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À ?        ? ? ?      ?    8?       ? ? ~  ?  ? ?  ? ?  ?    ?  ? ??  ?   ?   ? ??  ?   ?  ? ? ? ? ? ? ? ? ?  ? ?   ?   ?   ?  ?  ? ?? ? ? ??? ~?   ? ? ? ?? ? ??  ? ? ??  ?  ?  ?À? ? ?? ?? ?? ? ? ? ?? ?? ??? ? ?? ?? ? ? ?? ? ?? ??  ??  ???  ?  ?  ? ?? ??  ?  ?  >?  ?  ?? - ?: 9 4ǀ? ?4 4 4? 4 4 4 4 5? 5 4 ?4 ?4 5 5 5 ?1? ?1 ?1 ?1 ?0 1x 1 / /? ?/π / / / .? ??.? ?. <. - - - --,,?,,-?----?+?* ??* ?+,>,,,?,?,?,--.?.?.?.%?À%%%%%%?%%?%?%?%&&'''?'?'?''?'())))x)?)?)?))*+++ǀX? π? ? ??? ##?&#&#? %#0%#x?%#?x%#?|%#?%#?%#?%#?%#%#%#%# ?%# $# ?$#?$# $# ?$# $#$#$#$#$#$#$#$###??####?##?##?#$ ?#$'$?'$'*'*'+'++XC f X   @-  -@ yO'z#X\  P6G;ɒP# -  - ؐ\Ԙ XX  ddZd  Figure 1  Figure 1 #` 2pPG;9` # U 1  1 y!HHX@Uddfcclogo.wpgHHy$XX%%%%!$\!d dd(h d  dB'0#I2PG;P#News media information 202 / 4180500 'FaxOnDemand 202 / 4182830 AEInternet: http://www.fcc.gov lftp.fcc.gov\!PUBLIC NOTICE#Xm2PG;XP# ,%%A!!%,  P*4$*XX!%$X` hp x (#%'0*,.8135@8: \O  {O %'ԍ Universal Service Order, 12 FCC Rcd at 91999200, paras. 829830. Price cap LECs may treat their  {O%'contributions as exogenous changes to their price cap indices. Access Charge Reform Order, FCC Rcd at 16147,  yO&'para. 379.> Finally, the Commission directed that incumbent LECs use high cost support to reduce or satisfy the interstate revenue requirement"8. 0*((U"  X4otherwise collected through interstate access charges.q  {Oy'ԍ Access Charge Reform Order, 12 FCC Rcd at 16148, para. 381.q That decision was based on the  X4decision in the Universal Service Order to fund only the federal share, or 25 percent, of high cost support from the federal mechanism, discussed below.  X4In the first step of the Commission's fourstep methodology for determining support for nonrural carriers, a forwardlooking economic cost mechanism selected by the Commission, in consultation with the Joint Board, will be used to calculate the forwardlooking economic cost to nonrural carriers for providing the supported services in high cost  XJ4areas. $JZ yOU 'ԍ #X\  P6G;ɒP#Alternatively, states may submit cost studies that, if consistent with the criteria established by the  {O 'Commission in the Universal Service Order, will be used to compute the forwardlooking cost. #X\  P6G;ɒP#The Commission  {O 'will select a forwardlooking mechanism by August 1998. Universal Service Order, 12 FCC Rcd at 8890, 8910, 891216, paras. 206, 245, 24850.  Second, the Commission will establish nationwide revenue benchmarks calculated on  X34the basis of average revenue per line.u 3F {O*'ԍ See Universal Service Order, 12 FCC Rcd at 89198924, paras. 257267.u Without adopting a precise method for calculating the  X 4benchmarks, the Commission stated in the Universal Service Order that it appears that the benchmarks should be approximately $31 for residential services and approximately $51 for  X 4singleline businesses.g  {Oy'ԍ Universal Service Order, 12 FCC Rcd at 8924, para. 267.g The Commission intends to make a formal determination on the appropriate revenue benchmark before it implements a high cost support mechanism based on forwardlooking costs. Third, the difference between the forwardlooking economic cost and the benchmark will be calculated. Fourth, federal support will be 25 percent of that difference, corresponding to the percentage of loop costs allocated to the interstate  X}4jurisdiction.b}j  {O'ԍ Universal Service Order, 12 FCC Rcd at 8925, para. 269. As discussed in note 4, federal support for universal service historically has been provided by three Commission mechanisms, but other mechanisms also have contributed to maintaining affordable rates in rural areas, including subsidies implicit in intrastate rates. Because of the patchwork of implicit and explicit universal service support mechanisms that evolved prior to the 1996 Act, it has not been possible to quantify the actual historical federal share of total universal service support.b In the Universal Service Order, the Commission stated that, once states have taken steps to identify the subsidies implicit in intrastate rates, the Commission may reassess  XQ4the amount of federal support that is necessary to ensure affordable rates.hQ {O!'ԍ Universal Service Order, 12 FCC Rcd at 8926, para. 272. h A number of parties have sought reconsideration of the Commission's decision to initially fund only 25  X#4percent of total high cost support.# {O$'ԍ See, e.g., the petitions filed on July 17, 1997 in CC Docket No. 9645 by the following parties: Alaska Public Utilities Commission at 56; Alaska Telephone Association at 12; Arkansas Public Service Commission at 13; GVNW Inc. at 2, 8; Rural Telephone Coalition at 34; Sprint Corporation at 13; United Utilities at 34; U S WEST at 6; Vermont Public Service Board at 23; Western Alliance at 1819; and Wyoming Public Service  {O''Commission at 2. Several parties have also appealed that decision. Texas Office of Public Utility Counsel et. al."'0*(('"  {O'v. FCC, No. 9760421 (5th Cir. filed June 25, 1997). Since the period for filing comments on those"#Z0*(( " reconsideration petitions closed, several parties have proposed specific alternatives to the  X4Commission's 25/75 funding decision.Z yO'ԍ All of the proposals described in this Public Notice will be available on the Commission's web page at http://www.fcc.gov under the heading "Universal Service." The proposals that calculate forwardlooking cost use a forwardlooking economic cost model. For demonstration purposes, fund estimates are based on two industryproposed models under consideration by the Commission, the Benchmark Cost Proxy Model (BCPM) and the  yO'HAI model (HAI), however the versions of the models and the inputs used may vary across proposals. BCPM was submitted by BellSouth Corporation, BellSouth Telecommunications, Inc., U S WEST, Inc., and Sprint Local Telephone Company. Submission to CC Docket Nos. 9645 and 97160 by BCPM proponents, dated Dec. 11, 1997. HAI was submitted by AT&T and MCI. Letter from Richard N. Clarke, AT&T, to Magalie Roman Salas, FCC, dated Dec. 11, 1997. Versions of HAI filed before February 3, 1998, were known as the Hatfield Model.  X' Proposals to Modify the Commission's Methodology Upon recommendation by the Joint Board, the Commission adopted a nationwide  Xv4revenue benchmark based on average revenues per line. v  {O'ԍ FederalState Joint Board on Universal Service, CC Docket No. 9645, Recommended Decision, 12 FCC  {O'Rcd 87, 246 (1996); Universal Service Order, 12 FCC Rcd at 8919, para. 259.  Subsequent to the Joint Board's recommendation, a majority of state members of that Joint Board endorsed a nationwide benchmark based on the nationwide average cost of service, as determined by a forward X14looking cost model.r\1N  yO0'ԍ The majority state members concluded that a revenuebased benchmark will require periodic review and  {O'more regulatory oversight than a costbased benchmark. Majority State Members' Second Report on the Use of  {O'Cost Proxy Models, CC Docket 9645 (filed April 21, 1997) at 1415. r In light of the recommendation of the Joint Board's majority state members and the proposals described in this Public Notice, we seek additional comment regarding the use of a costbased benchmark. U S WEST proposes to modify the second step of the Commission's forwardlooking methodology for nonrural carriers by creating a second revenue benchmark (Interstate High  X 4Cost Affordability Plan or IHCAP).jZ r yO'ԍ Exhibit of James D. Smiley, U S WEST, for FCC En Banc Hearing, Universal Service (Mar. 6, 1998)  {O '(IHCAP Proposal). U S WEST does not specify different benchmark levels for different types of lines, e.g.,  yO\!'residential, singleline business, or multiline business lines.j Under the IHCAP, the federal mechanism would provide support for 25 percent of the costs between a "Primary Benchmark" and a "Super Benchmark," and 100 percent of the costs above the Super Benchmark. For demonstration  Xb4purposes, the IHCAP assumes a Primary Benchmark of $30 and a Super Benchmark of $50.<X b yO%'ԍ Using BCPM with a set of "common inputs" developed by Commission staff, rather than default inputs,  yOo&'U S WEST estimates that a federal fund that supported all switched lines would be $2,836,903,776 for the nonrural carriers. Letter from Glenn Brown, U S WEST, to Magalie Roman Salas, FCC, dated Mar. 13, 1998"7'0*((G'" (IHCAP Proposal) at att. Using BCPM and HAI with default inputs, the Telecommunications Industry Analysis Project (TIAP) estimates that a federal fund with $30 and $50 benchmarks would be $8,318 million with BCPM  yO 'and $2,556 million with HAI. Letter from Carol Weinhaus, TIAP, to Magalie Roman Salas, FCC, dated Mar.  yO'11, 1998 (TIAP Proposals) at 21. < "b0*((&" An Ad Hoc Working Group convened through the National Association of Regulatory Utility Commissioners proposes an alternative approach for determining and distributing high  X4cost support for both rural and nonrural carriers (Ad Hoc Proposal).B yO 'ԍ Letter from Peter Bluhm, Vermont Public Service Board, to Magalie Roman Salas, FCC, dated April 10,  {O '1998, at att. High Cost Support: An Alternative Distribution Proposal (Ad Hoc Proposal); see also Statement of Thomas Welch, Maine Public Utilities Commission, at March 6, 1998 en banc Commission meeting, transcript at 2425. Using HAI 5.0a, the Ad Hoc Group estimates that total high cost support for nonrural carriers under the Commission's forwardlooking methodology would be $4,900 million, 25 percent of which would be supported by a federal mechanism. The Ad Hoc Group estimates that their approach would result in a federal fund of  yO '$1,830 million. Ad Hoc Proposal at 22. TIAP estimates that the Ad Hoc Proposal would result in a federal  yO'fund of $1,699 million with BCPM and of $1,196 million with HAI. TIAP Proposals at 14.  In lieu of the forwardlooking cost methodology established by the Commission, a draft of the Ad Hoc Proposal filed with the Commission on April 10, 1998 calculates federal support for each state in five steps. First, the Ad Hoc Proposal uses a forwardlooking economic cost model selected by the Commission to calculate the average forwardlooking cost per line for each state, as well as the average forwardlooking cost per line for the nation. The difference between these amounts is calculated for each state and multiplied by a composite state separations factor  X 4which the proposal assumes to be 75 percent.  yO'ԍ The proposal notes that it may be more appropriate to use individual state's composite separations factor.  yOM'Ad Hoc Proposal at note 34. Second, the above process is repeated using embedded cost. Specifically, the difference between each state's average embedded cost and 105 percent of the national average embedded cost is calculated for each state and multiplied  X 4by a composite state separations factor.  yO'ԍ In order to reduce the overall size of the federal support fund, the target figure is set at 105% of the  yO`'national average cost. Ad Hoc Proposal at 14. Third, the lesser amount resulting from the first two  X 4steps is determined. Fourth, a "holdharmless" level is calculated for each state equal to federal support received by carriers in that state under existing mechanisms. For those states with aboveaverage embedded costs that also currently make a net contribution to federal support mechanisms, the holdharmless level is increased to ensure that a state's net contribution does not increase. Finally, the federal support for each state is set at either the  XK4holdharmless amount or the amount determined in step 3, whichever is greater. Federal support below the holdharmless level is distributed by state commissions to carriers that  X4receive support under the current system.j yO8%'ԍ The Ad Hoc Working Group notes that this support would be portable to competitive LECs that are  yO&'eligible telecommunications carriers. Ad Hoc Proposal at note 44. Federal support above the holdharmless level is  X4distributed to other eligible telecommunications carriers (ETCs) according to a state"0*((" distribution plan reviewed by the Commission. The Ad Hoc Working Group and the Telecommunications Industry Analysis Project (TIAP) also examine possible modifications to  X4the Ad Hoc Proposal.r {OK'ԍ See Ad Hoc Proposal at 1821; TIAP Proposals at 1620. r TIAP proposes four alternatives to the federal forwardlooking methodology. One proposal increases federal support to 40 percent of the difference between forwardlooking  Xv4cost and the revenue benchmark (40/60 Proposal). vZ yO 'ԍ TIAP estimates that the federal fund using a 25/75 approach and a $30 benchmark would be $3,938 million with BCPM and $1,927 million with HAI. TIAP estimates that a federal fund using a 40/60 approach  yO 'and the same benchmark would be $5,484 million with BCPM and $2,267 million with HAI. TIAP Proposals at 27, 33. In another proposal, the federal fund supports 100 percent of the difference between the forwardlooking economic cost and the benchmark only in one or two of the lowest density zones served by nonrural carriers  X14(Density Zone Proposal). 1B yO$'ԍ Assuming a $30 benchmark, TIAP estimates that federal support for the lowest density zone calculated by the models (0 to 5 lines per square mile) would result in a fund of $3,965 million, based on BCPM, or $2,410 million, based on HAI. TIAP states that federal support for the two lowest density zones (0 to 5 lines per square mile and 5 to 1000 lines per square mile) "would increase the federal fund by 312% for BCPM and  yOD'277% for HAI. " TIAP Proposals at 24.  A third proposal applies one nationwide surcharge to each telephone number per month (Telephone Number Proposal). Based on the assumption that the federal fund will provide 100 percent of the necessary support, the surcharge is calculated by  X 4dividing the fund by the number of phone numbers in service, and by twelve months.   yO'ԍ Using 1996 interstate and intrastate retail revenues, TIAP estimates that, with a $30 benchmark, and a total fund of $3,628 million with HAI or $11,670 million with BCPM, a monthly surcharge would be $1.31 or  yO'$4.20, respectively. TIAP also calculates estimated surcharges and fund sizes at $40 and $50 benchmarks. TIAP  yO'Proposals at 38. İ A fourth proposal applies one nationwide surcharge to each customer's bill based on a percentage of the total (interstate and intrastate) revenues on the bill (Percentage of Retail Revenues Proposal). Based on the assumption that the federal fund will provide 100 percent of the necessary support, the surcharge is calculated by dividing the fund by total annual retail  Xy4revenues.zXy yO 'ԍ Using 1996 total retail revenues, a $30 benchmark, and a total fund of $3,628 million with HAI or $11,670 million with BCPM, TIAP estimates that this surcharge would be 1.9% or 6.2%, respectively. TIAP  yO!'also calculates estimated surcharges and fund sizes at $40 and $50 benchmarks. TIAP Proposals at 41. z We seek comment on the use of a costbased benchmark and the proposals of U S WEST, the Ad Hoc Working Group, and TIAP. In addition, we seek comment on how to modify our rules in the event such a proposal were adopted. We also seek comment on the appropriate method and revenues to recover contributions for high cost support. "0*(("Ԍ X'  Implementation of High Cost Support Methodology  X4In the Universal Service Order, the Commission established a forwardlooking economic cost methodology for nonrural carriers that will calculate support based on forwardlooking cost beginning January 1, 1999. AT&T seeks to delay implementation of the high cost support mechanism for "the Major ILECs . . . at the very least until these companies  Xx4have opened their markets to robust and widespread local competition."x yO'ԍ Letter from Brian Masterson, AT&T, to Magalie Roman Salas, FCC, dated Mar. 12, 1998, at att. Presentation of Joel Lubin, AT&T, to March 6, 1998 en banc Commission meeting. In contrast, proponents of the Ad Hoc Proposal support the implementation of their proposal for both  XJ4rural and nonrural carriers on January 1, 1999.@ J  yO 'ԍ Ad Hoc Proposal at 13.@ U S WEST recommends that nonrural carriers begin receiving support based on the IHCAP on January 1, 1999, and that a forwardlooking methodology that will best meet the needs of rural carriers should be determined after  X 4several years of experience of calculating support based on IHCAP for the nonrural carriers.!  {Of'ԍ IHCAP Proposal at 4. See also letter to William E. Kennard, FCC, from Solomon D. Trujillo, U S WEST, dated April 2, 1998. We seek comment on these implementation proposals. With regard to AT&T's petition, we seek comment on the specific criteria that should trigger implementation of the forward X 4looking methodology for nonrural carriers.  X4Finally, in its Report to Congress, the Commission commits to completing a reconsideration of the issues raised in this Public Notice prior to implementing the new high  Xf4cost mechanism for nonrural carriers.V"f  {O!'ԍ Report to Congress at para. 224.V The Commission specifies that, in the course of  XO4reconsidering these issues, it will work closely with the state members of the Joint Board._#O {O'ԍ See Report to Congress at paras. 224, 228, 231._ The Commission attests that, in the past two years in particular, the ideas generated by the formal and informal dialogue among state members of the Joint Board and the FCC Commissioners have facilitated the shared objectives of preserving and advancing universal service as competition develops in local markets.  X4 Final Regulatory Flexibility Analysis  X4In the Universal Service Order we conducted a Final Regulatory Flexibility Analysis  X4(FRFA),p$.  {Oa%'ԍ Universal Service Order, 12 FCC Rcd at 92199260 paras. 870983.p as required by the Regulatory Flexibility Act (RFA).%Z  {O'#]\  PCɒP#э See 5 U.S.C.  604. The RFA, see 5 U.S.C.  601 et. seq.#x6X@K X@## ]\  PCɒP#, has been amended by the Contract With America Advancement Act of 1996, Pub. L. No. 104121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). We received no petitions"%0*(("  X4for reconsideration of that FRFA. In this present Public Notice, the Commission promulgates no additional final rules, and our action does not affect the previous analysis. If commenters believe that the proposals discussed in this Public Notice require additional RFA analysis, they should include a discussion of these issues in their comments.  X' Deadlines and Instructions for Filing Proposals and Comments Interested parties may file additional proposals regarding the Commission's methodology for determining universal service support for rural and nonrural carriers on or  X14before April 27, 1998 . Interested parties may file comments in support of or opposition to  X 4the proposals on or before May 15, 1998 . Reply comments are due on or before May 29,  X 41998 . All filings should refer to CC Docket Nos. 9645 and 97160, and DA 98715. One original and five copies of all filings must be sent to Magalie Roman Salas, Office of the Secretary, Federal Communications Commission, 1919 M Street, N.W., Room 222, Washington, D.C. 20554. Parties must also send copies to the individuals listed on the attached Service List (Appendix) and to the Commission's copy contractor, International Transcription Service, Inc., 1231 20th Street, N.W., Washington, D.C. 20554. For further information, please contact Chuck Keller at (202) 4187380 or via electronic mail at . Action by the Chief, Common Carrier Bureau. q FCC X` hp x (#%'0*,.8135@8: