Report and Order, 12 FCC Rcd  {O(8776 (1997), as corrected by FederalState Joint Board on Universal Service, CC Docket No. 9645, Erratum,  {OS(FCC 97157 (rel. June 4, 1997), aff'd in part, rev'd in part, remanded in part sub nom. Texas Office of Public  {O(Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999), petition for stay granted in part (Sept. 28, 1999), petitions  {O(for rehearing and rehearing en banc denied (Sept. 28, 1999) (First Report and Order). and the Seventh Report and Order,V _ {Oy(ԍFederalState Joint Board on Universal Service, Access Charge Reform, CC Docket Nos. 9645, 96262, Seventh Report & Order and Thirteenth Order on Reconsideration in CC Docket No. 9645, Fourth Report &  {O !(Order in CC Docket No. 96262, and Further Notice of Proposed Rulemaking, 14 FCC Rcd 8077 (1999), petition  {O!(for review filed sub nom. Vermont Department of Public Service v. FCC, No. 9960530 (5th Cir., filed June 23,  {O"(1999) (Seventh Report and Order).V we establish in this Order a new federal highcost  X 2support mechanism that will be sufficient to enable nonrural carriers'~ _ yO%(ԍNonrural carriers are those that do not meet the following statutory definition of a rural telephone company: X` ` The term "rural telephone company" means a local exchange carrier operating entity to the extent that such entity "<(,')')2("ԌXX` `  ,(A) provides common carrier service to any local exchange carrier study area that does not include either ` XX` ` X ,h(i) any incorporated place of 10,000 inhabitants or more, or any part thereof, based on the most recently available population statistics of the Bureau of the Census; or XX` ` X ,h(ii) any territory, incorporated or unincorporated, included in an urbanized area, as defined by the Bureau of the Census as of August 10, 1993; XX` `  ,(B) provides telephone exchange service, including exchange access, to fewer than 50,000 access lines; ` XX` `  ,(C) provides telephone exchange service to any local exchange carrier study area with fewer than 100,000 access lines; or ` XX` `  ,(D) has less than 15 percent of its access lines in communities of more than 50,000 on the date of enactment of the Telecommunications Act of 1996. ` 47 U.S.C.  153(37).~ rates for services" ,')')``& " supported by universal service to remain affordable and reasonably comparable in all regions of the nation. The support determined by the mechanism described in this Order will replace the support that nonrural carriers currently receive from the existing highcost fund, which  X2provides support for intrastate rates and services.D _ yO|(ԍWe intend to address the support that may be implicit in interstate access charges in a future order,  {OD(jointly captioned in this proceeding and our access charge reform proceeding. See, e.g., Access Charge Reform,  {O(Price Cap Performance Review for Local Exchange Carriers, Interexchange Carrier Purchases of Switched  {O(Access Services Offered by Competitive Local Exchange Carriers, Petition of US West Communications, Inc. for  {O(Forbearance from Regulations as Dominant Carrier in the Phoenix, Arizona MSA, CC Docket Nos. 96262, 941, 98157, CCB/CPD File No. 9863, Fifth Report and Order and Further Notice of Proposed Rulemaking, FCC  {O4(99206 (rel. Aug. 27, 1999); Sunshine Restrictions Applicable to Access Charge Reform (CC Docket No. 96262), Price Cap Performance Review for Local Exchange Carriers (CC Docket No. 941), and FederalState Joint Board on Universal Service (CC Docket No. 9645) Lifted with Regard to Issues Raised in the July 29, 1999, Ex Parte Submission of the Coalition for Affordable Local and Long Distance Services in CC Docket Nos. 9645,  {OV(96262, 941, and 99249, Public Notice, FCC 99214 (rel. Aug. 11, 1999).D The new highcost support mechanism described in this Order provides support based on the estimated forwardlooking costs of providing supported services. The forwardlooking costs and the cost model that we will use  Xv2to estimate them are discussed at length in the companion Inputs Order adopted today.= ^v|_ {O(ԍFederalState Joint Board on Universal Service, ForwardLooking Mechanism for HighCost Support for  {Om(Nonrural LECs, CC Docket Nos. 9645, 97160, Report and Order, FCC 99304 (rel. Nov. 2, 1999) (Inputs  {O7 (Order).= With  Xa2the adoption of this Order and the Inputs Order, the Commission's new forwardlooking highcost support mechanism for nonrural carriers will be ready to begin providing support effective January 1, 2000.  X 23.` ` Our methodology for determining nonrural carriers' highcost universal service support conforms to the 1996 Act's goals and balances the competing interests involved in this proceeding. As the 1996 Act requires, the Commission has developed policies for reforming highcost support in consultation with the Joint Board, and this Order reflects"  ,')')``X "  X2deference to states' interests and needs.L X_ yOy(ԍWe have carefully considered states' concerns as they have been expressed to us in the Joint Board's recommendations and our ongoing consultations with the state members and staff, as well as in comments filed in this proceeding by states not directly represented on the Joint Board.L We also have attempted to balance the various and often countervailing concerns of many industry segments that have an interest in the outcome of this proceeding, including incumbent local exchange carriers (LECs), interexchange carriers (IXCs), competitive LECs, and wireless carriers.  X24.` ` Because of the disparate interests involved and the complexity of the issues, however, this has not been an easy process. For example, highcost states, which are likely to be net recipients of highcost support, have very different views on universal service than lowcost states, which are likely to be net payors of highcost support. On the other hand, all states have expressed similar concerns about the Commission's jurisdiction. Similarly, incumbent LECs in highcost states, which are likely to be major recipients of support, particularly in the near term, have very different views than other LECs, IXCs, and wireless carriers, which are major contributors to federal support mechanisms. In some cases, however, IXCs and wireless carriers are entering competitive local service markets, so that these carriers are both contributors and potential recipients.  X25.` ` The 1996 Act charged the Commission with resolving the difficult issues surrounding universal service, within prescribed guidelines, and so we must balance the competing interests of these divergent parties. In this proceeding, the Commission has done so in a way that is faithful to the statute's commitment to ensuring that support mechanisms  X42serve "consumers in all regions in the nation," and that consumers in highcost areas continue  X2to have access to reasonably comparable services at reasonably comparable rates.[ _ yO(ԍ47 U.S.C.  254(b)(3) (emphasis added).[  X2 II.XEXECUTIVE SUMMARY (#  X26.` ` Consistent with the 1996 Act, and based on the recommendations of the Joint Board, we adopt in this Order a new federal forwardlooking highcost support mechanism to  X2enable states to ensure the reasonable comparability of nonrural carriers' intrastate rates.Z x_ yO(ԍCarriers also recover a portion of their costs through interstate rates. We will address reform of  {O (universal service support in interstate rates in our ongoing access charge reform proceeding. See Access Charge Reform, Price Cap Performance Review for Local Exchange Carriers, Transport Rate Structure and Pricing and  {O"(End User Common Line Charges, CC Docket Nos. 96262, 941, 91213, and 9572, First Report and Order, 12  {O"(FCC Rcd 15982 (1997) (Access Charge Reform Order).Z Specifically, we are adjusting and finalizing the framework of the new mechanism for non Xg2rural carriers that we adopted on May 27, 1999, in the Seventh Report and Order. In the  XR2Seventh Report and Order, the Commission adopted a twopart methodology for calculating highcost support for nonrural carriers that considers: (1) the relative costs of providing supported services in highcost areas, and (2) the states' ability to support those costs using their own resources. In the first part of that methodology, the forwardlooking costs of". ,')')``" providing supported services, as calculated by a cost model, are compared to a national benchmark. In the second part of that methodology, a state's ability to support the costs that exceed the national benchmark is estimated by multiplying a fixed dollar amount by the number of lines served by nonrural carriers in the state. Federal support would then be provided for costs that exceed both the benchmark and the state's estimated ability to support those costs.  X_27.` ` For the reasons discussed below, however, we are adjusting the framework of this methodology so that it will better reflect the historical and statutory roles of federal and state universal service support programs. As the Joint Board has suggested, we believe that the primary role of federal highcost support is to enable reasonable comparability of rates  X 2among states, while the primary role of state highcost support is to ensure reasonable  X 2comparability of rates within states. _ {Og (ԍSee Second Recommended Decision, 13 FCC Rcd at 24760, paras. 3739; Seventh Report and Order, 14 FCC Rcd at 8094, para. 35, 8101, para. 46, 8102, para. 48, 8128, para. 105. In Texas Office of Public Utility Counsel v. FCC, the United States Court of Appeals for the Fifth Circuit found that the principles set forth in section 254(b), which include the principle of reasonable comparability, are policy goals, not  X 2legal obligations.~ "_ {O~(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 41112, 425.~ Thus, the Fifth Circuit held that the Commission did not have an unambiguous legal obligation to support intrastate services, and that the Act did not unequivocally establish that all federal universal service support should go to support rates for  Xf2intrastate services.yf_ {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 42526.y The Fifth Circuit nevertheless confirmed that federal universal service  XO2support may be used to support rates for intrastate services.vOF_ {OF(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 444.v The court also found that the Commission could set conditions that states must satisfy to be eligible to receive such federal  X!2universal service support.v!_ {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 444.v Regardless of the extent to which the Commission is legally obligated to support intrastate services, we find that, as a matter of policy, federal universal service highcost support should be sufficient to enable reasonably comparable rates among states, while leaving states with sufficient resources to set rates for intrastate services that are reasonably comparable to rates charged for similar services within their borders. Because the Commission does not set rates for intrastate services, the decision we adopt today is intended to allow states to ensure that rates are reasonably comparable within their borders. We find that this is consistent with the goals that Congress established in section 254(b)(3).  XR28.` ` In fulfilling the federal goal of enabling states to set rates that are reasonably comparable to rates in other states, we do not believe at this time that it is appropriate for the federal highcost support mechanism for nonrural carriers to assume that state support mechanisms will supply a particular amount of support above the national benchmark to" j ,')')``$" enable reasonable comparability of rates among states. Rather, states should be free to use the full extent of their own resources to fulfill their primary role in the federalstate highcost support dichotomy, i.e., ensuring reasonable comparability of rates within states. We find that we can ensure that state resources are accounted for in determining federal support amounts by considering the average cost of providing the supported services in the entire area of the state served by nonrural carriers. We base this judgment on the facts before us and the characteristics of the overall mechanism that we are adopting herein. Therefore, we  X_2reconsider and eliminate the second part of the twopart methodology described in the Seventh  XJ2Report and Order, and conclude that the goal of the federal highcost mechanism should be to provide support to nonrural carriers based solely on the extent to which the costs of  X 2providing supported services in highcost areas exceed the national benchmark. _ {O (ԍAs discussed in the Seventh Report and Order, the Commission adopted the Joint Board's  {Oa (recommendation to use costs as a proxy for rates. Seventh Report and Order, 14 FCC Rcd at 809293, paras. 3233. The Commission concluded that comparing costs in different states, rather than rates, allows the federal mechanism to provide sufficient support to enable reasonably comparable rates without having to evaluate the  {O(myriad state policy choices that affect those rates. Seventh Report and Order, 14 FCC Rcd at 809293, paras. 3233.   X 29.` ` In this Order, we also are filling in the framework of the revised methodology for nonrural carriers to address certain implementation issues on which we sought comment  X 2in the Seventh Report and Order. These issues include the area over which costs should be averaged; the level of the national benchmark; the amount of support to be provided for costs above the national benchmark; targeting support to highcost areas; the holdharmless and portability provisions; and the methods to ensure that nonrural carriers use support in compliance with the 1996 Act. In addition, consistent with our commitment to protect rural carriers' support levels during our reform of nonrural carriers' highcost support, we are modifying our existing highcost support mechanism to ensure that support for rural carriers is not substantially changed when nonrural carriers are removed from that mechanism and begin receiving support from the new forwardlooking support mechanism.  X2 10.` ` The following is a summary of the salient points of the highcost support mechanism for nonrural carriers that we adopt today. Each of these points is discussed in greater detail in the sections below.  X2XX` ` The forwardlooking costs estimated by the cost model are averaged at the statewide level.(#`  X=2XX` ` The national benchmark is set at 135 percent of the national average forwardlooking cost per line of providing supported services.(#`  X2XX` ` The forwardlooking highcost support mechanism provides support for all intrastate forwardlooking costs per line that exceed the national benchmark.(#`  X!2XX` ` The amount of support indicated by the forwardlooking highcost support"!F,')')``" mechanism on a statewide basis is targeted so that the amount of support available to a competitor depends on the wire center cost of the line that the competitor serves.(#`  X2XX` ` Pursuant to the interim holdharmless provision, a carrier will receive the greater of the amount of support provided to that carrier under the current mechanism or the amount of support provided by the forwardlooking mechanism. Holdharmless support is determined on a perline basis; if a carrier loses a line, it loses the support for that line. Holdharmless support is targeted, based on wire center costs, to the highestcost wire centers.(#`  X 2XX` ` Pursuant to the portability provision, when a competitor acquires a customer from an incumbent receiving support, the competitor will receive the incumbent's support.(#`  X 2XX` ` States must certify that nonrural carriers receiving federal highcost support will use that support in compliance with section 254(e) of the Act. To the extent that forwardlooking support calculations exceed support levels based on the current mechanism, no nonrural carrier in a particular state will receive federal support based on forwardlooking costs until that state files the required certification with the Commission. No nonrural carrier in a particular state  X2will receive any federal support after January 1, 2001, if that particular state has not filed the required certification with the Commission.(#`  X2 11.` ` The Commission will use this methodology to provide highcost universal service support to nonrural carriers effective January 1, 2000. The support mechanism for rural carriers will remain unchanged at least until January 1, 2001, and reform will be undertaken only after the Commission, the Joint Board, and a Rural Task Force appointed by  X~2the Joint Board have selected an appropriate methodology for rural support.&~_ {O(ԍFirst Report and Order, 12 FCC Rcd at 8889, para. 204, 891718, paras. 25256. See also FederalState Joint Board on Universal Service Announces the Creation of a Rural Task Force; Solicits Nominations for  {O(Membership on Rural Task Force, CC Docket No. 9645, Public Notice, 12 FCC Rcd 15752 (1997) (Rural Task  {OS(Force Public Notice).  XP2 III.XBACKGROUND (#  X"2X A.X` ` Historical HighCost Universal Service Support (#`  X2 12.` ` The purpose of highcost universal service support has always been to enable access to telecommunications service in areas where the cost of such service otherwise would be prohibitively high. Historically, this purpose has been achieved by providing highcost support to incumbent LECs to enable them to serve highcost customers at belowcost rates. This support has been both explicit and implicit. "#,')')``!"Ԍ X2` ` 1.X ,Explicit Support (#  X2 13.` ` Several federal and state programs have provided explicit monetary payments to  X2support the local loop and switching costs of incumbent LECs serving highcost areas.X_ yO4(ԍA local loop is the connection between the telephone company's central office building and the customer's premises. A switch is a mechanical or electrical device that selects, opens, and closes circuits or paths. The most significant program for nonrural carriers that we are addressing in this phase of our universal service proceeding is the current highcost loop support mechanism, which provides increasing amounts of explicit support based on the amount by which an incumbent LEC's  X_2loop costs, as reflected in its books, exceed the national average.`Z__ yO (ԍPursuant to section 36.631 of the Commission's rules, the current highcost mechanism provides greater levels of support for study areas reporting 200,000 or fewer working loops than for study areas reporting more  {O (than 200,000 working loops. See 47 C.F.R.  36.631(c), (d).` Beginning with loop costs between 115 percent and 160 percent of the national average, the current federal support mechanism for incumbent LECs with more than 200,000 lines provides support for 10 percent of the incumbent LEC's book loop costs (in addition to the 25percent allocation of all loop costs to the interstate jurisdiction), and provides gradually more support as those costs exceed  X 2160 percent of the national average.=X _ yO(ԍ47 C.F.R.  36.631(d). The existing highcost loop support mechanism provides gradually more support for costs that exceed certain thresholds, or steps, above the national benchmark. Thus, the support mechanism is often referred to as a "step function benchmark."= The following chart summarizes the levels of support  X 2provided by the current highcost support mechanism for large incumbent LECs: * _ yO(ԍ47 C.F.R.  36.631(d). The amounts shown in the chart are exclusive of the base 25 percent of loop costs that are recovered in the interstate jurisdiction through access charges. O ddx !ddx  "O     "Loop Cost as a % of the National Averageh"Amount of Intrastate Loop Cost Supported a  T  greater than 115%, but not greater than 160%T"10%aq h Th  greater than 160%, but not greater than 200%:h"30%q q  greater than 200%, but not greater than 250%h"60%q  : h  greater than 250%L"75%   X52 14.` ` Historically, the dial equipment minutes (DEM) weighting program, now called  X2the local switching support program,Q  {OQ%(ԍSee 47 C.F.R.  54.301.Q has provided support for the switching costs of incumbent LECs with fewer than 50,000 lines. Because most of these companies meet the" ,')')``~"  X2statutory definition of a rural telephone company,H yOy(ԍ47 U.S.C.  153(37).H support levels for these carriers will  X2remain unchanged pending later proceedings.JX {O(ԍSee supra para. 11.J Carriers that set their access charges through participation in the NECA commonline cost pool, including a few nonrural carriers, also may receive longterm support (LTS), which provides explicit support to reduce these  X2carriers' looprelated access charges.Q {O? (ԍSee 47 U.S.C.  54.303.Q   Xv2XX` ` 2.X ,Implicit Support (#   XH215.` ` In contrast to explicit support, some state rate designs and, to a lesser extent, the federal interstate access charge system, have provided implicit highcost support flowing from (1) urban areas to rural areas; (2) business customers to residential customers; (3) vertical services to basic service; and/or (4) long distance service to local service. First, many states have adopted the practice of setting uniform local rates throughout the territory that a given company serves within the state, thereby enabling incumbent LECs to charge abovecost rates in urban (lowcost) areas to support the belowcost rates they charge in rural (highcost) areas. Second, some state regulators have allowed incumbent LECs to charge business customers higher rates than residential customers even though the costs of serving business and residential customers in the same area are roughly the same, thereby creating a businesstoresidential support flow. Third, through rate regulation in some states, incumbent LECs are able to charge abovecost rates for vertical services (e.g., touch tone, conference calling, speed dialing, call waiting, caller identification, etc.) in order to support the rates for basic local service. Fourth, incumbent LECs in some states have been able to charge relatively high intrastate access charges to interexchange carriers to cover costs not recovered through local rates. The IXCs pass these access charges on to their long distance customers in the form of higher usage charges for intrastate long distance service, thus creating implicit support from long distance service to local service. Further, the federal interstate access charge system has capped flat enduser rates and recovered certain loop costs through perminute charges to IXCs, which are being phased out through our access charge reform proceeding.  Xe216.` ` Although implicit universal service support was sustainable in a monopoly environment, it will become more difficult to sustain as competition increases. In a competitive market, a carrier that charges rates significantly above its costs to a class of customers may lose those customers to a competitor charging costbased rates. As carriers lower their rates closer to their costs in urban areas, or lose lowcost customers to new entrants charging costbased rates, the implicit support for belowcost rates in highcost areas may erode. Moreover, efforts to sustain implicit universal service support in a competitive environment could encourage business decisions contrary to the purpose of highcost support ! to enable access to telecommunications service in areas where the cost of such service otherwise would be prohibitively high. For example, competitors may be likely to target"" |,')')``*!~" highrevenue business customers in lowcost urban areas where incumbent LECs are charging rates significantly above costs, while foregoing opportunities to serve lowerrevenue residential customers in highcost rural areas where incumbent LECs are charging artificially low rates because of implicit support flows.  X2X B.X` ` Universal Service Principles Stemming From the 1996 Act (#`  X_217.` ` In the 1996 Act, Congress, recognizing that existing universal service support mechanisms were designed for a monopoly environment, directed the Commission to establish support mechanisms for the preservation and advancement of universal service in the  X 2competitive telecommunications environment that Congress envisioned.  {O (ԍ47 U.S.C.  254(b), (d). See also Joint Explanatory Statement at 113. To assist the Commission in preserving and advancing universal service, Congress instructed the Commission to convene a Joint Board for the purpose of making recommendations to the  X 2Commission regarding universal service reform.J Z yO(ԍ47 U.S.C.  254(a)(1).J  X 218.` ` Congress also provided several principles to guide the Commission and the Joint Board in their reform efforts. Specifically, Congress declared that consumers in all regions of the nation, including consumers in rural, insular, and highcost areas, should have  Xb2access to telecommunications services at rates that are affordable and reasonably comparable.Ub yO(ԍ47 U.S.C.  254(b)(1), (3).U Congress also stated that federal universal service support mechanisms should, as far as  X42possible, be explicit,B Z4z {O_(ԍ47 U.S.C.  254(e). See also Joint Explanatory Statement at 131 ("To the extent possible, the conferees intend that any support mechanisms continued or created under new section 254 should be explicit, rather than implicit as many support mechanisms are today.").B as well as specific, predictable, and sufficient to preserve and advance  X2universal service.J! yOj(ԍ47 U.S.C.  254(b)(5).J The support mechanisms also should require all providers of telecommunications services to make an equitable and nondiscriminatory contribution to the  X2preservation and advancement of universal service.J",  yO (ԍ47 U.S.C.  254(b)(4).J The support mechanisms should be competitively neutral, i.e., they should neither unfairly advantage nor disadvantage one  X2provider over another, and neither unfairly favor nor disfavor one technology over another.b#  yO.$(ԍBesides the universal service principles specified in the 1996 Act, Congress directed that the Joint Board and the Commission be guided by such other principles they determine to be consistent with the Act, and necessary and appropriate for the protection of the public interest, convenience, and necessity. 47 U.S.C.  254(b)(7). At the recommendation of the Joint Board, the Commission adopted competitive neutrality as an  {ON'(additional principle for universal service. First Report and Order, 12 FCC Rcd at 880103, paras. 4651.b Additionally, the support mechanisms should allow any telecommunications carrier, using any" n#,')')``z~" technology, including wireless technology, to receive universal service support if it meets the  X2criteria for eligible telecommunications carrier status under the 1996 Act.$ {Ob(ԍSee 47 U.S.C.  214(e)(1); First Report and Order, 12 FCC Rcd at 885859, para. 145.  X2X C.X` ` Actions by the Commission and the Joint Board to Reform HighCost  X2Universal Service Support Pursuant to the 1996 Act (#`  Xv219.` ` As required by the 1996 Act, the Commission convened the Joint Board,`%vZ {O (ԍUniversal Service NPRM, 11 FCC Rcd 18092.`  X_2which produced its first set of recommendations to the Commission in November 1996.&_ {O (ԍFederalState Joint Board on Universal Service, Recommended Decision, 12 FCC Rcd 87 (Jt. Bd. 1996)  {O ((First Recommended Decision).  XH2Based on those recommendations, the Commission adopted the universal service First Report  X32and Order in May 1997. Among other things, the Commission identified the services included within the definition of universal service and established a specific timetable for  X 2implementation of revised universal service support mechanisms.' H {O(ԍSee First Report and Order, 12 FCC Rcd 8776. The Commission designated the following as services eligible for universal service support: (1) singleparty service; (2) voicegrade access to the public switched network; (3) Dual Tone Multifrequency signaling or its functional equivalent; (4) access to emergency services including, in some circumstances, access to 911 and Enhanced 911; (5) access to operator services; (6) access to interexchange service; (7) access to directory assistance; and (8) toll limitation services for qualifying low  {O(income consumers. First Report and Order, 12 FCC Rcd at 8807, para. 56. Consistent with the Joint  X 2Board's recommendations, the Commission further concluded that carriers should receive support for serving rural, insular, and highcost areas based on a methodology using the forwardlooking costs of providing supported services. The Commission explained that using forwardlooking costs will provide sufficient support without giving carriers an incentive to  X2inflate their costs or to refrain from efficient costcutting.(  {O (ԍFirst Report and Order, 12 FCC Rcd at 88998900, paras. 22426. See also First Recommended  {O(Decision, 12 FCC Rcd at 232, para. 276.  Xf220.` ` To determine the forwardlooking costs of providing supported services, the  XO2Commission considered various cost models.)O  {O !(ԍFirst Report and Order, 12 FCC Rcd at 89038917, paras. 23251. See also First Recommended  {O!(Decision, 12 FCC Rcd at 21234, para. 23782. A cost model consists of: (1) a model platform, which contains a series of fixed assumptions about network design and engineering; and (2) input values for the model platform, such as the cost of network components, e.g.,  X 2cables and switches, as well as various capital cost parameters.**Z | yO7&(ԍBecause of various deficiencies in the cost models initially presented to the Commission, it did not  {O&(adopt a specific model platform or set of input values in the First Report and Order. First Report and Order, 12 FCC Rcd at 890910, para. 245. After further consideration of revised cost models, the Commission adopted a"'),')')'"  {O(model platform in the Platform Order released in October 1998. FederalState Joint Board on Universal  {OZ(Service, ForwardLooking Mechanism for HighCost Support for NonRural LECs, CC Docket Nos. 9645, 97 {O$(160, Fifth Report and Order, 13 FCC Rcd 21323 (1998) (Platform Order). As discussed infra, the Commission proposed input values in a FNPRM released on May 28, 1999, and adopted final input values in a companion  {O(Order today. FederalState Joint Board on Universal Service, ForwardLooking Mechanism for HighCost  {O(Support for NonRural LECs, CC Docket Nos. 9645, 97160, Further Notice of Proposed Rulemaking, FCC 99 {OJ(120 (rel. May 28, 1999) (Inputs Further Notice); Inputs Order, FCC 99304.* Under the methodology"  *,')')``~"  X2described in the First Report and Order, the cost model ultimately selected by the Commission would be used to estimate the forwardlooking costs of providing the supported services, but would not, by itself, determine the amount of federal support. Instead, federal support would be based on a methodology comparing the relative differences between the forwardlooking costs of providing supported services in a particular area and a national benchmark.  Xa221.` ` In the First Report and Order, the Commission, following the Joint Board's recommendation, concluded that its highcost methodology should compare the forward X52looking costs of providing supported services to a national revenue benchmark.+5 {O(ԍFirst Report and Order, 12 FCC Rcd at 8888, para. 200. See also First Recommended Decision, 12 FCC Rcd at 18485, paras. 18485. The Commission decided that the share of support provided by the federal mechanism initially should be set at 25 percent of the difference between the forwardlooking cost of providing  X 2supported services and an appropriate revenue benchmark to be determined later.,$ n  {O(ԍFirst Report and Order, 12 FCC Rcd at 8888, para. 201. The Commission chose this level of support because 25 percent approximates the cost of providing the supported network facilities that historically have been assigned to the interstate jurisdiction, and 25 percent is the current interstate allocation factor applied to loop  {Oi(costs in the separations process. First Report and Order, 12 FCC Rcd at 8888, para. 201, 8925, para. 269. The Commission stated, however, that the federal share of support would be subject to review in  X 2light of state proceedings, the development of competition, and other relevant factors.[-^ Z  {O(ԍSee First Report and Order, 12 FCC Rcd at 8926, paras. 27172. See also FederalState Joint Board on  {O(Universal Service, CC Docket No. 9645, Report to Congress, 13 FCC Rcd at 1160209, paras. 219234 (1998)  {Oa((April 1998 Report to Congress).[ The  X 2Commission also determined in the First Report and Order that nonrural carriers would  X2begin to receive highcost support based on forwardlooking costs on January 1, 1999.p. {O (ԍFirst Report and Order, 12 FCC Rcd at 892930, para. 281.p This  X2date subsequently was extended to January 1, 2000.*/ {OB#(ԍAs discussed infra, the implementation date for nonrural carriers initially was extended to July 1, 1999,  {O $(in conjunction with the referral of issues back to the Joint Board. See FederalState Joint Board on Universal  {O$(Service, CC Docket 9645, Order and Order on Reconsideration, 13 FCC Rcd 13749, 13751, para. 4 (1998)  {O%((Referral Order). The implementation date was later extended to January 1, 2000, in order to allow interested parties to provide further information and verification on certain implementation issues and model input values.  {O2'(Seventh Report & Order, 14 FCC Rcd at 8086, para. 19; Inputs Further Notice, FCC 99120 at para. 2.* Implementation of support based on  Xh2forwardlooking costs for rural carriers, however, would not occur at least until January 1,"h /,')')``@~" 2001, and only after the Commission selects an appropriate forwardlooking mechanism based on recommendations from the Joint Board and a Rural Task Force appointed by the Joint  X2Board.0 {OK(ԍFirst Report and Order, 12 FCC Rcd at 8889, para. 204, 891718, paras. 25256. See also Rural Task  {O(Force Public Notice, 12 FCC Rcd 15752.  X222.` ` The Commission's decisions in the First Report and Order regarding the highcost support methodology generated significant comment and numerous petitions for  Xx2reconsideration.1x$ {OM (ԍSee April 1998 Report to Congress, 13 FCC Rcd at 1160304, paras. 22223. In addition, several parties filed petitions for review of the First Report and  Xc2Order, which were consolidated before the United States Court of Appeals for the Fifth  XN2Circuit.2N {O (ԍSee Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999). The court's decision  {O(is discussed infra in section III.D. In the spring of 1998, the state members of the Joint Board requested that certain  X72issues related to the determination of highcost support be referred back to the Joint Board.z3\7 {O(ԍFormal Request for Referral of Designated Items by the State Members of the  254 FederalState Joint  {O(Board on Universal Service, CC Docket No. 9645 (filed March 11, 1998); Letter from the State Members of the Joint Board to William Kennard, Chairman, FCC, CC Docket No. 9645 (filed June 18, 1998).z In April 1998, the Commission committed itself to completing a proceeding reconsidering the federal share of support before revised support mechanisms are implemented for nonrural  X 2carriers,u4 6  {O(ԍApril 1998 Report to Congress, 13 FCC Rcd at 11605, para. 224.u and sought proposals and comments on how to reform highcost support for non X 2rural carriers.5  {OT(ԍCommon Carrier Bureau Seeks Comment on Proposals to Revise the Methodology for Determining  {O(Universal Service Support, Public Notice, 13 FCC Rcd 7341 (Com. Car. Bur. 1998). In response, parties submitted a variety of proposals and comments, and  X 2provided input in a series of en banc hearings.6 $ {O(ԍIn connection with the preparation of the April 1998 Report to Congress, the Commission held an en  {Oc(banc hearing on March 6, 1998, covering, among other things, revisions to the support methodology for non {O-(rural carriers. On June 8, 1998, the Commission convened an en banc hearing, which included the state Joint Board commissioners, to address options for revising the support mechanisms for nonrural carriers. On October  {O(29, 1998, the Commission held an en banc hearing, which included the state Joint Board commissioners, to address the consumer billing and information issues that had been referred to the Joint Board.  X223.` ` In July 1998, the Commission referred several issues to the Joint Board for its  X2recommendations.g7 {O$(ԍReferral Order, 13 FCC Rcd at 1375152, para. 6.g Specifically, the Commission sought recommendations on the following issues: an appropriate methodology for determining support amounts; the extent to which federal universal service support should be applied to the intrastate jurisdiction; whether interstate access charges should be reduced concomitantly to reflect a transition from implicit"<67,')')``p~" to explicit support; how to avoid "windfalls" to carriers if federal funds are applied to the intrastate jurisdiction before states reform intrastate rate structures and support mechanisms; whether and to what extent federal universal service policy should support state efforts to make intrastate support mechanisms explicit; the relationship between the jurisdiction to which funds are applied and the appropriate revenue base upon which the Commission should assess and recover providers' universal service contributions; and to what extent, and in what manner, it is reasonable for providers to recover universal service contributions through rates,  X_2surcharges, or other means.g8_ {O(ԍReferral Order, 13 FCC Rcd at 1375152, para. 6.g  X1224.` ` In November 1998, the Joint Board released its recommendations on these  X 2issues.k9 Z {O% (ԍSecond Recommended Decision, 13 FCC Rcd 24744.k The Second Recommended Decision called for a renewed focus on the statutory principles that sufficient support should be available to ensure that rates are affordable and  X 2reasonably comparable.q:  {O(ԍSecond Recommended Decision, 13 FCC Rcd at 24746, para. 3.q The Joint Board had previously found that rates were generally  X 2affordable,p; ~ {O(ԍFirst Recommended Decision, 12 FCC Rcd at 154, para. 133.p and in the Second Recommended Decision focused on laying the groundwork for  X 2a mechanism to enable reasonably comparable rates.q<  {O(ԍSecond Recommended Decision, 13 FCC Rcd at 24746, para. 3.q Based on the Second Recommended  X 2Decision, the Commission released the Seventh Report and Order in May 1999.g=  {O(ԍSeventh Report and Order, 14 FCC Rcd 8078.g In the  X2Seventh Report and Order, the Commission recognized that the 1996 Act requires that rates should be "just, reasonable, and affordable," and that rates in rural, insular, and highcost  Xl2areas should be "reasonably comparable" to rates charged for similar services in urban areas.>l4  {OQ(ԍSeventh Report and Order, 14 FCC Rcd at 809192, para. 29, 8095 para. 36; 47 U.S.C.  254(b)(1), (3). Because the Joint Board had previously determined that rates are generally affordable, the Commission chose to focus more closely on the issue of reasonable comparability of rates in  X'2the Seventh Report and Order.t?'  {O (ԍSeventh Report and Order, 14 FCC Rcd at 8092, para. 30.t The Commission adopted the Joint Board's proposal that "reasonably comparable" rates should refer to a "fair range" of rates, requiring support levels sufficient "to prevent pressure from high costs and the development of competition from  X2causing unreasonable increases in rates above current, affordable levels."t@X  {O$(ԍSeventh Report and Order, 14 FCC Rcd at 8092, para. 30.t  X225.` ` In the Seventh Report and Order, the Commission reconsidered and repudiated  X2the decision in the First Report and Order that federal support should be limited to 25 percent"@,')')``~" of the difference between the forwardlooking cost of providing supported services and a  X2national revenue benchmark.sA {Ob(ԍSeventh Report and Order, 14 FCC Rcd at 8080, para. 3.s Based on the recommendations of the Joint Board, the Commission concluded that federal support should not be limited to 25 percent because such a limit failed to consider the states' ability to support the costs of providing supported  X2services.BZ {O(ԍSeventh Report and Order, 14 FCC Rcd at 809394, para. 34, 810506, para. 57. The Commission adopted the Joint Board's recommendation to use costs as a proxy for rates in assessing its responsibilities to enable the reasonable comparability of rates. Thus, if federal support is available to cover costs that substantially exceed the national average, no state should face rates that are significantly higher than those elsewhere. The Commission also decided, based on the Joint Board's recommendation, that a cost benchmark would be more appropriate than a revenue benchmark because revenues may not accurately reflect the need for support due to varying ratesetting methods and goals among different states, and because of the administrative difficulties of a revenue approach in light of carriers' decisions to bundle supported services with unsupported services, such as long distance  X 2services, wireless services, and Internet access services.{C  {Or(ԍSeventh Report and Order, 14 FCC Rcd at 810708, paras. 6162.{ Therefore, the Commission adjusted  X 2the initial support framework outlined in the First Report and Order and established a twopart methodology for nonrural carriers that considers both the relative costs of providing  X2supported services and the states' ability to support those costs using their own resources.{D~ {O(ԍSeventh Report and Order, 14 FCC Rcd at 810610, paras. 5866.{  Xd226.` ` In the first step of the methodology described in the Seventh Report and Order, the costs incurred by a nonrural carrier to provide supported services are estimated using a  X82model based on forwardlooking costs.E8 {O(ԍSeventh Report and Order, 14 FCC Rcd at 810610, paras. 5866. Those costs are then compared to a national cost benchmark to determine the areas that have costs exceeding the benchmark and are therefore  X 2in need of support.{F  {O](ԍSeventh Report and Order, 14 FCC Rcd at 810610, paras. 5866.{ In the second step of the methodology,G 4  yO(ԍAs discussed below in section IV.C.4., we have reconsidered and eliminated the second step of the methodology. the state's ability to achieve reasonably comparable rates using its own resources would be estimated by multiplying a  X2fixed dollar amount by the number of lines served by nonrural carriers in the state.|H  {O$(ԍSeventh Report and Order, 14 FCC Rcd at 810610, paras. 5866.| The federal support mechanism would then provide support for costs that exceed both the national  X2benchmark and the individual state's resources to support those costs.{I {O}'(ԍSeventh Report and Order, 14 FCC Rcd at 810610, paras. 5866.{ Under this"I,')')``p~" methodology, states would not be required to impose a perline charge to collect intrastate universal service support, and carriers would not necessarily be entitled to recover a perline  X2amount from state mechanisms.tJ {OK(ԍSeventh Report and Order, 14 FCC Rcd at 8110, para. 65.t Instead, the perline amount would be an estimate of a state's ability to achieve reasonable comparability, and would establish a level above which  X2federal support would be provided.tKZ {O(ԍSeventh Report and Order, 14 FCC Rcd at 8110, para. 65.t  Xv227.` ` In accordance with the Joint Board's recommendations, the Commission also decided to adopt a holdharmless provision as part of its new highcost methodology, i.e., the amount of support provided under the new support mechanism will be no less than the  X12amount provided under the current support mechanism.tL1 {O (ԍSeventh Report and Order, 14 FCC Rcd at 8111, para. 68.t The holdharmless provision is intended to prevent potential rate shocks and disruptions in state rate designs when the  X 2forwardlooking mechanism takes effect.tM ~ {O2(ԍSeventh Report and Order, 14 FCC Rcd at 8111, para. 68.t To ensure that support is distributed in a competitively neutral manner, the Commission adopted the Joint Board's recommendation that  X 2a portability provision be included in the new highcost methodology.{N  {O(ԍSeventh Report and Order, 14 FCC Rcd at 811213, paras. 7172.{ Under this provision,  X 2highcost support will be made available to all carriers eligible for support,QO  {O(ԍSee 47 U.S.C.  214(e).Q whether they are  X 2incumbent LECs, competitive LECs, or wireless carriers.tP 4  {O(ԍSeventh Report and Order, 14 FCC Rcd at 8113, para. 72.t In addition, pending a decision from the Fifth Circuit concerning the Commission's authority to assess carriers' intrastate revenues, the Commission decided that contributions to the highcost support mechanism  Xb2should continue to be based on interstate and international revenues.tQb  {O(ԍSeventh Report and Order, 14 FCC Rcd at 8122, para. 90.t The Commission committed itself to reviewing the operation of the new forwardlooking highcost support  X42mechanism on or before January 1, 2003.{R4X  {O=!(ԍSeventh Report and Order, 14 FCC Rcd at 812324, paras. 9394.{  X228.` ` Although the Commission adopted a revised framework for the new highcost  X2support mechanism in the Seventh Report and Order, it allowed parties an opportunity for further comment on certain implementation issues in order to create a sufficient record  X2regarding those issues.tS {O^'(ԍSeventh Report and Order, 14 FCC Rcd at 8124, para. 95.t Specifically, in the further notice section of the Seventh Report and  X2Order, the Commission sought comment on the level of the national benchmark; the size of"|S,')')``~" the area over which costs should be averaged; the estimate of a state's ability to support highcost areas; methods for ensuring that support is distributed and applied consistent with the  X21996 Act; and the implementation of the holdharmless and portability provisions.T {OK(ԍSeventh Report and Order, 14 FCC Rcd at 812436, paras. 96122. To supplement the record in the  {O(ongoing companion access charge reform proceeding, the Commission also sought comment in the Seventh  {O(Report and Order on how interstate access charges should be adjusted to account for implicit highcost universal  {O(service support that may, in the future, be identified in access rates. Seventh Report and Order, 14 FCC Rcd at  {Os(813641, paras. 12335. As discussed in section IV.H., infra, comments in response to the questions raised about interstate access charges will be addressed in the ongoing access charge reform proceeding rather than the instant  {O (universal service proceeding. See Access Charge Reform Order, 12 FCC Rcd 15982. At the  X2same time the Commission released the Seventh Report and Order, the Commission also  X2released the Inputs Further Notice seeking comment on proposed input values for the cost  X2model._U {OV (ԍInputs Further Notice, FCC 99120._  Xc2X D.X` ` Opinion of the Fifth Circuit Court of Appeals (#`  X5229.` ` On July 30, 1999, a threejudge panel of the Fifth Circuit issued its opinion in  X 2Texas Office of Public Utility Counsel v. FCC, affirming in part, reversing in part, and  X 2remanding in part the First Report and Order.vV  {O`(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 449.v Among other things, the court rejected challenges by several incumbent LECs to the use of a forwardlooking cost model for determining highcost support for nonrural carriers. The court concluded that the Commission could reasonably interpret section 254 of the 1996 Act to authorize a cost model  X 2methodology.vW 8  {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 411.v Specifically, the court held:vX  {O*(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 412.v X[T]he FCC's reason for adopting this methodology is not just to preserve universal service. Rather it is also trying to encourage local competition by setting the cost models at the "most efficient" level so that carriers will have the incentive to improve operations. As long as it can reasonably argue that the methodology will provide sufficient support for universal service, however,  X2it is free, under the deference we afford it under Chevron [USA, Inc. v.  X2National Resources Defense Council, Inc., 467 U.S. 837 (1984)] steptwo, to adopt a methodology that serves its other goal of encouraging local competition.  The court also accepted the Commission's argument that "sufficient" support does not mean"\ X,')')``~"  X2that the amount of support provided must equal the costs reflected in carriers' books.vY {Oy(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 412.v  X230.` ` Concerning the assessment base for contributions to the universal service support mechanisms, the court found that the Commission lacked jurisdiction to assess the  X2intrastate revenues of universal service contributors.yZZ {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 44648.y The court also reversed and remanded for further consideration the Commission's decision to assess contributions based on the  Xv2international revenues of contributors having interstate revenues.y[v {O (ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 43335.y In addition, the court reversed the Commission's "decision to require ILECs to recover universal service  XH2contributions from their interstate access charges."v\H~ {Ow(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 425.v The court held that this requirement  X12maintained an implicit subsidy in violation of section 254(e) of the Act.x]1 {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 425. x  X 2X E.X` ` Response to the Fifth Circuit's Opinion (#`  X 231.` ` On September 9, 1999, the Commission filed a motion for stay of the Fifth  X 2Circuit's mandate in Texas Office of Public Utility Counsel v. FCC, which was to become  X 2effective on September 20, 1999.u^  yO(ԍCommission's Motion for a Stay of the Mandate (filed Sept. 9, 1999).u On September 13, 1999, the Commission, GTE, and  X2AT&T each filed petitions for rehearing with the Fifth Circuit._&2  {Ou(ԍFCC Petition for Panel Rehearing (filed Sept. 13, 1999); FCC Petition for Rehearing En Banc (filed  {O?(Sept. 13, 1999); Petition for Rehearing of the GTE Entities (filed Sept. 13, 1999); Petition for Rehearing En  {O (Banc of the GTE Entities (filed Sept. 13, 1999); Petition of Intervenor AT&T Corp. for Rehearing En Banc (filed Sept. 13, 1999). On September 28, 1999, the Fifth Circuit denied all of the petitions for rehearing, and granted the Commission's motion  Xd2for stay in part.A`\d  {O5 (ԍTexas Office of Public Utility Counsel v. FCC, No. 9760421, (Sept. 28, 1999) (Order denying petitions  {O (for rehearing); Texas Office of Public Utility Counsel v. FCC, No. 9760421, (Sept. 28, 1999) (Order granting motion for stay in part). A The Fifth Circuit stayed its mandate until November 1, 1999.adD {OY#(ԍTexas Office of Public Utility Counsel v. FCC, No. 9760421, (Sept. 28, 1999) (Order granting motion for stay in part).  X6232.` ` In response to the court's rulings, the Commission adopted an Order on"6a,')')``z~" October 8, 1999, that amends its contribution and recovery rules, effective November 1,  X21999.b; {Oy(ԍFederalState Joint Board on Universal Service, CC Docket No. 9645, Access Charge Reform, CC Docket No. 96262, Sixteenth Order on Reconsideration in CC Docket No. 9645, Eighth Report and Order in CC Docket No. 9645, Sixth Report and Order in CC Docket No. 96262, FCC 99290 (rel. Oct. 8, 1999)  {O((Universal Service Remand Order).  Specifically, the Commission removed intrastate revenues from the contribution base, so that universal service contributions are now calculated using a single contribution factor  X2based on interstate and international enduser telecommunications revenues.sc {O7(ԍUniversal Service Remand Order, FCC 99290 at paras. 15, 17.s The Commission also exempted from the contribution base the international revenues of interstate carriers whose interstate revenues account for less than 8 percent of their combined interstate  Xv2and international revenues.vdv] {O (ԍUniversal Service Remand Order, FCC 99290 at paras. 15, 1929.v Further, the Commission revised its rules to comply with the court's directive that our rules not require implicit support flows. The new rules allow incumbent LECs to recover their contributions through access charges or through enduser  X12charges.re1 {O(ԍUniversal Service Remand Order, FCC 99290 at paras. 3033.r To the extent they choose to implement an interstate enduser charge, incumbent LECs that are currently recovering their universal service contributions in interstate access charges must make corresponding reductions in their interstate access charges to avoid any  X 2double recovery.mf  {O(ԍUniversal Service Remand Order, FCC 99290 at para 33.m X` ` (#  X 2 33.` ` In light of the Fifth's Circuit's decision and the Commission's response to it,  X 2the present Order adjusts the methodology described in the Seventh Report and Order, resolves the remaining implementation issues, and adopts a final forwardlooking highcost  X{2support methodology. In the companion Inputs Order adopted today, the Commission  Xf2resolves the issues raised in the Inputs Further Notice and adopts final input values for the  XQ2cost model.PgQ  {O(ԍInputs Order, FCC 99304.P With the adoption of these two Orders, the Commission's new forwardlooking highcost support mechanism is now ready to begin providing support to nonrural carriers effective January 1, 2000.  X2 IV.XORDER (#  X2X A.X` ` Introduction (#`  X2!34.` ` In this Order, we adopt a new specific and predictable forwardlooking mechanism that will provide sufficient support to enable affordable, reasonably comparable" g,')')``~"  X2intrastate rates for customers served by nonrural carriers.Jh {Oy(ԍSee 47 U.S.C.  254(b)(3), (5). We intend to address reform of universal service support in interstate  {OC(access rates in our ongoing access charge reform proceeding. See Access Charge Reform Order, 12 FCC Rcd  {O (15982. In section IV.C.3., infra, we specifically account for carriers' bifurcated recovery of costs in the two  {O(jurisdictions to ensure that our actions here do not disrupt our jurisdictional separations rules. See 47 C.F.R. Part 31.J The methodology for this  X2mechanism is based on the framework outlined in the Seventh Report and Order, with certain modifications discussed below. Specifically, the forwardlooking mechanism compares the costs of providing supported services in a particular state, as determined by the cost model, to a national benchmark, and provides support for costs that exceed that benchmark. In constructing this mechanism, we begin by examining the appropriate federal and state roles in providing universal service support for intrastate rates. Next, we address specific methodological issues relating to the calculation of forwardlooking support, including the area over which costs should be averaged; the level of the national benchmark; the amount of support to be provided for costs above the national benchmark; the elimination of the state share requirement; and the targeting of the statewide support amount. We then address the holdharmless and portability provisions, and the methods to ensure that nonrural carriers use support in compliance with the 1996 Act. We next address the assessment and recovery bases for contributions to the highcost support mechanism. We also describe our plan to address  X 2implicit support in access charges as part of our separate Access Charge Reform proceeding. In addition, we modify the rules governing our existing support mechanism to ensure that support for rural carriers is not substantially changed when nonrural carriers are removed from that mechanism and transitioned to the new forwardlooking support mechanism. Finally, we lift the stay on our section 251 pricing rules, effective May 1, 2000. We emphasize that there may be several ways in which we could design the various components of the federal support mechanism consistent with section 254, but we believe, in light of the facts before us and in consultation with the Joint Board, that the method we adopt here appropriately balances the varied and competing goals of section 254.  X2"35.` ` The new forwardlooking support mechanism that we adopt today will provide forwardlooking support effective January 1, 2000. As discussed below in section IV.F., however, the actual disbursement of forwardlooking support (retroactive to January 1, 2000) will not occur until the second quarter of 2000. Moreover, no commenter has claimed that implementation of the new forwardlooking mechanism presents any "Y2K" problems. Thus, we do not foresee any "Y2K" issues associated with the transition to the new forwardlooking mechanism because there will be no actual change in support levels on or around January 1,  X;22000.i; yOl#(ԍIn the event that a carrier presents a serious and unanticipated Y2Krelated implementation problem to  {O4$(the Commission before January 1, 2000, we will consider the issue expeditiously. See Minimizing Regulatory and Information Technology Requirements that Could Adversely Affect Progress Fixing the Year 2000 Date  {O%(Conversion Problem, Year 2000 Network Stabilization Policy Statement, FCC 99272 (rel. Oct. 4, 1999). We discourage parties dissatisfied with the policies adopted in this Order from using Y2K as an excuse to delay implementation of the new forwardlooking support mechanism. "$ i,')')``~"Ԍ X2X B.X` ` Federal and State Roles in Providing Universal Service Support for  X2Intrastate Rates (#`   X2#36.` ` To construct an appropriate methodology for providing federal highcost support, we must first examine the respective roles of federal and state regulators in providing such support. Historically, federal programs have provided explicit intrastate highcost  Xv2support for local loop and switching costs that significantly exceeded the national average.jv yO(ԍUnder the Commission's rules, only certain small carriers are eligible to receive support for switching  {O(costs. See 47 C.F.R.  54.201, 54.301. Many state programs, on the other hand, have largely achieved the goals of intrastate universal service implicitly through rate structures and, to a lesser extent, through explicit state highcost support mechanisms. As discussed above, many state rate structures have  X 2included significant implicit support for universal service.Qk " {O (ԍSee supra section III.A.2.Q The states' historical authority over intrastate ratemaking, and thus their primary responsibility for intrastate universal  X 2service, has been recognized by the Commission.9lZ  {OQ(ԍSee, e.g., First Report and Order, 12 FCC Rcd at 8926, para. 271 ("The Commission does not have any authority over the local rate setting process or the implicit intrastate universal service support reflected in  yO(intrastate rates.").9 The Commission, however, has had a longstanding goal of promoting universal service nationwide, and thus has provided support for intrastateallocated costs that significantly exceed the national average.  X2$37.` ` In Texas Office of Public Utility Counsel v. FCC, the Fifth Circuit held that section 254 of the Act did not affect the proscription, set forth in section 2(b), against  Xd2Commission regulation of intrastate rates.md {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 421, 424, 44648. Although the Commission disagrees with the court's jurisdictional analysis, this Order is consistent with the court's decision.  Thus, states alone have jurisdiction for setting rates for intrastate services. Consequently, states alone have the authority to set rates for intrastate services that are just, reasonable, affordable, and reasonably comparable. We conclude that Congress would not have imposed on the Commission obligations regarding intrastate rates that the Commission does not have the legal authority to effectuate. Indeed, the Fifth Circuit found that the Commission was permitted (but not required) to provide  X2federal universal service support for intrastate services.vn0  {O!(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 444.v The Fifth Circuit also found that the Commission may condition such support on assurances by states that such federal support  X2will be used for its intended purposes.vo  {O%(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 444.v  X~2%38.` ` In the Second Recommended Decision, the Joint Board recognized that section"~T o,')')``~"  X2254 does not alter the states' historical responsibility for intrastate universal service.p {Oy(ԍSecond Recommended Decision, 13 FCC Rcd at 24747, para. 6, 2475556, paras. 2426. The Joint Board interpreted section 254(b)(3)'s principle that rates be "reasonably comparable" to refer to "a fair range of urban/rural rates both within a state's borders, and among states  X2nationwide."rqZ {O(ԍSecond Recommended Decision, 13 FCC Rcd at 24754, para. 18.r The Joint Board found that the federal role in achieving reasonably comparable rates should be to provide "those amounts necessary to establish a standard of  X2reasonable comparability of rates across states."rr {O* (ԍSecond Recommended Decision, 13 FCC Rcd at 24760, para. 37.r According to the Joint Board, the state role is to "supplement, as desired, any amount of federal funds it may receive," and to "address issues regarding implicit intrastate support in a manner that is appropriate to local  XH2conditions."wsH~ {Ow(ԍSecond Recommended Decision, 13 FCC Rcd at 24760, paras. 37, 39.w Stated another way, the primary federal role is to enable reasonable comparability among states (i.e., to provide states with sufficient support so that states can make local rates reasonably comparable among states), and the primary role of each state is to ensure reasonable comparability within its borders (i.e., to apply state and federal support to make local rates reasonably comparable within the state). This Order adopts that approach as a policy goal. In addition, the approach is consistent with the Fifth Circuit's decision regarding the Commission's responsibility for supporting intrastate services. It also is consistent with Congress's goal of making universal service support explicit.  Xy2X C.X` ` New ForwardLooking HighCost Support Methodology (#`  XK2&39. ` ` This Order sets out a methodology ! in essence, a set of formulas ! that will be used to determine nonrural carriers' support amounts for serving rural and highcost areas. The methodology computes a specific support amount, and can be replicated by carriers or other members of the public. The methodology will change over time only in the ways we specifically describe herein or pursuant to modifications that we make in the future pursuant to public notice and comment in this proceeding. Thus, the methodology is specific and  X2predictable.Yt {O(ԍSee 47 U.S.C.  254(b)(5), (d).Y Moreover, for the reasons discussed below, we find that this mechanism will result in sufficient support to enable affordable and reasonably comparable rates for customers  X2in areas served by nonrural carriers.Yu {O"(ԍSee 47 U.S.C.  254(b)(3), (d).Y  Xe2'40. ` ` In the First Report and Order, the Commission concluded that highcost  XP2support should be based on forwardlooking costs.wvP4  {O5'(ԍFirst Report and Order, 12 FCC Rcd at 88998900, paras. 224226.w Since that time, the Commission has"P v,')')``~"  X2continued to work to adopt a cost model that is reasonably accurate and verifiable.wN {Oy(ԍSee, e.g., FederalState Joint Board on Universal Service, CC Docket Nos. 9645, ForwardLooking  {OC(Mechanism for HighCost Support for NonRural LECs, 97160, Further Notice of Proposed Rulemaking, 12  {O (FCC Rcd 18514 (1997) (1997 Further Notice); Common Carrier Bureau Requests Further Comment on Selected  {O(Issues Regarding the ForwardLooking Economic Cost Mechanism for Universal Service, CC Docket Nos. 9645,  {O(97160, Public Notice, DA 98848 (rel. May 4, 1998) (Inputs Public Notice); Common Carrier Bureau to Hold Three Workshops on Input Values to be Used to Estimate ForwardLooking Economic Costs for Purposes of  {O3(Universal Service Support, CC Docket Nos. 9645, 97160, Public Notice, DA 982406 (rel. Nov. 25, 1998)  {O((Workshop Public Notice); Inputs Further Notice, FCC 99120. As an  X2initial matter, we note that in the Inputs Order we have affirmed the Commission's decision  X2to base support calculations on forwardlooking costs.\x {Oc (ԍInputs Order, FCC 99304 at para. 22.\ Moreover, the Commission and its staff have undertaken a thorough review of the model and its input values over the past six months. In so doing, the staff has coordinated extensively with, and received substantial input from, the Joint Board staff and interested outside parties. As a result of this examination of  Xx2the model, we have concluded in the Inputs Order that the model generates reasonably accurate estimates of forwardlooking costs and that the model is the best basis for  XL2determining nonrural carriers' highcost support in a competitive environment.\yLp  {Om(ԍInputs Order, FCC 99304 at para. 23.\ We have found that none of the criticisms of the model undermine our decision to use it for calculating  X 2nonrural carriers' highcost support.\z   {O(ԍInputs Order, FCC 99304 at para. 24.\ As discussed in the Inputs Order, we believe that using the model is the best way to determine nonrural carriers' support amounts for the  X 2funding year beginning January 1, 2000.\{  {O7(ԍInputs Order, FCC 99304 at para. 28.\ We also recognize, however, that the model must evolve as technology and other conditions change. We therefore have committed in the  X 2Inputs Order to initiating a proceeding to study how the model should be used in the future  X 2and how the model itself should change to reflect changing circumstances.\| & {O(ԍInputs Order, FCC 99304 at para. 28.\  X2(41. ` ` Finally, as discussed further in the Inputs Order, we reiterate that the federal cost model was developed for the purpose of determining federal universal service support, and that it may not be appropriate to use nationwide values for other purposes, such as  X>2determining prices for unbundled network elements.V}Z> {O#(ԍInputs Order, FCC 99304 at para. 32. State commissions, for example, may find that it is not appropriate to use nationwide values in determining state universal service support or prices for unbundled network elements and may choose instead to use statewide or companyspecific values.V The Commission has not considered the appropriateness of this model for any other purposes, and we have cautioned parties from  X2making any claims in other proceedings based upon the input values adopted in the Inputs"},')')``~"  X2Order.\~ {Oy(ԍInputs Order, FCC 99304 at para. 32.\  X2)42. ` ` Consistent with the goals of federal universal service support discussed above, the new forwardlooking support mechanism will compare the average costs of providing supported services in a given area to the national benchmark, provide support for costs exceeding the national benchmark, and then target that support based on wirecenter costs, so that the amount of support available to a competitor depends on the cost level of the wire center. In this section, we examine the area over which costs should be averaged; the level of the national benchmark; the amount of support to be provided for costs above the national benchmark; the elimination of the state share requirement; and the method for targeting statewide support amounts.   X 2XX` ` 1.X ,Area Over Which Costs Should Be Averaged (#  X 2XX` ` X , a.XhBackground (#  X2*43.` ` In the Second Recommended Decision, the Joint Board weighed several options  X}2for the area over which costs should be averaged.y}Z {O(ԍSecond Recommended Decision, 13 FCC Rcd at 2475859, paras. 3235.y Recognizing that states have a substantial role in preserving universal service and "can be expected to participate as full partners" with the Commission, the Joint Board considered the use of statewide average costs to determine  X82the need for universal service support.r8 {O(ԍSecond Recommended Decision, 13 FCC Rcd at 24759, para. 35.r The Joint Board observed that statewide averaging could require some states to create mechanisms to transfer support among nonrural carriers in  X 2different study areas.r ~ {O9(ԍSecond Recommended Decision, 13 FCC Rcd at 24759, para. 35.r Because the Joint Board believed that the short lead time before implementation of the new forwardlooking mechanism would not be sufficient for some  X2states to create such mechanisms, it declined to recommend a statewide approach.r {O(ԍSecond Recommended Decision, 13 FCC Rcd at 24759, para. 35.r Instead,  X2the Joint Board recommended that costs be averaged at the study area level.w {O!(ԍSecond Recommended Decision, 13 FCC Rcd at 24759, paras. 33, 35.w Although the Joint Board recognized that determining costs at the wire center level allows for a more granular measure of support, it concluded that, as between the study area and wire center approaches, the study area approach would "properly measure the support responsibility that  Xi2ought to be borne by the federal mechanism given the current extent of local competition."Zi4  {ON&(ԍSecond Recommended Decision, 13 FCC Rcd at 24759, para. 33. As discussed infra, the Commission believes that the appropriate federal role in providing support for intrastate rates, rather than the current level of competition, should be the driving factor in the selection of the appropriate area over which costs should be"',')')'" averaged."iX,')')``~"Ԍ X2ԙ+44.` ` Instead of adopting a particular approach in the Seventh Report and Order, the  X2Commission sought comment on the appropriate area over which costs should be averaged.xX {O(ԍSeventh Report and Order, 14 FCC Rcd at 812630, paras. 101109. x Specifically, the Commission asked commenters to consider the wire center level, the  X2unbundled network element (UNE) cost zone level, and the study area level.s {OX(ԍSeventh Report and Order, 14 FCC Rcd at 812627, para. 102. s The Commission also described the perceived benefits and drawbacks of each of those  X2approaches.x| {O (ԍSeventh Report and Order, 14 FCC Rcd at 812730, paras. 103109. x  Xa2XX` ` X , b.XhDiscussion (#   X32,45.` ` Federal and State Roles. After further consultation with the Joint Board, we believe that the federal mechanism should calculate support levels for nonrural carriers by comparing the forwardlooking costs of providing supported services, averaged at the  X 2statewide level, to the national benchmark.   yO(ԍBecause we are, in this phase of this proceeding, considering universal service reform only for nonrural carriers, when we speak of "statewide" averaged costs, we are referring only to the entire area within a state that is served by nonrural carriers. Moreover, our decision to adopt a statewide averaging approach for nonrural carriers does not necessarily mean that we will adopt a similar approach for rural carriers in the future. Of all the potential approaches suggested,  yO(ԍWe recognize that the Commission did not specifically ask for comment on the statewide averaging  {O_(approach in the Seventh Report and Order. Considering that the Joint Board addressed the statewide approach in  {O)(its Second Recommended Decision, and that the Commission was seeking comment on the appropriate area over which costs should be averaged, we believe that the decision to adopt a statewide approach is a logical outgrowth  {O(of the proposal to average costs over a given area. See Small Refiner Lead PhaseDown Task Force v. EPA, 705 F.2d 506 (D.C. Cir. 1983). we believe that statewide averaging is the approach most consistent with the federal role of providing support for intrastate universal service to enable reasonable comparability of rates among states. Federal highcost support is generated through contributions by all interstate telecommunications carriers for purposes of providing support to highcost states. This has the effect of shifting money from relatively lowcost states to relatively highcost states. By averaging costs at the statewide level, the federal mechanism compares the relative costs of providing supported services in different states. The federal mechanism will then provide support to carriers in those states with costs that exceed the national average by a certain  X!2amount, i.e., the national benchmark (135 percent of the national average).s!t {OF%(ԍThe national benchmark is discussed infra in section IV.C.2.s This approach ensures that no state with costs greater than the national benchmark will be forced to keep rates reasonably comparable without the benefit of federal support. By averaging costs at the statewide level, the federal mechanism is designed to achieve reasonable comparability of",')')``r~" intrastate rates among states based solely on the interstate transfer of funds.  X2-46.` ` The states, in contrast, have the primary responsibility for ensuring reasonable comparability of rates within their borders. The federal mechanism leaves this state role intact, but provides support to carriers in states with average costs substantially in excess of  X2the national average. With the elimination of the state share requirement,V {O(ԍSee infra section IV.C.4.V no state resources are relied upon by the federal mechanism in providing support for costs above the benchmark. This permits the states to use their substantial resources to achieve the goal of reasonably comparable rates within states. In many cases, states have brought their resources to bear through rate averaging and other forms of implicit support. Recently, some states have  X 2created explicit support mechanisms.$ Z yO% (ԍWhile the 1996 Act does not require states to establish explicit intrastate universal service support mechanisms, the Joint Board has acknowledged that the competitive forces that prompted Congress to favor  {O(explicit federal support mechanisms may also lead states to establish explicit state support mechanisms. Second  {O(Recommended Decision, 13 FCC Rcd at 24756, para. 26. We recognized the states' jurisdiction over intrastate  X 2support in the Seventh Report & Order, when we observed that "the erosion of intrastate implicit support does not mean that federal support must be provided to replace [it]. Indeed, it would be unfair to expect the federal support mechanism, which by its very nature operates by transferring funds among jurisdictions, to bear the support burden that has historically been  X 2borne within a state by intrastate, implicit support mechanisms." F {O(ԍSeventh Report & Order, 14 FCC Rcd at 8101, para. 46. See AT&T reply comments at 6 (the federal mechanism should focus on support flows among states, rather than within states). Thus, we believe that statewide averaging, together with the rest of the methodology we adopt today, is consistent with the division of federal and state responsibility for achieving reasonable comparability for nonrural carriers.  X62.47.` ` Joint Board. We also find that averaging costs at the statewide level is consistent with the Joint Board's vision for the scope and purpose of the federal highcost support mechanism. The Joint Board noted that this Commission alone has the ability to  X2implement a support mechanism that transfers support from one state to another,u {OD(ԍSecond Recommended Decision, 13 FCC Rcd at 2475253, para. 14.u and stated  X2that federal support should be provided to achieve reasonably comparable rates across states.r2  {O!(ԍSecond Recommended Decision, 13 FCC Rcd at 24760, para. 37.r The Joint Board envisioned that the states should have the primary responsibility for ensuring  X2reasonable comparability within states.v  {O#%(ԍSecond Recommended Decision, 13 FCC Rcd at 24760, paras. 3839.v Although the Joint Board recommended averaging costs at the study area level instead of the statewide level, it did so based on its concern that there would be insufficient time before implementation of the new federal mechanism for some states to adopt the necessary mechanisms to transfer support among nonrural carriers in"iV ,')')``~"  X2different study areas within a particular state.r {Oy(ԍSecond Recommended Decision, 13 FCC Rcd at 24759, para. 35.r The carrierbycarrier interim holdharmless  X2approach that we adopt today, however, alleviates the Joint Board's concern.Z {O(ԍThe carrierbycarrier holdharmless approach is discussed in section IV.D., infra. Under that approach, each nonrural carrier within a state will receive no less support under the new mechanism than it receives under the current mechanism. Because the carrierbycarrier interim holdharmless approach will be in effect for up to three years from implementation of the new forwardlooking mechanism, states have no immediate need to transfer support  Xv2among study areas within their borders.v {O (ԍIn the Seventh Report and Order, the Commission stated that it would review the operation of the new  {O (federal mechanism, including the holdharmless provision, on or before January 1, 2003. Seventh Report and  {O (Order, 14 FCC Rcd at 812324, para. 94. In this Order, we have asked the Joint Board to provide us with its recommendations, on or before July 1, 2000, regarding how the interim holdharmless provision may be phased  {O9(out without causing undue disruption to consumer rates in highcost areas. See infra section IV.D. In addition, states should have ample time to implement whatever state mechanisms are necessary to achieve such transfers before the Commission reviews the need for a holdharmless provision. Therefore, the only impediment to statewide averaging identified by the Joint Board ! lack of sufficient time for state action ! has been removed by the carrierbycarrier interim holdharmless provision.  X 2/48.` ` Alternative Approaches. We have carefully reviewed the alternatives to statewide averaging, and in the context of nonrural carriers, in light of the overall methodology we adopt here and the specific circumstances before us, we conclude that statewide averaging is the best approach to further the goals of section 254, while respecting the historical federal and state roles for universal service. There are several benefits to statewide averaging. Statewide averaging considers costs averaged with regard to state boundaries, thereby taking into consideration each state's authority and ability to achieve reasonable comparability of rates within its borders. We recognize that averaging at the study area, UNE cost zone, or wire center levels would have the advantage of providing a more granular measure of support, and that granularity of support is a desirable goal in a  X2competitive marketplace. yO](ԍThe results from these substatewide approaches can be tabulated into state categories to determine the amount of support provided to a particular state, but the averaging occurs independent of state boundaries. Given the specific circumstances and purposes we address here, however, we believe that statewide averaging, coupled with our decision to target the distribution of support to wire centers with the highest costs in a state, better balances the goal of targeting support to highcost areas against the recognition that states can and should satisfy their own rate comparability needs to the extent possible before drawing support from other states.  Xg2049. ` ` For example, assume that the Commission chose to average costs at the wire"g ,')')``~"  X2center level. {Oy(ԍSeveral commenters support averaging costs at the wire center level. See PCIA comments at 3; PRTC comments at 5; SBC comments at 3; Western Wireless comments at 3; USCC reply comments at 7. Under this approach, the costs of providing supported services in individual wire centers would be averaged together to arrive at a national average cost per wire center. Wire centers with costs that exceed the national benchmark would receive support. Because the costs in highcost wire centers in a given state would not be averaged first with lowercost wire centers in the same state, wire center averaging would ignore the state's authority and ability to ensure reasonable comparability of rates within its borders. Stated another way, the federal mechanism would shift funds from lowcost wire centers (and customers) in other states to fund highcost wire centers in the state at issue, and would do so without giving the state the opportunity to support its highcost wire centers with funds from its lowcost wire centers.  X 2150.` ` The same issue arises if costs are averaged at the UNE cost zone level. " {O(ԍSome commenters support averaging costs at the UNE cost zone level. See BellSouth comments at 6; GTE comments at 23; USTA comments at 6. Pursuant to our UNE cost zone rules, state commissions must set different rates for elements in at least three defined geographical areas within the state to reflect geographic cost differences, and may employ existing densityrelated zone pricing plans or other costrelated  X 2zone plans established pursuant to state law.~ | {O(ԍImplementation of the Local Competition Provisions in the Telecommunications Act of 1996, First  {O(Report and Order, 11 FCC Rcd 15499 (1996), aff'd in part and vacated in part sub nom. Iowa Utilities Bd. v.  {Oh(FCC, 120 F.3d 753 (8th Cir. 1997), aff'd in part and rev'd in part sub nom. AT&T Corp. v. Iowa Utilities Bd.,  {O2(119 S.Ct. 721 (1999) (Local Competition Order). See infra section IV.J., regarding the reinstatement of our UNE deaveraging rules following the Supreme Court's decision in that matter.~ Under a UNE cost zone approach to averaging forwardlooking costs, costs in individual UNE cost zones would be averaged together to arrive at a national average cost per UNE cost zone. UNE cost zones with costs greater than the benchmark would receive support. As in the wire center approach, the federal mechanism would provide support to highcost UNE cost zones in a state, without regard to the state's authority or ability to ensure reasonable comparability of rates within its borders. In providing such support, the federal mechanism would shift funds from lowcost UNE zones in other states to highcost UNE zones in the subject state, thus saddling ratepayers in other states with burdens more appropriately placed on ratepayers in the subject state. Additionally,  X2although we expressed concern in the Seventh Report and Order that averaging costs over an area larger than the UNE cost zone could result in opportunities for arbitrage or other uneconomic activities, our concern was based on the assumption that all lines within that larger geographic area would be eligible for the same amount of support, even though UNE  X~2prices would differ among UNE zones.r~4  {Oc%(ԍSeventh Report and Order, 14 FCC Rcd at 812829, para. 106.r Because the new federal mechanism calculates the amount of support at the statewide level, but targets that support to highcost wire centers"g ,')')``~"  X2within the state,V {Oy(ԍSee infra section IV.C.5.V all lines within a state are not eligible for the same amount of support.  X2Thus, the potential for arbitrage or other uneconomic activity is reduced.WZ {O(ԍSee West Virginia comments at 8.W  X2251.` ` Study area cost averaging suffers from the same infirmities as wire center or  X2UNE cost zone averaging.'Z {OA (ԍThe majority of commenters support study area averaging. See AT&T comments at 1213; Bell Atlantic comments at 56; California comments at 912; CBT comments at 4; CompTel comments at 3; Vermont comments at 15; West Virginia comments at 4.' In many states, only one nonrural carrier provides service. In such states, the state boundary and the study area boundary are the same. Some states,  Xv2however, possess more than one nonrural carrier, and thus more than one study area. v yO5(ԍThe following states have more than one nonrural study area: Alabama (3); California (4); Florida (3); Illinois (3); Indiana (3); Kentucky (3); Michigan (2); Minnesota (2); Missouri (3); North Carolina (6); Nebraska (2); Nevada (2); New York (2); Ohio (4); Oklahoma (2); Oregon (2); Pennsylvania (2); South Carolina (2); Tennessee (2); Texas (4); Virginia (4); Washington (2); and Wisconsin (2). Thus, under a study area averaging approach, costs in individual study areas would be averaged together to arrive at a national average cost per study area. Study areas with costs greater than the benchmark would receive support. The federal mechanism, therefore, would shift funds from lowcost study areas in one state to highcost study areas in another state without regard to the recipient state's authority or ability to provide support for costs within its borders. In addition, such a federal mechanism could provide greater support to a state with more than one study area than it would to a state with a single study area, even though both states have the same average forwardlooking costs on a statewide level, thus discriminating against a state that has only one nonrural study area. For example, assume that a state with a single study area has average costs below the benchmark and therefore does not receive forwardlooking support. Assume that another state has the same average statewide costs below the benchmark, but has two study areas, one with costs above the benchmark and one with costs below the benchmark. Under a study area averaging approach, the federal mechanism would provide support for the highcost study area even though the statewide average cost is below the benchmark. This result would burden the federal support mechanism (and thus all ratepayers) with providing support for a state that, through happenstance, has more than one nonrural carrier, and therefore more than one study area. Such support should instead be provided by the state in its role as the primary ratemaking authority and provider of support within its borders.  X2352.` ` Several commenters have suggested nonetheless that a decision by the Commission to average costs over a large geographic area is merely an arbitrary way to  Xe2restrain the size of the fund created by the new forwardlooking support mechanism.e  {O '(ԍSee, e.g., BellSouth comments at 78; GSA reply comments at 4; US West reply comments at 12. We reject this assertion. Congress stated that the Commission shall establish specific, predictable,"N ,')')``~"  X2and sufficient mechanisms to preserve and advance universal service.G yOy(ԍ47 U.S.C.  254(d).G Moreover, the Fifth Circuit approved the Commission's use of a methodology based on forwardlooking cost models for this task "[a]s long as [the Commission] can reasonably argue that the  X2methodology will provide sufficient support for universal service . . . ."vX {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 412.v Thus, despite our general agreement with the Joint Board's conclusion that the federal fund should not increase  X2substantially at this time, {O* (ԍSeventh Report and Order, 14 FCC Rcd at 812930, para. 109. See infra section IV.C.3. our primary goal in this proceeding must be to provide sufficient  Xx2universal service support to enable reasonable comparability of rates among states._x| {O (ԍSee Iowa comments at 3; US West comments at 22; GTE reply comments at 8. We recognize that section 254 also states that federal support should be specific and predictable. 47 U.S.C.  254 (b)(5), (d). We believe, however, that the forwardlooking mechanism that we adopt today achieves these goals. Because the forwardlooking mechanism provides a definitive amount of support on a per line basis, we conclude that it meets section 254's specificity goal. In addition, because the cost model and support methodology are available to the public and will change only through Commission action after notice and comment, carriers can predict the amount of support provided for a given period. Thus, we conclude that the forwardlooking mechanism meets section 254's predictability goal. Moreover, commenters generally have not suggested that the new forwardlooking mechanism fails to satisfy the specificity and predictability goals. Therefore, we believe that our primary focus at this stage of this proceeding should be on section 254's sufficiency goal._ We meet this policy goal, however, in a manner consistent with the federal role for providing universal service support, which, as discussed above, we find to be transferring funds among  X32states.v3 {O(ԍSee supra section IV.B. See also New York comments at 7.v Accordingly, we conclude that statewide averaging of forwardlooking costs is the appropriate means for achieving the federal mechanism's primary goal of enabling reasonable comparability of rates among states.  X 2XX` ` 2.X ,National Benchmark (#  X 2XX` ` X , a.XhBackground (#   X{2453.` ` In the Second Recommended Decision, the Joint Board recommended that the Commission consider a national benchmark in the range between 115 and 150 percent of the  XO2national average cost per line.uO {O"(ԍSecond Recommended Decision, 13 FCC Rcd at 2476162, para. 43.u While most commenters supported the use of a national benchmark, many were reluctant to comment on the Joint Board's recommendation in the  X!2absence of a more finalized cost model. Therefore, we sought further comment in the Seventh  X 2Report and Order on the Joint Board's recommended range and urged commenters to formulate their comments using the updated cost model outputs available as a result of the":,')')``~"  X2Inputs Further Notice.n {Oy(ԍSeventh Report and Order, 14 FCC Rcd at 8124, para. 97.n We received numerous comments in response to this request.f"Z {O (ԍSee, e.g., Ameritech comments at 9; AT&T comments at 78; BellSouth comments at 56; CBT comments at 34; California comments at 89; ITCs comments at 4; New York comments at 4; PRTC comments at 34; Sprint comments at 1516; US West comments at 18; Vermont comments at 89; West Virginia comments at 9.f Commenters proposed benchmarks ranging from 80 percent to 200 percent of the national  X2average forwardlooking cost per line.t"D {O (ԍSee, e.g., AT&T comments at 78 (200% benchmark); ITCs comments at 34 (115% benchmark); Sprint comments at 15 (150% benchmark); US West comments at 18 (115% benchmark); Vermont comments at 14 (80% benchmark); West Virginia comments at 9 (135% benchmark); Western Wireless comments at 8 (150% benchmark at a minimum).t For the reasons discussed below, we select 135 percent as the appropriate national cost benchmark.  X2XX` ` X , b.XhDiscussion (#  Xa2554.` ` In establishing a national cost benchmark to enable reasonably comparable rates among states, we observe that the 1996 Act does not define the term "reasonably comparable." We find that Congress's use of the term "reasonably" indicates its recognition that the task of setting federal support amounts is not an exact science. Accordingly, consistent with our interpretations of "reasonableness" provisions elsewhere in the statute, we conclude that the term "reasonably comparable" leaves us substantial discretion to determine what is reasonable, including the manner in which we make that determination. The Joint Board interpreted the reasonable comparability standard to refer to a "fair range" of urban and rural rates both  X 2within a state's borders, and among states nationwide.I\ .  {O(ԍSecond Recommended Decision, 13 FCC Rcd. at 24753, para. 15. This definition of reasonable comparability contradicts, for example, ITCs' assumption that the goal of reasonable comparability should refer  {O(to equality of rates. ITCs comments at 34.I In the Seventh Report and Order,  X2the Commission adopted the Joint Board's interpretation.nR  {O(ԍSeventh Report and Order, 14 FCC Rcd at 8092, para. 30.n The Commission recognized, however, that reasonably comparable does not mean that rate levels in all states, or in every  Xf2area of every state, must be the same.nf {O (ԍSeventh Report and Order, 14 FCC Rcd at 8092, para. 30.n Therefore, we believe that reasonably comparable must mean some reasonable level above the national average forwardlooking cost per line, i.e., greater than 100 percent of the national average. In interpreting "reasonably comparable," we must consider the burden placed on belowbenchmark states (and ratepayers) whose contributions fund the federal support mechanism. We also must ensure that the benchmark we select, when taken together with other aspects of the overall funding mechanism, allows for universal service support that is specific and predictable.  X2655.` ` We conclude that the level of the national benchmark should be set at 135" v,')')``*~" percent of the national average forwardlooking cost per line for nonrural carriers. The federal mechanism will provide support for costs that exceed this national benchmark. A national benchmark of 135 percent falls within the range recommended by the Joint Board, and ensures that no state will face costs greater than 35 percent above the national average cost per line. Moreover, setting the benchmark at 135 percent of the national average forwardlooking cost is consistent with the precedent of the existing support mechanism and the comments we have received. The current mechanism begins providing support for costs between 115 and 160 percent of the national average cost per line, based on carriers' books, and the vast majority of nonrural carriers receive all their current support for costs in this  X12range.1 yO (ԍThat is, very few nonrural carriers have book costs that exceed 160 percent of the nationwide average.  {Or (For a more detailed description of the current support mechanism, see supra section III.A.1. The new national benchmark of 135 percent is near the midpoint of this range. Commenters generally proposed benchmark levels between 80 and 200 percent of the  X 2nationwide average.t" " {O(ԍSee, e.g., Vermont comments at 14 (80% benchmark); AT&T comments at 78 (200% benchmark); ITCs comments at 34 (115% benchmark); Sprint comments at 15 (150% benchmark); US West comments at 18 (115% benchmark); West Virginia comments at 9 (135% benchmark); Western Wireless comments at 8 (150% benchmark at a minimum).t Vermont and US West, for example, advocated benchmarks of 80  X 2percent and 115 percent, respectively.  yO(ԍVermont comments at 14 (80% benchmark); US West comments at 18 (115% benchmark). California stated that it uses an affordability  X 2benchmark of 150 percent.P  yO"(ԍCalifornia reply comments at 4.P CBT, Sprint, and Western Wireless also advocate a 150 percent  X 2benchmark, and AT&T urges us to use a 200 percent benchmark. ,  yO(ԍSprint comments at 15 (150% benchmark); Western Wireless comments at 8 (150% benchmark at a minimum); AT&T comments at 78 (200% benchmark). Thus, the 135 percent benchmark is a reasonable compromise of commenters' proposals. By adopting this benchmark, we do not mean to suggest that we could not, in consultation with the Joint Board, determine that a different level of benchmark is appropriate in future proceedings. In the context of nonrural carriers, and in light of the overall methodology we adopt here and the specific circumstances before us, however, we believe that the benchmark we adopt appropriately balances various goals under the statute. These goals include, among others, sufficiency, specificity, and predictability, as well as the need to achieve rate comparability. In addition, we have also attempted to ensure that the fund is no larger than necessary, and to minimize burdens on carriers and consumers that contribute to universal service mechanisms.  X2756.` ` We believe that this level of support will provide states with the ability to  X2provide for a "fair range" of urban and rural rates within their borders,  {O%(ԍSecond Recommended Decision, 13 FCC Rcd at 24753, para. 15. See also Seventh Report and Order, 14 FCC Rcd at 8091, para. 29. and will be sufficient to "prevent pressure from high costs and the development of competition from"!,')')``$~"  X2causing unreasonable increases in rates above current, affordable levels."n {Oy(ԍSeventh Report and Order, 14 FCC Rcd at 8092, para. 30.n Because no state will face costs, net of federal support, that exceed 135 percent of the national average, the federal mechanism will prevent excessive upward pressure on rates caused by high costs. This will remain true even as competition develops and pushes prices toward economic cost. We therefore find that using a benchmark set at 135 percent of the national average forwardlooking cost per line will, at this time, in light of the facts before us, provide sufficient support to enable reasonably comparable rates.  XH2857.` ` We recognize that, irrespective of our policies, the development of competition may place pressure on implicit support mechanisms at the state level. For example, states that use abovecost pricing in urban areas to subsidize belowcost service in rural areas may face pressure to deaverage rates as competitors begin to offer costbased rates to urban customers. Although this development may compromise states' ability to facilitate universal service using implicit support, it should not compromise states' ability to facilitate universal service through explicit support mechanisms. In addition, we do not believe it would be equitable to expect the federal mechanism ! and thus ratepayers nationwide ! to provide support to replace implicit state support that has been eroded by competition if the state possesses the resources to replace that support through other means at the state level. This approach is consistent with our discussion, above, of the appropriate, respective roles of the state and federal jurisdictions in providing universal service support.  X2958.` ` We also believe that a national benchmark of 135 percent strikes a fair balance between the federal mechanism's responsibility to enable reasonable comparability of rates among states and the burden placed on belowbenchmark states (and ratepayers) whose contributions fund the federal support mechanism. We recognize that selecting the national benchmark is not an exact science. We conclude, however, that a national benchmark of 135 percent of the national average cost per line will allow the federal mechanism to provide  X2sufficient support pursuant to the Act,OZ yO(ԍ47 U.S.C.  254(b)(5), (d).O while at the same time minimizing the burden on those who fund the federal support mechanism. Moreover, we believe that, given the specific circumstances here, the mechanism we adopt today is consistent with the Joint Board's conclusion that the federal highcost support fund should be only as large as necessary, consistent with other requirements of the law.  X 2:59.` ` Some commenters have suggested that our choice of a benchmark will  X2necessarily be arbitrary,Z {O$(ԍSee, e.g., Ameritech comments at 9.Z and some have suggested that we will intentionally set the  X2benchmark with an eye to minimizing the size of the federal support mechanism.\| {O'(ԍSee, e.g., BellSouth comments at 78.\ We reject these claims. We remain committed to the objective that the fund not be any larger than is" ",')')``~" necessary to achieve the various goals of section 254. As noted above, we have attempted to set a benchmark level that provides sufficient support to enable reasonably comparable rates, as the statute requires. To do so, we have relied on the Joint Board's recommendations, the existing mechanism, and commenters' proposals to arrive at a benchmark level that reasonably balances the roles of the states and the federal mechanism to meet the statutory goals.  Xv2XX` ` 3.X ,Support for Costs Above the National Benchmark (#  XH2XX` ` X , a.XhBackground  (#  X 2;60.` ` In the Seventh Report and Order, the Commission recognized that there is a tension between the goal of preventing the fund from growing substantially and the goal of  X 2ensuring that support is targeted directly to the highcost areas that need it most.o  {Og (ԍSeventh Report and Order, 14 FCC Rcd at 8129, para. 107.o In light of the Joint Board's recommendations and commenters' suggestions, the Commission proposed  X 2five methods for resolving this tension. Z {O(ԍSeventh Report and Order, 14 FCC Rcd at 812930, paras. 10809. Although the Commission described these methods as "four proposals," the fourth proposal consisted of two separate proposals. Four of those proposals sought to average costs over a relatively small area (the wire center or UNE cost zone level), while limiting the size of the fund by providing less than 100 percent of the support for costs above the national benchmark. The remaining proposal sought to average costs over a larger area (the study area level), while targeting the resulting support amount to the highest cost areas within that large  XM2area.jM {O(ԍThat proposal is addressed infra at section IV.C.5.j In this section, we address the four proposals to limit the size of the fund by: (1) providing only a uniform percentage of the support otherwise indicated by costs exceeding the benchmark level; (2) capping the amount of support available to any particular state at a fixed percentage of the overall fund; (3) raising the benchmark; or (4) employing incremental funding levels for costs above the selected benchmark similar to the existing highcost loop  X2support mechanism (i.e., a step function benchmark).~F {O(ԍSeventh Report and Order, 14 FCC Rcd at 812930, paras. 10809. ~ Commenters offered varying degrees  X2of support for each of these methods.BX yOL (ԍCalifornia comments at 1314; CBT comments at 34; GTE comments at 2830; SBC comments at 56; US West comments at 2224; West Virginia comments at 89; Western Alliance comments at 16; Western Wireless comments at 9; Florida reply comments 1011; USCC reply comments at 7.B  X2XX` ` X , b.XhDiscussion (#  Xg2<61.` ` All of the proposals to limit the size of the highcost support mechanism assume that costs will be averaged at the wire center or UNE cost zone level. As discussed above in section IV.C.1., however, we have concluded that averaging costs below the statewide level is not the most appropriate means for the federal support mechanism to""# ,')')``f~" achieve the goals of the Act. We recognize that our primary mission in this proceeding is to  X2construct a federal mechanism that provides sufficient support,V {Ob(ԍSee supra section IV.C.1.V and we conclude that using one of the proposals described above to limit the amount of support available to states from the federal mechanism would not provide sufficient support and would be contrary to Congress's goals and the Fifth Circuit's decision. Therefore, we reject all four of these proposals.  X_2=62.` ` We observe, however, that providing support for all loop costs that exceed the  XH2federal benchmark would not properly take account of our separations rules.GZHZ {OS (ԍSee Sprint comments at 16; Vermont comments at 10 (arguing that providing 100 percent of the difference between cost and the benchmark would lead to doublerecovery because a portion of cost is recovered in the interstate jurisdiction pursuant to the separations process).G Pursuant to the separations process, incumbent carriers currently recover, through interstate access rates, a portion of their book costs for all components necessary to provide supported services, e.g., loop costs, switching costs, etc. Our separations rules specify the percentage of costs that will  X 2be recovered through interstate rates.6\ | {O(ԍThe separations rules have historically operated on carriers' book costs. See 47 C.F.R. Part 36. In  {O(addition, most carriers' actual access charge recovery is determined by our price cap rules. See 47 C.F.R. Part 69, Subpart C.6 In producing cost estimates, the cost model estimates  X 2only the forwardlooking intrastate (i.e., separated) costs for all of the components necessary to provide supported services, with three important exceptions: loop costs, port costs, and local number portability (LNP) costs. The model's estimates for loop and port costs consist  X2of both the intrastate and interstate (i.e., unseparated) costs of the loop and port. The model's estimates of LNP costs consist solely of interstate costs. In this Order, we are  Xf2addressing support to enable the reasonable comparability of intrastate rates. It would therefore be inappropriate for us to address costs in this Order that are recovered through interstate rates, as these costs, or their recovery, will not directly affect intrastate rates. Our methodology must therefore account for the percentage of costs that are recovered in the interstate jurisdiction in determining how much support should be provided to enable the reasonable comparability of intrastate rates.  X2>63.` ` Our current separations rules allow carriers to recover 25 percent of their book loop costs through interstate rates. Carriers also recover 15 percent of their book port costs, on average, through interstate rates, and 100 percent of their LNP costs through the federal  X2LNP cost recovery mechanism.X {O#(ԍSee 47 C.F.R. Part 52, Subpart C.X We therefore conclude that the forwardlooking mechanism will calculate support based on 75 percent of forwardlooking loop costs, 85 percent of forwardlooking port costs, and 0 percent of forwardlooking LNP costs, as well as 100 percent of all other forwardlooking costs determined by the cost model. Based on the percentage of forwardlooking costs that the intrastate portion of each of these items"&$2 ,')')`` ~" represents, we have determined that together they represent 76 percent of total forward X2looking costs.=b  yOb(ԍTo arrive at 76 percent, we begin with the national average cost per line generated by the model, which is $23.836. This amount consists of $20.813 in loop costs, $0.861 in port costs, $0.320 in LNP costs, and $1.842 in all other costs. Under our separations rules, 75 percent of loop costs and, on average, 85 percent of port costs are allocated to the intrastate jurisdiction. Thus, $15.610 ($20.813 x 75%) of the total forwardlooking loop cost, and $0.732 ($0.861 x 85%) of the total forwardlooking port cost, represent the intrastate loop and port costs the forwardlooking mechanism will support. Under our LNP rules, 100 percent of LNP costs are recovered through the federal LNP cost recovery mechanism. Thus, 0 percent of LNP costs will be supported by the forwardlooking mechanism. Combining intrastate loop costs ($15.610), intrastate port costs ($0.732), intrastate LNP costs ($0), and all other intrastate costs ($1.842) equals $18.184, which represents the total  {Oj (forwardlooking intrastate costs produced by the cost model. We then divide the total forwardlooking intrastate costs produced by the cost model ($18.184) by the total forwardlooking intrastate and interstate costs produced by the cost model ($23.836), and arrive at 76 percent.= Therefore, we conclude that the federal mechanism should provide 76 percent of the portion of the forwardlooking cost of providing the supported services that  X2exceeds the national benchmark.  yO^(ԍThe remaining 24 percent of forwardlooking costs estimated by the cost model are already recovered through the interstate jurisdiction. We emphasize that this will not undermine the federal  X2mechanism's ability to provide sufficient support.8J  yO(ԍWe recognize that, although the national average forwardlooking loop, port, and LNP costs are $20.813, $0.861, and $0.320 per month, respectively, the loop, port, and LNP costs in a particular wire center may be higher or lower than those amounts. Theoretically, it would be possible to calculate a different level of support for costs above the benchmark, i.e., other than 76 percent, in each wire center. We conclude, however, that the administrative burdens of such an approach would outweigh any of its benefits.8 Rather, it is merely a safeguard to ensure that our mechanism adequately takes account of our separations rules and the division of cost recovery responsibility set forth in those rules. If necessary, we will adjust this support amount in light of further developments in our ongoing separations and access charge reform proceedings.   X 2XX` ` 4.X ,Elimination of the State Share Requirement from the Forward X 2Looking Support Methodology (#  X 2` ` X , a.XhBackground (#  X 2?64.` ` In the Second Recommended Decision, the Joint Board recommended that the methodology for determining federal highcost support amounts should take into account the states' ability to support their own universal service needs internally through their own  Xd2resources.d {O$(ԍSecond Recommended Decision, 13 FCC Rcd at 2476162, paras. 42, 4445.ă The Joint Board recommended that federal support be provided only for costs that exceed both the national benchmark and the states' ability to support their own universal  X62service needs.6 {Os'(ԍSecond Recommended Decision, 13 FCC Rcd at 2476162, paras. 42, 4445.ă Several members of the Joint Board, however, believed that the federal support methodology should not account for the states' ability to support their own universal"%,')')``~" service needs because doing so would be inconsistent with the rest of the methodology  X2proposed by the Joint Board. yOb(ԍDissenting Statement of Commissioner Harold FurchtgottRoth, 13 FCC Rcd at 24791 ("[A] State contribution level seems to conflict with other recommendations in the report. . . . In any event, I do not support either an explicit or an implicit federal requirement that States establish intrastate universal service funds."); Separate Statement of Commissioner Laska Schoenfelder Dissenting, 13 FCC Rcd at 24801 ("This approach is inconsistent with language contained in the recommended decision that federal support may not be made contingent upon any actions taken, or not taken, by the states.").  X2@65.` ` In the Seventh Report and Order, the Commission adopted the Joint Board's recommendation that the federal support mechanism take into account the states' ability to  X2support universal service internally, i.e., the state share requirement.t@ {O (ԍSeventh Report and Order, 14 FCC Rcd at 8109, para. 63.t Specifically, the Commission concluded that a set dollar amount per line would be an appropriate method by  Xa2which to ascertain a state's internal ability to achieve reasonable comparability of rates.ta {O(ԍSeventh Report and Order, 14 FCC Rcd at 8109, para. 63.t  XJ2The Commission then sought comment on the level of that set dollar amount per line.tJd  {O_(ԍSeventh Report and Order, 14 FCC Rcd at 8109, para. 63.t  X 2XX` ` X , b.XhDiscussion (#  X 2A66.` ` After further consultation with the Joint Board, we conclude that determining support amounts for nonrural carriers in each state based on statewide averaged costs will, under these specific circumstances, more accurately reflect each state's ability to support universal service with its own resources than would imputing a perline amount to each state to support universal service internally. Therefore, we reconsider and eliminate the state share  X{2requirement from the methodology adopted in the Seventh Report and Order.{  {O"(ԍSeveral commenters are generally opposed to any state share requirement. See, e.g., GTE comments at 3033; PRTC comments at 6; SBC comments at 6; USTA comments at 6.  XO2B67.` ` We find that this result is consistent with both section 254 and the Joint Board's overarching recommendation that federal support not be dependent on any particular state action and that "no state can or should be required by the Commission to establish an  X 2intrastate universal service fund."x P  {O #(ԍSecond Recommended Decision, 13 FCC Rcd at 24760, para. 38.x We conclude that the Joint Board's general recommendation, namely that the Commission abstain from requiring any state action as a condition for receiving federal highcost universal service support (other than state  X2certifications),O {OX'(ԍSee infra, section IV.F.O represents the best policy choice at this time.|t {O(ԍSee Texas Office of Public Utility Counsel v. FCC, 183 F.3d at 444.| Furthermore, we conclude"&Z,')')``v~" that, together with the statewide averaging approach discussed above in section IV.C.1., the elimination of the state share requirement better fosters the Joint Board's goal of ensuring that the states' ability to provide for universal service needs within their borders is reflected in the federal mechanism. Thus, we reconsider and eliminate the state share requirement from the methodology for the forwardlooking highcost support mechanism for nonrural carriers.  Xv2XX` ` 5.X ,Targeting Statewide Support Amounts (#  XH2XX` ` X , a.XhBackground (#  X 2C68.` ` Under the methodology that we have adopted above, the forwardlooking federal mechanism determines the amount of support to be provided to each state by comparing the average statewide cost per line for nonrural carriers to the national benchmark of 135 percent of the national average cost per line for nonrural carriers. The mechanism then provides support for 76 percent of the costs per line that exceed the benchmark. The statewide average amount of support per line indicated for a particular state, multiplied by the number of lines in that state within nonrural carriers' study areas, equals the total amount of  Xy2support provided to nonrural carriers in the state.0ZyZ yO(ԍIf, however, a nonrural carrier would receive less support under the forwardlooking mechanism than it  {OL(receives under the current mechanisms, then the carrier will receive interim holdharmless support. See infra, section IV.D.0  XK2D69.` ` In the Seventh Report and Order, the Commission proposed that, instead of taking the total amount of support provided and making it available to all carriers in a uniform amount per line, the total amount of support should be targeted so that more support  X2is available in highcost wire centers.q| {O5(ԍSeventh Report and Order, 14 FCC Rcd at 8129, para. 108. q The Commission observed that this approach would ensure that support reaches the areas that need it the most, and "would not significantly  X2increase the size of the fund."" {O(ԍSeventh Report and Order, 14 FCC Rcd at 8129, para. 108. In fact, targeting support has no effect on the overall size of the fund. Rather, as discussed above, the fund size is dependent on the area over which costs are averaged, the level of the national benchmark, and the amount of support provided for costs above the benchmark.  The Commission also tentatively concluded that, if the federal support amount based on forwardlooking costs provides only a portion of the support for a carrier's wire centers, then support should be allocated among all lines in those highcost  X2wire centers in a pro rata manner.o  {O>%(ԍSeventh Report and Order, 14 FCC Rcd at 8133, para. 116.o  Xi2` ` X , b.XhDiscussion (# "R' ,')')``~"Ԍ X2E70.` ` We conclude that, after the total amount of forwardlooking support provided to carriers in a particular state has been determined in accordance with the methodology set forth above, which is based on statewide average costs, the total support amount will then be targeted so that support is only available to carriers serving those wire centers with forwardlooking costs in excess of the benchmark, and so that the amount available per line in a  X2particular wire center depends on the relative cost of providing service in that wire center.9\ {O(ԍSee, e.g., California comments at 12; SBC comments at 5; AT&T reply comments at 8. In section  {O(IV.D., infra, we adopt a slightly different approach for targeting the amount of holdharmless support provided to a particular carrier.9 This targeting approach has two main effects. First, once the forwardlooking mechanism calculates the total amount of support available within a state, the targeting approach determines which carriers receive support, and how much support is provided to each carrier. Second, the targeting approach determines the amount of support that is available to a  X 2competitive carrier that captures lines from an incumbent carrier.  yO(ԍThe targeting approach does not affect a state's ability to direct or approve how carriers use their federal  {O(support, so long as the use is consistent with section 254(e). See infra section IV.F.  X 2F71.` ` As discussed above in section IV.B., the primary role of the federal mechanism is to transfer funds among states, while states are primarily responsible for transferring funds within their borders. Our targeting approach is consistent with this determination. The total amount of support available within the state is based, as discussed above, on statewide costs ! not wire center costs ! relative to the federal benchmark. If we did not target support, then the same amount of federal support would be available for any line served by a competitor within the state. Thus, support would be available, for example, to competitors that serve only lowcost, urban lines, regardless of whether the cost of any of the lines served exceeds  X42the benchmark. This result would create uneconomic incentives for competitive entry,K4F {O+(ԍSee infra, para. 74.K and could result in support not being used for the purposes for which it was intended, in  X2contravention of section 254(e).' yO(ԍWe also note that this targeting does not affect states' authority in connection with their certifications to  {OW(the Commission that support is being used in a manner consistent with section 254(e). See infra section IV.F.'  X2G72.` ` In the Seventh Report and Order, the Commission described this targeting process as follows: "if we were to determine total support amounts in each study area by running the model to estimate costs at the study area level, [we propose] to distribute support by running the model again at the wire center level in order to target support to highcost  X~2wire centers within the study area."l~2  {Oa%(ԍSeventh Report and Order, 14 FCC Rcd 8129, para. 108.l We clarify that this process does not involve running the model more than once. The cost model, by design, calculates costs at the wire center level. The wire center costs generated by the model can then be averaged together, as desired, at higher levels of aggregation, such as the UNE cost zone level (assuming UNE cost";( ,')')``l~" zones are composed of wire centers), the study area level, or the statewide level. Thus, the model only needs to be run once to determine forwardlooking costs for whatever methodology is selected.  X2H73.` ` Under the methodology we adopt today, the model's wire center costs are averaged at the statewide level and a total statewide support amount is determined. That total statewide support amount is then targeted, based on the individual highcost wire center costs in the state, as previously determined by the cost model, that are above the benchmark. For example, assume that a state has three wire centers with ten lines in each wire center. Assume that the average forwardlooking cost per line in each wire center is as follows: Wire Center 1 $20, Wire Center 2 $30, Wire Center 3 $40. Thus, the statewide average cost per line is $30 ((($20 x 10) + ($30 x 10) + ($40 x 10)) / 30 lines). Assume further that the national benchmark equates to $25 per line. Using the statewide methodology adopted above, the total amount of support provided to the carriers in the state would be $114.00 (($30 $25) x 30 lines x 76%), or $3.80 per line per month of untargeted support. Under the targeting approach, however, this support is distributed to carriers serving lines in the highestcost wire centers, based on the difference between costs in that wire center and the benchmark, the number of lines served, and a pro rata factor. Any carrier serving customers in the lowcost wire center receives no support. Targeting support to highcost wire centers requires three calculations. First, support is calculated separately for each wire center (wcscale support). Wire Center 1 is not entitled to any support because its cost is below the benchmark. Wire Center 2's wcscale support would be $38.00 (($30 $25) x 10 lines x 76%). Wire Center 3's wcscale support would be $114.00 (($40 $25) x 10 lines x 76%). Second, a prorating factor is calculated for the state. Total wcscale support for both wire centers is $152 ($38.00 + $114.00). Because only $114.00 of support is available in the state, each wire center will receive 75 percent ($114 / $152) of its wcscale support. Third, the prorating factor is applied to each wire center eligible for support. In Wire Center 2, support will be $2.85 per line ($38.00 x 75% / 10). In Wire Center 3, support will be $8.55 per line ($114.00 x 75% / 10). Total support in the state, distributed in this way, is $114.00 (($2.85 x 10) + ($8.55 x 10)). The targeting mechanism, therefore, provides support to carriers serving the highest cost customers, but within the overall limit on the state's support amount from the federal mechanism.  X 2I74.` ` By comparison, a uniform distribution in the hypothetical state described above would result in all lines in the state receiving $3.80. Thus, even though a carrier serving lines in Wire Center 1 has costs ($20) below the benchmark ($25), it would receive a substantial amount of support ($3.80) for those lines, resulting in a windfall for the carrier and an artificial incentive for other carriers to compete in that wire center. At the same time, although the carrier serving lines in Wire Center 3 has costs ($40) above the benchmark ($25), it would receive a support amount ($3.80) substantially below its costs, thereby discouraging competitive entry in that wire center and placing increased pressure on the state to provide additional support.  X#'2J75. ` ` By targeting the total amount of support to highcost wire centers, the federal mechanism avoids the inefficiencies and potential market distortions that could be caused by" (),')')``%~" distributing federal support on a uniform statewide basis. We believe that this distribution methodology ensures that federal highcost support provided by statetostate transfers will flow to carriers serving the highcost areas within each state.  X2K76. ` ` After further consultation with the Joint Board, we recognize that some states may wish to have federal support targeted to an area different than the wire center, e.g., the UNE cost zone, in order to achieve the individual state ratemaking goals unique to a  X_2particular state._ {O(ԍSee also AT&T reply comments at 8 (support should be distributed to UNE cost zones). We believe that such an approach is consistent with the states' primary role in ensuring reasonable comparability within their borders and would give the states a degree of flexibility in reaching that goal. Therefore, we conclude that a state may file a petition for waiver of our targeting rules, asking the Commission to target federal support to an area different than the wire center. Such a petition should include a description of the particular geographic level to which the state wishes federal support to be targeted, and an explanation of how that approach furthers the preservation and advancement of universal service within  X 2the state. Z yO(ԍAs a prerequisite to filing a waiver petition of this nature, the state must first comply with the  {O(certification requirements regarding section 254(e) of the 1996 Act that are described in section IV.F., infra.  X2 XD.` ` Interim HoldHarmless Provision(#  Xy2  Xb2` ` 1.  ,Background (#`  X42L77.` ` In the Seventh Report and Order, the Commission concluded that, consistent with the Joint Board's recommendations, a holdharmless provision should be included with the new federal highcost support mechanism for nonrural carriers to ensure that the amount of support provided under the new mechanism is no less than the amount provided under the  X2existing mechanism.& {O?(ԍSeventh Report and Order, 14 FCC Rcd at 8111, para. 68. Rural carriers have been held harmless by  {O (the Commission's conclusion in the First Report and Order that the support mechanism for rural carriers should not change until the Rural Task Force and the Joint Board have made recommendations to the Commission, but  {O(in no event before January 1, 2001. See First Report and Order, 12 FCC Rcd at 893442, paras. 291306. The Commission found that this holdharmless provision was necessary to prevent substantial reductions of federal support and any rate shock that may  X2occur when the new federal mechanism goes into effect.n {O!(ԍSeventh Report and Order, 14 FCC Rcd at 8111, para. 68.n While the Commission agreed in principle that a holdharmless provision should be adopted, it sought further comment in the  X~2Seventh Report and Order on the exact operation of the holdharmless provision.~4  {Oc%(ԍSeventh Report and Order, 14 FCC Rcd at 8111, para. 68, 813336, paras. 117122. Specifically, the Commission sought comment on whether the holdharmless provision should  XR2be implemented on a statebystate basis or on a carrierbycarrier basis (i.e., on whether the  X=2holdharmless provision should ensure that no state receives less support than it receives under"=* ,')')``~"  X2the current mechanism, or that no carrier should receive less than it receives under the current  X2mechanism).w {Od(ԍSeventh Report and Order, 14 FCC Rcd at 813336, paras. 117122.w If a statebystate holdharmless approach were adopted, the Commission sought comment on how such a provision would allocate support among nonrural carriers in a state if the state holdharmless amount was not sufficient to fully hold each carrier  X2harmless.rZ {O(ԍSeventh Report and Order, 14 FCC Rcd at 813435, para. 120.r Assuming a statebystate approach, the Commission also asked whether federal  X2support should be distributed directly to state commissions.u {O, (ԍSeventh Report and Order, 14 FCC Rcd at 8135, para. 121.u  Xa2` ` 2.X ,Discussion (#  X32M78.` ` We conclude that the new federal highcost support mechanism will contain an interim holdharmless provision that provides holdharmless support on a carrierbycarrier  X 2basis. That is, no carrier will receive less support, on a perline basis, ~ yO4(ԍSupport under the existing mechanism is calculated on a perline basis in each study area. than it would have received if we had continued to provide support under the existing highcost support mechanism. To accomplish this result, we shall calculate interim holdharmless support pursuant to the existing highcost support mechanism for nonrural carriers in Part 36 of our  X 2rules for the duration of the interim holdharmless provision.  {Oh(ԍSee 47 C.F.R. Part 36, Subpart F. As discussed, infra, the Commission will reexamine the need for the holdharmless provision no later than January 1, 2003. Interim holdharmless support also shall include LTS under section 54.303 of our rules for those nonrural carriers that would otherwise be eligible for LTS if we had continued to provide support under our  Xd2existing highcost support mechanism.Qdh  {O}(ԍSee 47 U.S.C.  54.303.Q To the extent that a carrier qualifies for forwardlooking support, in an amount greater than it would receive pursuant to the existing mechanism, the carrier shall receive support based solely on the forwardlooking methodology. To the extent that a carrier does not qualify for forwardlooking support, or qualifies for forwardlooking support in an amount less than it would receive pursuant to the existing mechanism, the carrier shall receive interim holdharmless support based solely on the existing support mechanism in Part 36 of our rules, and, if applicable, LTS under section 54.303 of our rules. Thus, we will ensure that no nonrural carrier will receive less support on a per line basis than it receives under the current mechanism.  X~2N79.` ` Existing federal highcost support under Part 36 and section 54.303 is calculated on a carrierbycarrier basis and is reflected in the recipient carrier's rates. Our continuation of the highcost support mechanism under Part 36 and section 54.303, as an interim holdharmless provision, therefore, effectively adopts a carrierbycarrier holdharmless approach. The majority of commenters supporting a holdharmless provision are in""+ ,')')``z~"  X2favor of a carrierbycarrier approach." yOy(ԍBellSouth comments at 910; CenturyTel comments at 48; CBT comments at 2; GTE comments at 36; Sprint comments at 7; TDS comments at 10; USTA comments at 5; US West comments at 29; Western Alliance  {O (comments at 15. But see AT&T comments at 15; California comments at 5; PCIA comments at 78; Western Wireless comments at 10. We believe that a carrierbycarrier holdharmless provision is necessary to ensure that no sudden or undue disruption in consumer rates occurs during the transition to the new federal highcost support mechanism based on forwardlooking economic costs. Moreover, as discussed above in section IV.C.1., an interim carrierbycarrier holdharmless provision ensures that states will not have to take immediate action to transfer funds among carriers within their borders as a result of our decision to average costs at the statewide level.  XH2O80.` ` We emphasize, however, that we do not intend for the continuation of highcost support under Part 36 and section 54.303 as an interim holdharmless provision, to insulate carriers from changes in their support amounts due to changed circumstances unrelated to the rules adopted in this Order. If a carrier becomes ineligible for highcost universal service support after January 1, 2000, then the carrier shall not continue to receive holdharmless support under Part 36 or section 54.303 of our rules. In addition, our continuation of support under Part 36 and section 54.303 as an interim holdharmless provision ensures that, if the carrier's highcost universal service support would have changed under the existing mechanism after December 31, 1999, then the carrier's holdharmless support will be adjusted to reflect that change. We believe that computing holdharmless support under Part 36 and section 54.303 of our rules on an ongoing basis is a better policy choice than simply  XK2"freezing" support levels as of a certain date.QZK {O(ԍ See, e.g. USTA comments at 5 (support should be frozen at the level received in the quarter prior to adoption of the new mechanism, and that frozen amount would be multiplied by 4 to determine the amount of support the carrier would receive upon implementation of the new mechanism).Q Freezing holdharmless support could provide windfalls, or create hardships, for carriers that should have experienced changes in their support amounts through the normal operation of Part 36 and section 54.303. Therefore, we reject the frozen holdharmless approach.  X2P81.` ` We recognize that an interim carrierbycarrier holdharmless provision may increase the size of the federal highcost fund slightly when compared to a statebystate hold X2harmless provision. {O/!(ԍSee CenturyTel comments at 78; Sprint reply comments at 56 (increases in the fund from a carrierbycarrier holdharmless approach, as opposed to a statebystate approach, are likely to be small). Nonetheless, we agree with commenters that this concern is outweighed by the potential for rate shock in highcost areas during the transition to a  X|2forwardlooking mechanism if carriers are not fully held harmless.|.  {O[%(ԍSee BellSouth comments at 10; CenturyTel comments at 47; GTE comments at 36; Western Alliance comments at 15. Under the interim carrierbycarrier holdharmless provision that we adopt today, the amount of federal highcost support provided to each nonrural carrier will be the greater of the amount indicated by the"N, ,')')``h~" new forwardlooking support mechanism, or the explicit amount of federal highcost support that the carrier would receive, on a perline basis, under the operation of the existing high X2cost support mechanism at Part 36 and section 54.303 of the Commission's rules.y {OK(ԍSee Seventh Report and Order, 14 FCC Rcd at 8134, para. 119.y  X2Specifically, all carriers will continue to report cost and loop count data pursuant to Part 36.JZ {O(ԍSee infra para. 87.J In the event that carriers in a particular state do not qualify for forwardlooking support  X2pursuant to Part 54X {O* (ԍSee 47 C.F.R. Part 54, Subpart D.X of our rules because the statewide average forwardlooking cost per line is below the national cost benchmark, or the amount determined pursuant to section 54.309 of our rules is less than the amount that would be determined under Part 36 and section 54.303, then those carriers shall receive interim holdharmless support pursuant to Part 36 and, if  X12applicable, section 54.303.1~ yO`(ԍThe provision of federal support to nonrural carriers is contingent upon compliance with the state  {O((certification requirements discussed infra in section IV.F. This provision will ensure that no nonrural carrier receives less federal highcost universal service support per line under the new mechanism than it receives under the current mechanism.  X 2Q82.` ` Rather than simply making available a uniform holdharmless amount to each nonrural carrier, however, we conclude that holdharmless support must be targeted for competitive purposes to the highcost wire centers served by a nonrural carrier. We believe that targeting holdharmless support to individual wire centers is necessary for many of the same reasons that we chose to target forwardlooking support to individual wire centers. By targeting holdharmless support to individual wire centers, we can encourage competitive entry in highcost wire centers. Targeting also avoids the economic inefficiencies that could be caused by making holdharmless support available to competitors on a uniform basis among all of the wire centers served by a carrier, such as arbitrage between deaveraged UNE rates and averaged support in lowcost wire centers.  X2R83.` ` Because the interim holdharmless support provided pursuant to Part 36 and section 54.303 of our rules, unlike forwardlooking support, will be based on carriers' book costs rather than the forwardlooking methodology, the amount of holdharmless support provided is not related to the level of the national benchmark. Thus, during the limited period for which holdharmless support is available, certain carriers may receive support for costs that are below the national benchmark for forwardlooking support. To ensure that holdharmless support is available in the highest cost wire centers, we adopt a method for targeting holdharmless support that is slightly different than the method we adopted for targeting  X 2forwardlooking support.P  {O&(ԍSee supra section IV.C.5.P Specifically, as discussed in the following paragraph, we adopt a cascading approach to target holdharmless support, so that a carrier's highestcost wire" -j ,')')``$~" centers receive support before its lowercost wire centers receive support. Thus, while the total amount of interim holdharmless support available to a carrier is determined pursuant to Part 36 and section 54.303, that amount is targeted to the carrier's individual wire centers based on the forwardlooking costs of providing supported services in those wire centers as determined pursuant to section 54.309 of our rules. As we explained above in section IV.C.5., carriers will receive lump sum support payments, and the states can direct carriers to spend the federal support in a manner consistent with section 254(e), though not necessarily in the wire center to which the support was targeted. By targeting holdharmless support, however, the federal mechanism ensures that, in a wire center where the incumbent is receiving holdharmless support, a competitor will receive an amount of support that is related  X 2to the costs in that wire center.N  {O (ԍSee infra section IV.E.N  X 2S84.` ` For example, assume a state has a single carrier with three wire centers in the state and ten lines in each wire center. Assume that the average forwardlooking cost per line in each wire center is as follows: Wire Center 1 $15, Wire Center 2 $20, Wire Center 3 $25. Thus, the statewide average cost per line is $20 (($150 + $200 + $250) / 30 lines = $20 / line). Assume further that the national benchmark equates to $22 per line, and therefore the carrier receives no forwardlooking support under the forwardlooking methodology in Part 54 of our rules, which averages costs at the statewide level. Also assume that the carrier receives a total of $90 of interim holdharmless support as determined pursuant to Part 36 of our rules.  X42Under our targeting approach, the holdharmless support is distributed first to the wire center with the highest costs until that wire center's costs, net of support, equal the costs in the next most expensive wire center. This process continues in a cascading fashion until all support has been distributed. In this example, the first $50 of holdharmless support ($5 per line) would be distributed to Wire Center 3, so that the average forwardlooking cost in Wire Center 3, net of holdharmless support, is reduced to $20 per line. This places Wire Center 3 on equal footing with Wire Center 2, which also has average costs of $20 per line. The remaining $40 of holdharmless support would be divided equally on a perline basis between Wire Center 2 and Wire Center 3. Thus, both wire centers would receive an additional $2 per line ($40 / 20 lines), so that the average forwardlooking costs, net of holdharmless support, in Wire Center 2 and Wire Center 3 would be $18 per line.  X 2T85.` ` Moreover, because we have decided that a competitor that captures a customer from an incumbent is entitled to any per line holdharmless support that the incumbent is  X2receiving,NZ {O"(ԍSee infra section IV.E.N the distribution described above is necessary to prevent uneconomic incentives for competitive entry, potential for arbitrage with UNE rates, and to ensure that support reaches the areas where it is needed most. If holdharmless support were not targeted to highcost wire centers, then a uniform holdharmless amount would be available for a competitor serving any line in the state, including lowcost lines. For example, in the hypothetical situation described above, a uniform distribution would result in all lines being eligible for $3"#.,')')``!~" ($90 / 30 lines) of holdharmless support. Thus, even though the cost of providing service is relatively low in Wire Center 1 ($15), competitors serving lines in that wire center would receive a significant amount of support for those lines, creating an artificial incentive for other carriers to compete in that wire center. At the same time, the cost of providing service is relatively high in Wire Center 3 ($25), but this would not be reflected in the amount of support available to competitors, thereby discouraging competitive entry in that wire center. Accordingly, we conclude that targeting forwardlooking support to highcost wire centers is an appropriate means for achieving Congress's goal of promoting competition in the marketplace.  X 2U86.` ` In section IV.C.5., above, we decided to allow individual states to petition the Commission to have federal forwardlooking support targeted for competitive purposes to an area different from the wire center. We concluded that such an approach is consistent with the states' primary role in achieving the goal of reasonable comparability within their borders and would allow states greater flexibility to reach that goal. We conclude that the same rationale applies with equal force in the context of targeting interim holdharmless support. Accordingly, we conclude that a state may file a petition for waiver of our targeting rules, asking the Commission to target interim holdharmless support to an area different than the wire center. Such a petition should include a description of the particular geographic level to which the state wishes interim holdharmless support to be targeted, and an explanation of how that approach furthers the preservation and advancement of universal service within the  X2state. yO(ԍAs a prerequisite to filing a waiver petition of this nature, the state must first comply with the  {O^(certification requirements regarding section 254(e) of the 1996 Act that are described in section IV.F., infra.  X2V87.` ` As discussed below in section IV.E., we are adopting several amendments to the current data reporting requirements to ensure that cost and loop count data submitted by nonrural carriers under Part 36 will conform with loop count data submitted under our Part 54 rules for forwardlooking support. All carriers serving customers in areas served by nonrural incumbent LECs will be required to file data on a quarterly schedule, instead of the present annual schedule with voluntary quarterly updates. The filing of quarterly data for rural carriers, however, shall remain voluntary. By synchronizing the reporting requirements for nonrural highcost support, we can ensure that all nonrural carriers receive support based on data from the same time periods. We conclude that this synchronization will result in a highcost support mechanism that is easier to administer and is more equitable, nondiscriminatory, and competitively neutral.  X2W88.` ` We stress that the interim carrierbycarrier holdharmless provision that we  X 2adopt today is a transitional provision intended to protect consumers in highcost areas during the shift to the new federal support mechanism that will provide support based on statewide X"2averaged forwardlooking costs of providing the supported services."" yOk'(ԍThe method for ensuring that carriers use holdharmless support in accordance with the 1996 Act is discussed below in section IV.F. We agree with""/z,')')`` ~" commenters that the holdharmless provision should not be a perpetual entitlement, and should  X2be phased out as carriers and states adapt to the new forwardlooking mechanism. {Ob(ԍSee, e.g., Bell Atlantic Comments at 6; BellSouth comments at 10; California comments at 56; CompTel comments at 7; NY DPS comments at 13; Western Wireless comments at 11. Accordingly, we request that, on or before July 1, 2000, the Joint Board provide the Commission with a recommendation on how the interim holdharmless provision can be phased out or eliminated without causing undue disruption to consumer rates in highcost  X2areas. In addition, we reaffirm our original conclusion in the Seventh Report and Order that the Commission and the Joint Board shall, no later than January 1, 2003, comprehensively  Xa2examine the operation of the revised highcost universal service support mechanism.Za" {O4 (ԍSeventh Report and Order, 14 FCC Rcd at 812324, para. 94. Furthermore, since we are adopting a carrierbycarrier holdharmless mechanism and not a statebystate mechanism, we do not address issues raised  {O (in the Seventh Report and Order that were specific to the use of a statebystate holdharmless mechanism, including how support should be allocated if the statebystate amount were insufficient to hold each carrier in the state harmless, and whether universal service highcost support should be distributed directly to state  {O (commissions. See Seventh Report and Order, 14 FCC Rcd at 813435, paras. 120121. We further note that commenters addressing this issue are unanimously opposed to distributing federal highcost support directly to state commissions. GTE comments at 3637; Omnipoint comments at 34; RTC comments at 1415; SBC comments at 10; Sprint comments at 810; USTA comments at 5; US West comments at 30; Western Wireless comments at 1213; Roseville reply comments at 11.Z  X32 XE.X` ` Portability of Support(#`  X 2` ` 1.X ,Background (#  X 2X89.` ` In the Seventh Report and Order, the Commission reaffirmed its commitment  X 2to the policy established in the First Report and Order that federal universal service highcost support should be made available to all eligible telecommunications carriers that provide the  X2supported services, including wireless carriers, regardless of the technology used.  {O(ԍSeventh Report and Order, 14 FCC Rcd at 811314, paras. 7274. See also First Report and Order, 12 FCC Rcd at 886162, paras 151152. The Commission also reiterated its belief that competitive neutrality is a fundamental principle of universal service reform, and that portability is necessary to ensure that universal service  XQ2funds are distributed in a competitively neutral manner.nQ {O!(ԍSeventh Report and Order, 14 FCC Rcd at 8113, para. 72.n The Commission sought comment on the amount of support to be ported in the event a competitor wins a customer from an  X#2incumbent receiving holdharmless support.# {O$(ԍSeventh Report and Order, 14 FCC Rcd at 813133, paras. 113116, 813536, para. 122. Specifically, the Commission asked whether the competitor should receive the forwardlooking amount or the incumbent's holdharmless  X2amount.r> {O'(ԍSeventh Report and Order, 14 FCC Rcd at 813536, para. 122.r"0,')')``~"Ԍ X2ԙ ` ` 2.X ,Discussion (#  X2Y90.` ` We reiterate that federal universal service highcost support should be available and portable to all eligible telecommunications carriers, and conclude that the same amount of support (i.e., either the forwardlooking highcost support amount or any interim holdharmless amount) received by an incumbent LEC should be fully portable to competitive  Xv2providers.$v {O(ԍSee AT&T comments at 16; BellSouth comments at 10; California comments at 7; GTE comments at 38; Western Wireless comments at 12. Some commenters believe, however, that a competitor should receive  {O (only the forwardlooking amount of support. See PRTC comments at 8; RTC comments at 15; US West comments at 30. A competitive eligible telecommunications carrier, when support is available, shall receive perline highcost support for lines that it captures from an incumbent LEC, as well as for any "new" lines that the competitive eligible telecommunications carrier serves in highcost areas. To ensure competitive neutrality, we believe that a competitor that wins a highcost customer from an incumbent LEC should be entitled to the same amount of support that the incumbent would have received for the line, including any interim holdharmless amount. While holdharmless amounts do not necessarily reflect the forwardlooking cost of serving customers in a particular area, we believe this concern is outweighed by the competitive harm that could be caused by providing unequal support amounts to incumbents  X 2and competitors.a  {O (ԍSee, e.g., California comments at 7.a Unequal federal funding could discourage competitive entry in highcost areas and stifle a competitor's ability to provide service at rates competitive to those of the incumbent.  XK2Z91.` ` We reiterate our finding in the First Report and Order that, where a competitive eligible telecommunications carrier is providing service to a highcost line exclusively through unbundled network elements (UNEs), that carrier will receive the universal service support for that highcost line, not to exceed the cost of the unbundled  X2network elements used to provide the supported services.&F {O(ԍ See First Report and Order, 12 FCC Rcd. at 893233, para. 287. We also remind parties of our finding  {O(in the First Report and Order that carriers that provide service to lines solely through resale are not eligible for  {O|(support for those lines, and the underlying carrier should receive the support. First Report and Order, 12 FCC Rcd. at 893334, para. 290. The remainder of the support  X2associated with that element, if any, will go to the incumbent LEC.j4  {O!(ԍ First Report and Order, 12 FCC Rcd. at 893233, para. 287.j  X2[92.` ` As discussed above in section IV.D., we are modifying our reporting requirements to synchronize nonrural carrier submissions under Part 36 and Part 54 of our  X~2rules.~  {O&(ԍSee also Western Wireless Corporation Petition for Clarification or Rulemaking, CC Docket No. 9645 (filed Oct. 15, 1998). Under our current Part 36 rules, incumbent LECs are required to report cost and"~1 ,')')``~"  X2loopcount data on July 31st of each year.G yOy(ԍ47 C.F.R.  36.611.G If they so choose, incumbent LECs may update  X2the July 31st data on a quarterly basis.GX yO(ԍ47 C.F.R.  36.611.G Part 54 of the Commission's rules, on the other hand, requires competitive eligible telecommunications carriers to report loopcount data on  X2July 31st of each year. yOT(ԍ47 C.F.R.  54.307(b). Because the forwardlooking support mechanism provides support based on costs estimated by the Commission's cost model, nonrural carriers will be required to file loopcount data, but not cost data, in order to receive forwardlooking support under Part 54. Because the interim holdharmless provision provides support based on Part 36 and section 54.303 of the Commission's rules, which rely on book costs, nonrural incumbent LECs will be required to file cost data, in addition to loopcount data, in order to receive interim holdharmless support. Interim holdharmless support for nonrural competitive eligible telecommunications carriers in a particular wire center is based on the amount of interim holdharmless support available to the incumbent LEC, and thus nonrural competitive eligible telecommunications carriers need only file loopcount data under Part 54 in order to receive interim holdharmless support. Unlike the rules applicable to incumbent LECs, however, Part 54 of the Commission's rules does not currently allow competitive eligible telecommunications carriers to update their loopcount data on a quarterly basis. To ensure that forwardlooking support provided under Part 54 and interim holdharmless support provided under Part 36 and section 54.303 are based on data from the same reporting periods, and to ensure equitable, nondiscriminatory, and competitively neutral treatment of incumbent LECs and competitive eligible telecommunications carriers, we shall require mandatory quarterly reporting for non X 2rural carriers under both Part 54 and Part 36 of our rules.l  yO(ԍQuarterly filing shall remain voluntary for rural carriers.l By allowing incumbent LECs and competitive eligible telecommunications carriers to obtain support for highcost lines on a regular quarterly basis, our rules will facilitate portability of support among carriers. In addition, the quarterly filing requirement is consistent with the Universal Service  X 2Administrative Company's (USAC) quarterly submission of program demand projections,T H  {O(ԍSee 47 C.F.R.  54.709(a).T and should allow more accurate projections based on regular quarterly loop counts.  Xy2 F.` ` Use of Federal HighCost Support by Carriers   XK2XX` ` 1.X ,Background (#  X2\93.` ` Section 254(e) of the Act states that carriers must use universal service support "only for the provision, maintenance and upgrading of facilities and services for which the  X2support is intended."G yOz%(ԍ47 U.S.C.  254(e).G In the Seventh Report and Order, the Commission concluded that carriers receiving federal universal service highcost support must apply that support in a"2j,')')``~"  X2manner consistent with section 254(e).n {Oy(ԍSeventh Report and Order, 14 FCC Rcd at 8115, para. 77.n The Commission also concluded that, if it finds that a carrier has not applied its highcost support in a manner consistent with section 254, the  X2Commission has the authority to take appropriate enforcement action.qZ {O(ԍSeventh Report and Order, 14 FCC Rcd at 811516, para. 78.q  X2]94.` ` The Commission sought further comment in the Seventh Report and Order on ways in which it could ensure that carriers use federal highcost support for its intended  Xx2purpose.wx {O (ԍSeventh Report and Order, 14 FCC Rcd at 813133, paras. 113116.w Specifically, the Commission sought comment on whether making highcost support available as carrier revenue, to be accounted for in the state ratesetting process, will sufficiently fulfill the requirements of section 254(e) of the Act, and whether state commissions have the jurisdiction and resources to take the actions this approach would  X 2require.r ~ {OK(ԍSeventh Report and Order, 14 FCC Rcd at 813132, para. 114.r The Commission asked whether carriers should be required to notify highcost customers that their lines have been identified as "highcost" and that federal highcost support  X 2is being provided to their carrier.r  {O(ԍSeventh Report and Order, 14 FCC Rcd at 813132, para. 114.r The Commission also sought comment on what further restrictions, if any, could be imposed to ensure that carriers use federal highcost support in a manner consistent with section 254. Specifically, the Commission tentatively concluded that state oversight may not in every case ensure that the goals of section 254(e) are met, and asked whether the receipt of federal support should be conditioned on any state action,  X{2including adjustments to local rate schedules.r{ {O(ԍSeventh Report and Order, 14 FCC Rcd at 813233, para. 115.r The Commission tentatively concluded that even states that lack the direct regulatory authority to ensure that federal funds are used appropriately would be able to certify to the Commission that a carrier within the state had accounted for its receipt of federal support in its rates or otherwise used the support in a  X2manner consistent with section 254(e).r4  {O(ԍSeventh Report and Order, 14 FCC Rcd at 813233, para. 115.r Finally, the Commission sought comment on the carrier or state commission actions, if any, that may be necessary to prevent doublerecovery  X2of universal service support at both the federal and state levels.r  {Oh"(ԍSeventh Report and Order, 14 FCC Rcd at 813233, para. 115.r  X2XX` ` 2.X ,Discussion (#   X2^95.` ` We conclude that providing federal universal service highcost support in the form of carrier revenue, to be accounted for by states in their ratemaking process, is an appropriate mechanism by which to ensure that nonrural carriers use highcost support only"g3X ,')')``6~" for the "provision, maintenance and upgrading of facilities and services for which the support  X2is intended," in accordance with section 254(e) of the Act.G yOb(ԍ47 U.S.C.  254(e).G We note, however, that we are not attempting to direct the manner in which states incorporate federal highcost support into their ratemaking processes, nor are we setting forth elaborate rules for compliance with  X2section 254(e).X {O(ԍSee Bell Atlantic comments at 78; BellSouth comments at 89; RTC comments at 23. Rather, we anticipate that states will take the appropriate steps to account for the receipt of federal highcost support and ensure that the federal support is being applied in a manner consistent with section 254, and then certify to the Commission that federal highcost support received by nonrural carriers in their states is being used appropriately. Because the support that will be provided by the methodology described in this Order is intended to  X12enable the reasonable comparability of intrastate rates, and states have primary jurisdiction over intrastate rates, we find that it is most appropriate for states to determine how the support is used to advance the goals set out in section 254(e).  X 2_96.` ` For example, a state could adjust intrastate rates, or otherwise direct carriers to use the federal support to replace implicit intrastate universal service support to highcost rural areas, which was formerly generated by abovecost rates in lowcost urban areas, that has been eroded through competition. A state could also require carriers to use the federal support to upgrade facilities in rural areas to ensure that services provided in those areas are reasonably comparable to services provided in urban areas of the state. These examples are intended to be illustrative, not exhaustive. As long as the uses prescribed by the state are consistent with section 254(e), we believe that the states should have the flexibility to decide how carriers use support provided by the federal mechanism.  X2`97.` ` As a regulatory safeguard, however, we adopt rules in this Order requiring states that wish to receive federal universal service highcost support for nonrural carriers within their territory to file a certification with the Commission stating that all federal highcost funds flowing to nonrural carriers in that state will be used in a manner consistent with section 254(e). This certification requirement is applicable to nonrural incumbent LECs, and competitive eligible telecommunications carriers seeking highcost support in the service area of a nonrural LEC. The certification shall be filed annually and shall be applicable to all nonrural carriers that the state certifies as eligible to receive federal universal service high X92cost support during that annual period.9 {O!(ԍThe timing and effectiveness of these annual certifications are discussed infra in paragraphs 98104. A state may file a supplemental certification for carriers not subject to the state's annual certification. A certification may be filed in the form of a letter from the appropriate state regulatory authority, and shall be filed with (1) the Commission and (2) USAC. Each certification shall become part of the public record maintained by the Commission. We note that some state commissions, including Wisconsin, may lack direct regulatory oversight to ensure that federal support is reflected in intrastate" 4|,')')``h~"  X2rates. {Oy(ԍSee, e.g., Wisconsin comments at 23 (Wisconsin PSC does not have authority to require rate actions by price cap regulated utilities in the state). We believe, nonetheless, that states that lack direct authority over rates in their jurisdictions would still be able to certify to the Commission that a nonrural carrier in the state had accounted to the state commission for its receipt of federal support, and that such support had been used only for the provision, maintenance, and upgrading of facilities and  X2services for which the support is intended.G" yOw(ԍ47 U.S.C.  254(e).G Indeed, in states with limited jurisdiction over carriers, the state need not initiate the certification process itself. Instead, in such states, nonrural LECs, and competitive eligible telecommunications carriers serving lines in the service area of a nonrural LEC, may formulate plans to ensure compliance with section 254(e), and present those plans to the state, so that the state may make the appropriate certification to the Commission. Under our rules, a state shall also have the authority to revoke a certification in the event that it determines that a carrier has not complied with section 254(e). Because states are responsible for making section 254(e) certifications to the Commission, challenges to the propriety of the certifications, or revocation of the certifications, should be brought at the state level.  X 2a98.` ` To ensure that nonrural carriers comply with section 254(e), we do not believe that a nonrural carrier in a particular state should receive federal forwardlooking support until the Commission receives an appropriate certification from the state. Absent such a certification, the Commission has no reliable way of knowing whether the forwardlooking support is being used properly, because of the Commission's limited authority over carriers' intrastate activities. Therefore, we conclude that, during the first year of operation of the new federal forwardlooking support mechanism (January 1, 2000 December 31, 2000), a nonrural carrier in a particular state will not receive forwardlooking support until the state files an appropriate certification with the Commission. The carrier will, however, receive interim holdharmless support during the first year in the event that the state does not make the required certification. Given the short time before implementation of the new mechanism, we believe that providing interim holdharmless support in the absence of a state certification is necessary to prevent possible rate shocks that might occur absent such support.  Xe2b99.` ` After further consultation with the Joint Board, we conclude that all federal highcost support flowing to nonrural carriers in the second year of operation and thereafter, including both forwardlooking support and interim holdharmless support (to the extent that this measure is still in place), should be contingent upon the state's filing the section 254(e) certification described above. Although we recognize that some states will need more time than others to produce a certification, we must have a reliable way of knowing that federal support is being used in a manner consistent with section 254(e). We believe that the certification requirement is not an overly burdensome means of effectuating Congress's goals, and we conclude that a year is a sufficient period of time for states to file the required certification with the Commission. "#5,')')``!~"Ԍ X2c100.` ` Under our existing rules, USAC submits estimated universal service support requirements, including highcost support, to the Commission two months before the  X2beginning of each quarter.M  yOK(ԍ47 C.F.R.  54.709(a)(3).M Thus, for the first quarter of 2000, USAC will submit estimated universal service support requirements on or before November 1, 1999. The Commission uses  X2those support requirements to establish a contribution factor for the upcoming quarter.T X {O(ԍSee 47 C.F.R.  54.709(a).T USAC then uses the contribution factor to bill carriers and collect the appropriate amount of  Xv2support to fund the universal service programs.T v {O (ԍSee 47 C.F.R.  54.709(a).T In order for USAC to submit an accurate estimate of highcost demand, it will need to know which carriers have been certified by states pursuant to the section 254(e) certification process before it files its estimate. To allow USAC sufficient time to process section 254(e) certifications and estimate demand, we conclude that states should file such certifications one month before USAC's filing is due. For a given program year of the new forwardlooking highcost support mechanism, this would mean that section 254(e) certifications would be due on October 1.  X 2d101.` ` We recognize that the timing of the adoption of this Order will not give states sufficient time to file section 254(e) certifications for the first program year 2000 under this approach. Therefore, for the first and second quarters of 2000 only, nonrural carriers in a state shall be entitled to retroactive forwardlooking highcost support for those quarters. Specifically, if the state files its certification on or before January 1, 2000, then carriers subject to that certification shall receive forwardlooking support for the first quarter of 2000  X42in the second quarter of 2000, 4| yOa(ԍSuch forwardlooking support shall be net of any holdharmless support provided to the carrier in the first quarter of 2000. and forwardlooking support for the second quarter of 2000 in that quarter. If the state files its certification on or before April 1, 2000, and certifies carriers for the first and second quarters of 2000, then carriers subject to that certification shall receive forwardlooking support for the first quarter of 2000 in the third quarter of 2000,  X2together with forwardlooking support for the third quarter of 2000.  yO](ԍSuch forwardlooking support shall be net of any holdharmless support provided to the carrier in the first quarter of 2000. Such carriers shall receive forwardlooking support for the second quarter of 2000 in the fourth quarter of 2000,  X2together with forwardlooking support for the fourth quarter of 2000.,  yO#(ԍSuch forwardlooking support shall be net of any holdharmless support provided to the carrier in the second quarter of 2000.  X|2e102.` ` Under this approach, some carriers may receive two quarters worth of support in a single quarter. To prevent fluctuations in the contribution factor and ensure a uniform collection of contributions, we direct USAC to collect contributions in the first quarter of"N6 ,')')``~" 2000 as if all carriers potentially eligible for forwardlooking support were certified to receive such support beginning in the first quarter of 2000, and as if support were actually provided  X2beginning in the first quarter of 2000.(X yOK(ԍTo the extent that USAC is unable to provide an estimate of first quarter 2000 demand for highcost support based on this directive before its November 1 filing is due, USAC may submit a supplemental filing in November containing this information.( In the event that not all potentially eligible carriers are certified to receive support for the first and second quarters of 2000, USAC shall apply any surplus contributions to reduce future collection requirements.  Xv2f103.` ` In order for nonrural carriers in a state to receive any highcost support, either forwardlooking or holdharmless support, for the second program year beginning on January 1, 2001, the state must file its section 254(e) certification no later than one month before USAC's filing is due (i.e., October 1, 2000). In order for nonrural carriers in a state to receive any highcost support, either forwardlooking or holdharmless support, for subsequent program years beginning on January 1, of each year, the state must file its section 254(e) certification no later than one month before USAC's filing is due (i.e., October 1 of the preceding year).  X 2g104.` ` In the event that a state files an untimely certification, the carriers subject to that certification will not be eligible for support until the quarter for which USAC's subsequent filing is due. For example, if a state files a section 254(e) certification for the first program year, after April 1, 2000, but on or before July 1, 2000, then carriers subject to that certification will not receive forwardlooking support until the fourth quarter of 2000. If a state files a section 254(e) certification for the first program year after July 1, 2000, then carriers subject to that certification will not receive forwardlooking support in the first program year. If a state files a section 254(e) certification for the second program year, after October 1, 2000, but on or before January 1, 2001, then carriers subject to that certification will not receive any support, either forwardlooking or holdharmless support, until the second  X2quarter of 2001.Z {OZ(ԍSee Appendix C for the relevant rules. The Commission does not intend to grant requests for retroactive application of state certifications, except for state certifications filed before April 1, 2000, as discussed above.  X2h105. ` ` Because support from the federal methodology described in this Order will be  X|2used to maintain reasonably comparable intrastate rates, we must decide how to apply the federal support in the intrastate jurisdiction. The current federal support mechanism operates through the jurisdictional separations rules, shifting additional carrier book costs into the interstate jurisdiction so that they can be recovered through the federal mechanism.  X 2i106.` ` We conclude that support amounts provided to incumbent nonrural carriers as a result of the holdharmless provision should continue to operate through the jurisdictional separations process to reduce book costs to be recovered in the intrastate jurisdiction. The holdharmless amounts are based on the existing system, which is based on carriers' book" 7 ,')')``@~" costs. Moreover, these amounts have generally been accounted for in intrastate ratemaking, so treating them differently could result in a need for states to take further action to ensure the proper application of the support.  X2j107. ` ` As noted above, forwardlooking support will be provided to nonrural carriers once states have certified that such support will be used in the intrastate jurisdiction in a manner consistent with section 254(e). In light of this provision, we conclude that we do not need to take further action to specify how such support will be applied in the intrastate jurisdiction. Before forwardlooking support begins flowing to nonrural carriers, the state commission will have specified or reached agreement with that carrier on how the support will be used in the intrastate jurisdiction, in a manner consistent with section 254(e). Thus, there is no reason for further federal requirements for the application of the support.   X 2k108.` ` We are not adopting any rules in this Order that, as a means to ensure compliance with section 254(e), would require that nonrural carriers receiving federal high X 2cost support offer an affordable basic local service package to their customers.b  {O (ԍSee GTE comments at 34; USTA comments at 7.b GTE, for example, argues that each state should be required to determine the rate it considers "affordable" and then certify to the federal fund administrator that each carrier seeking highcost funding for areas within that state provide at least one service package that meets the Commission's definition of the supported services, and is offered at a rate no greater than the  X42statedetermined affordable rate.D4Z yO?(ԍGTE comments at 35.D We decline to condition support on such extensive state actions. We believe that the less onerous certification requirements described above allow states an appropriate amount of flexibility to determine how to ensure that carriers comply  X2with section 254(e). Furthermore, as we found in the First Report and Order, even assuming that section 214(e) allowed the Commission to impose such a "basic service package" requirement, it is not necessary to adopt such a requirement because, in areas where there is no competition, states are charged with setting rates for local services, and where competing carriers offer the supported services, consumers will be able to choose the carrier that offers  X~2the service package best suited to the consumer's needs.l~ {O(ԍFirst Report and Order, 12 FCC Rcd at 8824, para. 86.l  XP2l109.` ` We also decline to adopt rules in this Order that would require incumbent nonrural carriers to notify their customers that the incumbent has received federal support for  X"2their lines and that such support is portable to the carrier of the customer's choice.O"| {OO$(ԍSee AT&T comments at 14.O We agree with commenters that the issue of whether or not to require nonrural incumbent LECs to provide notification or display highcost support credits on customer bills or inserts is best"8,')')``~"  X2left to the individual state jurisdictions to decide.\ yOy(ԍUS West comments at 27; RTC comments at 23.\  X2m110.` ` Finally, we reemphasize our conclusion in the Seventh Report and Order that, if we find that a carrier has not applied its universal service highcost support in a manner consistent with section 254(e), we have the authority to take appropriate enforcement actions  X2against that carrier.rX {O(ԍSeventh Report and Order, 14 FCC Rcd at 811516, para. 78.r We remind parties that they may petition the Commission, under section 208 of the Act, if they believe a carrier has misapplied its highcost support, and may also fully avail themselves of the Commission's formal complaint procedures to bring any  XJ2alleged misapplication of federal highcost support before the Commission.J yO (ԍ47 U.S.C.  208. The Commission's procedures for complaints involving common carriers are codified  {O (at 47 C.F.R.  1.720 et seq. Moreover, although we have given states the flexibility to determine how carriers may use federal support in a manner consistent with section 254(e), we may revisit this issue if we find that a more prescriptive approach is necessary to ensure compliance with section 254(e).  X 2 XG.X` ` Assessment and Recovery Bases for Contributions to the HighCost  X 2Support Mechanism (#`  X2n111.` ` Pursuant to the First Report and Order, the Commission currently assesses contributions to the highcost universal service support mechanism on the basis of carriers' interstate and international enduser telecommunications revenues, and carriers recover their  XO2contributions through their rates for interstate services.xOD {OD(ԍSee First Report and Order, 12 FCC Rcd at 920001, paras. 82536.x In the Second Recommended  X:2Decision, the Joint Board stated that the Commission may wish to consider adding intrastate  X%2revenues to the assessment and recovery bases for the highcost support mechanism.GZ% {O(ԍSecond Recommended Decision, 13 FCC Rcd at 2476768, para. 63. By "assessment base," we mean the basis on which carriers' contributions to the universal service mechanisms are assessed. By "recovery base," we mean the basis on which carriers recover their contributions.G In the  X2Seventh Report and Order, the Commission took the Joint Board's recommendation under advisement, pending resolution of challenges to the Commission's assessment and recovery  X2rules in the Fifth Circuit.o  {O"(ԍSeventh Report and Order, 14 FCC Rcd at 8122, para. 90. o  X2o112.` ` As discussed above in section III.D., a three judge panel of the Fifth Circuit ruled that the Commission could not assess carriers' intrastate revenues to fund its universal  X2service support mechanisms.y  {O'(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 44648.y The court also reversed and remanded for further"9,')')``~" consideration the Commission's decision to assess the international revenues of carriers with  X2interstate revenues.y {Ob(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 43335.y In addition, the court reversed the Commission's "decision to require  X2ILECs to recover universal service contributions from their interstate access charges."vZ {O(ԍTexas Office of Public Utility Counsel v. FCC, 183 F.3d at 425.v In response to the court's decision, the Commission removed intrastate revenues from the  X2contribution base;s {OA (ԍUniversal Service Remand Order, FCC 99290 at paras. 15, 17.s exempted from the contribution base the international revenues of interstate carriers whose interstate revenues account for less than 8 percent of their combined  Xv2interstate and international revenues;vv~ {O (ԍUniversal Service Remand Order, FCC 99290 at paras. 15, 1929.v and revised its rules to allow incumbent LECs to  X_2recover their contributions through access charges or through enduser charges. $_ {O (ԍUniversal Service Remand Order, FCC 99290 at paras. 3033. To the extent they choose to implement an interstate enduser charge, incumbent LECs that are currently recovering their universal service contributions in interstate access charges must make corresponding reductions in their interstate access charges to avoid any  {Oz(double recovery. Universal Service Remand Order, FCC 99290 at para 33. In light of the court's decision, and the Commission's response to it, the assessment base for contributions to the highcost support mechanism shall remain interstate and international enduser telecommunications revenues, and the recovery base shall remain rates for interstate services.  X 2 XH.X` ` Adjusting Interstate Access Charges to Account for Explicit Support (#`  X 2p113.` ` In the Seventh Report and Order, the Commission agreed with the Joint Board that the Commission has the jurisdiction and responsibility to identify any universal service  X{2support that is implicit in interstate access charges.w!{  {O((ԍSeventh Report and Order, 14 FCC Rcd at 80988100, paras. 4143.w If such implicit support does exist, the  Xd2Commission concluded that, to the extent possible, it should make that support explicit.s"d  {O(ԍSeventh Report and Order, 14 FCC Rcd at 80988100, para. 43.s Thus, in order to supplement the record in the ongoing companion access charge reform  X62proceeding, the Commission sought comment in the Seventh Report and Order on how interstate access charges should be adjusted to account for implicit highcost universal service  X 2support that may, in the future, be identified in access rates.{#   {O#(ԍSee Seventh Report and Order, 14 FCC Rcd at 813641, paras. 123135.{ Specifically, the Commission sought further comment on a number of proposals and tentative conclusions regarding the adjustment of interstate access charges to account for explicit support, including: (1) whether price cap LECs should reduce their interstate access rates to reflect any increase in explicit federal highcost support they receive; (2) whether the Commission should require price cap":#,')')``~" LECs to make a downward exogenous adjustment to their common line basket price cap indexes (PCIs); (3) whether price cap carriers should reduce their base factor portion (BFP); (4) whether the Commission should reduce the subscriber line charge (SLC) on primary residential or singleline business lines; and (5) whether nonrural rateofreturn LECs should  X2apply additional interstate explicit highcost support revenues to the CCL element.w$ {O(ԍSeventh Report and Order, 14 FCC Rcd at 813641, paras. 123135.w The Commission received numerous comments addressing these issues. As we stated in the  Xv2Seventh Report and Order, we intend to move ahead with access reform in tandem with the  Xa2implementation of the revised federal highcost support methodology.s%aZ {Ol (ԍSeventh Report and Order, 14 FCC Rcd at 80998100, para. 43.s Accordingly, we anticipate that the Commission's final determinations regarding adjustments to interstate access charges to account for explicit universal service support will be issued in the separate  X 2Access Charge Reform proceeding. We reemphasize that the support provided through the methodology described in this Order will be used to enable the reasonable comparability of  X 2intrastate rates, and thus will not be used to replace implicit support in interstate access rates.  X 2 XI.X` ` HighCost Loop Support For Rural Carriers (#`  X2` ` 1.X ,Background (#  Xh2q114.` ` Under current Commission rules, highcost loop support for all carriers is restricted by an "interim cap" that limits the growth of the current fund each year to the  X:2annual growth in nationwide loops.T&: {O(ԍSee47 C.F.R.  36.601(c).T The cap on total funds available for highcost loop support is determined by applying the total growth rate in industry working loops to the prior  X 2year funding level.b' ~ {O;(ԍSee generally 36 C.F.R. Part 36, Subpart F.b The loop costs of all incumbent LECs, both rural and nonrural, are  X2used to calculate the national average cost per loop.T( {O(ԍSee47 C.F.R.  36.601(c).T The growth rate in working loops for nonrural carriers historically has been faster than the growth rate in working loops for rural carriers. Under our current rules, nonrural carriers are scheduled to be removed from the  X2existing rules, and thus from the interim cap, on January 1, 2000.T) {O"(ԍSee47 C.F.R.  36.601(c).T Thus, because the growth rate in rural working loops is slower than the growth rate in nonrural working loops, support for rural carriers will increase at a slower rate if nonrural carriers are removed from the existing system.  X=2r115.` ` The Rural Telephone Coalition (RTC) and Western Alliance argue that rural carriers may be harmed when nonrural carriers move to the new forwardlooking highcost"&;4 ),')')``~" support methodology due to the operation of the interim cap, which will remain applicable to  X2rural carriers.u* {Ob(ԍSee RTC comments at 1621; Western Alliance comments at 47. u NECA asserts that removing nonrural carrier loop growth data from the interim cap calculations will slow the total growth rate in industry loops, so that the growth in support levels for rural carriers will slow when the interim cap is applied solely to the smaller  X2universe of rural carriers with lower growth levels.J+Z yO(ԍNECA reply comments at 4.J NECA asserts that, under the current mechanism, the "cap reduction" amount (i.e., the amount by which universal service support is reduced to avoid exceeding the cap) actually increases when nonrural carriers are removed from the current funding mechanism, and, as this larger reduction is applied solely to nonrural carriers, the overall result is a significant reduction in the annual growth rate in support  X12for rural carriers.J,1 yO (ԍNECA reply comments at 6.J  X 2XX` ` 2.X ,Discussion (#  X 2s116.` ` Initially, we emphasize that, under our current rules, removing the nonrural  X 2carriers from the existing system does not result in a decrease in support for rural carriers. Rather, rural carriers would receive a smaller annual increase in support when nonrural carriers are removed from the interim cap.  Xd2t117.` ` There are three general options available to address this issue. First, we could take no action and, pursuant to our existing rules, calculate rural support under the interim cap using only the total growth in rural carrier loops. Second, as proposed by Western Alliance, we could remove the interim cap in its entirety. Finally, as proposed by NECA, we could calculate support for rural carriers as if all carriers, rural and nonrural, continued to  X2participate in the existing fund.J-z yO(ԍNECA reply comments at 6.J  X2u118.` ` Consistent with our commitment not to consider significant changes in rural carriers' support until after the Rural Task Force and the Joint Board have made their recommendations, we conclude that we should amend our Part 36 rules to calculate universal service funding for rural carriers as if all carriers continued to participate in the fund. This approach will avoid significant and immediate changes in support for rural carriers, and is similar to the interim holdharmless provision that we adopted for nonrural carriers. We also believe that it would be inconsistent with the intent of section 254 if we allowed the growth rate of highcost universal service support for rural carriers to be significantly and unintentionally reduced because of the overall slowdown in loop growth caused by the removal of nonrural carriers. Contrary to the suggestions of Western Alliance, however, we do not believe that removing the cap from the calculation is an appropriate remedy for this situation. The cap is designed to prevent excessive growth in the existing highcost fund, and" < -,')')``~" we believe it should remain in place pending any restructuring of the highcost support mechanism for rural carriers. In addition, because we are requiring nonrural carriers to continue reporting cost and loopcount data under Part 36 pursuant to the interim holdharmless provision, continuing to calculate the expense adjustment for rural carriers using data from all carriers will be administratively easy to implement. We also wish to stress that, although we are modifying our rules to calculate the rural loop expense adjustment based on  Xv2loop data for both rural and nonrural carriers, this remedy is an interim solution until we consider appropriate reforms for the rural highcost support mechanism.  X32X J.X` ` Lifting the Stay of the Commission's Section 251 Pricing Rules (#`  X 2v119. ` ` In August 1996, the Commission promulgated certain rules in the Local  X 2Competition Order to implement section 251 of the Communications Act of 1934, as  X 2amended..  {OT(ЍSee Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Report and Order, 11 FCC Rcd 15499 (1996). One such rule, section 51.507(f), requires each state commission to establish different rates for [interconnection and unbundled network elements (UNEs)] in at least three  X 2defined geographic areas within the state to reflect geographic cost differences.J/ " yO(ԍ47 C.F.R.  51.507(f).J Numerous  X2parties, including incumbent LECs and state commissions, appealed the Local Competition  X2Order, and the U.S. Court of Appeals for the Eighth Circuit stayed the Commission's section  Xl2251 pricing rules in September 1996 pending its consideration of the appeal.0(l {O(  #X\  P6G;ɒP#эIowa Utilities Board v. FCC, 96 F. 3d 1116 (8th Cir. 1996) (per curium) (temporarily staying the Local  {O(Competition Order until the filing of the courts order resolving the petitioners motion for stay). See also Iowa  {Oc(Utilities Board v. FCC, 109 F.3d 418 (8th Cir.) (dissolving temporary stay and granting petitioners motion for  {O-(stay, pending a final decision on the merits of the appeal), motion to vacate stay denied, 117 S. Ct. 429 (1996).#&a\  P6G;u&P#Ѹ In July 1997, the Eighth Circuit vacated the deaveraging rule, among others, on the grounds that the  X>2Commission lacked jurisdiction.1> {O(ԍIowa Utilities Board v. FCC, 120 F.3d 753, 800 n.21, 819 n.39, 820 (8th Cir. 1997). On January 25, 1999, however, the U.S. Supreme Court reversed the Eighth Circuits decision with regard to the Commissions section 251 pricing authority, and remanded the case to the Eighth Circuit for proceedings consistent with the  X2Supreme Courts opinion.v24  {O (ԍAT&T v. Iowa Utilities Board., 119 S. Ct. 721, 733, 738 (1999).v  X2w120.` ` Because the section 251 pricing rules had not been in force for more than two years, and not all states established at least three deaveraged rate zones, the Commission stayed the effectiveness of section 51.507(f) on May 7, 1999, to allow the states to bring their  X2rules into compliance. 3  {O&(ԍSee Deaveraged Rate Zones for Unbundled Network Elements, CC Docket No. 9698, Stay Order, 14  {O'(FCC Rcd. 8300, 830001 (1999) (Deaveraged Rate Zones for Unbundled Network Elements).  The Commission stated that the stay would remain in effect until six"="3,')')``~" months after the Commission released its order in CC Docket No. 9645 finalizing and  X2ordering implementation of highcost universal service support for nonrural LECs.4 {Ob(ԍDeaveraged Rate Zones for Unbundled Network Elements, 14 FCC Rcd at 8301. The Commission did so to allow the states to coordinate their consideration of deaveraged rate  X2zones with issues raised in that proceeding.5Z {O(ԍDeaveraged Rate Zones for Unbundled Network Elements, 14 FCC Rcd at 8302. Now that we have adopted an order in CC Docket No. 9645 finalizing and ordering implementation of intrastate highcost universal service support for nonrural LECs, state commissions can consider deaveraging in concert with the federal highcost support that will be available in the intrastate jurisdiction. Consequently, the stay that has been in effect since May 7, 1999, shall be lifted on May 1, 2000. By that date, states are required to establish different rates for interconnection and UNEs in at least three geographic areas pursuant to section 51.507(f) of the Commission's rules.  X 2 V.XPROCEDURAL MATTERS (#  X 2 A. ` ` Regulatory Flexibility Act Certification   X2x121. ` ` The Regulatory Flexibility Act (RFA)6Z {O-(ԍSee 5 U.S.C.  601 et seq. The RFA was amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Title II of the Contract with America Advancement Act of 1996, Pub. L. 104121, 110 Stat. 87 (1996). requires an Initial Regulatory  Xy2Flexibility Analysis (IRFA)C7y yO8(ԍ5 U.S.C.  603.C whenever an agency publishes a notice of proposed rulemaking,  Xb2and a Final Regulatory Flexibility Analysis (FRFA)C8b yO(ԍ5 U.S.C.  604.C whenever an agency subsequently promulgates a final rule, unless the agency certifies that the proposed or final rule will not have "a significant economic impact on a substantial number of small entities," and includes  X2the factual basis for such certification.F9.  yO(ԍ5 U.S.C.  605(b).F The RFA generally defines "small entity" as having the same meaning as the terms "small business," "small organization," and "small  X2governmental jurisdiction."m:  yO^"(#X\  P6G;ɒP#э5 U.S.C.  601(6).m In addition, the term "small business" has the same meaning as  X2the term "small business concern" under the Small Business Act.;N  yO$(#]\  PCɒP#э5 U.S.C.  601(3) (incorporating by reference the definition of "small business concern" in Small Business Act, 15 U.S.C.  632). A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business">;,')')``~"  X2Administration (SBA).< yOy(#X\  P6G;ɒP#эSmall Business Act, 15 U.S.C.  632. The SBA defines a small telecommunications entity in SIC code 4813 (Telephone Communications, Except Radiotelephone) as an entity with 1,500 or fewer  X2employees.H=X yO(ԍ13 C.F.R.  121.201.H  X2y122. ` ` We conclude that a FRFA is not required here because the foregoing Report  X2and Order adopts a final rule affecting only the amount of highcost support provided to nonrural LECs. Nonrural LECs generally do not fall within the SBA's definition of a small business concern because they are usually large corporations or affiliates of such corporations.  XL2In a companion Further Notice of Proposed Rulemaking in this docket, the Commission prepared an Initial Regulatory Flexibility Analysis (IRFA) seeking comment on the economic  X 2impacts on small entities.?>\  {O(ԍSee FederalState Joint Board on Universal Service, ForwardLooking Mechanism for HighCost  {O(Support for NonRural LECs, Further Notice of Proposed Rulemaking, CC Docket Nos. 9645, 97160, FCC 99120 at paras. 257271 (rel. May 28, 1999).? No comments were received in response to that IRFA.  X 2Furthermore, we are taking action in this Report and Order that will have a beneficial impact on smaller rural carriers. Specifically, we are amending our Part 36 rules to calculate universal service funding for rural carriers as if all carriers, both rural and nonrural, continued to participate in the fund, pending the selection of an appropriate forwardlooking  X 2highcost support mechanism for rural carriers.N?  {Ol(ԍSee supra section IV.I.N This action will avoid significant changes in support for rural carriers, and prevent the growth rate of highcost universal service support for rural carriers from being significantly reduced because of a slowdown in loop growth rates that would be caused by the removal of nonrural carriers from the fund calculations. Therefore, we certify, pursuant to section 605(b) of the RFA, that the final rule adopted in the  X<2Report and Order will not have a significant economic impact on a substantial number of  X'2small entities.F@' yOv(ԍ5 U.S.C.  605(b).F The Office of Public Affairs, Reference Operation Division, will send a  X2copy of this certification, along with this Report and Order, to the Chief Counsel for  X2Advocacy of the SBA in accordance with the RFA.PA.  {O (ԍSee 5 U.S.C. 605(b).P In addition, this certification, and  X2Report and Order (or summaries thereof) will be published in the Federal Register. The  X2Commission will send a copy of this Report and Order including a copy of this final certification, in a report to Congress pursuant to the Small Business Regulatory Enforcement  X2Fairness Act of 1996.VB  {O&(ԍSee 5 U.S.C. 801(a)(1)(A).V  Xu2 B.` ` Effective Date of Final Rules "u?R B,')')``~"Ԍ X2ԙz123. ` ` We conclude that the amendments to our rules adopted herein shall be effective upon publication in the Federal Register, and the information collections adopted herein shall be effective upon approval from the Office of Management and Budget (OMB). In this Order we conclude that the new forwardlooking highcost support mechanism should be implemented on January 1, 2000, and that states and territories that desire nonrural carriers within their jurisdiction to receive forwardlooking highcost support for calendar year 2000 must certify to the Commission and the Administrator that nonrural carriers receiving support within their jurisdiction will only use the support for the provision, maintenance and upgrading of the supported services. The first filing deadline for this certification will be January 1, 2000. Thus, the amendments must become effective before January 1, 2000. Making the amendments effective 30 days after publication in the Federal Register would jeopardize the required January 1, 2000 implementation and filing date. Accordingly, pursuant to the Administrative Procedure Act, we find good cause to depart from the general requirement that final rules take effect not less than 30 days after their publication in the  X 2Federal Register.SC  {O7(ԍSee 5 U.S.C.  553(d)(3).S  X2 C. ` ` Paperwork Reduction Act   Xb2{124. ` ` This Report and Order contains either proposed or modified information collections. The Commission has requested Office of Management and Budget ("OMB") approval, under the emergency processing provisions of the Paperwork Reduction Act of  X21995, Pub. L. No. 10413, of the information collections contained in this rulemaking.RDZ {O*(ԍSee 44 U.S.C.  3507(j).R  X2 VI.XORDERING CLAUSES (#  X2|125.` ` Accordingly, IT IS ORDERED that, pursuant to the authority contained in sections 14, 201205, 214, 218220, 254, 303(r), 403, and 410 of the Communications Act of 1934, as amended, 47 U.S.C.  151154, 201205, 214, 218220, 254, 303(r), 403, and 410, the NINTH REPORT AND ORDER AND EIGHTEENTH ORDER ON RECONSIDERATION IS ADOPTED. The collections of information contained within are contingent upon approval by the Office of Management and Budget.  X"2}126.` ` IT IS FURTHER ORDERED that Part 36 of the Commission's Rules, 47 C.F.R. Part 36, IS AMENDED as set forth in Appendix C hereto, effective immediately upon publication in the Federal Register.  X 2~127.` ` IT IS FURTHER ORDERED that Part 54 of the Commission's Rules, 47 C.F.R. Part 54, IS AMENDED as set forth in Appendix C hereto, effective immediately upon publication in the Federal Register. "#@D,')')``!~"Ԍ X2128.` ` IT IS FURTHER ORDERED that the Commission's Office of Public Affairs, Reference Operations Division, SHALL SEND a copy of the Report and Order, including the Regulatory Flexibility Act Certification, to the Chief Counsel for Advocacy of the Small Business Administration. XX` ` X ,XhXhhFEDERAL COMMUNICATIONS COMMISSION(#h XX` ` X ,XhXhhMagalie Roman Salas(#h XX` ` X ,XhXhhSecretary(#h " AD,')')``P ~"  X2Բo  APPENDIX A PARTIES FILING COMMENTS ă  X2 Commenter` ` X ,XhXhhXXXppXAbbreviation(#p  X2   X2AT&T Corp.` ` X ,XhXhhXXXppXAT&T(#p  X2Ameritech` ` X ,XhXhhXXXppXAmeritech(#p  Xv2Bell Atlantic` ` X ,XhXhhXXXppXBell Atlantic(#p  X_2BellSouth Corporation` hXhhXXXppXBellSouth(#p  XH2People of the State of CALIFORNIA andXXppXCalifornia  (#p  X12the California PUCh  X 2CenturyTel, Inc. ,XhXhhXXXppXCenturyTel(#p  X 2Cincinnati Bell Telephone CompanyXXppXCBT(#p  X 2Competitive Telecommunications AssociationhXppXCompTel(#p  X 2General Services Administration hhXXXppXGSA(#p  X 2GTE Service Corporation` hXhhXXXppXGTE(#p  X 2GVNW Consulting, Inc.` hXhhXXXppXGVNW(#p  X2Iowa Utilities Board ,XhXhhXXXppXIowa(#p  Xy2ITCs, Inc.` ` X ,XhXhhXXXppXITCs(#p  Xb2MCI Worldcom, Inc. ,XhXhhXXXppXMCIW(#p  XK2New York State Dept. of Public ServiceXXppXNew York(#p  X42Omnipoint Communications, Inc. hhXXXppXOmnipoint(#p  X2Personal Communications Industry AssociationhXppXPCIA(#p  X2Puerto Rico Telephone Company hhXXXppXPRTC(#p  X2Rural Telephone Coalition` hXhhXXXppXRTC(#p  X2SBC Communications Inc.` hXhhXXXppXSBC(#p  X2Sprint Corporation ,XhXhhXXXppXSprint(#p  X2State Members of the Joint Board hhXXXppXState Members(#p  X2TDS Telecommunications CorporationXXppXTDS(#p  X|2Texas Office of Public Utility Counsel,XXppXTexas(#p XConsumer Federation of (# XAmerica, National Association of (# XState Utility Consumer Advocates,(# Xand the Consumer Union(#  X 2United States Cellular Corporation hhXXXppXUSCC(#p  X2United States Telephone AssociationXXppXUSTA(#p  X2US West, Inc. ,XhXhhXXXppXUS West(#p  X 2Vermont Public Service Board hhXXXppXVermont(#p XArkansas Public Service Commission(# XMaine Public utilities Commission(# XMontana Public Service Commission(# XNew Hampshire Public Utilities Commission(# XNorth Dakota Public Service Commission(# XWest Virginia Public Service Commission(# XWyoming Public Service Commission(#  X (2Virgin Islands Telephone CorporationXXppXVitelco(#p" (BD,')')``%~"Ԍ X2West Virginia Public Service CommissionXXppXWest Virginia(#p XConsumer Advocate Division(#  X2Western Alliance ,XhXhhXXXppXWestern Alliance(#p  X2Western Wireless Corporation hhXXXppXWestern Wireless(#p  X2Wisconsin PSC ,XhXhhXXXppXWisconsin   xx  (#p "CD,')')``L~"  X2  APPENDIX B PARTIES FILING REPLY COMMENTS ă  X2 Commenter` ` X ,XhXhhXXXppXAbbreviation(#p  X2   X2Ameritech` ` X ,XhXhhXXXppXAmeritech(#p  X2AT&T` ` X ,XhXhhXXXppXAT&T(#p  Xv2Bell Atlantic Telephone Companies hhXXXppXBell Atlantic(#p  X_2BellSouth Corporation` hXhhXXXppXBellSouth(#p  XH2People of the State of CALIFORNIA andXXppXCalifornia  (#p the California PUC  X 2CenturyTel, Inc. ,XhXhhXXXppXCenturyTel(#p  X 2Florida Public Service Commission hhXXXppXFlorida(#p  X 2General Services Administration hhXXXppXGSA(#p  X 2GTE Service Corporation` hXhhXXXppXGTE(#p  X 2MCI WorldCom, Inc.` hXhhXXXppXMCIW(#p  X 2National Exchange Carrier Association, Inc.hXppXNECA(#p  X2Puerto Rico Telephone Company hhXXXppXPRTC(#p  Xy2Roseville Telephone Company hhXXXppXRoseville(#p  Xb2Sprint Corporation ,XhXhhXXXppXSprint(#p  XK2United States Cellular Corporation hhXXXppXUSCC(#p  X42US West, Inc. ,XhXhhXXXppXUS West(#p  X2Virgin Islands Telephone CorporationXXppXVitelco(#p  X2West Virginia Consumer Advocate hhXXXppXWest Virginiaxx (#p"DD,')')``~"  X2#Xj\  P6G;ynXP# #Xj\  P6G;ynXP# vnAPPENDIX C FINAL RULES ă Part 36 of Title 47 of the Code of Federal Regulations is amended as follows:  X2 PART 36 JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES, EXPENSES, TAXES AND RESERVES FOR TELECOMMUNICATIONS  X_2COMPANIES  X12 Subpart F Universal Service Fund  X 21.Section 36.601 is amended to read as follows:  X 2  36.601 General.  X 2 (a) . . . (b) . . . (c) The annual amount of the total nationwide expense adjustment shall consist of the amounts calculated pursuant to section 54.309 of this Chapter and the amounts calculated pursuant to this subpart F. The annual amount of the total nationwide loop cost expense adjustment calculated pursuant to this Subpart F shall not exceed the amount of the total loop cost expense adjustment for the immediately preceding calendar year, increased by a rate equal to the rate of increase in the total number of working loops during the calendar year preceding the July 31st filing. The total loop cost expense adjustment shall consist of the loop cost expense adjustments, including amounts calculated pursuant to sections 36.612(a) and 36.631 of this Subpart. The rate of increase in total working loops shall be based upon the difference between the number of total working loops on December 31 of the calendar year preceding the July 31st filing and the number of total working loops on December 31 of  XN2the second calendar year preceding that filing, both determined by the company's submissions pursuant to section 36.611 of this Subpart. Beginning January 1, 2000, nonrural incumbent local exchange carriers and, eligible telecommunications carriers serving lines in the service area of nonrural incumbent local exchange carriers, shall only receive support pursuant to this Subpart F to the extent that they qualify pursuant to section 54.311 of this Chapter for interim holdharmless support.  X!22.Section 36.611 is amended to read as follows:  X#2  36.611 Submission of information to the National Exchange Carrier Association. In order to allow determination of the study areas and wire centers that are entitled to an expense adjustment, each incumbent local exchange carrier (LEC) must provide the National Exchange Carrier Association (NECA) (established pursuant to Part 69 of this Chapter) with the information listed below for each of its study areas, with the exception of" (ED,')')``*&~" the information listed in subsection (h), which must be provided for each study area and, if applicable, for each wire center, as that term is defined in Part 54 of this Chapter. This information is to be filed with NECA by July 31st of each year, and must be updated pursuant to section 36.612 of this Subpart. The information filed on July 31st of each year will be used in the jurisdictional allocations underlying the cost support data for the access charge tariffs to be filed the following October. An incumbent LEC is defined as a carrier that meets the definition of an "incumbent local exchange carrier" in section 51.5 of this Chapter. (a) . . . (b) . . . (c) . . . (d) . . . (e) . . . (f) . . . (g) . . . (h) For rural telephone companies, as that term is defined in section 51.5 of this Chapter, the number of working loops for each study area. For nonrural telephone companies, the number of working loops for each study area and for each wire center. For universal service support purposes, working loops are defined as the number of working Exchange Line C&WF loops used jointly for exchange and message telecommunications service, including C&WF subscriber lines associated with pay telephones in C&WF Category 1, but excluding WATS closed end access and TWX service. These figures shall be calculated as of December 31st of the calendar year preceding each July 31st filing.  X 23.Section 36.612 is amended to read as follows:  X2  36.612 Updating information submitted to the National Exchange Carrier Association. (a) Any rural telephone company, as that term is defined in section 51.5 of this Chapter, may update the information submitted to the National Exchange Carrier Association (NECA) on July 31st pursuant to section 36.611 (a) through (h) of this Subpart one or more times annually on a rolling year basis according to the schedule below. Every nonrural telephone company must update the information submitted to NECA on July 31st pursuant to section 36.611 (a) through (h) of this Subpart according to the schedule below. ` ` (1) Submit data covering the last nine months of the previous calendar year and the first three months of the existing calendar year no later than September 30th of the" (FD,')')``%~" existing year; ` ` (2) Submit data covering the last six months of the previous calendar year and the first six months of the existing calendar year no later than December 30th of the existing year; ` ` (3) Submit data covering the last three months of the second previous calendar year and the first nine months of the previous calendar year no later than March 30th of the existing year.  X 24.Section 36.622 is amended to read as follows:  X 2  36.622 National and study area average unseparated loop costs. (a) . . . ` ` (1) The National Average Unseparated Loop Cost per Working Loop shall be recalculated by the National Exchange Carrier Association to reflect the September, December, and March update filings. ` ` (2) . . . ` ` (3) . . . (b) . . . ` ` (1) If a company elects to, or is required to, update the data which it has filed with the National Exchange Carrier Association as provided in  36.612(a), the study area average unseparated loop cost per working loop and the amount of its additional interstate expense allocation shall be recalculated to reflect the updated data. ` ` (2) . . . (c) . . . (d) [deleted].  X!25.Section 36.631 is amended to read as follows:  X#2  36.631 Expense adjustment.  Xh$2 (a) . . . (b) . . . " (GD,')')``%~"Ԍ(c) . . . (d) Beginning January 1, 1998, for study areas reporting more than 200,000 working loops pursuant to  36.611(h), the expense adjustment (additional interstate expense allocation) is equal to the sum of subsections (d)(1)(4). After January 1, 2000, the expense adjustment (additional interstate expense allocation) shall be calculated pursuant to section 54.309 of this Chapter or section 54.311 of this Chapter (which relies on this Part), whichever is applicable. ` ` (1) . . . ` ` (2) . . . ` ` (3) . . . ` ` (4) . . .  Xb2Part 54 of Title 47 of the Code of Federal Regulations is amended as follows:  X42 PART 54 UNIVERSAL SERVICE Subpart D Universal Service Support for High Cost Areas  X2 6.Section 54.5 is amended by adding the following paragraph to the end of the section as follows:  X2  54.5 Terms and definitions. . . .  X72Wire center. A wire center is the location of a local switching facility containing one or more central offices, as defined in the Appendix to Part 36. The wire center boundaries define the area in which all customers served by a given wire center are located.  X27.Section 54.307 is amended to read as follows:  X 2  X!2  54.307 Support to a competitive eligible telecommunications carrier.  X#2 (a) Calculation of support. A competitive eligible telecommunications carrier shall receive universal service support to the extent that the competitive eligible telecommunications carrier captures the subscriber lines of an incumbent local exchange carrier (LEC) or serves new subscriber lines in the incumbent LEC's service area. ` ` (1) A competitive eligible telecommunications carrier shall receive support for"(HD,')')``&~" each line it serves in a particular wire center based on the support the incumbent LEC would receive for each such line. ` ` (2) A competitive eligible telecommunications carrier that uses switching purchased as unbundled network elements pursuant to section 51.307 of this Chapter to provide the supported services shall receive the lesser of the unbundled network element price for switching or the perline DEM support of the incumbent LEC, if any. A competitive eligible telecommunications carrier that uses loops purchased as unbundled network elements pursuant to section 51.307 of this Chapter to provide the supported services shall receive the lesser of the unbundled network element price for the loop or the incumbent LEC's perline payment from the highcost loop support and LTS, if any. The incumbent LEC providing nondiscriminatory access to unbundled network elements to such competitive eligible telecommunications carrier shall receive the difference between the level of universal service support provided to the competitive eligible telecommunications carrier and the percustomer level of support that the incumbent LEC would have received. ` ` (3) A competitive eligible telecommunications carrier that provides the supported services using neither unbundled network elements purchased pursuant to section 51.307 of this Chapter nor wholesale service purchased pursuant to section 251(c)(4) of the Act will receive the full amount of universal service support that the incumbent LEC would have received for that customer. (b) In order to receive support pursuant to this Subpart, a competitive eligible telecommunications carrier must report to the Administrator on July 31st of each year the number of working loops it serves in a service area as of December 31st of the preceding year, subject to the updates specified in subsection (c). For a competitive eligible telecommunications carrier serving loops in the service area of a rural telephone company, as that term is defined in section 51.5 of this Chapter, the carrier must report the number of working loops it serves in the service area. For a competitive eligible telecommunications carrier serving loops in the service area of a nonrural telephone company, the carrier must report the number of working loops it serves in the service area and the number of working loops it serves in each wire center in the service area. For universal service support purposes, working loops are defined as the number of working Exchange Line C&WF loops used jointly for exchange and message telecommunications service, including C&WF subscriber lines associated with pay telephones in C&WF Category 1, but excluding WATS closed end access and TWX service. These figures shall be calculated as of December 31st of the calendar year preceding each July 31st filing. (c) For a competitive eligible telecommunications carrier serving loops in the service area of a rural telephone company, as that term is defined in section 51.5 of this Chapter, the carrier may update the information submitted to the Administrator on July 31st pursuant to subsection (b) one or more times annually on a rolling year basis according to the schedule below. For a competitive eligible telecommunications carrier serving loops in the service area of a nonrural telephone company, the carrier must update the information submitted to the Administrator on July 31st pursuant to subsection (b) according to the schedule below." (ID,')')``%~"Ԍ` ` (1) Submit data covering the last nine months of the previous calendar year and the first three months of the existing calendar year no later than September 30th of the existing year; ` ` (2) Submit data covering the last six months of the previous calendar year and the first six months of the existing calendar year no later than December 30th of the existing year; ` ` (3) Submit data covering the last three months of the second previous calendar year and the first nine months of the previous calendar year no later than March 30th of the existing year.  X 2 8. A new section 54.309 is added as follows:  X 2  54.309 Calculation and distribution of forwardlooking support for nonrural carriers.  X 2  X2 (a) Calculation of Total Support Available Per State. Beginning January 1, 2000,  X{2nonrural incumbent local exchange carriers, and eligible telecommunications carriers serving lines in the service areas of nonrural incumbent local exchange carriers, shall receive universal service support for the forwardlooking economic costs of providing supported services in highcost areas, provided that the State in which the lines served by the carrier are located has complied with the certification requirements in section 54.313 of this Subpart. The total amount of forwardlooking support available in each State shall be determined according to the following methodology: ` ` (1) For each State, the Commission's cost model shall determine the statewide average forwardlooking economic cost (FLEC) per line of providing the supported services. The statewide average FLEC per line shall equal the total FLEC for nonrural carriers to provide the supported services in the State, divided by the number of lines served by nonrural carriers in the State.  X92` ` (2) The Commission's cost model shall determine the national average FLEC per line of providing the supported services. The national average FLEC per line shall equal the total FLEC for nonrural carriers to provide the supported services in all States divided by the total number of lines served by nonrural carriers in all States. ` ` (3) The national cost benchmark shall equal 135 percent of the national average FLEC per line. ` ` (4) Support calculated pursuant to this section shall be provided to nonrural carriers in each State where the statewide average FLEC per line exceeds the national cost benchmark. The total amount of support provided to nonrural carriers in each State where the statewide average FLEC per line exceeds the national cost benchmark shall equal 76 percent of the amount of the statewide average FLEC per line that exceeds the national cost benchmark, multiplied by the number of lines served by nonrural carriers in the State."(JD,')')``%~"Ԍ` ` (5) In the event that a State's statewide average FLEC per line does not exceed the national cost benchmark, nonrural carriers in such State shall be eligible for support pursuant to section 54.311 of this Subpart. In the event that a State's statewide average FLEC per line exceeds the national cost benchmark, but the amount of support otherwise provided to a nonrural carrier in that State pursuant to this section is less than the amount that would be provided pursuant to section 54.311 of this Subpart, the carrier shall be eligible for support pursuant to section 54.311 of this Subpart.  XH2(b) Distribution of Total Support Available Per State. The total amount of support available per State calculated pursuant to subsection (a) shall be distributed to nonrural incumbent local exchange carriers, and eligible telecommunications carriers serving lines in the service areas of nonrural incumbent local exchange carriers, in the following manner: ` ` (1) The Commission's cost model shall determine the wire center average FLEC per line for each wire center in the service areas of nonrural carriers in the State. Nonrural incumbent local exchange carriers, and eligible telecommunications carriers serving lines in the service areas of nonrural incumbent local exchange carriers, that serve wire centers with an average FLEC per line above the national cost benchmark, as defined in subsection (a)(3), shall receive forwardlooking support; ` ` (2) The wire center scale support amount for each wire center identified in subsection (b)(1) shall equal 76 percent of the amount of the wire center average FLEC per line that exceeds the national cost benchmark, multiplied by the number of lines in the wire center; ` ` (3) The total amount of forwardlooking support available in the State calculated pursuant to subsection (a)(4) shall be divided by the sum of the total wire center scale support amounts calculated for each wire center pursuant to subsection (b)(2); ` ` (4) The percentage calculated pursuant to subsection (b)(3) shall be multiplied by the total wire center scale support amount calculated for each wire center pursuant to subsection (b)(2); ` ` (5) The total amount of support calculated for each wire center pursuant to subsection (b)(4) shall be divided by the number of lines in the wire center to determine the perline amount of forwardlooking support for that wire center; ` ` (6) The perline amount of support for a wire center calculated pursuant to subsection (b)(5) shall be multiplied by the number of lines served by a nonrural incumbent local exchange carrier in that wire center, or by an eligible telecommunications carrier in that wire center, to determine the amount of forwardlooking support to be provided to that carrier.  X%'2(c) Petition for Waiver. Pursuant to section 1.3 of this Chapter, any State may file a petition for waiver of subsection (b), asking the Commission to distribute support calculated"(KD,')')``%~" pursuant to subsection (a) to a geographic area different than the wire center. Such petition must contain a description of the particular geographic level to which the State desires support to be distributed, and an explanation of how waiver of subsection (b) will further the preservation and advancement of universal service within the State.  X29. A new section 54.311 is added as follows:  X_2  54.311 Interim holdharmless support for nonrural carriers.  XH2  X12(a) Interim HoldHarmless Support. The total amount of interim holdharmless support provided to a nonrural incumbent local exchange carrier shall equal the amount of support calculated for that carrier pursuant to Part 36 of this Chapter. The total amount of interim holdharmless support provided to a nonrural incumbent local exchange carrier shall also include Long Term Support provided pursuant to section 54.303 of this Subpart, to the extent that the carrier would otherwise be eligible for such support. Beginning on January 1, 2000, in the event that a State's statewide average FLEC per line, calculated pursuant to section 54.309(a) of this Subpart, does not exceed the national cost benchmark, nonrural incumbent local exchange carriers in such State shall receive interim holdharmless support calculated pursuant to Part 36, and, if applicable, section 54.303 of this Subpart. In the event that a State's statewide average FLEC per line, calculated pursuant to section 54.309(a) of this Subpart, exceeds the national cost benchmark, but the amount of support that would be provided to a nonrural incumbent local exchange carrier in such State pursuant to section 54.309(b) of this Subpart is less than the amount that would be provided pursuant to Part 36 and, if applicable, section 54.303 of this Subpart, the carrier shall be eligible for support pursuant to Part 36 and, if applicable, section 54.303 of this Subpart. To the extent that an eligible telecommunications carrier serves lines in the service area of a nonrural incumbent local exchange carrier receiving interim holdharmless support, the eligible telecommunications carrier shall also be entitled to interim holdharmless support in an amount per line equal to the amount per line provided to the nonrural incumbent local exchange carrier pursuant to subsection (b).  X92(b) Distribution of Interim HoldHarmless Support Amounts. The total amount of interim holdharmless support provided to each nonrural incumbent local exchange carrier within a particular State pursuant to subsection (a) shall be distributed first to the carrier's wire center with the highest wire center average FLEC per line until that wire center's average FLEC per line, net of support, equals the average FLEC per line in the second most highcost wire center. Support shall then be distributed to the carrier's wire center with the highest and second highest wire center average FLEC per line until those wire center's average FLECs per line, net of support, equal the average FLEC per line in the third most highcost wire center. This process shall continue in a cascading fashion until all of the interim holdharmless support provided to the carrier has been exhausted.  X>&2(c) Petition for Waiver. Pursuant to section 1.3 of this Chapter, a State may file a petition for waiver of subsection (b), asking the Commission to distribute interim holdharmless support to a geographic area different than the wire center. Such petition must"(LD,')')``%~" contain a description of the particular geographic level to which the State desires interim holdharmless support to be distributed, and an explanation of how waiver of subsection (b) will further the preservation and advancement of universal service within the State.  X210.XA new Section 54.313 is added as follows:(#  Xv2  54.313 State certification.  XH2(a) Certification. States that desire nonrural incumbent local exchange carriers and/or eligible telecommunications carriers serving lines in the service area of a nonrural incumbent local exchange carrier within their jurisdiction to receive support pursuant to sections 54.309 and/or 54.311 of this Subpart must file an annual certification with the Administrator and the Commission stating that all federal highcost support provided to such carriers within that State will be used only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Support provided pursuant to sections 54.309 and/or 54.311 of this Subpart shall only be provided to the extent that the State has filed the requisite certification pursuant to this section.  Xd2(b) Certification Format. A certification pursuant to this section may be filed in the form of a letter from the appropriate regulatory authority for the State, and must be filed with both the Office of the Secretary of the Commission clearly referencing CC Docket No. 9645, and with the Administrator of the highcost universal service support mechanism, on or before the deadlines set forth below in subsection (c). The annual certification must identify which carriers in the State are eligible to receive federal support during the applicable 12month period, and must certify that those carriers will only use the support for the provision, maintenance, and upgrading of facilities and services for which the support is intended. A State may file a supplemental certification for carriers not subject to the State's annual certification. All certifications filed by a State pursuant to this section shall become part of the public record maintained by the Commission.  XR2(c) Filing Deadlines. In order for a nonrural incumbent local exchange carrier in a particular State, and/or an eligible telecommunications carrier serving lines in the service area of a nonrural incumbent local exchange carrier, to receive federal highcost support, the State must file an annual certification, as described in subsection (b), with both the Administrator and the Commission. Support shall be provided in accordance with the following schedule:  X 2` ` (1) First Program Year (January 1, 2000 December 31, 2000). During the first program year (January 1, 2000 December 31, 2000), a carrier in a particular State shall receive support pursuant to section 54.311 of this Subpart. If a State files the certification described in this section during the first program year, carriers eligible for support pursuant to section 54.309 shall receive such support pursuant to the following schedule:  XB&2` `  ,(i) Certifications filed on or before January 1, 2000. Carriers subject to certifications filed on or before January 1, 2000 shall receive support pursuant to section 54.309 of this Subpart for the first and second quarters of 2000 in the second quarter of 2000,"(MD,')')``%~" and on a quarterly basis thereafter. Support provided in the second quarter of 2000 shall be net of any support provided pursuant to section 54.311 of this Subpart for the first quarter of 2000.  X2` `  ,(ii) Certifications filed on or before April 1, 2000. Carriers subject to certifications that apply to the first and second quarters of 2000, and are filed on or before April 1, 2000, shall receive support pursuant to section 54.309 of this Subpart for the first and third quarters of 2000 in the third quarter of 2000, and support for the second and fourth quarters of 2000 in the fourth quarter of 2000. Such support shall be net of any support provided pursuant to section 54.311 of this Subpart for the first or second quarters of 2000.  X 2` `  ,(iii) Certifications filed on or before July 1, 2000. Carriers subject to certifications filed on or before July 1, 2000, shall receive support pursuant to section 54.309 of this Subpart for the fourth quarter of 2000 in the fourth quarter of 2000.  X 2` `  ,(iv) Certifications filed after July 1, 2000. Carriers subject to certifications filed after July 1, 2000, shall not receive support pursuant to section 54.309 of this Subpart in 2000.  XQ2` ` (2) Second Program Year (January 1, 2001 December 31, 2001). During the second program year (January 1, 2001 December 31, 2001), a carrier in a particular State shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart until such time as the State files the certification described in this section. Upon the filing of the certification described in this section, support shall be provided pursuant to the following schedule:  X2` `  ,(i) Certifications filed on or before October 1, 2000. Carriers subject to certifications filed on or before October 1, 2000 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first, second, third, and fourth quarters of 2001.  XX2` `  ,(ii) Certifications filed on or before January 1, 2001. Carriers subject to certifications filed on or before January 1, 2001 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the second, third, and fourth quarters of 2001. Such carriers shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first quarter of 2001.  X 2` `  ,(iii) Certifications filed on or before April 1, 2001. Carriers subject to certifications filed on or before April 1, 2001 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the third and fourth quarters of 2001. Such carriers shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first or second quarters of 2001.  XH&2` `  ,(iv) Certifications filed on or before July 1, 2001. Carriers subject to certifications filed on or before July 1, 2001 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the fourth quarter of 2001. Such"(ND,')')``%~" carriers shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first, second, or third quarters of 2001.  X2` `  ,(v) Certifications filed after July 1, 2001. Carriers subject to certifications filed after July 1, 2001 shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in 2001.  Xa2` ` (3) Subsequent Program Years (January 1 December 31). During the program years subsequent to the second program year (January 1, 2001 December 31, 2001), a carrier in a particular State shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart until such time as the State files the certification described in this section. Upon the filing of the certification described in this section, support shall be provided pursuant to the following schedule:  X 2` `  ,(i) Certifications filed on or before October 1. Carriers subject to certifications filed on or before October 1 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first, second, third, and fourth quarters of the succeeding year.  XQ2` `  ,(ii) Certifications filed on or before January 1. Carriers subject to certifications filed on or before January 1 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the second, third, and fourth quarters of that year. Such carriers shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first quarter of that year.  X2` `  ,(iii) Certifications filed on or before April 1. Carriers subject to certifications filed on or before April 1 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the third and fourth quarters of that year. Such carriers shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first or second quarters of that year.  XA2` `  ,(iv) Certifications filed on or before July 1. Carriers subject to certifications filed on or before July 1 shall receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, beginning in the fourth quarter of that year. Such carriers shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in the first, second, or third quarters of that year.  X!2` `  ,(v) Certifications filed after July 1. Carriers subject to certifications filed after July 1 shall not receive support pursuant to sections 54.309 or 54.311 of this Subpart, whichever is applicable, in that year."#OD,')')``!~"  X2 P D   Separate Statement of Commissioner Susan Ness  X2  V2Re: FederalState Joint Board on Universal Service (CC Docket No. 9645). A cornerstone of the Telecommunications Act of 1996 is the notion that all Americans should have access to telecommunications services at affordable and reasonably  X12comparable rates. It is axiomatic that universal service benefits all Americans, not just lowincome consumers or those living in high cost areas. Each time a new subscriber is added to the system, the value of that system is enhanced. Under section 254 of the Act, the federal government and the states together share responsibility for ensuring that specific, predictable and sufficient mechanisms are in  X 2place to preserve and advance universal service.C  yO"(ԍ 47 U.S.C.  254(b)(5).C A key component of universal service is the requirement that quality services be available at just, reasonable, and  X{2affordable rates.C{X yO(ԍ 47 U.S.C.  254(b)(1).C Working in close consultation with our colleagues on state public utility commissions, we today adopt an order that further clarifies these principles. We identify the federal role as enabling reasonable comparability among states; the state role is to ensure reasonable comparability within its borders. We emphasize that states can and should satisfy their own rate comparability needs to the extent possible before drawing support from other states through the federal mechanism. We also establish, in part through operation of a cost model, the amount of federal funding that nonrural carriers receive in those states that do not have sufficient resources to make local rates reasonably comparable. The cost model estimates the carriers forwardlooking cost of providing service, which is the basis for prices in a competitive market. We cannot permanently rely on a system that is based upon the historic costs of incumbent carriers ! costs which are not uniformly and predictably derived. The cost model is far from perfect. But, when used to measure forwardlooking costs statewide, the model appears to have gained a reasonable level of acceptance. The model was developed to determine universal service support, and is not in its current form intended to be used for other purposes, such as setting prices for unbundled network elements. I will be watching the implementation closely to determine whether the cost model achieves our objectives. I want to underscore what I have said previously ! we have made no determination as to the appropriateness of applying this model, or any model, to determine comparative funding levels for rural carriers. The Joint Board has asked the Rural Task Force to"#P,')')``!~" examine the unique cost structures and competitive circumstances of rural carriers. I await its recommendations next spring and Joint Board action before making any significant changes to the universal service mechanisms for rural carriers. But I urge us to move expeditiously once the Task Force has issued its report to finalize any modifications in rural carrier support. I am also increasingly concerned about the aggregate impact of our universal service reforms on consumers, particularly those who make very few long distance telephone calls. These subscribers have not derived the benefits of the very substantial rate reductions in long distance service. This past July, we issued a Notice of Inquiry seeking comment on the aggregate impact of marketplace changes on lowvolume users. We need to move swiftly to review these comments and determine what, if anything, should be done to reduce any disproportionate burden on this group. Finally, I would have preferred to proceed concurrently with reform of high cost support and access charges. The two go hand in glove. Unfortunately, while progress has been made in access charge reform, the proposals on the table do not adequately take into account the needs of consumers. We will continue to work on access charge reform to finalize changes expeditiously, but cannot justify further delay in implementing our revisions to high cost support."KQ,')')``T~"  X2 XX   R DISSENTING STATEMENT OF COMMISSION FURCHTGOTTROTH ă   X2Re:44FederalState Joint Board on Universal Service, Ninth Report & Order and  X2Eighteenth Order on Reconsideration, CC Docket No. 9645; FederalState Joint Board on Universal Service, ForwardLooking Mechanism for High Cost Support for  X2NonRural LECs, Tenth Report and Order, CC Docket Nos. 9645, 97160. 44In the companion orders that it releases today, the Commission finalizes its implementation of a computer model that it will use to determine the total cost of providing service to every resident in the country. It plans to use this model to distribute universal service support among nonrural carriers, the term that is used to describe the large telephone companies that serve rural areas. As I have said at earlier stages in this proceeding, this Commissions approach to universal service is fundamentally at odds with the Telecommunications Act generally and specifically with its express directive that the Commission preserve and advance universal service. Moreover, its adoption of this unwieldy model is inconsistent with the Acts mandate that universal service support be specific and predictable. Finally, as a consequence of the Commissions action today, consumers will now pay higher bills for dubious subsidies to large companies. I therefore dissent from these orders. 44  X:244 The Orders Are Inconsistent With Congresss Objective of Preserving  X#2Universal Service Support for Rural Carriers. By way of background, four years ago, universal service was a $2 billion per year program targeted mostly at small, rural telephone companies. Today, as a result of the Commissions unwarranted interference in the existing universal service system and the new programs that it has dreamed up, the program costs taxpayers more than $5 billion a year. 44 44I believe that this proceeding illustrates, yet again, that this Commission has its universal service priorities entirely backward. Section 254 of the Telecommunications Act of 1996 was drafted with rural carriers in mind. The primary objective of that provision was to ensure that rural carriers continued to receive sufficient funding to enable them to provide local service at rates comparable to those in urban areas. In light of this objective, the Commission should have turned first to the matter of preserving rural universal service. Instead, the Commission has squandered a tremendous amount of its employees time and taxpayers money coming up with an entirely new approach to universal service. And the matter of universal service support for rural carriers has been this Commissions very last priority. 44 44I am relieved to see that the Commission has in these orders taken steps to ensure that funding for rural carriers will not decrease ! at least in the near term. I have little confidence, however, that rural carriers can count on this promise for long. This Commission has so substantially increased universal service funding for other, less essential programs that, if and when it finally turns to addressing the issue of rural universal service support, I question whether there will be any money left for rural telephone companies."(R,')')``%~"Ԍ X2ԙ44 The Commissions Model Is Unwieldy, Easily Manipulated, and Will  X2Require Constant Maintenance. Not only does the Commission have its universal service priorities wrong, but also the model on which it relies is inconsistent with the Telecommunications Acts requirement that universal service support be specific and predictable. The model is an immensely complicated computer program that requires around 180 hours ! more than one week ! to run. Since issuing an October 1998 NPRM in which it proposed this model, the Commission has made numerous changes to the model platform, and each change has required interested parties to go back to their computers and spend days testing the model. Only in the last few weeks has the Commission decided on final input values. In my view, it is unclear whether interested parties have even had the opportunity meaningfully to comment on a final version of the model, as the Administrative Procedure Act requires.  X 2 44The model is also completely dependent on hundreds of assumptions about the local exchange markets and costs. The bottom line is that, simply by making different assumptions about local exchange networks, or by picking different input values for costs, the Commission is able to push the end result in whatever direction it chooses. I do not believe that a system that can be manipulated in this way will generate the specific and predictable universal service support that the 1996 Act requires. In addition, the fact that the Commission has found it necessary to tinker with this model so extensively reflects its fundamental lack of confidence in its model. 44 44The model is also going to be enormously timeconsuming and expensive to maintain. Each time technology or prices change, the Commissions staff will be required to adjust the model. I am opposed to wasting resources on this effort. 44  X244 The Commissions Approach to Universal Service Means that Consumers  X2Will Pay More. As a final matter, I want to point out what the Commissions current approach to highcost universal service will mean for consumers. According to the model, carriers in a few states (primarily Mississippi and Alabama) should receive significantly more funding than they currently do, and the Commission plans to increase subsidies for carriers in these states. But the model also says that carriers in  X 2many other states should receive less universal service funding than they now do. The Commission, however, does not plan to follow the models guidance with respect to these carriers. Instead, because it committed to Congress in April 1998 that universal service support would not decrease for any state, the Commission plans to continue distributing current levels of universal service support to carriers in all states. 44 44The result of this socalled hold harmless requirement is that all carriers will receive as much or more universal service funding as they did before the issuance of these two orders. In other words, the bill for highcost universal service support will go up, and consumers phone bills are going to increase correspondingly. I predict that these will be only the first of several increases that consumers can expect to see in the upcoming months as a result of this Commission's misguided universal service policies."(S,')')``%~"       X2 SEPARATE STATEMENT OF COMMISSIONER MICHAEL K. POWELL,  X2qCONCURRING IN PART x  Vv2Re:XNinth Report and Order and Eighteenth Order on Reconsideration, FederalState Joint  V_2Board on Universal Service (CC Docket No. 9945).(# I enthusiastically support the Commission taking this important step toward fulfilling our duty to implement the universal service provisions of the Telecommunications Act of 1996. The task of determining support levels for federal high cost support is one of the most complex and contentious issues the Commission has faced since it began implementing the 1996 Act. My colleagues, our Common Carrier staff and the state members of the Joint Board are to be commended for their diligent and, at times, frustrating work to develop a platform for estimating cost of service that attempts to build on the best ideas from each of the other proposed models. In order to promote competition and reduce at least some of the distortions created by the traditional subsidy regime, I think it is imperative that we introduce some notion of economic cost into universal service support. Although I believe the criticisms leveled at the approach we have taken with the new support mechanism have at least some merit, I cannot agree that we should have abandoned the cost models altogether. The only alternative to this approach appears to involve continuing to funnel money to states and carriers with little way of knowing objectively whether such support was necessary and without being able to target it for purposes of minimizing distortions to competitive entry signals. I fully understand that the platform is not perfect, but it is the best approach for estimating economic cost of service on a nationwide basis that we currently have. Furthermore, the models have been subjected to prolonged scrutiny over the past several years. Yet, even though I applaud the Commissions adoption of the new mechanism as a general matter, I am troubled that we have not specified a date when carriers will no longer be held harmless with respect to the levels of federal support received under the old high cost mechanism, and thus I must reluctantly concur in part. I agree that there is merit in giving carriers that will not receive as much federal support under the new mechanism some period to adjust to that change. I believe it is essential, however, that we keep that period as brief as reasonably possible because we will be collecting and distributing funds for two support mechanisms as long as the hold harmless  X#2stays in place. This approach, I concede, holds carriers receiving federal support harmless.  Xj$2But clearly, other carriers and consumers will not be held harmless. Rather, to support the old and new mechanisms simultaneously, carriers will have to make temporarily inflated contributions, which they will pass on to their customers in the form of higher rates or unnecessarily high line items. Thus, at the very least, I would have preferred to specify in  X(2this Order a date certain (i.e., a sunset date) by which the hold harmless would end, absent"(T,')')``%~" further action by the Commission in consultation with the Joint Board. This approach would have given the Joint Board ample opportunity to weigh in to recommend that we accelerate and, if absolutely necessary, extend the sunset date. Certainly, I applaud the extent to which the item describes the hold harmless as transitional. Without a sunset date as a baseline, however, I fear we have left the Commission, as well as the carriers and consumers who will have to pay for the two funds, unnecessarily vulnerable to enormous pressures by those states and carriers that will receive less federal support under the new mechanism. I should add that, by leaving ambiguous precisely when we will end the hold harmless, we have left ourselves vulnerable to accusations, in the courts and perhaps elsewhere, that the hold harmless is not really transitional at all. That said, I would reiterate my strong support for this important action in our universal service implementation. The fact that it is our duty to take this action does not take away from the need for courage in doing so. And our decision today is, indeed, courageous, for it brings us even closer to ensuring that all subsidy flows are visible to everyone in the marketplace, even consumers. Although important to the development of universal service, many implicit and other subsidy flows historically have not been as apparent to carriers and consumers, and thus they have frustrated the development of local competition. The Act wisely commands that we make universal service support explicit in order to remove this obstacle to competition and thereby benefit the public. The public, however, may not always appreciate this benefit. Consumers may long for the days when they did not know what they were paying for. But thats not the way markets work, and in exchange for the benefits of competition, consumers must give up some of the comforts of regulatory paternalism that were only possible under the old, monopolistic regime. And, I dare say, letting consumers know what they are paying for will better help us to balance our duty to promote universal service against the harsh reality that, like any government spending program, the costs of universal service are ultimately borne by the American public. Perhaps that balance will curb what otherwise would be an irresistible temptation to allow federal largesse in this regard to grow unconstrained. Based on our action today, I am hopeful that the Commission can exercise similar courage as we work hard to put together the other pieces of the subsidy puzzle, including access reform and rural high cost support. We must not quaver in our resolve to make that which is implicit explicit, nor should we be na5ve enough to think we can reform implicit subsidies without any effect on consumers. Certainly, we should try to minimize these effects to the extent doing so does not undermine the reform itself. But the Commission has repeatedly tried ! and, to my mind, consistently failed ! to shield consumers from such impacts. And I see on the horizon no truly viable method, whether directly or through less formal means, for shielding consumers in a significant way from these impacts, save doing what seems almost unthinkable: imposing new price regulations on the competitive long distance market, just as we watch long distance rates plummet toward commodity levels. In my view, our time would be better spent completing the exercise of subsidy reform, rather than engaging in exercises in futility.":&U,')')``$~"       j<s# k\  P6QF P# Separate Statement of  j<>" Commissioner Gloria Tristani  X*2#XP\  P6QynXP#  V2Re:X44FederalState Joint Board on Universal Service; Ninth Report & Order and Eighteenth Order on Reconsideration. CC Docket No. 9645!4 X44FederalState Joint Board on Universal Service; ForwardLooking Mechanism for High Cost Support for NonRural LECs. CC Docket Nos. 9645 & 97160. !4  X 2 44In adopting these Orders, the Commission has taken an important step towards fulfilling its mandate under the 1996 Act to ensure that all Americans have access to telecommunications and information services. The new highcost mechanism, together with the selected inputs, establishes a specific, predictable, and sufficient mechanism to preserve and advance universal service. I believe that the mechanism will provide sufficient resources to the states to ensure reasonable comparability of rates among states. Moreover, I am pleased that the Commission will be ready to provide forwardlooking support to nonrural carriers based on this mechanism, effective January 1, 2000. 44 44I commend my fellow Joint Board members, the Joint Board staff, and the Common Carrier Bureau for their outstanding cooperation in developing the model and model inputs. I likewise commend the outside parties who worked with the Joint Board and the Bureau throughout this process. I look forward to continued cooperation as we confront the other pieces of universal service reform, including adjusting interstate access charges to account for explicit support, selecting an appropriate methodology for rural carriers serving high cost areas, and addressing the needs of unserved and underserved areas.