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^44U``8;;`444```````````44Hx|vCHxv`;`;dd8UkUhU?]o84o8okkhLFCkddk]YdY`4`````4``````d`o8UUUUUU|U|U|U|UC8C8C8C8okkkkkkkkkUdkkkkvkX`XXX``x|X|`|`|Xd````ooC8`o``Cok``o|8|Hx`xCx8ddodkHH`lL`FlL``|H|8`kdkkdkkX]Xhx`o```kx4dd888WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNd``4HUU``````Codd`C88UU`88``xxdddvoo8UdC"d`d9dCCx4d`o`d``Y`s]xUvdYY;;;;xxoxoY|LYdYC8YooYdYxvdxddYYxoxxx|C`xYxxxx44```````x`sdYC\   pxtll\tll@\@\`L2f Xj cQn",tB^ f ^00U``000`000d``````````00FsvdC?vo]x~0d0dd0]`HdH8U`;0d8o]]`N;?hh]YUYdY`4`````0``````d`d;]]]]]~HvHvHvHvHC;C;C;C;o]]]]hhhhY]d]]Y]o]xd`xdXX``xxXv`v`xXd``````D;`d``Cdk``dp8pHv`vCv8ddod`xLxL`dL];dL``pHp8x`hdhhdh`pL~UpLdv`o``x`dx0dd080WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNd``4FQQ```YY`CYdd`C00QQ`;;``xxdddhdk0QdC"dYd9dCCx0d`o`d``Y`s]xUvdYY0000xsoxoYvN~YdYC8YooYdYxodxddxYYxoxxxvC`xYxxxx00```````x`sdYC\   pxtll\tll@\@\`Ly.X80,ɒX\  P6G;P7jC:,ynXj\  P6G;XP7nC:,\4  pG;\5hC:,%rXh*f9 xr G;XX W!@(#,h@\  P6G;hP!H5!,),5\  P6G;,P\"{,W80,%BZW*f9 xr G;X#z-X80,<|X9 xOG;$x/c81,X c PE37P %2a=5,u&a\  P6G;&P &P:% ,J:\  P6G;JP'H<!,X,< PE37,P(z-b81,aub&_ x7X<?xxx,qx6X@`7X@ ?xxx,yΡx6Nhez7XH)#mt,ؐ\  P6G;P*6jC:,<̃Xj9 xOG;X+8wC;,X|Xw PE37XPD7zC;,EXz_ pi7X6uC;,aE;Xu&_ x7XX9NC,Ӽ2PG;P6ND,A2pPG;T9ND,Å2xjAG;Xj"L/(,L2PG;Pk!O/),O2pPG;l;xC4,SXxjp P7XPlT$H(,phHjp P7hP&;sC0,Xs4@ x7XX%k!O/),5O2pPG;?xxx,\x `7X X-  "4% yO-#X\  P6G;ɒP#Federal Communications Commission`F (#'FCC 96J3  yxxdddy "  `(##FCC 96J3 ă  X-v3 #X\  P6G;ɒP#Before the à FEDERAL COMMUNICATIONS COMMISSION  yOaWashington, D.C. 20554 #Xj\  P6G;ynXP#у  X4-In the Matter of hh@) x` `  hh@)  X-FederalState Joint Board onhh@)hppCC Docket No. 9645  X-Universal Service hh@) x` `  hh@)  X - RECOMMENDED DECISION ă Adopted: November 7, 1996`(#Released: November 8, 1996 By the FederalState Joint Board (Chairman Hundt and Commissioners Johnson, Nelson, and Ness, and the Honorable Martha Hogerty issuing separate statements; Commissioners McClure, Schoenfelder, and Chong concurring in part and dissenting in part and issuing separate statements):  X- Table of Contents ă  X- Topic`!(# Paragraph No. ă  Xh-X` hp x (#%'0*,.8135@8:", } {O -ԍ See, e.g., Florida PSC comments at 4; LINCT Coalition comments at 2 (stating "all four goals need not be met"); Oregon PUC comments at 5 (urging the FCC and the Joint Board to interpret the four criteria in a way that does not require that every criterion be met before a service can be included in the definition of universal service); RTC comments at 78. For instance, Florida PSC strongly endorses the FCC's interpretation that the use of the verb "consider" allows selection of services for support that">*&&dd"  X-do not meet all four criteria.D?} yOy-ԍ Florida PSC comments at 4.D In addition, RTC argues that "a service need not satisfy all  X-four criteria" for inclusion in the federal universal service definition.>@X} yO-ԍ RTC comments at 78.> Some parties,  X-however, disagree.A} {Ok-ԍ See Florida Cable comments at 5; Georgia PSC comments at 6; NCTA comments at 4; USTA comments at 5. Georgia PSC argues that all four principles must be met before designating a service for support, and that a failure to do so could be "an abuse of discretion  X-by the Commission, arbitrary and capricious, and a violation of the intent of Congress."DBB} yO -ԍ Georgia PSC comments at 6.D NCTA, USTA and Florida Cable maintain that the use of the conjunction "and," rather than the disjunctive word "or," indicates a service must meet each and all of the statutory criteria  X_-to be included within the definition of universal service.nC_} yO-ԍ Florida Cable comments at 5; NCTA comments at 4; USTA comments at 5.n Florida Cable argues that, at a minimum, all of the criteria must be considered when determining whether access to a service  X1-should be guaranteed.FD1b } yOD-ԍ Florida Cable comments at 5.F  X -x 33.` ` On another matter of statutory interpretation, a few commenters argue that the 1996 Act's statutory language and legislative history indicate that section 254(c)(1) does not permit universal service support for information services, but expressly limits support to  X -telecommunications services.ZE } yOa-ԍ ITA/EMA comments at 510; TCI comments at 56. Z Specifically, these parties construe the 1996 Act's definition of "telecommunications" as excluding those services that "change . . . the form or content of  X-the information as sent and received."F } {O-ԍ ITA/EMA comments at 6 (citing 47 U.S.C.  153(43)). See also TCI comments at 56 (citing 47 U.S.C.  153(43)). Further, these parties cite legislative history to bolster their arguments that universal service support must be limited to telecommunications  Xb-services.Gb} yO -ԍ ITA/EMA comments at 67 (noting that Congress adopted the Senate's definition of "telecommunications" which excludes information services and citing H.R. Conf. Rep. No. 458, 104th Cong., 2d Sess. 116 (1996)); TCI comments at 67 (noting that Congress rejected an earlier version of a Senate bill which included information services within the description of universal service and citing S. 1822, 103d Cong. 2d Sess.  102(a) (1994)).  X4-x!34.` ` Defining Universal Service. Some commenters disagree with the NPRM's"4G*&&dd"  X-approach to defining universal service.H} {Oy-ԍ See, e.g., Georgia PSC comments at 5; Washington UTC comments at 7; Alliance for Public Technology further comments at 4. Washington UTC, for example, argues that listing specific services to support "freeze[s] universal service policy in the technology and services  X-of 1996."GI"} yO-ԍ Washington UTC comments at 7.G Washington UTC proposes instead that a description of functionalities and access,  X-rather than services, be used to define universal service.3J} {O -ԍ Id.3 Alliance for Public Technology  X-also asserts that defining universal service in terms of specific services is unworkable._KD} yO -ԍ Alliance for Public Technology further comments at 4._ Instead, Alliance for Public Technology recommends that carriers choose the amount of  Xv-bandwidth they will offer.3Lv} {O-ԍ Id.3 Carriers would then earn 100 percent of the maximum support  X_-available for maximum bandwidth and lesser percentages for lesser bandwidth offerings.3M_f } {Ov-ԍ Id.3 Other parties argue that access to services, but not any service itself, should be eligible for  X1-support.vN1 } {O-ԍ See, e.g., Georgia PSC comments at 5; CompTel further comments at 89.v  X -x"35.` ` A crosssection of commenters and most of the commenters that addressed this issue including LECs, IXCs, consumer groups and state PUCs, favor designating all  X -five services for federal universal service support for purposes of section 254(c)(1).O" } {O-ԍ See, e.g., 360 comments at 3; Ameritech comments at 6; Florida PSC comments at 6; GTE comments at 2; ITA/EMA comments at 4; Michigan Consumer Federation comments at 20; NCTA comments at 5; PULP comments at 9; SBA comments at 5; SWBT comments at 8; Sprint comments at 6; Time Warner comments at 4; U S West comments at 5; Western comments at 7. Alaska PUC, for example, argues that a substantial majority of customers subscribe to each of these  X -and they are commonly deployed in the public telecommunications network.CP t} yO-ԍ Alaska PUC comments at 2.C Washington UTC, however, advises the Joint Board to allow the market to determine the definition of universal service in order to avoid creating barriers to entry by requiring the provision of  Xb-certain services.GQb} yO$-ԍ Washington UTC comments at 9.G Similarly, Western opposes requiring dialtone, which, it states, effectively"bQ*&&dd"  X-discriminates against wireless carriers.R} yOy-ԍ Western comments at 8 (describing dial tone as "a frequency tone audible to a caller"). In contrast, some commenters submit that each of these services can be offered by cellular providers and, thus, they do not provide a barrier to  X-entry for cellular carriers.SX} {O-ԍ See, e.g., Commnet Cellular reply comments at 8. See also 360 comments at 4.  X-x#36.` ` Voice Grade Access to the Public Switched Network. Parties that address this issue overwhelmingly favor supporting voice grade access to the public switched network with  Xv-the ability to place and receive calls.DTZv} {O -ԍ  See, e.g., Bell South comments at 5; Florida PSC comments at 6; MCI comments at 3; Michigan Consumer Federation comments at 20; North Dakota PSC comments at 1; Rural Iowa Indep. Tel. Ass'n comments at 2; SWBT comments at 8; AT&T reply comments at 17; NTIA reply comments at 7.D Georgia PSC, however, argues that voice grade access is a group of services rather than one service, and that some of these services will qualify for  XH-support while others will not.UH } yO-ԍ Georgia PSC comments at 7 (arguing that single party wireline service qualifies for universal service support, but the Commission is prohibited from providing universal service support for cellular service).  X -x$37.` ` Several commenters argue that usage of, and not merely access to, the local  X -network should be supported.V  d } yO-ԍ AARP comments at 9; Edgemont comments at 12; Florida PSC comments at 6; LINCT Coalition comments at 34; MCI comments at 3; People For comments at 11; Texas PSC comments at 8; Time Warner comments at 4; CPI reply comments at 5 n.10; NTIA reply comments at 7 n.14; Ohio Consumers' Council reply comments at 1213; Pennsylvania PUC reply comments at 6; Citizens Utilities further comments at 5. For example, Time Warner states that a basic level of local usage should be included within the definition of universal service because, it argues, the  X -ability to place calls is equally, if not more, important than the ability to receive calls.MW L } yO-ԍ Time Warner further comments at 12.M Pennsylvania PUC interprets the "singleparty service" component of the NPRM's proposed  X -core services to include local service usage.QX } yO4-ԍ Pennsylvania PUC reply comments at 34.Q Illinois CC, in contrast, opposes universal  X-service support for local usage.Yl} {O -ԍ Illinois CC comments at 4. See also CSE Foundation reply comments at 4; AirTouch further comments at 5.  Xb-x%38.` ` In addition, Florida PSC proposes supporting flatrate service and unlimited  XK-calling within a subscriber's local calling area.oZK} {O%-ԍ Florida PSC comments at 6. See also Texas OPUC comments at 16.o Some parties note that a large number of"KXZ*&&dd"  X-consumers consistently choose flatrate service over measuredrate service.[} yOy-ԍ AARP comments at 9; Georgia PSC comments at 89; Ohio Consumers' Council comments at 13. California PUC advocates a support mechanism that would allow consumers to choose between flat or  X-measuredrate service.G\X} yO-ԍ California PUC comments at 6.G CSE Foundation, in contrast, states that mandating flatrate service for all subscribers restricts their options, because, it argues, some consumers may desire more  X-limited service at a price lower than that of flatrate service.M]} yO= -ԍ CSE Foundation reply comments at 4.M  Xv-x&39.` ` Some parties favor using universal service funding to ensure that consumers may access their "community of interest" or area in which essential public services are  XH-located, by placing local calls.^ZHx} {Oq-ԍ See, e.g., Colorado PUC comments at 3; Louisiana PSC comments at 3; Michigan Consumer Federation comments at 20; Montana PSC comments at 4; New Jersey Advocate comments at 8; OITAWITA comments at 35. Various commenters note that subscribers in rural areas must often place toll calls in order to access essential services such as schools, health care providers  X -and local government offices._" } {Oe-ԍ See, e.g., AARP comments at 18; Century comments at 46; Keystone comments at 8; Montana PSC comments at 4; Rural Iowa Indep. Tel. Coalition comments at 3; Telec Consulting comments at 5; Minnesota Indep. Coalition reply comments at 34; Alaska Tel. further comments at 5; CFA further comments at 23; Western Alliance further comments at 2.  X -x'40.` ` TouchTone.` } yO!-ԍ Florida PSC suggests the Joint Board refer to this function as "dual tone multifrequency" (DTMF) 116 rather than touchtone. Florida PSC comments at 6. Parties express widespread support for providing universal  X -service support for touch tone service.aZ } {Ob-ԍ  See, e.g., Bell Atlantic comments at 7; Farmers Tel. comments at 2; Michigan Consumer Federation comments at 20; Missouri PSC comments at 4; TCA comments at 5; NENA reply comments at 1; NTIA reply comments at 7. SBA, for example, maintains that touchtone service plays an important role in allowing customers to connect to a variety of voice mail systems,  X -information services, and productordering services.>b } yOV!-ԍ SBA comments at 56.> In addition, Citizens Utilities contends  X-that touchtone service meets the statutory criteria of section 254(c)(1)(B), (C) and (D).zc} {O#-ԍ Citizens Utilities comments at 6 (citing 47 U.S.C.  254(c)(1)(B)(D)).z Bell Atlantic, however, argues that the decision to provide support for touchtone service is a"y c*&&dd"  X-matter that should be left to the states.Fd} yOy-ԍ Bell Atlantic comments at 8.F  X-x(41.` ` SingleParty Service. Many parties support including singleparty service in the  X-definition of universal service.eX} {O-ԍ See, e.g., Bell Atlantic comments at 7; Florida PSC comments at 6; Frontier comments at 2; Georgia PSC comments at 7; NASUCA comments at 1718; CPI reply comments at 6. Bell Atlantic, for example, argues that singleparty service  X-meets all four of the criteria of section 254(c)(1).nf} {O -ԍ Bell Atlantic comments at 7 (citing 47 U.S.C.  254(c)(1)).n Bar of New York argues that singleparty  X-service is essential because it is recognized to be a prerequisite for Internet access.IgD} yO -ԍ Bar of New York comments at 14.I SWBT contends that a transition period is required to permit upgrades that transform multiparty  X_-service to singleparty service.=h_} yO-ԍ SWBT comments at 8.= Washington UTC, however, states that in some cases,  XH-converting to singleparty service might be costprohibitive.GiHd } yO]-ԍ Washington UTC comments at 8.G  X -x)42.` ` Access to Emergency Service. Several commenters favor providing universal service support for access to emergency services, where the actual service, i.e., Public Safety  X -Answering Point (PSAP), is provided by local authorities.~j } yO-ԍ Oregon PUC comments at 5; SWBT comments at 8; Texas Emergency reply comments at 12.~ Wisconsin PSC recommends that the Joint Board and Commission carefully define "access to emergency services" to indicate whether this term means the ability to place calls to these numbers or whether it includes the specialized call routing network that delivers calls to the designated governmentchosen  X-PSAP.Hk } yO-ԍ Wisconsin PSC comments at 8. H Michigan Consumer Federation argues that emergency services, and not merely  Xy-access to emergency services such as 911, should be offered at no cost.Vly} yO>-ԍ Michigan Consumer Federation comments at 20.V Some parties assert that carriers should not receive universal service support for 911 service if existing state  XK-funding mechanisms already provide support.GmK} {O"-ԍ See Ameritech comments at 7 (stating that support should be provided for the transmission facility that connects a subscriber to the location manned by public safety personnel, but not for the equipment used by those personnel or their training, as these costs are generally supported by tax revenues); Missouri PSC comments at 45 (noting that the Commission must distinguish between the cost of the switch necessary for E911 and the cost of the service itself because Missourians already pay taxes to cover the cost of the service).G Texas Emergency suggests that carriers"KVm*&&dd" seeking support should certify that 911 service is being provided by the local government in geographic areas they serve and that network costs are not already being recovered by the  X-rates paid by local government authorities for 911 service.Nn} yOK-ԍ Texas Emergency reply comments at 3.N Georgia PSC believes that  X-access to emergency services should be delegated to the states.FoX} yO-ԍ Georgia PSC comments at 7. F  X-x*43.` ` Some commenters recommend supporting enhanced 911 (E911) service.TpD} yO& -ԍ Michigan Consumer Federation comments at 20; NENA comments at 2. E911 is a system wherein, when a wireline 911 call is placed in a region with E911 capability, the telephone number of the telephone from which the 911 call is made is passed to the LEC central office at which a database, usually maintained by the LEC, is then used to route the call to the most appropriate PSAP. The caller's telephone number and other information are transmitted to the PSAP along with the location of the telephone, as determined from LEC  {O-records. See Revision of the Commission's Rules to Ensure Compatibility with Enhanced 911 Emergency Calling  {O-Systems, CC Docket No. 94102, Report and Order and Further Notice of Proposed Rulemaking, FCC 96264 (rel. July 26, 1996).T AlabamaMississippi Tel. Ass'n, however, contends that most states have their own separate funding mechanisms for E911 and, therefore, E911 should not be supported by the universal  XH-service fund at this time.WqH } yO-ԍ AlabamaMississippi Tel. Ass'n comments at 3.W Commnet Cellular asserts that consideration of support for E911 should wait until the Commission concludes its existing public safety proceeding to determine  X -whether to impose E911 requirements on wireless carriers.zr } {OO-ԍ Comnet Cellular reply comments at 8 (citing Commission Docket No. 94102).z  X -x+44.` ` Access to Operator Service. Various parties favor supporting access to operator  X -services.s } {O-ԍ See, e.g., AT&T comments at 12; BellSouth comments at 5; Florida PSC comments at 6; Michigan Consumer Federation comments at 20; Cincinnati Bell reply comments at 3; LDDS reply comments at 7. Bell Atlantic, for example, contends that access to operator service meets each of the criteria set forth in section 254(c)(1), and therefore, it argues, should be supported through  X -universal service mechanisms.ut p} {O-ԍ Bell Atlantic comments at 7 (citing 47 U.S.C.  254(c)(1)(A)(D)).u Georgia PSC, in contrast, submits that access to operator  X-services is competitive in Georgia and does not require federal universal service support.Du} yOC"-ԍ Georgia PSC comments at 7.D  Xb-x ` ` 3. Discussion (#  X4-x,45. ` ` As previously mentioned, the 1996 Act defines "telecommunications services""4u*&&dd" as "the offering of telecommunications for a fee directly to the public . . . regardless of the  X-facilities used."Av} yOb-ԍ 47 U.S.C.  153(46).A With the exception of singleparty service and touchtone dialing, the core services proposed in the NPRM represent functionalities or applications associated with the provision of access to the public network, rather than tariffed services. The Joint Board concludes that defining telecommunications services in a functional sense, rather than on the basis of tariffed services alone, is consistent with the intent of section 254(c)(1). First, a functionalities approach to defining universal service will be more flexible than a servicesonly approach, particularly with respect to anticipated technological and marketplace changes and evolutions. Second, a functionalities approach is consistent with the overarching goal of the 1996 Act of encouraging competition, since it is technology neutral. Thus, we recommend that for purposes of defining universal service, "telecommunications services" should not be limited to tariffed services, but instead also should include functionalities and  X -applications associated with the provision of services.w X} yO-ԍ For discussion purposes, we hereafter refer to these functionalities and applications as "services."  X -x-46.` ` Based on the overwhelming support in the record, the Joint Board recommends that the services proposed in the NPRM should be included in the general definition of services supported under section 254(c)(1). We conclude that providing universal service support for each of these services, or access to the services, where applicable, is consistent with the statutory guidelines set forth in the 1996 Act. We reject the arguments of commenters that a service must meet all of the statutory criteria of section 254(c)(1)(A)(D)  X4-before it may be included within the definition of universal service.}x4} {O-ԍ See, e.g., Georgia PSC comments at 6; NCTA comments at 4; USTA comments at 5.} Instead, we conclude that while the Joint Board must consider all four criteria before determining that a service or functionality should be included, we need not find that a particular service meets each of the four criteria. Accordingly, we recommend that singleparty service, voice grade access to the  X-public switched telephone network (PTSN), DTMF or its functional digital equivalent,Cyz} {O-ԍ See infra para. 23.C access to emergency services and access to operator services be designated for universal service support pursuant to section 254(c)(1).  X|-x.47. ` ` We conclude that singleparty service is widely available and subscribed to by a majority of residential customers. In addition, we find that singleparty service is essential to public health and safety in that it, among other things, allows access to emergency services without delay. Furthermore, singleparty service is consistent with the public interest, convenience and necessity. Therefore, the Joint Board recommends that singleparty service should receive universal service support. We further find that singleparty service means that"  y*&&ddy" only one customer will be served by each subscriber loop or access line, although carriers may offer consumers the choice of multiparty service in addition to singleparty service and remain eligible for universal service support. In addition, to the extent that wireless providers use spectrum shared among users to provide service, we find that wireless carriers provide the equivalent of singleparty service since users are given a dedicated channel for each  X-transmission.CzX} yO-ԍ Wireless carriers are not, however, required to provide a single channel dedicated to a particular user at all times; a wireless carrier provides the equivalent of singleparty service when it provides a dedicated message path for the length of a user's particular transmission. C Moreover, we recommend permitting a transition period for carriers to make upgrades to provide singleparty service, but only to the extent carriers can meet a heavy burden that such a transition period is necessary and in the public interest. Since state commissions will be responsible for designating carriers as eligible for purpose of receiving  X1-federal universal service support,{1} {O -ԍ See infra section VI for a discussion of carriers eligible for universal service support. we recommend that states make the determination as to the need for a transition period for a particular carrier.  X -x/48. ` ` We find that the record provides ample support for our conclusion that voice grade access, an essential element to telephone service, is subscribed to by a substantial majority of residential customers and its being deployed in public telecommunications networks by telecommunications carriers. In addition, we find that voice grade access should occur in the frequency range between approximately 500 Hertz and 4,000 Hertz, for a bandwidth of approximately 3,500 Hertz. Because we find that voice grade access should be defined within this range, we decline to adopt the sliding scale approach, which would base an eligible carrier's support amount on the bandwidth offered by the carrier, as advocated by Alliance for Public Technology. Voice grade access should also include the ability to place calls, including the ability to signal the network that the caller wishes to place a call, and the ability to receive calls, including the ability to signal the called party that there is an incoming  X-call.k|z} yO-ԍ We explicitly do not include call waiting within this definition.k  X-x049. ` ` Based on strong support in the record, we also recommend including a local usage component within the definition of voice grade access. The record suggests that local usage is essential to realizing the full benefits of voice grade access. We conclude that the states are best positioned to determine the local usage component that represents affordable  Xe-service within their jurisdictions.f}e } {O #-ԍ See infra section V for a discussion of affordability.f Nonetheless, for purposes of determining the amount of federal universal service support, we recommend that the Commission determine a level of local usage. " }*&&dd"Ԍ X-x150. ` ` We agree with commenters who argue that "touchtone" is more appropriately termed DTMF signaling. DTMF facilitates the transportation of signaling through the network. DTMF also accelerates call setup time. As noted in the NPRM, other methods of signaling, such as digital signaling, can provide network benefits equivalent to that of  X-DTMF.g~} yO-#]\  PCɒP#э NPRM at para. 19 n.53.g Therefore, we recommend that DTMF or its functional digital equivalent (hereinafter referred to as "DTMF") be supported under section 254(c)(1). We find that the network benefits that emanate from DTMF or its equivalent, particularly rapid call setup time, are essential to a modern telecommunications system. In addition, we find that supporting DTMF is competitively neutral, consistent with our recommended principle. We note that various wireless carriers favor inclusion of "touchtone" within the general definition  X -of universal service.; X} {O# -#]\  PCɒP#э See, e.g., PCIA comments at 14 n.38 (stating "PCIA [concurs] with the Commission's assessment that touch tone service is one of the elements that should be supported by the universal service plan. The Commission correctly points out that touch tone is increasingly essential to completing telecommunications transactions. This is certainly true in connection with the delivery of messages to a messaging service subscriber."); 360 comments at 3; Comnet Cellular reply comments at 8.;  X -x251. ` ` Like the other core services, access to emergency service is a functionality that is widely deployed and subscribed to by a majority of residential subscribers. Further, access to emergency service is widely recognized as "essential to . . . public safety." In defining access, the record supports the inclusion of access to 911. Nearly 90 percent of lines today  X-have access to 911 capability. In addition, we recommend access to E911 service, where the locality has chosen to implement that service, be included in the definition of universal service. We do not recommend providing universal service support, however, for E911 service itself. As in the case of regular 911 service, the telecommunications network is only one component of E911 service; local governments provide the PSAP. E911 facilitates the determination of the location of the calling party, but wireless carriers are not currently capable of providing E911 service. The Commission has directed cellular, broadband Personal Communications Service (PCS) and certain Specialized Mobile Radio (SMR) carriers to provide E911 service, but the requirement will not be effective for five years because such a requirement will compel these wireless carriers to make technical upgrades before they will  X-be able to offer E911.B\ } {Og -ԍ See Revision of the Commission's Rules to Ensure Compatibility with Enhanced 911 Emergency Calling  {O1!-Systems, CC Docket No. 94102, Report and Order and Further Notice of Proposed Rulemaking, FCC 96264  yO!-(rel. July 26, 1996).B Therefore, requiring carriers to provide E911 would presently  X-exclude all wireless carriers from eligibility to be "eligible telecommunications carriers,"e. } {Ot$-ԍ See infra section VI for a discussion of eligibility.e contrary to the principle that universal service be competitively neutral. Accordingly, we"~ *&&dd" recommend not including E911 service within the definition of services to be supported at this time, but may recommend its consideration when the definition is revisited, as anticipated by  X-section 254(c)(2). Nevertheless, we recommend supporting access to E911, in addition to access to 911 and other emergency services, when a local community requests that a carrier  X-provide such access.s} {O-ԍ See discussion of services supported but not mandated, infra.s  Xx-x352. ` ` The record provides support for our conclusion that access to operator service is widely deployed and used by a majority of residential customers. Access to operator service is essential in public health and safety emergencies. In supporting this functionality, we recommend that the Commission adopt the definition of operator services it implemented for purposes of section 251(b)(3), namely, "any automatic or live assistance to a consumer to  X -arrange for billing or completion, or both, of a telephone call."& Z} {O-ԍ Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket  {O-No. 9698, Interconnection Between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket No. 95185, Second Report and Order and Memorandum Opinion and Order, FCC 96333 (rel. Sept.  {Ol-6, 1996) (Local Competition Second Report and Order). We note that the Commission has recently implemented rules to ensure that LECs permit nondiscriminatory  X -access to operator services by competing providers.L H} {O-ԍ Id. at paras. 114137.L  X -x453.` ` There is no evidence in the record to suggest that any one of these services will create a barrier to entry for potential new competing carriers if it is included in the definition of universal service. One of the explicit goals of the 1996 Act is a "procompetitive" national  Xd-telecommunications policy.Md} yO-ԍ Joint Explanatory Statement at 113.M We find that including these services within the definition of universal service will not erect technical barriers that would prevent wireless and other telecommunications carriers from competing. In fact, two wireless providers, Commnet Cellular and 360, assert that each of the services proposed in the NPRM can be provided by wireless carriers. We find Western's argument regarding wireless carriers' inability to provide  X-dialtone to be immaterial because, as discussed infra, we recommend that the definition of voice grade access not require the provision of dialtone. Further, we find no merit in Georgia PUC's assertion that the Commission is prohibited from providing universal service support for cellular service, as this prohibition is neither a provision of the 1996 Act, nor consistent with the 1996 Act's procompetitive principle. Indeed, cellular service falls within the"j *&&dd3"  X-definition of telecommunications services:X} yOy-ԍ 47 U.S.C.  153(46) (stating that "[t]he term 'telecommunications service' means the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used").: and section 254(c)(1) specifically requires this  X-Joint Board to recommend telecommunications services for which support will be provided.M} {O-ԍ See 47 U.S.C.  254(c)(1).M  X-x C.` ` Other Services (#`  X-x` ` 1. Background (#  X_-x554.` ` The NPRM asked whether, consistent with the criteria enumerated in section  XH-254(c)(1), support should be available for services besides those proposed in the NPRM.@Hz} yOs-ԍ NPRM at paras. 17, 23.@ Specifically, the NPRM, noting the directive of section 254(b)(3) relating to "access to . . . interexchange services," sought comment on whether access to interexchange service, i.e., the  X -ability to originate and receive toll calls, should be supported.; } yO-ԍ NPRM at para. 23.; The NPRM also requested comment on whether services such as relay services, directory listings, and equal access to interexchange carriers, i.e., the ability to access the long distance carrier to which a customer  X -is presubscribed by dialing a 1+ number, should be supported.3 } {O -ԍ Id.3 In addition, the NPRM requested comment on whether advanced services, for example Internet access, data transmission capability, optional SS7 features or blocking of such features, enhanced services, and broadband services warrant inclusion, now or in the future, in the list of services  Xb-supported by the federal universal service fund.3b, } {O?-ԍ Id.3   X4-x` ` 2. Comments (#  X-x655.` ` Expanding the Definition of Universal Service. Several commenters oppose expanding the definition of services to be supported under section 254(c)(1) beyond those  X-services proposed in the NPRM. } {OG#-ԍ See, e.g., CSE Foundation comments at 6; DCA comments at 22; ITA/EMA comments at 5; MCI comments at 9; Sprint comments at 78; Citizens Utilities further comments at 5. A few parties advocate permitting the selection of services by consumers in the marketplace to dictate whether and when the definition of universal"*&&dd"  X-service evolves to include additional services.~ } yOy-ԍ AARP comments at 11; SWBT comments at 9 (asserting that customer demand, marketplace acceptance and deployment of costs should be considered); U S West comments at 6 (urging that "highmarketpenetration level" and "a net benefit to society from providing the service universally" should determine whether additional service are supported).~ Some parties cite as arguments against expanding supported services beyond the services proposed in the NPRM the goals of limiting  X-the amount of contribution needed to support universal service|} {O3-ԍ See, e.g., Washington UTC comments at 9; CSE Foundation reply comments at 4.| and ensuring the quality and  X-availability of services currently offered.JB} yO -ԍ Nat'l Retail Fed. comments at 2.J Ad Hoc Telecom. Users maintains that advanced services should not be supported because they are neither subscribed to by a majority of  X-subscribers nor necessary for health or safety.N} yO-ԍ Ad Hoc Telecom. Users comments at 4.N MCI asserts that other services should be supported only if, after analyzing the cost of the service and the effect of the support on the demand for the service, the subscribership benefit of the service exceeds the cost of the  XH-reduced subscribership of the subsidizing service.>Hb } yO[-ԍ MCI comments at 89.> NARUC contends that the definition of supported services should evolve over time to meet expanding needs and that states must be able to develop and refine universal service policies to meet the needs of subscribers within  X -their jurisdictions.? } yO-ԍ NARUC comments at 11.?  X -x756.` ` As discussed in the following paragraphs, many parties, however, recommend expanding the definition of services to be supported beyond the services proposed in the  X -NPRM and suggest a wide range of other services. } {O-ԍ See, e.g., AARP comments at 10; Cincinnati Bell comments at 4; Farmers Tel. comments at 23; Michigan Consumer Federation comments at 2021; Minnesota Indep. Coalition comments at 9. According to GVNW, the services  X-proposed in the NPRM will provide nothing more than "plain old telephone service."E} yO-ԍ GVNW reply comments at 78.E In addition, Wyoming PSC asserts that providing universal service support for additional services will enhance the viability of rural states which, it states, have become "increasingly reliant on  XK-the deployment of modern telecommunications technology for economic growth."pKl} {Oh#-ԍ Wyoming PSC comments at 8. See also Alaska PSC comments at 36.p  X-x857.` ` Access to Interexchange Service. Many commenters favor providing support"*&&dd"  X-for access to interexchange service.} {Oy-ԍ See, e.g., Florida PSC comments at 7; New Hope Tel. comments at 23; OITAWITA comments at 35; Fred Williamson comments at 1011. West Virginia Consumer Advocate, for example, argues that consumers who live in rural areas and must place toll calls to obtain essential  X-services especially require access to interexchange service."} yO-ԍ West Virginia Consumer Advocate comments at 7. The arguments of commenters who favor providing  {Om-universal service support for toll usage are discussed infra. AirTouch, however, contends that universal service suppresses interexchange usage because, it argues, long distance rates  X-rise as a result of IXCs' contributions to universal service.E|} yO -ԍ AirTouch comments at 1314.E  Xv-x958.` ` Equal Access to IXCs. Some parties favor supporting equal access to long distance service, i.e., the ability to access the long distance carrier to which a customer is  XH-presubscribed by dialing a 1+ number./ZH } {O-ԍ See, e.g., AT&T comments at 12; Ardmore Tel. comments at 2; Bledsoe Tel. comments at 3; Bloutsville Tel. comments at 2; LDDS comments at 8; Minnesota Indep. Coalition comments at 9; Missouri PSC comments at 6; TCA comments at 5; Wyoming PSC comments at 7./ Ohio Consumers' Council asserts that consumers should have access to all available long distance carriers, but questions whether universal  X -service support is required to provide access.Q . } yO-ԍ Ohio Consumers' Council comments at 13.Q 360 argues that requiring eligible carriers to provide equal access to IXCs would preclude CMRS providers from receiving universal  X -service support and would be contrary to congressional intent."Z } {O[-ԍ 360 reply comments at 2, citing 47 U.S.C.  332(c)(8) ("A person engaged in the provision of commercial mobile services . . . shall not be required to provide equal access to common carriers for the provision of telephone toll services.")."  X -x:59.` ` TRS. Many commenters favor universal service support for TRS, } {OO-ԍ See, e.g., Alaska PUC comments at 6; Michigan Consumer Federation comments at 21; Minnesota Indep. Coalition comments at 9; New York CPB comments at 6; Telec Consulting comments at 4. while  X -others argue that support should be limited to access to TRS. :} {O -ԍ See, e.g., California PUC comments at 6; Cincinnati Bell comments at 4; Louisiana PSC comments at 3; Pennsylvania PUC comments at 6. Some parties recognize that  X-TRS is currently supported through a separate TRS fund.o} {O#-ԍ See, e.g., AT&T comments at 13 n.17; NYNEX comments at 11 n.21.o  Xb-x;60.` ` White Page Directories and Listings. Many commenters favor including a"b &*&&dd"  X-standard white page directory listing and directory assistance among supported services.2Z} {Oy-ԍ See, e.g., AARP comments at 10; Blountsville Tel. comments at 2, Michigan Consumer Federation comments at 21; NTIA reply comments at 7; New York DPS comments at 1213; Rural Iowa Indep. Tel. Ass'n comments at 2; SWBT comments at 8; Wyoming PSC comments at 7.2 Florida PSC argues, however, that eligible telecommunications carriers should be required to provide their subscribers with white page listings, but should not recover the cost from  X-universal service support mechanisms.F} yOV-ԍ Florida PSC comments at 78.F Instead, Florida PSC suggests that telecommunications providers can sell "designer" white page listings to pay for the cost of  X-producing directories.3z} {O -ԍ Id.3  X_-x<61.` ` Directory Assistance. Some parties recommend that access to directory  XH-assistance be supported.H } {O-ԍ See, e.g., AARP comments at 10; Michigan Consumer Federation comments at 21; NTIA reply comments at 7; New York DPS comments at 1213; SWBT comments at 8. New York CPB, for example, asserts that directory listings and services are widely deployed by telecommunications providers, are used by "virtually all telephone subscribers," are essential for access to the network, and provide public safety and  X -health benefits, especially to users away from home.E f } yO-ԍ New York CPB comments at 6.E  X -x=62.` ` Blocking Services. A few parties propose supporting 900 number blocking  X -through universal service mechanisms. } yOe-ԍ AARP comments at 10; Alaska PUC comments at 6; New York CPB comments at 67; Wyoming PSC comments at 7. Other parties favor providing universal service  X -support for toll blocking or toll controluX N } yO-ԍ With toll blocking, a subscriber voluntarily surrenders his ability to place toll calls over his subscriber loop. With toll control, a subscriber's long distance usage is capped at a certain dollar or minuteofuse amount per month. Both mechanisms are designed to enable subscribers to control their long distance service bills.u services.UZ n} {O-ԍ See, e.g., Alaska PUC comments at 6; Benton comments at 2; GSA comments at 8; Indiana URC comments at 23; LDDS comments at 89; Missouri PSC comments at 6; PULP comments at 1617 (noting that NYNEX currently provides voluntary toll blocking to all residents at no charge); RUS comments at 11.U Missouri PSC argues that toll blocking might increase subscribership levels by permitting those who have been disconnected due to unpaid toll bills to regain basic telephone service that would enable them to make and receive  Xb-local calls and to receive toll calls.Gb} yO%-ԍ Missouri PSC comments at 67.G Missouri PSC cites studies that, it argues, suggest that a"b! *&&dd" large number of individuals currently without phone service were disconnected due to unpaid  X-toll bills.U} {Ob-ԍ Missouri PSC comments at 67 (citing Field Research Corp., Affordability of Telephone Service S7, S19  {O,-to S20 (1993); Milton Mueller and Jorge Reina Schement, Rutgers University Project on Information Policy,  {O-Universal Service from the Bottom Up: A Profile of Telecommunications Access in Camden, New Jersey (1995);  {O-Chesapeake & Potomac Telephone Company, Submission of Telephone Penetration Studies in Formal Case No.  {O-850 (D.C. PSC, Oct. 1, 1993)).U  X-x>63.` ` Access to the Internet. Several parties argue that Internet access should be  X-supported.Z} {O -ԍ See, e.g., American Foundation for the Blind comments at 5; Bar of New York comments at 914; Community Colleges comments at 11; Iowa Utilities Board comments at 2; Michigan Consumer Federation comments at 2021. Other commenters, however, oppose allocating universal service support for  X-Internet access.}} {O-ԍ  See, e.g., MCI comments at 9; NYNEX comments at 12; LDDS reply comments at 9.} Some parties advocate providing universal service support for localdial up access to the Internet, so that consumers in rural areas do not have to pay for a toll call for  X_-access._6 } yOF-ԍ Alaska PSC comments at 5; Iowa Utilities Board comments at 2; Missouri PSC comments at 6. Some parties, however, oppose providing support for services like Internet access, because, they contend, doing so would be contrary to congressional intent that only  X1-"telecommunications services" may be included in the definition of universal service.|1 } {O-ԍ ITA/EMA comments at 3, 510; Information Technology Industry Council comments at 4, 67, citing 47  {Or-U.S.C.  254(c)(1) (universal service is "an evolving level of telecommunications services that the Commission shall establish periodically under this section, taking into account advances in telecommunications and information technologies and services.") (emphasis added). In addition, both ITA/EMA and ITI cite 47 U.S.C. sections 153(48) [sic] and 153(51) [sic] for the definitions of "telecommunications" and "telecommunications services." Because the new provisions were codified, these definitions are now found at 47 U.S.C.  153(43) and 153(46), respectively.   X -x?64.` ` Other services and functionalities. Commenters suggest providing universal service funding for the following services and functionalities: access to basic local directory  X -assistance;Z } {O-ԍ See, e.g., Governor of Guam comments at 910; Information Technology Industry Council comments at 34; Ohio Consumers' Council comments at 1112; SWBT comments at 8; TCA comments at 5; AT&T reply comments at 18. call tracing;h ,} yO"-ԍ AARP comments at 10; Minnesota Indep. Coalition comments at 9.h call waiting;D } yOB$-ԍ Texas OPUC comments at 16.D interoffice digital facilities;> L} yO%-ԍ AARP comments at 10.> equal access to SS7" "*&&dd "  X-functionalities;} yOy-ԍ AARP comments at 10; Blountsville Tel. comments at 3; NorTel reply comments at 2, 56. ISDN services; X} yO -ԍ Alaska Tel. comments at 24 (arguing that supporting a lower level of functionality than ISDN would create a twotiered telecommunications system that would separate those with access to data capabilities from those without such access); Matanuska Tel. Ass'n comments at 2; Southwest Virginia Future comments at 1; Dell Tel. reply comments at 4. interconnection among carriers;>@} yO-ԍ AARP comments at 10.> reasonable toll usage;V} yO -ԍ Michigan Consumer Federation comments at 20.V  X-carrierprovided customer support services;PX` } yO -ԍ Louisiana PSC comments at 3 (supporting access to customer support services, including billing); Michigan Consumer Federation comments at 21 (advocating free calls to a carrier's office for requesting repairs, making billing inquiries and obtaining information about programs such as Lifeline).P adequate line quality for facsimile and data  X-transmission;Z } {O-ԍ See, e.g., Colorado PUC comments at 2; Michigan Library Ass'n comments at 6; RUS comments at 10 (asserting that voice grade service should allow data transmission at 28.8 kbps rates through modems); Wyoming PSC comments at 7. endtoend digital service;D} yO%-ԍ Wyoming PSC comments at 7.D telecommunications services for handicapped and  X-disabled students and employees;<2} yO-ԍ ACE comments at 6.< guaranteed functional performance requirements; X} yO.-ԍ Alaska Health comments at 2 (supporting "voice grade access to dialup lines on the public switched network, with the ability to place and receive calls with a guaranteed functional transmission rate of 14.4 Kbps via modem").   X-guaranteed continued power for telephone service in the event of a power outage;G} yO7-ԍ Colorado PUC comments at 24.G nocost  X-repair of the network on the provider's side of the network demarcation point;Gr} yO-ԍ New Jersey BPU comments at 2.G and number  Xv-portability.Dv} yO) -ԍ AT&T reply comments at 18.D  XH-x` `  3.` Discussion (#  X -x@65.` ` In addition to the services proposed to be included within the general definition of universal service by the NPRM, the Joint Board recommends that access to interexchange service be included. We find that Congress was unequivocal in its intent that the Commission" #*&&dd^ " should include access to interexchange services when it provided "customers in all regions of the nation . . . should have access to telecommunications and information services, including  X-interexchange services."C} yOK-ԍ 47 U.S.C.  254(b)(3).C In addition, we find that the majority of residential subscribers currently have access to interexchange service, consistent with the criterion of section 254(c)(1)(B). Moreover, the record in this proceeding supports our finding that access to  X-interexchange service is essential for education, public health and public safety.PX} {O-ԍ See 47 U.S.C.  254(c)(1)(A).P Customers who live in rural areas, especially, require access to interexchange service to reach medical and emergency services, schools, and local government. Although access may more properly be characterized as a functionality of the loop rather than a service, the record also supports the conclusion that access to interexchange service is demanded by a substantial majority of  X -residential customers and is generally available.T } {O-ԍ See 47 U.S.C.  254(c)(1)(B)(C).T Further, we find that access to  X -interexchange service is consistent with the public interest.{ |} {O0-ԍ See AT&T reply comments at 18. See also 47 U.S.C.  254(c)(1)(D).{ Based on these considerations, and the strong support in the record, we recommend that access to interexchange service meaning the ability of a subscriber to place and receive interexchange calls be included as a  X -supported service.e } yO}-ԍ We do not recommend, however, support for interstate usage.e  X-xA66.` ` The Joint Board, however, recommends that access to interexchange service should not be defined, at this time, to include equal access to interexchange carriers. We acknowledge the importance of equal access to interexchange service in a competitive environment, but we conclude that equal access should not be supported because of the potential costs to wireless carriers involved in upgrading facilities and because wireless  X-carriers are not currently required to provide equal access.} {Ol-ԍ See 47 U.S.C.  332(c)(8) ("a person engaged in the provision of commercial mobile services . . . shall not be required to provide equal access to common carriers for the provision of telephone toll services").  X-xB67. ` ` The Joint Board recommends including access to directory assistance, specifically, the ability to place a call to directory assistance, be included in the definition of universal service. Like access to interexchange service, access to directory service is a  X-functionality of the loop. We are recommending support be provided for access to directory assistance, not the service itself. We agree with the numerous commenters who favor providing universal service support for access to directory assistance because it is a necessity for consumers to access "telecommunications and information services." Directory assistance"g$ *&&dd1" provides consumers access to necessary information, such as government, business, and customer listings. Indeed, we believe that without the ability to access directory assistance, consumers' access to other telecommunications and information services is greatly diminished. In considering the statutory factors contained in section 254(c)(1), we find access to directory  X-assistance is essential for education, public health and safety. Although not a service per se, directory assistance is used by a substantial majority of residential customers, is widely  Xx-available, and is consistent with the public interest, convenience and necessity.x} {O-ԍ 47 U.S.C.  254(c)(1)(A)(D). See also Minnesota Indep. Coalition comments at 5. The Joint Board, therefore, recommends that access to directory assistance be included in the definition of universal service, pursuant to section 254(c)(1). Therefore, we will refer to voice grade access to the public switched network, DTMF or touchtone, singleparty service, access to emergency service, access to operator service, access to interexchange service, and access to directory assistance as the "designated" or "core" services for universal service for purposes of section 254(c)(1). x  X -xC68.` ` Although the provision of "white page listings" received significant record support, we do not recommend that it be included it within the general definition of universal service. While we agree with the commenters that suggest that this is an important service that facilitates access to the telecommunications network, we do not consider white page  Xd-listings to be within the 1996 Act's definition of "telecommunication services."AdZ} yOo-ԍ 47 U.S.C.  153(46).A Therefore, white page listings should not receive universal service support. We agree with the Florida PSC that carriers have at their disposal the means to recover the costs of these services. Although we find that white page listings should not be included in the definition of universal service support, we strongly recommend that the states take the necessary and appropriate steps to ensure the continued availability of this fundamentally important offering.  X-xD69.` ` We recommend that no additional services be included in the general definition  X-of universal service at this time.0Z} yOG-ԍ We do, however, recommend that toll blocking be provided without charge for low income subscribers. For a further discussion of this subject and other recommendations regarding services for low income consumers,  {O-see infra section VIII.0 For example, although we recognize the integral role of TRS in the provision of universal telephone service, we agree with the commenters that state that universal service support is not necessary because the service is already supported through  Xg-a separate fund.Tg } {O$#-ԍ See, e.g., AT&T comments at 13 n.17.T We find that access to the Internet, to the extent that this implies nontoll access, is provided through voicegrade access to the public switched network. The Joint Board rejects the position of some commenters that the actual use of Internet services be supported. We find that the provision of Internet service does not meet the statutory""%*&&dd" definition of a "telecommunications service." In addition, we decline to support toll access to Internet providers. We predict, however, that increasing demand for Internet service will result in broader accessibility of Internet service providers. This should have the effect of reducing or eliminating the need for customers in rural areas to place toll calls to obtain  X-Internet service.} {O-ԍ See 47 U.S.C.  3(46), 254(c)(1). See also SWBT reply comments at 4.  Xv-xE70.` ` We further conclude that no other services proposed by commenters in the record substantially meet the criteria stated in section 254(c)(1). Moreover, we find that an overly broad definition of universal service might have the unintended effect of creating a  X1-barrier to entry for some carriers because, as discussed infra, carriers must provide each of the core services in order to be eligible for universal service support. Because the definition of universal service is evolving, however, we must, as the 1996 Act instructs, consider the  X -definition again in the future.C Z} yO-ԍ 47 U.S.C.  254(c)(1).C  X -x` ` D. Feasibility of Providing Designated Services(#  X-x` `  1.` Background (#  Xd-xF71.` ` Section 214(e)(1)(A) requires eligible carriers to "offer the services that are  XM-supported by Federal universal service support mechanisms".FM} yO-ԍ 47 U.S.C.  214(e)(1)(A).F On July 3, 1996, the Common Carrier Bureau released a Public Notice to supplement the NPRM's requests for  X-comment.z} {OJ-ԍ Public Notice, Common Carrier Bureau Seeks Further Comment on Specific Questions in Universal  {O-Service Notice of Proposed Rulemaking, DA961078 (rel. July 3, 1996) (Public Notice). The Public Notice asked, inter alia, for comment on the effects on competition if a carrier is denied universal service support because it is technically infeasible for that  X-carrier to provide one or more of the designated services.F} yOz-ԍ Public Notice at question 4.F  X-x` `  2.` Comments (#  X-xG72.` ` Carriers' Ability to Provide Designated Services. Several commenters representing various sections of the telecommunications industry maintain that the services proposed in the NPRM are so basic that no telecommunications provider will have difficulty"i&f *&&dd"  X-providing them.} {Oy-ԍ See, e.g., BellSouth further comments at 7; Bell Atlantic further comments at 2; MFS further comments at 12; NCTA further comments at 2; Vanguard further comments at 3. Florida PSC, for example, maintains that requiring carriers to provide the core services, or even additional services, would not be unduly burdensome or adversely  X-affect competition.L"} yO-ԍ Florida PSC further comments at 7.L Some parties assert that because the 1996 Act permits carriers to provide services by resale, carriers are able to provide even those services that their facilities  X-do not support.} yO -ԍ Century further comments at 9; NECA further comments at 4; NYNEX further comments at 5; Puerto  {O -Rico Tel. Co. further comments at 5; TCI further comments at 10; U S West further comments at 45. See also CompTel further comments at 8 (asserting that "the Joint Board should make clear that eligibility may not be denied simply because, for technical and economic reasons, the CLEC purchases ILEC elements necessary to provide core services."). Determining which carriers are eligible for universal service support is discussed  {O -further in section VI, infra.  Xv-xH73.` ` Some parties contend, however, that expanding the list of services might stifle competition if carriers generally are unable to provide services designated for universal  XH-service.H. } {O'-ԍ See, e.g., Ameritech further comments at 10; MCI further comments at 3; Time Warner further comments at 1314. Various parties argue, therefore, that universal service should be defined as  X1-narrowly as possible.1 } {Oj-ԍ See, e.g., GCI further comments at 3; GTE further comments at 10; MCI further comments at 3; Time Warner further comments at 12; Vanguard further comments at 3. Teleport contends that, by limiting the definition of universal service to those services that "have . . . been subscribed to by a substantial majority of residential customers" and "are being deployed in public telecommunications networks by telecommunications carriers," Congress has attempted to ensure that the definition of universal  X -service remains competitively and technologically neutral.z } {Oh-ԍ Teleport further comments at 3 (citing 47 U.S.C.  254(c)(1)(B) (C)).z Vanguard argues that a narrow definition of services will promote competition because support will not be limited to only  X -those carriers that can provide extensive services.I t} yO-ԍ Vanguard further comments at 4.I Vanguard asserts that a narrow definition  X-of universal service will facilitate the addition of other services at a later time.3} {OE"-ԍ Id.3  Xb-xI74.` ` Effect of Interconnection and Unbundled Elements Requirements. Some parties, including AT&T and ALTS, link the ability of competitive carriers to provide core"K'*&&dd"  X-services with the implementation of the 1996 Act's requirements related to interconnection?} yOy-ԍ 47 U.S.C.  251. ?  X-and access to unbundled elements.vX} {O-ԍ Id. See ALTS further comments at 12; AT&T further comments at 5.v Specifically, Citizens Utilities argues that competitive carriers have the right to acquire any or all of the network elements they need, at costbased  X-rates, from the incumbent LEC.} {OV-ԍ Citizens Utilities further comments at 4 (citing 47 U.S.C.  251(c)(3), 252(d)(1)). ALTS contends that, if the cost of access to the databases necessary for the provision of emergency services were set at rates that make it economically infeasible for competitive carriers to use the incumbent LEC's databases, then competitive  Xv-carriers would be unable to provide access to emergency services.Ev|} yO -ԍ ALTS further comments at 2.E Similarly, some parties argue that, if incumbent LECs deny new entrants access to unbundled elements, it may be  XH-technically infeasible for a new entrant to provide one or more of the core services.|H } yO-ԍ AT&T further comments at 5; MCI further comments at 3; MFS further comments at 12.|  X -xJ75.` ` Provision of Core Services and Eligibility. Some commenters argue that carriers that are unable to provide one or more of the core services should be ineligible to  X -receive universal service support." } {O9-ԍ See, e.g., Ameritech further comments at 10; ITC further comments at 3; New York DOE further comments at 5; Puerto Rico Tel. Co. further comments at 5; RUS further comments at 4; SWBT further comments at 3; Sprint further comments at 3; Teleport further comments at 4; Time Warner further comments at 13; Vitelco further comments at 3; Washington UTC further comments at 5. SWBT argues that Congress intended to limit universal service funding to "eligible telecommunications carriers" that are required to "offer the  X -services supported by the Federal universal service support mechanisms. . . ."| } {O-ԍ SWBT further comments at 3 (citing 47 U.S.C.  254(e), 214(e)(1)(A)).| Thus, SWBT contends, providing support for a carrier that does not offer all of the core services would be contrary to the language of the statute which, SWBT argues, clearly expresses the intent of  Xy-Congress.3y} {OB-ԍ Id.3 In addition, Ameritech asserts that competition would be harmed if a carrier that did not provide one or more core service was still eligible for support intended for core services, particularly when that carrier is competing with others that are providing core  X4-services "in accordance with the rules."K4} yO#-ԍ Ameritech further comments at 10.K Similarly, Minnesota Indep. Coalition contends that providing universal service support for a "partial provider" might raise the cost of full service"(:*&&dd"  X-providers by reducing their revenue bases.[} yOy-ԍ Minnesota Indep. Coalition further comments at 7.[ BellSouth argues that "niche" providers might choose not to provide all of the core services in a given area, and that these carriers should  X-not be eligible for support.JX} yO-ԍ BellSouth further comments at 7.J ITC maintains that the impact on consumers who might be denied core services should serve as a reason against providing support for carriers that do not  X-provide all the core services.r} {O= -ԍ ITC further comments at 3. See also Sprint further comments at 3.r  Xv-xK76.` ` Waivers. A few comments favor permitting carriers that are unable to provide one or more of the core services to apply for waivers in order to receive universal service  XH-support.uHz} {Os-ԍ See, e.g., NENA further comments at 3; PacTel further comments at 12.u For example, NENA argues that waivers should be granted so that a carrier's failure to offer a service that would be technically infeasible for that carrier to provide would  X -not make the carrier ineligible for universal service support.E } yO-ԍ NENA further comments at 3.E NENA contends that, in the case of 911, infeasibility of providing access to emergency service could arise from a political  X -determination that an emergency calling system is not needed or wanted in a particular area.3 } {O9-ԍ Id.3  X -In such an area, NENA argues, access to 911 should not be considered a core service.3 . } {O-ԍ Id.3 Similarly, PacTel asserts that carriers should be able to apply for waivers based on specific  X -facts and circumstances that make it unable to provide one or more core service.H } yO-ԍ PacTel further comments at 12.H x  Xy-xL77.` ` PacTel also argues that geographic circumstances might prevent carriers serving  Xb-a particular area from providing a core service.3bP } {Oc-ԍ Id.3 Accordingly, PacTel contends that the Commission could issue different standards relating to the provision of core services for  X4-different geographic areas.34} {O"-ԍ Id.3 PacTel, however, asserts that, to receive support, every company serving a particular geographic area should be required to provide the same core")t*&&dd"  X-services.3} {Oy-ԍ Id.3 Similarly, Maine PSC contends that, because E911 is not available everywhere, its  X-absence should not disqualify carriers serving a particular area from receiving support.JZ} yO-ԍ Maine PSC further comments at 6.J  X-xM78.` ` Transition Period. Some parties favor implementing a transition period to enable carriers to meet the universal service requirements and provide the core services within  X-a reasonable time period.$} {O( -ԍ See, e.g., Century further comments at 910; GTE further comments at 10; SWBT further comments at 4.  {O -See also USTA further comments at 7 (arguing that incumbent carriers should be given additional time to provide core services without losing universal service support, but that competing carriers must provide all core services before they are eligible for support). For example, GTE maintains that a transition period is necessary  Xv-to permit some incumbent LECs to provide singleparty service.iv} {O-ԍ GTE further comments at 10. See also SWBT comments at 8.i Further, RTC argues that the 1996 Act requires the definition of universal service to evolve and, thus, at some time in the future, the definition of core services is likely to extend beyond the services carriers are  X1-capable of providing.G1h } yOJ-ԍ RTC further comments at 910.G RTC recommends that state agencies, in their capacity to determine eligible carriers under section 214(e), should determine whether carriers continue to receive high cost support while they are upgrading their networks in order to provide all universal  X -services in an entire service area.3 } {O-ԍ Id.3  X -x` ` 3. Discussion (#  X-xN79.` ` We generally agree with those commenters that argue that carriers designated as eligible telecommunications service providers must provide each of the services designated for support subject to certain exemptions as discussed below. We recommend that telecommunications carriers that are unable to provide one or more of these services should  X4-not receive universal service support unless exceptional circumstances exist.4 } {Oo -ԍ As stated supra , we recommend that states have the discretion to provide for a transition period, for good cause, to allow carriers to make upgrades to provide singleparty service. We conclude that conditioning a carrier's eligibility for support upon its provision of the core services will  X-not impose an anticompetitive barrier to entry, as discussed supra.J} {O$-ԍ See supra section IV.A.3.J We agree with Teleport that the statutory principles for defining universal service are designed to ensure competitive"*v*&&dd'" and technological neutrality. There is no compelling evidence in the record that demonstrates that requiring eligible carriers to provide these services would unduly burden new competitors or nonwireline carriers. In addition, we agree with commenters observing that the 1996 Act facilitates the provision of services because it permits a telecommunications carrier to provide the supported services by using its own facilities in combination with resale of another  X-carrier's services.F} yO-ԍ 47 U.S.C.  214(e)(1)(A).F  X_-xO80. ` ` A few commenters argue that it may not be feasible for competitive carriers to provide the designated services because incumbent LECs may set exorbitant rates for network elements or deny access to unbundled elements. We believe that these arguments are speculative given that section 252 requires network element charges to be based on cost and  X -to be nondiscriminatoryN X} yO -ԍ 47 U.S.C.  252(d)(1)(A)(i)(ii).N and section 251 requires incumbent LECs to provide requesting carriers "nondiscriminatory access to network elements on an unbundled basis . . . on rates,  X -terms and conditions that are just, reasonable, and nondiscriminatory."C } yOn-ԍ 47 U.S.C.  251(c)(3).C  X -xP81.` ` We recommend that the Commission not implement the general transition proposed by GTE, RTC, and others that would allow carriers to draw support from the universal service fund but provide only some of the services designated for universal service  Xb-support.bx} yO-ԍ We note, however, that there will be a transition period leading up to the time the Commission's  {OS-universal service rules take effect. See infra section VII.E. Such a transition period would appear to be inconsistent with section 254(e) which states that "[a]fter the date on which Commission regulations implementing this section take effect, only an eligible telecommunications carrier . . . shall be eligible to receive" Federal  X-universal service support.@} yO-ԍ 47 U.S.C.  254(e).@ Moreover, we find that requiring some carriers to provide services while not imposing the same requirements on other carriers would be inconsistent with our recommended principle of competitive neutrality. We find little in the record that indicates that telecommunications carriers are generally unable to provide one or more of the recommended core services. A few commenters, however, maintain that some incumbent LECs are currently unable to provide singleparty service. Although we find that singleparty service is essential to modern life and to a modern telecommunications system, we recognize that exceptional circumstances may prevent some carriers from offering singleparty service  Xe-initially. Accordingly, as discussed supra, we recommend that state commissions, in their capacity to designate telecommunications providers that are eligible to receive universal service support, be permitted to grant an eligible carrier's request for a transition period after"9+b *&&dd" which the carrier must offer singleparty service. Such a request will be granted only if the state commission finds exceptional circumstances warrant an exemption from this requirement.  X-xQ82.` ` In addition to our general conclusion that carriers must provide each of the designated services in order to receive support, we find that universal service support should be available in limited instances where a carrier is unable to provide a few specific services.  Xv-For example, based on our analysis of E911, discussed supra, we conclude that access to E911 should be among those services supported by universal service mechanisms because, for example, it is "essential to . . . public safety" consistent with section 254(c)(1)(A). We realize, however, that not all carriers are currently capable of providing access to E911 and, in fact, as noted by NENA, not all communities have the facilities in place to provide E911 service. Nevertheless, we conclude that access to E911 should be supported to the extent that  X -carriers are providing such access. Similarly, as discussed infra, we find that toll blocking or control services should be supported when provided to qualifying lowincome consumers, to the extent that eligible carriers are technically capable of providing these services. Thus, we recommend that eligible carriers be required to provide all of those services we characterize as "designated" services, but we also recommend that the Commission support additional services such as E911 and toll limitation, to the extent eligible carriers are providing these important services.  X8-xR83. ` ` Finally, we conclude that waivers should not generally be available to carriers  X!-that do not provide one or more of the designated services. Nevertheless, as discussed supra, the record supports the contention that some carriers may currently be unable to offer singleparty service. Because section 214(e) requires eligible carriers to "offer the services that are supported by Federal universal service support mechanisms under section 254," we are unwilling to recommend that telecommunications providers be permitted to receive broad waivers from the requirement to provide the services we recommend designating for universal  X-service support. As discussed supra, however, we recommend that state commission be permitted to grant a request for a transition to carriers that cannot currently provide singleparty service if the circumstances warrant such a transition period.  X?-x E.` ` Extent of Universal Service Support (#`  X-x` ` 1. Background (#  X-xS84.` ` The 1996 Act states that "[c]onsumers in. . . high cost areas, should have  X -access to telecommunications and information services. . . ."C } yOE#-ԍ 47 U.S.C.  254(b)(3).C The NPRM asks for comment regarding whether universal service support should be limited to carriers providing designated services to residential users or residential and singleline business users, or whether support"",X*&&dd!"  X-should be provided for designated services provided to all users in high cost areas.=} yOy-ԍ NPRM at para. 24. = x  X-x` ` 2. Comments (#  X-xT85.` ` Support for Single Residential Connections. Those commenters that addressed the issue of the extent of universal service generally favor limiting universal service support to  Xv-designated services carried on the initial line to residences.ivX} {O -ԍ See, e.g., Illinois CC comments at 5; NCTA comments at 6.i Washington UTC, for example,  X_-opposes supporting two or more singleparty lines per residence._} {O -ԍ See, e.g., Washington UTC comments at 10. See also Ameritech comments at 8. NTIA contends that  XH-federal universal service support should be targeted toward singleline residential service.EH|} yOu-ԍ NTIA reply comments at 89.E GTE argues that a definition of "household" must be established if support is limited to primary residential lines so that carriers are not required to determine whether a customer  X -sharing a house or apartment is a separate household.D } yO-ԍ GTE reply comments at 89.D  X -xU86.` ` Support for Services Carried to Additional Residences. GTE opposes any attempt to restrict universal service support to designated services carried on lines to primary  X -residences.B } yO-ԍ GTE reply comments at 8.B According to GTE, it would be impractical to make such a distinction and,  X-further, the record does not support this approach.3, } {Om-ԍ Id.3  Xb-xV87.` ` Support for Designated Services Carried to Businesses. Some commenters  XK-favor extending support to connections to businesses in high cost areas.K } {O-ԍ See, e.g., Cincinnati Bell comments at 5; LDDS comments at 910; Montana Indep. Telecom. comments at 5; SWBT comments at 78; Staurulakis comments at 5; Telec Consulting comments at 4. For example, Nat'l Ass'n of Dev. Orgs. argues that rural economic viability depends upon access to communications services; thus, it argues, support should be extended to multipleconnection  X-businesses.T} yO#-ԍ Nat'l Ass'n of Dev. Orgs. comments at 89.T Citizens Utilities argues that, if a proven need for support exists for business lines, a national affordability standard for businesses should be developed that is different"-*&&ddE"  X-from any affordability standard established for residential service.K} yOy-ԍ Citizens Utilities comments at 7.K  X-xW88.` ` Several parties, in contrast, oppose providing universal service support for  X-designated services carried to businesses.AZX} {O-ԍ See, e.g., AT&T comments at 13; Ameritech comments at 8; LCI comments at 3 (stating that "universal service support has always been limited to baseline, residential services and the 1996 Act provides no indication that Congress intended otherwise."); Western comments at 9.A Florida PSC argues that the goal of promoting universal service relates to maximizing the number of households that have telephone  X-service.Fz} yO -ԍ Florida PSC comments at 7. F NTIA maintains that the costs of telephone services are likely to be a small fraction of total operating costs for most businesses and, thus, affordability of service should  X_-not generally be a problem for business users.C_ } yO-ԍ NTIA reply comments at 9.C Florida PSC and NTIA assert that states  XH-should provide appropriate funding if they determine that businesses need support.^H} yO-ԍ Florida PSC comments at 7; NTIA reply comments at 9.^ West Virginia Consumer Advocate contends support should be limited to designated services provided to residences because, it asserts, even singleline businesses can take tax deductions  X -for telephone services as a cost of doing business.X * } yO-ԍ West Virginia Consumer Advocate comments at 8.X MCI opposes extending universal service support to businesses, because, it argues, supporting business lines would cause the level of  X -support to grow excessively.f } {O@-ԍ MCI comments at 9. See also NTIA reply comments at 9.f  X -  X -x` ` 3. Discussion (#  Xy-xX89.` ` We find that support for designated services provided to residential customers should be limited to those services carried on a single connection to a subscriber's principal  XK-residence.KL } yOH -ԍ In light of our recommended principle of competitive neutrality, we will hereinafter refer to "connections" rather than "lines." We find that supporting one connection per residence is consistent with section 254(b)(3), which states that access to services for low income consumers and those in rural,  X-insular and high cost areas should be reasonably comparable to that available in urban areas.C} yOr$-ԍ 47 U.S.C.  254(b)(3).C We conclude that support for a single residential connection will permit a household complete".4*&&ddd" access to telecommunications and information services. All supported services, including access to emergency services, would be available to a household by providing support for this residential connection. The Joint Board, however, declines at this time to provide support for other residential connections beyond the primary residential connection. Support for a second connection is not necessary for a household to have the required "access" to  X-telecommunications and information services.} {O-ԍ Id. See also 47 U.S.C.  254(b)(2) (promoting "access to advanced services"). Moreover, the statutory language does not provide any guidance for determining what, if any, uses of a second connection are consistent with the goals of universal service. Nor does the record provide sufficient basis for supporting second residential lines. GTE contends that carriers will have difficulty determining whether a second connection to a residence is a household's second connection or whether the residence is shared by two or more households. It would appear, however, that carriers can use subscriber billing information to determine the number of households at a given address. Accordingly, we conclude that eligible carriers should receive support for designated services carried on the initial connection to a customer's primary residence.  X -xY90.` ` We are unpersuaded that universal service support should be extended to second residences in high cost areas. We conclude that the consumer benefits that result from support should not be extended to second homes, which may not be occupied at all times. There is no evidence that the additional cost of supporting second or vacation residences is justified in light of the presumption that owners of these residences can afford to pay rates that accurately reflect the carrier's costs to provide services carried on connections to second residences. x  X-xZ91.` ` We find that designated services carried to singleconnection businesses in rural, insular and other high cost areas should be supported by universal service mechanisms, although we find that a reduced level of support may be appropriate. We find general similarities between residential and singleline business customers. Both singleline business and residential subscribers require access for health, safety and employment reasons. Moreover, like residential subscribers, most singleline businesses have few or no competitive options for local telecommunications service. We disagree with Nat'l Ass'n of Dev. Orgs. that support should be extended to multipleconnection businesses. We note that the Commission has, in the past, elected to treat singleline businesses like residential customers,  X -that is, differently from multipleline businesses.Z Z} {O+!-ԍ See In the Matter of MTS and WATS Market Structure, Memorandum Opinion and Order, 101 FCC 2d 1222 (1985) (determining that all singleline subscribers, whether residential or business, should pay the same SLC). In one instance, the Commission, finding that small businesses lack the ability to use alternatives to the public switched network that are available to large corporations, held that the customer line charges should be the same for"/|*&&dd"  X-singleline business and residential customers.3 } {Oy-ԍ Id.3 We determine that a distinction between singleconnection and multipleconnection business is likewise appropriate for universal service purposes. The cost of service is unlikely to be a factor that would cause a multipleconnection business not to subscribe to telephone service. For small, singleconnection businesses in high cost areas, however, the price of telephone service may be prohibitive without support. Therefore, we recommend making universal service support available for designated services carried to singleconnection businesses in high cost areas.  XH-x[92.` ` We conclude, however, that designated services carried to businesses subscribing to only one connection should not receive the full amount of support designated for residential connections in high cost areas. We agree with Citizens Utilities that, for business connections, a standard different from that applied to residential connections for determining support should be established. We recommend initially supporting the designated services carried on business connections in a high cost area at a lower level than that provided  X -for residential connections in the same area. As discussed, infra, we recommend that the Commission use a benchmark based on the revenue generated per line to determine the  X-amount of support carriers should receive.H Z} {O-ԍ See infra section VII.C.H Under this recommended approach, eligible carriers would receive less support for serving singleconnection businesses than they would  Xd-for residential service because business rates are higher than residential rates. d} {O-ԍ As discussed in greater detail in section VII.C, infra, we recommend that the amount of support be derived from calculating the difference between the cost of providing service and the benchmark amount. Moreover, we find that providing support for designated services carried to singleconnection businesses in high cost areas at a reduced level is not inconsistent with the 1996 Act. We note that, as competition develops, it may be unnecessary to provide even this reduced support for services carried on the initial connection of businesses in high cost areas.  X-x F.` ` Quality of Service (#`  X-x` ` 1. Background (#  X~-x\93.` ` The 1996 Act requires that "quality services should be available at just,  Xg-reasonable and affordable rates."C gF} yO^"-ԍ 47 U.S.C.  254(b)(1).C Accordingly, the NPRM asked for comment on how the  XP-Commission can assess whether quality services are being made available.: P} yO$-ԍ NPRM at para. 4.: In particular, the NPRM sought comment on the utility of performancebased measurements to evaluate"90f *&&dd"  X-whether this congressional objective is being met.3} {Oy-ԍ Id.3 Further, the NPRM stated that the Commission is disinclined to prescribe technical standards for telecommunications carriers or  X-other service providers.;Z} yO-ԍ NPRM at para. 68.; Rather, the NPRM stated that the Commission preferred to let affected entities (such as IXCs, LECs, equipment manufacturers, and customers) develop technical and performance standards without direct intervention from the Commission, unless  X-necessary.3} {O( -ԍ Id.3 The NPRM, expressing the Commission's preference for encouraging existing standardsetting bodies to discuss and establish relevant technical standards, noted that there are currently several industry bodies that address standards for various aspects of  XH-communications networks.H|} {Ou-ԍ Id. (referring to the American National Standards Institute Committee T1, Electronic Industry Association and Telecommunications Industry Association).  X -x]94.` ` The NPRM also sought comment on whether, in implementing the congressional mandate to ensure that "quality services" are available, it would be useful to collect and publish certain basic information regarding technical performance levels of carriers  X -subject to the Commission's rules.; } yO\-ԍ NPRM at para. 69.; The NPRM noted that providing customers with easy access to service quality information could facilitate comparisons between the performance levels of various telecommunications carriers and could potentially create a marketbased  X-incentive for carriers to provide quality services.3f } {O-ԍ Id.3 In addition, noting that competition will probably not develop in a uniform fashion throughout the Nation, the NPRM sought comment on whether it is necessary to obtain data that could be used by the public, regulators, and regulated entities to monitor service quality performance from carriers, particularly those carriers that serve rural areas and are not currently subject to the Commission's existing  X-service quality monitoring program._ } {O-ԍ Id. (citing 47 C.F.R.  43.2122)._ The NPRM also emphasized that the collection and publication of these data should entail the least possible cost to the companies involved and, accordingly, solicited comment on whether industry organizations or state commissions  X-already collect the information that should be contained in these performance reports.2 } {O$-ԍ Id.2 The NPRM also asked whether it would be reasonable to rely upon such existing information"1*&&dd"  X-rather than extending the Commission's reporting requirements to all carriers.3} {Oy-ԍ Id.3 Commenters were also asked to estimate the potential costs associated with these various proposals for collecting performance information, in accordance with the 1996 Act's mandate that support  X-mechanisms should be "specific, predictable and sufficient."\Z} {O-ԍ Id. (citing 47 U.S.C.  254(b)(5)).\ Finally, the NPRM sought comment on whether the Commission should take action at some fixed date to evaluate the  X-need for continuing performance reports.;} yO* -ԍ NPRM at para. 70.; The NPRM requested that the Joint Board address in its recommended decision all of the issues raised in the NPRM with respect to monitoring  X_-of telecommunications services.2_|} {O -ԍ Id.2  X1-x` ` 2. Comments (#  X -x^95.` ` Assessing Existing Service Quality. As a preliminary matter, some parties maintain that high quality services currently exist, largely due to existing universal service  X -support.N } {O-ԍ See, e.g., NECA comments at 3.N A few commenters, however, contend that LECs operating under price cap  X -formulas are motivated to reduce costs to the extent that lower service quality often results. } {O-ԍ See International Communications Ass'n comments at 2; Michigan Consumer Federation comments at 5; NASUCA comments at 8. Harris argues that telephone customer service indicators should continue to be used to assess  X-service quality.  } yO;-ԍ Harris comments at 1718 (noting that current methods of evaluating customer service rely on engineering and customer service objectives such as central office blocking, time to clear outofservice reports, customer service call answer times, operator service call answer times, call completion rates, trouble reports and commission complaints). ACTA maintains that the concept of quality of service must incorporate service provided by one carrier to other carriers, such as underlying service provided by  Xb-carriers to resellers and by access carriers to IXCs.=b} yO -ԍ ACTA comments at 2.=  X4-x_96.` ` Quality of Service Standards. Some parties generally support the imposition of  X-service quality standards on telecommunications providers.r} {O@%-ԍ See, e.g., CWA comments at 6; GCI comments at 7; NTIA reply comments at 7 n.13. GCI, for example, argues that"2*&&dde" the Commission should adopt certain quality standards for core services including an evaluation of valid complaints filed by consumers and customers (such as IXCs) and the  X-amount of time taken to fill customer service orders.<} yOK-ԍ GCI comments at 7.< In addition, International Communications Ass'n recommends that the Commission impose quality of service rules that measure service availability, errors per second, mean time to restore outages, and service  X-disruption.] X} yO-ԍ International Communications Ass'n comments at 34.] Some parties argue that, if competition comes to rural areas, the Commission should institute sufficient safeguards to assure that the quality of service is equivalent to the  X_-standards met by the incumbent provider.d!_} yO -ԍ GVNW comments at 2; Montana Indep. Telecom. comments at 2.d USTA, in contrast, opposes the implementation of quality of service standards, because, it argues, the market will provide the best means to  X1-enforce quality services in competitive areas.>"1x} yOZ-ԍ USTA comments at 14.>  X -x`97.` ` Some commenters provide specific models on which to base quality of service standards. Wyoming PSC recommends that the Commission adopt on a nationwide basis its service quality rules, which are based on the National Regulatory Research Institute service  X -quality framework model.F# } yOw-ԍ Wyoming PSC comments at 23.F Michigan Library Ass'n also recommends the use of the  X -National Regulatory Research Institute model for a service quality framework.O$ } yO-ԍ Michigan Library Ass'n comments at 5.O Texas PUC cites NARUC's Model Telecommunications Service Quality Rules and Telephone Service  Xy-Quality Handbook as models for regulators to use to implement quality of service standards.B%y( } yOR-ԍ Texas PUC comments at 2.B Some parties argue that the Commission should base its service quality standards on existing  XK-standards in the statesZ&K } yO-ԍ NASUCA comments at 9; Virginia CC comments at 1.Z or supplement those state standards.<'KH } yOD -ԍ CWA comments at 9.<  X-xa98.` ` A few parties argue that the receipt of universal service support should be  X-contingent on maintaining certain quality of service levels.`(} {O$-ԍ See, e.g., CWA comments at 6; GCI comments at 7.` For example, CWA argues that any carrier wishing to receive federal universal service support must meet quality standards in"3j(*&&ddE" all four prior calendar quarters in order to receive support, and that a carrier that does not reach this goal should be required to pay a penalty in the form of a contribution to universal  X-service.<)} yOK-ԍ CWA comments at 6.< x  X-xb99.` ` State Roles. Several commenters believe state commissions should enforce  X-quality of service standards.*ZX} {O-ԍ See, e.g., AlabamaMississippi Tel. Ass'n comments at 4; Century comments at 9; GTE comments at 7 n.15; MCI comments at 22; OITAWITA comments at 16; Pennsylvania PUC comments at 8; Fred Williamson comments at 6. A few state public utility commissions argue that the  Xv-Commission should defer to the states to monitor service quality.\+vz} yO -ԍ Idaho PUC comments at 6; Oregon PUC comments at 3.\ Other state commissions  X_-submit that quality standards should be based on existing state standards.`,_ } yO-ԍ New York DPS comments at 3; Wyoming PUC comments at 2.` A few parties maintain that states should monitor the quality of services provided by incumbent LECs until  X1-a competitive market emerges.X-1} yO|-ԍ LDDS comments at 10; Oregon PUC comments at 3.X Taconic Tel. argues that states will have the responsibility to designate which carriers will be eligible to receive support, and, thus, states should have  X -the responsibility to establish and monitor service quality levels.K. * } yO-ԍ Taconic Tel. reply comments at 4.K  X -xc100.` ` Technical Standards. Some parties propose specific technical standards, such as transmission rates. For example, Merit argues that carriers should be required to provide voice grade access to the public switched network capable of supporting highspeed modem  X-access./ } {O-ԍ Merit comments at 2 (proposing an initial definition of "high speed" equal to 28,000 kbps). See also People For comments at 10. Michigan Consumer Federation contends that quality standards tied to performance  Xy-level requirements are preferable to technical specifications that may become obsolete.U0y} yO>-ԍ Michigan Consumer Federation comments at 8.U Michigan Consumer Federation argues that the Commission must ensure that any technical  XK-standard setting bodies to which it defers include public representation.U1K} yO"-ԍ Michigan Consumer Federation comments at 7.U NorTel, in contrast, supports the Commission's tentative conclusion that it is unnecessary for the Commission to"4441*&&dd"  X-prescribe specific technical standards to ensure quality telecommunications services.2} yOy-ԍ NorTel reply comments at 4 (also arguing that the industry should focus on the development of standards specifically adapted to the needs of rural and high costs areas).  X-xd101. ` ` Quality of Service Reporting Requirements. Several commenters contend that  X-imposing reporting requirements would be unduly burdensome to carriers.3 } {O-ԍ See, e.g., AlabamaMississippi Tel. Ass'n comments at 4; Taconic Tel. reply comments at 4. For example, MCI argues that new entrants have no incentive to provide lower quality services, and, thus, although states should monitor quality of service generally, they should not burden new  Xv-entrants with the cost of collecting and filing service quality data.4Xv} yO -ԍ MCI comments at 22 (also arguing that the Commission and Joint Board should create a higher burden for any state that seeks to implement reporting requirements on new entrants that are equivalent to those imposed on incumbents). USTA contends that efforts to increase regulatory requirements are contrary to the 1996 Act's intent to provide for  XH-a procompetitive, deregulatory national policy framework.e5H} {O-ԍ USTA comments at 14. See also ALTS comments at 20. e A few state commissions, however, argue that information that would enable comparisons between the performance  X -levels of various telecommunications carriers must be available to consumers.6 d } yO/-ԍ Florida PSC comments at 1819; NASUCA comments at 10; North Dakota PSC comments at 3; OPCDC comments at 14.  X -xe102.` ` Using PubliclyAvailable Data. A few parties maintain that carriers are already required to file quality of service reports with state agencies to which the Commission could  X -have access if necessary.~7 } yO+-ԍ AlabamaMississippi Tel. Ass'n comments at 4; Pennsylvania PUC reply comments at 17.~ GTE argues that the Commission's ARMIS reporting requirements on certain price cap carriers already provide the Commission with service quality  X-information on mandatory price cap carriers.A8L } yO-ԍ GTE comments at 7 n.15.A North Dakota PSC, in contrast, states that the Commission would have to extend its reporting requirements to obtain quality of service information because many small carriers are currently exempt from its quality of service  XK-oversight and from the Commission's existing reporting requirements.I9K} yO!-ԍ North Dakota PSC comments at 3.I In addition, CWA argues that many states do not have service standards and that some that do have standards do  X-not make quality information available to the public.d:l} yO:%-ԍ CWA comments at 6 (referring to a 1992 NARUC publication).d"5:*&&dde"Ԍ X-ԙxf103.` ` Future Evaluation of Continued Monitoring. North Dakota PSC argues that the Commission should review the need for quality of service reports as local service competition  X-develops.I;} yOK-ԍ North Dakota PSC comments at 4.I  X-x` ` 3. Discussion (#  Xv-xg104. ` ` The 1996 Act enunciates the principle that "quality services" should be  X_-available.M<_X} {Oh -ԍ See 47 U.S.C.  254(b)(1).M We refrain from recommending that the Commission require that eligible carriers meet specific technical standards established by the Commission as a condition to receiving universal service support. We have already recommended the specific definitions of the services a telecommunications carrier must provide before receiving support. While we decline to recommend that the Commission establish federal service quality standards beyond the basic capabilities that carriers receiving universal service support must provide, we recognize that states may adopt and enforce service quality rules, on a competitively neutral basis, consistent with section 253(a), which furthers the congressional intent of ensuring that all Americans have quality services at just, reasonable and affordable rates. x  Xy-xh105. ` ` We recommend that the Commission, to the extent possible, rely on existing data to monitor service quality. Because many states already have adopted service quality  XK-requirements,0=ZK} {O-ԍ See, e.g., National Regulatory Research Institute, Telecommunications Service Quality (March 1996) (indicating that 32 state regulatory commissions and the District of Columbia have instituted quality of service standards since the AT&T divestiture).0 we do not recommend that the Commission undertake efforts to collect quality of service data in addition to those already in place with respect to price cap LECs. In many cases, additional requirements by the Commission would duplicate the states' efforts.  X- Instead, we recommend that state commissions submit to the Commission the service quality data provided to them by carriers. We further recommend that the Commission not impose  X-data collection requirements on carriers at this time.> } yO-ԍ We note that the Commission already imposes quality reporting requirements on some carriers. For example, price cap LECs are required to file service quality reports with the Commission. The ARMIS 4305 and ARMIS 4306 reports provide measures of service quality. Specifically, the ARMIS 4305 report covers service LECs provide to IXCs (Table I), the provision of local service (Table II), blockage on common trunk groups between the LEC wire centers and access tandems (Table III), LEC switch downtime (Table IV), and service quality complaints filed with the Commission and with state commissions (Table V). Table I of the  {OE#-ARMIS 4306 report covers subjective measures of customer satisfaction. See Second Report and Order, 5 FCC  {O$-Rcd 6786 (1990) and Erratum, 5 FCC Rcd 7664 (1990) (LEC Price Cap Order), modified on recon., 6 FCC Rcd  {O$-2637 (1991), further modified on recon. 6 FCC Rcd 4524 (1991) (ONA Part 69 Order), Second Further Recon.  {O%-aff'd 7 FCC Rcd. 5235 (1992), upheld on appeal, National Rural Telecom Association v. FCC, 988 F.2d 174"%=*&&&"  {O-(D.C. Cir. 1993). See also Policy and Rules Concerning Rates for Dominant Carriers, Memorandum Opinion  {OZ-and Order, 6 FCC Rcd 2974, pet. for recon. denied 6 FCC Rcd 7482 (1991). Therefore, we conclude that the"6$>*&&ddr" Commission should rely on service quality data collected at the state level in making its determination that "quality services" are available, consistent with section 254(b)(1).  X-xi106.` ` Further, we agree with NECA that competition should ultimately give carriers the incentive to provide quality services by allowing consumers to choose among various telecommunications providers. We are unpersuaded by the arguments of GVNW and Montana Indep. Telecom., which contend that the Commission should institute specific standards to ensure that competitors provide the same quality service as the incumbent. We believe that most competitors will strive to attain a level of service quality at least equal to the level currently provided by incumbents in order to attract and maintain subscribers. In addition, to the extent quality is readily observable to potential customers, competitive carriers will have an incentive to maintain service quality even in the absence of competition.  X -x G.` ` Revisiting the Definition of Universal Service(#`  X -x` ` 1. Background(#  X-  Xy-xj107.` ` Section 254(c)(2) states that "[t]he Joint Board may, from time to time, recommend to the Commission modifications in the definition of the services that are  XK-supported by Federal universal service support mechanisms."C?K$} yO -ԍ 47 U.S.C.  254(c)(2).C Accordingly, the NPRM provided that the Commission will periodically review, after obtaining Joint Board  X-recommendations, the definition of services supported by universal service mechanisms.:@} yO-ԍ NPRM at para. 2.: The NPRM suggested that the Joint Board and the Commission may wish to revisit the  X-definition of universal service at fixed intervals such as fiveyear periods,A$D} yO-ԍ NPRM at para. 67 (citing Rulemaking on the Commission's Own Motion into Universal Service and to Comply with the Mandates of Assembly Bill 3643, R.9501020; and Investigation on the Commission's Own  {Ot-Motion into Universal Service and to Comply with the Mandates of Assembly Bill 3643, I.9501020, Interim  {O>-Opinion (Cal. Pub. Utils. Comm'n, filed Jan. 24, 1995)). but stated that, contingent upon the information collected in a Commission proceeding mandated by section  X-706 of the 1996 Act, the topic may be reconsidered even sooner.B0 } yO"-ԍ NPRM at para. 67 n.147 (citing 47 U.S.C.  706(b) which states "[t]he Commission shall, within 30 months after the date of enactment of this Act, and regularly thereafter, initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all Americans. . . . The Commission shall determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion."). The NPRM stated that, in"7B*&&ddS" order to apply the criteria set forth in section 254(c)(1), additional information specifically, the extent to which particular services "are being deployed in public telecommunications networks" and "have been subscribed to . . . by a substantial majority of residential  X-customers" must be obtained.cC} {O4-ԍ NPRM at para. 67 (citing 47 U.S.C.  254(c)(1)).c The NPRM recognized that, although periodic review could help to ensure that the definition does not remain static, it could also entail the  X-expenditure of resources on unnecessary proceedings.;DZ} yO-ԍ NPRM at para. 67.; Therefore, the NPRM proposed to rely on information sources that already exist and to initiate additional data collection efforts only if existing information is inadequate to assess proposed changes to the definition of universal service and a cost/benefit analysis demonstrates that the burden of collection would  X1-not outweigh the value of the information requested.;E1} yO -ԍ NPRM at para. 67.;  X -x` ` 2. Comments (#  X -xk108.` ` Periodic Reassessment. GTE proposes adopting the California PUC's plan for  X -reviewing the definition of universal service.<F z} yO-ԍ GTE comments at 3.< Under the California PUC plan, a review is  X -made no more frequently than every three years.[G } yOb-ԍ California PUC comments at 17; GTE comments at 3.[ According to GTE, the California plan  X-avoids toofrequent review, which can entail "unnecessary expenditure of resources"VH} yO-ԍ GTE comments at 3 (citing NPRM at para. 67).V and  Xy-allows eligible carriers to plan their network investments efficiently over time.<Iy* } yOT-ԍ GTE comments at 3.< GTE and California PUC propose a system whereby parties wishing to amend the definition can petition  XK-the Commission to add a new element if three years have passed since the last review.[JK } yO-ԍ California PUC comments at 18; GTE comments at 3.[ GTE also recommends that the Commission could set a maximum interval, such as five years,  X-after which it would undertake a review if no petition has been acted upon.<KJ } yO"-ԍ GTE comments at 3.<  0 x  X-xl109.` ` Harris advocates allowing NARUC to decide when to reconsider the definition"8K*&&ddE"  X-of universal service.?L} yOy-ԍ Harris comments at 6.? North Dakota PSC suggests that the list of services supported should be revisited each year for the first five years after implementation, and, thereafter, considered  X-every two years, with a monitoring report filed during the "off" years.IMX} yO-ԍ North Dakota PSC comments at 3.I New York DPS  X-recommends a triennial review.HN} yOT-ԍ New York DPS comments at 16. H Ohio Consumers' Council suggests a review no later than two years after the Commission's rules are issued and no less often than every two years  X-thereafter.QOx} yO -ԍ Ohio Consumers' Council comments at 18.Q USTA recommends implementing a review at least every five years, but not  Xv-more frequently than every three years.>Pv} yO/-ԍ USTA comments at 13.> Telec Consulting recommends a periodic review set  X_-at fixed intervals such as every two or three years.JQ_} yO-ԍ Telec Consulting comments at 15.J Wisconsin PSC advocates a biennial review, but believes that public comment and a Joint Board recommendation on the issue of reporting conditions should not be addressed until after new universal service programs are in  X -place, so that the effectiveness of any new programs can be measured.JR ( } yO-ԍ Wisconsin PSC comments at 1213.J  X -x` ` 3. Discussion (#  X -xm110.` ` We recommend that the Commission convene a Joint Board no later than January 1, 2001, to revisit the definition of universal service. We find that the Joint Board's and Commission's approach to revisiting the definition of universal service must strike a reasonable balance between too frequent reviews, which could result in an unnecessary expenditure of resources, and sporadic evaluation, which may not produce a definition of universal service that is consistent with the principles enumerated in section 254(b) and reflect the definitional criteria of section 254(c). In addition, the Commission may institute a review  X-at any time upon its own motion or in response to petitions by interested parties.CSZ } yO -ԍ We note that, in complying with the statutory mandate of section 706(b) of the 1996 Act, the Commission may take additional steps to determine whether advanced telecommunications capability is being  {O"-deployed to all Americans. See 1996 Act,  706(b). C  X-xn111.` ` We find the record to be insufficient at this time to support our recommending that the Commission adopt reporting requirements in order to collect data that may assist the Commission in reevaluating the definition of universal service. We recognize that, in order to"9S*&&dd" apply the criteria set forth by Congress in section 254(c)(1), the Commission will need information regarding, for example, whether a proposed service has "been subscribed to by a substantial majority of residential customers" and is "being deployed in public telecommunications networks by telecommunications carriers." Nevertheless, we recommend  X-that the Commission base future analyses of the definition of universal service, inter alia, on data derived from the Commission's existing data collection mechanisms such as those collected through ARMIS.  X3- V. x AFFORDABILITY  X -xA.` ` Overview (#`  X -xo112. ` ` The 1996 Act states that "quality services should be available at just,  X -reasonable, and affordable rates."ZT } yO9-ԍ 47 U.S.C.  254(b)(1) (emphasis added).Z This section examines the various ways the term "affordable" may be defined. In addition, it considers what factors should be considered in examining affordability including subscribership levels and other nonrate factors that may influence a consumer's decision to subscribe to local telephone service. Finally, in this section, the Joint Board considers the roles the Commission and state commissions should play in ensuring rates are affordable.  X!-x B.` ` Affordability (#`  X-x` ` 1. Background (#  X-xp113. ` ` Section 254(b)(1) provides that "[q]uality services should be available at just,  X-reasonable and affordable rates."CUX} yO-ԍ 47 U.S.C.  254(b)(1).C In addition, section 254(i) requires that "[t]he Commission and the states should ensure that universal service is available at rates that are just, reasonable  X-and affordable."V} {O-ԍ 47 U.S.C.  254(i). See also S. Rep. No. 230, 104th Cong., 2d Sess. 134 (1996) (Joint Explanatory Statement). The NPRM, noting that the "affordable" criterion has not previously been addressed in the context of universal service, requested comment on how the Joint Board can  XR-assess whether affordable service is being provided to all Americans.@WRB} yOE#-ԍ NPRM at para. 4.@ To facilitate discussion of the concept of affordability, the NPRM cited a dictionary definition of the term";:W*&&dd"  X-"afford."XZ} {Oy-ԍ NPRM at para. 4 (citing Webster's New World Dictionary at 23 (William Collins, Second College ed. 1980) ("afford" is defined as follows: "to have enough or the means for; bear the cost of without serious inconvenience")). The NPRM also sought comment proposing standards for evaluating the  X-affordability of all telecommunications, not merely telephone exchange, services.eY} yO-ԍ NPRM at para. 14 (citing 47 U.S.C.  254(c), (i)).e Specifically, the NPRM asked commenters to identify the criteria or principles that should be used to determine "affordable" rates, and whether there should be procedures to recalibrate these rates to reflect changes in inflation or other factors that may make periodic readjustment  X-necessary.;Zz} yO -ԍ NPRM at para. 25.; x  X_-xq114. ` ` In addition to seeking public comment in the NPRM, on July 3, 1996 the Commission's Common Carrier Bureau released a Public Notice to supplement the NPRM's  X1-requests for comment ("Public Notice").Y[1 } yO-ԍ Public Notice (DA961078) (rel. July 3, 1996).Y The Public Notice asked, inter alia, whether it is appropriate to assume that current rates for services included within the definition of universal  X -service are affordable, despite variations among companies and service areas.k\ } yOP-ԍ Public Notice (DA961078) (released July 3, 1996) at question 1.k In addition, the Public Notice requested comment on the extent to which factors other than rate levels, such as subscribership levels, telephone expenditures as a percentage of income, cost of living, or local calling area size, should be considered in determining the affordability and reasonable  X -comparability of rates.] * } yO-ԍ Public Notice at question 2. The Public Notice also asked for comment on whether a specific national  {OL-benchmark rate for core services should be established. This issue is discussed infra in section IV.  X{-x` ` 2. Comments (#  XM-xr115. ` `  In General. As a preliminary matter, a few parties address how the word "affordable" should be defined. Texas OPUC, for example, maintains that "affordable" is not determined by whether one can pay a certain rate, but whether that price causes a serious  X-detriment, consequence, or inconvenience.D^ } yO="-ԍ Texas OPUC comments at 12.D United Church of Christ opposes defining  X-"affordability" as "acceptable harm."P_} yO$-ԍ United Church of Christ comments at 5.P Michigan Consumer Federation argues that the Webster definition cited in the NPRM is misplaced because, it argues, the concept of";_*&&dd" affordability "clearly means rates that are at or below the true and reasonable cost of  X-providing service."V`} yOb-ԍ Michigan Consumer Federation comments at 18.V AARP asserts that the relative concept of affordability, i.e., "to bear the  X-cost of without serious inconvenience," must be given equal emphasis as the absolute concept,  X-"to have enough or the means for."aX} yO-ԍ AARP comments at 6; CPI reply comments at 8; Ohio Consumer's Council reply comments at 10. Specifically, AARP avers that the concept of affordability should be defined to mean that people are not forced to pay so much for a  X-necessity that it causes serious inconvenience or detriment.Cb} yO* -ԍ AARP comments at 7.C America's Carriers warns against defining "affordability" so that it equates with "free" and creates an entitlement to  Xc-telecommunications services.Kccx} yO -ԍ America's Carriers comments at 3.K  X5-xs116. ` ` Current Rates. Many commenters believe it is appropriate to conclude that  X -current rates are affordable.gd } {O-ԍ See, e.g., AT&T comments at 16; BellSouth comments at 1; MCI comments at 4 n.4; Missouri PSC comments at 4; NCTA comments at 34; Time Warner comments at 6; Sprint comments at 9; West Virginia Consumer Advocate comments at 8; CPI reply comments at 8; AT&T further comments at 3; AirTouch further comments at 2; Ameritech further comments at 4; Bell Atlantic further comments at 1; Century further comments  yO-at 6; NYNEX further comments at 1; PacTel further comments at 57; Time Warner further comments at 2; Vanguard further comments at 23.g Time Warner contends that there is a high rate of acceptance  X -of prevailing prices which indicates that rates are within an affordable range.Le } yO:-ԍ Time Warner further comments at 2.L BellSouth, AirTouch, and TCI argue that rates could be raised without significantly affecting  X -affordability.f } yO-ԍ AirTouch further comments at 23; BellSouth further comments at 12; TCI further comments at 5. Other parties conclude that urban rates may be considered affordable, but that  X -rural rates must be equivalent to urban rates in order to be deemed affordable.eg } yO-ԍ Pennsylvania RDC comments at 2; Sprint comments at 9.e A few parties argue that the Commission cannot make a determination that existing rates are  X-affordable without explicitly defining "affordable."fh2} {Ow!-ԍ See, e.g., Media Access Project further comments at 2.f  Xf-xt117. ` ` Several commenters argue that the Commission may not conclude that current"f<h*&&dd"  X-rates are affordable.i} {Oy-ԍ See, e.g., Alliance for Public Technology further comments at 2 (stating that "a rate is not affordable unless it is the lowest rate that would be possible if the least cost transmission mode were used for that bandwidth"); ITC further comments at 1 (stating that local rates are often "subject to political considerations, the target of contributions, the product of 'value of service' pricing, subject to concurrence in other Exchange Carrier  yO-local tariffs and often [set] absent any knowledge of true costs"); Maine PUC further comments at 13 (arguing that rates set by states are influenced by a variety of factors); Media Access Project further comments at 1 (arguing that current rates are likely to be artificially high as telecommunications providers are operating in a monopoly market); Vitelco further comments at 12 (stating that a company's existing rates must be measured against service areas and subscribers' income levels); Washington UTC further comments at 2 (arguing that affordability of current rates depends on the relationship between a serving company's costs and prices and nonrate factors). For example, Maine PUC cites "formidable measurement problems" that must be overcome before any conclusion regarding the effect of rates on universal service for a particular area can be made, including differences among state policies on which rates  X-are based.Pj* } yO-ԍ Maine PUC further comments at 2.P In addition, ITC contends that rates are "far from being usable as a measure of affordability" because they are often subject to political considerations and other variable  X-factors.Fk } yO-ԍ ITC further comments at 12.F  X_-xu118. ` ` Subscribership Levels and Other NonRate Factors. Some parties oppose considering affordability in terms of factors other than rates, such as subscribership and  X1-household income levels.l1J } yO,-ԍ AT&T further comments at 3; Ameritech further comments at 7; CompTel further comments at 6; GTE further comments at 5. Ameritech argues that any relationship that may exist between  X -nonrate factors and affordability has not been established.m } yOm-ԍ Ameritech further comments at 7 (arguing that the Commission should undertake an empirical study on impediments to subscribership before considering nonrate factors). Similarly, Sprint asserts that  X -rates have little to do with subscribership levels.Gn } yO-ԍ Sprint further comments at 2.G Time Warner maintains that, before mandating that nonrate factors be considered when determining affordability, the Commission should consider whether data reflecting these nonrate factors are readily available, whether it will be difficult to obtain any necessary data, and what costs are associated with gathering and  X -processing the requested data with respect to individual consumers or groups.Lo } yO"-ԍ Time Warner further comments at 6.L United Church of Christ opposes linking affordability to subscribership levels because, it argues, in some markets consumers have no choice but to pay rate increases or do without"y=o*&&dd"  X-telecommunications services.~p} {Oy-ԍ United Church of Christ comments at 6. See also Edgemont reply comments at 3.~ PacTel asserts that affordability is not necessarily correlated with income because, it argues, "affordability is a very personal decision based on many  X-different factors for each individual."BqZ} yO-ԍ PacTel comments at 23. B  X-xv119. ` ` Many parties contend that the present subscribership level indicates that current  X-rates are affordable.$r} yO( -ԍ NTIA reply comments at 12; AT&T further comments at 3; Ameritech further comments at 46; Citizens Utilities further comments at 2; GTE further comments at 5; MCI further comments at 12; MFS further comments at 2; Minnesota Indep. Coalition further comments at 1; NECA further comments at 1; NCTA further comments at 2; NYNEX further comments at 1; SWBT further comments at 2; TCI further comments at 5; Teleport further comments at 12; U S West further comments at 12; Vanguard further comments at 23.$ Vanguard argues that the Commission should take official notice of its own subscribership reports as demonstrating that current rates are sufficiently low to promote  X_-widespread subscribership.OsX_} yO-ԍ Vanguard further comments at 2 (citing "Telephone Subscribership in the United States," Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission (released June 1996) (estimating that 93.8 percent of all households in the United States have telephone service).O Ameritech asserts that, even considering the lowest penetration rate in the various states referring to an 85 percent subscribership rate in New Mexico it is not unreasonable to conclude that telephone services are generally available when at least  X -85 percent of households subscribe to "core" services.Jt } yO-ԍ Ameritech further comments at 4.J  X -xw120.` ` Other commenters argue that current subscribership levels demonstrate that  X -rates are not affordable to all Americans.u J } yO-ԍ Maine PUC comments at 3; Benton further comments at 2; CFA further comments at 1; Puerto Rico Tel. Co. further comments at 12. For example, New Mexico AG contends that the difference in subscribership rates between households with incomes above $50,000.00 and those below that amount indicate that affordable service is not currently available to all  X-Americans.tv} {O-ԍ New Mexico AG comments at 2. See also Benton further comments at 2.t Similarly, Idaho PUC argues that although prices could probably rise without a drastic reduction in subscribership, this does not mean that rates should be allowed to rise, as  Xb-affordability is a question of consumers' priorities, not just service prices.Dwb4} yOG#-ԍ Idaho PUC comments at 89.D  X4-xx121. ` ` Some commenters contend that affordability should be linked to subscriber"4>w*&&dd"  X-incomes.8xZ} yOy-ԍ Ad Hoc Telecom. Users. comments at 20; California Dept. of Consumer Affairs comments at 18; Puerto Rico Tel. Co. comments at 10; SWBT comments at 10; AirTouch further comments at 3; Bell South further  {O -comments at 3. See also GTE comments at 8.8 For example, some parties view the percentage of a subscriber's income that is  X-spent on telecommunications expenditures as an appropriate way to assess affordability.Uy} {O-ԍ See, e.g., CFA further comments at 2.U SWBT and USTA support identifying the "affordable rate" for local service as 1 percent of  X-the statewide and national median household income, respectively.z|} {O -ԍ SWBT comments at 1011; USTA comments at 15 n.21. See also BellSouth further comments at 2. AARP, however, arguing that residential rates would increase because residential customers currently spend less  X-than this amount on basic services on average, opposes these approaches.E{} yOL -ԍ AARP reply comments at 78.E Other parties  Xv-favor measuring affordability by considering consumers' disposable income.a|v} yO-ԍ PULP comments at 7; Puerto Rico Tel. Co. comments at 6.a U S West, for example, supports comparing telephone service expenditures to expenditures for cable television services, entertainment services, other communication services, or other  X1-discretionary household expenditures.I}1. } yO-ԍ U S West further comments at 2.I BellSouth argues that the affordability criteria should be based on what subscribers or households on the margins of the poverty level, specifically  X -at 125 percent of the poverty level, consider to be affordable.F~ } yOr-ԍ BellSouth comments at 3132.F  X -xy122.  Some commenters argue that the concept of affordability must account for a consumer's entire telecommunications expenditure, and not just include the cost of local  X -service.X N } yO-ԍ Century comments at 45; Minnesota Indep. Coalition comments at 79; USTA comments at 1415; Virginia CC reply comments at 2; AirTouch further comments at 3; Minnesota Indep. Coalition further comments at 3. For example, PULP recommends considering the costs to a consumer of connection charges, deposits, advanced payments, late payment charges, and other costs  Xy-needed to obtain or reinstate service.=yn} yO!-ԍ PULP comments at 9.= Similarly, OPCDC argues that affordability might be  Xb-measured by the number of terminations or suspensions for nonpayment.[b} yO$-ԍ PULP comments at 89; OPCDC reply comments at 7.[ In addition, ITC argues that underlying costs such as access charges and wholesale rates for resold services"K?*&&dd"  X-must also be affordable so that carriers can offer affordable services to end users.>} yOy-ԍ ITC comments at 56.> Several parties argue that calling scope must be factored into a determination of affordability, as rural  X-consumers must often place toll calls outside their local calling areas.|"X} {O-ԍ See, e.g., AARP comments at 18; Century comments at 46; Keystone comments at 8; Rural Iowa Indep. Tel. Ass'n comments at 3; Telec Consulting Resources comments at 5; Minnesota Indep. Coalition reply comments at 34; Alaska Tel. further comments at 5; CFA further comments at 23; Western Alliance further comments at 2.| For example, Rural Iowa Indep. Tel. Ass'n asserts that rural subscribers may have to place toll calls to reach  X-schools, health care providers, and other institutions.UB} yO -ԍ Rural Iowa Indep. Tel. Ass'n comments at 3.U NECA contends that calling scope and total amount of bills should be considered, but subscribership levels, consumer income,  Xv-and cost of living should not be presumed to affect affordability.Ev} yO-ԍ NECA further comments at 3.E  XH-xz123. ` ` State and Federal Determination of Affordability. A substantial number of commenters advocate permitting the states to define affordable rates, because of the unique  X -circumstances of consumers in each state.  b } {O--ԍ See, e.g., AARP comments at 18; California Dept. of Consumer Affairs comments at 17; NARUC comments at 5; New York DPS comments at 5; Ohio Consumer's Council comments at 11; PacTel comments at 20; Pennsylvania PUC comments at 9; Texas PUC comments at 5; Washington UTC comments at 7; Fred Williamson comments at 6, 12; CPI reply comments at 89; Virginia CC reply comments at 2; Bell Atlantic further comments at 1; GTE further comments at 8; NYNEX further comments at 2.  PacTel argues that states, in their ratemaking  X -capacities, should determine what is affordable.G } yO-ԍ PacTel further comments at 7.G Other parties favor the establishment of a  X -nationwide affordability rate.-\ } {OA-ԍ See, e.g., AT&T comments at 17; Time Warner comments at 7. The comments of additional parties who  {O -advocate a nationwide affordability benchmark for purposes of establishing high cost support are discussed infra, section VII.C.- Citizens Utilities suggests that a national price affordability standard be created, but that states be permitted to create their own affordability standards and create their own support mechanism to fund the difference between federal support levels and  X -carrier costs that are above the state standard.O } yO "-ԍ Citizens Utilities comments at 1112.O ITC believes that national subscribership  X-goals should be established and affordability should then be determined at the local level.DX} yO$-ԍ ITC further comments at 2.D "y@*&&dd"Ԍ X-ԙx{124. ` ` Readjustment of Affordability. Texas OPUC opposes recalibrating rates to reflect changes in inflation because, it argues, the real cost of providing services is  X-declining.D} yOK-ԍ Texas OPUC comments at 14.D Ohio Consumer's Council argues that any recalibration should be based on the growth or decline in consumers' incomes, but that declining industry costs should also be  X-considered.QX} yO-ԍ Ohio Consumer's Council comments at 11.Q Citizens Utilities argues that periodic adjustments to national price affordability  X-standards are necessary to account for inflation and pricing changes.L} yO& -ԍ Citizens Utilities comments at 11.L Similarly, GTE supports an automatic adjustment for inflation to prevent support from being diluted over time  X_-and to avoid future concerns regarding the growth of funding levels.A_x} yO -ԍ GTE comments at 8 n.16.A   x  X1-x` ` 3. Discussion (#  X -x|125. ` ` In the 1996 Act, Congress not only reaffirmed the continued applicability of the  X -principle of just and reasonable rates, but also introduced the concept of affordability.O } yO-ԍ 47 U.S.C.  254(b)(1), 254(i).O Although we believe an increasingly refined understanding of the term affordability will  X -evolve over time,q } yO-ԍ The principle of just and reasonable has been interpreted in numerous judicial and administrative  {O-proceedings. See, e.g., Bluefield Water Works & Improvement Co. v. Public Serv. Commn of West Virginia, 262  {O-U.S. 679, 693 (1923) (finding just and reasonable rate "depends on circumstances, locality and risk"); Federal  {Oc-Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944) (holding "fixing of 'just and reasonable' rates involves a balancing of the investor and the consumer interests").q we find that the Webster Dictionary definition is instructive in determining how to interpret the concept for purposes of crafting universal service policies consistent with the congressional intent underlying section 254. As AARP and other commenters appropriately note, the definition of affordable contains both an absolute component ("to have enough or the means for") and a relative component ("to bear the cost of without serious detriment"). Therefore, we conclude that both the absolute and relative components must be considered in making the affordability determination required under the statute. We find that an evaluation that considers price alone does not effectively address either component of affordability.  X-x}126. ` ` In general, we find that factors other than rates, such as local calling area size, income levels, cost of living, population density, and other socioeconomic indicators may"AN *&&dd"  X-affect affordability.} {Oy-ԍ We note that the specific needs of low income consumers are addressed in section VIII, infra. Washington UTC and other commenters observe that these other factors may vary by region. We conclude that the concept of affordability should encompass a consideration of factors other than rates.  X-x~127. ` ` Although subscribership levels can be influenced by many factors,Z} yO-ԍ Subscribership levels may also be influenced by such factors as the level of toll charges or service connection charges. we agree with the many commenters finding a general correlation between subscribership level and affordability. We find that a relatively high penetration rate suggests, but does not ensure,  X_-that rate levels are affordable.,G_} {O -ԍ See PULP comments at 6 (arguing that subscription data do not reveal whether a particular service can  X -be afforded without hardship).#XN\  P ynXP# #A\  P ɒP#As a number of commenters noted, because telephone service is considered a  {Ou-modern necessity, some consumers subscribe irrespective of whether the rate causes serious inconvenience. See,  {O?-e.g., CFA further comments, (App. I) at 12., We further conclude, however, that a low or declining penetration rate may be an indicator that rate levels in a jurisdiction are not affordable. In general, we find subscribership levels provide relevant information addressing the basic  X -question of whether consumers have the means to subscribe to telephone service.#XN\  P ynXP# We find monitoring subscribership to be a tool in evaluating the affordability of rates. It should not,  X -however, be the exclusive tool in measuring affordability.V } {O^-ԍ See Alaska Tel. further comments at 4.V Subscribership levels do not address the second component of the definition of affordability, namely, whether paying the rates charged for services imposes a hardship for those who subscribe.  X-x128. ` ` We also find, consistent with the arguments of Montana PSC and other parties, that the scope of the local calling area directly and significantly impacts affordability. The rate design described by Puerto Rico Tel. Co. illustrates the correlation between scope of  XK-calling area and rate.PKS } yOO-ԍ Puerto Rico Tel. Co. comments at 910.P According to Puerto Rico Tel. Co., its rates for unlimited basic residential calling range from $18.80 in the densely populated San Juan area with access to  X-more than 340,000 access lines to $6.45 in an area with access to 200 or fewer access lines." } yO -ԍ Puerto Rico Tel. Co. subscribers with access to between 10,000 and 40,000 callers in their local calling area pay $15.10; with access to 5,001 to 10,000, the rate is $14.00; and with access to 201 to 1,000, the rate is  {OA"-$7.60. Id. See also Alaska Tel. further comments at 5; Minnesota Indep. Coalition further comments at 34; RTC further comments at 7. Implicit in the Puerto Rico Tel. Co. rate design is recognition that, with more limited local calling areas, subscribers may have to incur greater toll charges to reach an equivalent number of lines. If rates charged for local service were the only consideration, the $6.45 rate would"B*&&dd" be considered "more affordable" than the $18.80 rate. Yet consideration of the scope of the calling area suggests that rates disparate on their face may in fact be similarly affordable for a given level of toll charges. Conversely, identical rates may not be equally affordable when the extent of their associated local calling areas differ. Therefore, the Joint Board concludes that the scope of the local calling area should be considered as another factor to be weighed when determining the affordability of rates. In addition, we find that in considering this last factor, examining the number of subscribers to which one has access for local service in a local calling area alone is not sufficient. A determination should be made that the calling area reflects the pertinent community of interest, allowing subscribers to call hospitals, schools, and other essential services without incurring a toll charge.  X -x129. ` ` Customer income level also is a factor that should be examined when addressing affordability. While a specific rate may be affordable to most customers in an affluent area, the same rate may not be affordable to lower income customers. We agree with the conclusions of many commenters regarding the nexus between income level and ability to  X -afford telephone service.W } {O -ԍ See, e.g., Benton reply comments at 10.W We reject, however, SWBT's proposal to define affordability based on a percentage of national median income. Such an approach would be inequitable because of the significant disparity in income levels throughout the country. For example, a rate equal to 1 percent of the national median income level would equal 7 percent of the  XK-average annual income level for a household in Birch Creek, Alaska.xKZ} {OV-ԍ Alaska PUC comments at 34. See also Florida PSC further comments at 3.x Therefore, we conclude that per capita income of a local or regional area, and not a national median, should be considered in determining affordability. In addition to income level, we agree with CNMI and other commenters that conclude that the cost of living in an area may affect the affordability of a given rate.  X-x19. ` ` We also agree with Maine PUC when it recognizes that many variations in a states rates reflect legitimate local variations in rate design. Such variations include the proportion of fixed costs allocated between local services and intrastate toll services; proportions of local service revenue derived from perminute charges and monthly recurring charges; and the imposition of mileage charges to recover additional revenues from customers  XP-located a significant distance from the wire center.MP} yO -ԍ Maine PUC comments at 1112. M We find that these factors too should be considered in making the determination of affordability of rates.  X -x130. ` ` In summary, we find that a determination of affordability must take into" C|*&&dd["  X-consideration both rates and other factors.V} {Oy-ԍ See supra for a list of those factors.V In addition, we agree with commenters that argue that scope of local calling area should be considered in determining whether rates are affordable. We also find that customer income level and cost of living are factors that should be considered on a local rather than nationwide basis in order to accurately capture the effects of local circumstances on affordability. Finally, we conclude that, because a variety of factors contribute to the establishment of local rates, these factors should also be considered when determining whether rates are affordable.  XH-x131. ` ` In light of our conclusions regarding the importance of the particular factors other than rates identified in the preceding paragraphs, we recommend that the states exercise primary responsibility, consistent with the standard enumerated above, for determining the affordability of rates. As many commenters note, the characteristics of each jurisdiction are unique, and the states possess both the knowledge and expertise to understand and evaluate these factors and to determine ultimately how they affect rate affordability. In finding that states should assume the primary responsibility in ensuring affordability, we expressly reject the approach favored by some commenters that the Commission designate a nationwide affordable rate. A nationwide affordable rate would ignore the vast differences within and between regions that can affect what constitutes affordable service. Because, as commenters have noted, various factors contribute to the establishment of rates, we further reject the assertion that an average of current unadjusted rates would accurately reflect an affordable rate. To the extent that consumers wish to challenge whether a rate is truly "affordable," we find the state commissions, in light of their ratesetting roles, are the appropriate forums for raising such issues. Additionally, we conclude that the Commission will continue to oversee the development of the concept of affordability, and may take action to ensure rates are affordable, where necessary and appropriate. x  X-x132. ` ` Although we recommend that the states should make the primary determination of rate affordability, we recognize that Congress, through the 1996 Act, gave the Commission a role in ensuring universal service affordability. Subscribership levels, while not dispositive on the issue of affordability, provide an objective criterion to assess the overall success of state and federal universal service policies in maintaining affordable rates. Therefore, we recommend that, to the extent that subscribership levels fall from the current levels on a statewide basis, the Commission and affected state work together informally to determine the cause of the decrease and the implications for rate affordability in that state. If necessary and appropriate, the Commission may open a formal inquiry on such matters and, in concert with the affected state, take such action as is necessary to fulfill the requirements of section 254. We find that this proposed dual approach in which both the states and the Commission play roles in ensuring affordable rates is consistent with the statutory mandate embodied in section 254(i). "#DZ*&&dde""Ԍ X-x133. ` ` While we view local rates as generally affordable throughout the nation based on subscribership levels, a formal determination that current rates are affordable is unnecessary at this time given the recommended decisions we reach in the paragraph above. Each state will continue to have the primary responsibility for making the finding that rates for local service are affordable based upon its consideration of the rates in question in light of the abovedescribed nonrate factors.  XH- VI.XxCarriers Eligible for Universal Service Support (#  X -x A.` ` Overview (#`  X -x134.` ` In this section of the Recommended Decision, we discuss which telecommunications carriers will be eligible to receive support from the federal universal service support mechanisms. We recommend that the statutory criteria set out in section 214(e) be used to determine which carriers are designated eligible telecommunications carriers. Pursuant to section 214(e), carriers must offer all the services supported by the federal universal service support mechanism throughout their service areas to be eligible for universal service support, except that only carriers with the technical capability to offer toll limitation services should be required to offer such services to qualifying lowincome  X4-consumers, as discussed infra in section VIII. Specifically, section 214(e) requires that, throughout its designated service area, an eligible carrier: (1) offer all of the services that are supported by the federal universal service mechanism; (2) offer such services using its own facilities or a combination of its own facilities and resale of another carrier's services; and (3) advertise the availability and charges for such services. In the case of areas served by rural telephone companies, we recommend that such a company's existing study area be used as the designated service area. With respect to areas served by nonrural carriers, the states have primary responsibility for designating the service area. We recommend, however, that the service areas chosen by the states not be unreasonably large. x  XP-x B.` ` Eligible Telecommunications Carriers (#`  X"-x` ` 1. Background (#  X-x135.` ` Section 254(e) provides that, after the effective date of the Commission's regulations implementing section 254, "only an eligible telecommunications carrier designated  X -under section 214(e) shall be eligible to receive specific Federal universal service support."@ } yO?#-ԍ 47 U.S.C.  254(e).@ Section 254(e) further prescribes that a carrier receiving universal service support "shall use that support only for the provision, maintenance, and upgrading of facilities and services for""EX*&&dd!"  X-which the support is intended."@} yOy-ԍ 47 U.S.C.  254(e).@ Additionally, section 254(k) prohibits a carrier from using  X-noncompetitive services to subsidize services that are subject to competition.@X} yO-ԍ 47 U.S.C.  254(k).@  X-x136.` ` Section 214(e)(1) of the 1996 Act provides that:  X- Xx(# Xx"A common carrier designated as an eligible telecommunications carrier under paragraph [214(e)(2)] or [214(e)(3)] shall be eligible to receive universal service support in accordance with section 254 and shall, throughout the service area for which the designation is received  XxX` ` (A) offer the services that are supported by Federal universal service support mechanisms under section 254(c), either using its own facilities or a combination of its own facilities and resale of another carrier's services (including the services offered by another eligible telecommunications carrier); andx` XxX` ` (B) advertise the availability of such services and the charges  X -therefor using media of general distribution."C } yO@-ԍ 47 U.S.C.  214(e)(1).Cx`  Xy-x137.` ` Pursuant to section 214(e)(2), state commissions must, either upon their own motion or upon a carrier's request, designate a common carrier that meets the requirements of section 214(e)(1) "as an eligible telecommunications carrier for a service area designated by  X4-the State commission."C4x} yO]-ԍ 47 U.S.C.  214(e)(2).C Section 214(e)(2) also provides for the designation of more than one carrier as an eligible telecommunications carrier. It states: XxUpon request and consistent with the public interest, convenience, and necessity, the State commission may, in the case of an area served by a rural  X-telephone company,x} yOz-ԍ The term "rural telephone company" is defined at 47 U.S.C.  153(37) as follows: Xx"The term 'rural telephone company' means a local exchange carrier operating entity to the extent that such entity  XxX` ` (A) provides common carrier service to any local exchange carrier study area that does not include eitherx` XxX` ` (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; orx` XxX` ` (ii) any territory, incorporated or unincorporated, included in a urbanized area,"%*&&&" as defined by the Bureau of the Census as of August 10, 1993;x` XxX` ` (B) provides telephone exchange service, including exchange access, to fewer that 50,000 access lines;x` XxX` ` (C) provides telephone exchange service to any local exchange carrier study area with fewer than 100,000 access lines; or x` XxX` ` (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."x`  and shall, in the case of all other areas, designate more"F*&&ddq" than one common carrier as an eligible telecommunications carrier for a service area designated by the State commission, so long as each additional requesting carrier meets the requirements of paragraph (1). Before designating an additional eligible telecommunications carrier for an area served by a rural telephone company, the State commission shall find that the designation is in  X-the public interest.@} yOF -ԍ 47 U.S.C.  214(e)(2). Section 214(e) also contains provisions governing a carrier's relinquishment of its eligible carrier designation in areas served by more than one eligible carrier. The statute requires states to permit eligible carriers to relinquish their designation after giving the state notice. The statute requires remaining eligible carriers to serve the relinquishing carrier's customers and requires the state to give remaining carriers time to construct or purchase facilities if necessary. 47 U.S.C.  214(e)(4). The NPRM noted that section 214(e)(4) reserves to the states the consideration of requests from designated eligible carriers to relinquish their designation. The Commission invited commenters to identify any of the Commission's regulations that may be inconsistent with that reservation of authority to the states. NPRM at para. 49.   X_-x138.` ` The NPRM sought comment and the Joint Board's recommendation on various issues raised by the provisions of sections 214(e) and 254(e). It sought comment regarding the need for any measures to ensure that universal service support is used for its intended  X -purpose, as required by section 254(e).; } yO-ԍ NPRM at para. 41.; The Commission also invited commenters to propose means to ensure that all eligible carriers and no ineligible carriers receive the  X -appropriate amount of universal service support.= } yO=-ԍ NPRM at para. 41. = The Commission sought comment on the need to ensure that telecommunications carriers do not use services that are not competitive to  X -subsidize competitive services, which is barred by section 254(k).; 0} yO-ԍ NPRM at para. 41.; The NPRM further sought comment regarding standards for compliance with the requirement in section 214(e)(1) that eligible telecommunications carriers provide universal service using their own facilities or  Xy-a combination of their own facilities and resale.;y} yO#-ԍ NPRM at para. 43.; The Commission also stated its belief that it may be useful to develop guidelines defining the steps that would be sufficient to meet the 1996 Act's requirement that carriers advertise the availability of universal services and the"KGP*&&ddI" rates charged for those services throughout the service area. The NPRM invited parties to  X-suggest guidelines for such advertising.;} yOb-ԍ NPRM at para. 46.;  X-x139.` ` In its Public Notice seeking further comment in this proceeding, the Common Carrier Bureau raised specific questions relating to the provision of high cost support to companies subject to price cap regulation. The Bureau asked whether companies subject to price cap regulation should be eligible for high cost support, and if not, whether the exclusion  X_-of price cap carriers would be consistent with the provisions of section 214(e).=_X} yOh -ԍ Public Notice at 5.= Alternatively, the Bureau asked if high cost support should be structured differently for price cap carriers than for other carriers. The Public Notice also solicited comment on how a price cap company should be defined, assuming that such companies are treated differently. It asked whether a company participating in a state, but not a federal price cap plan, should be  X -deemed a price cap company.= } yO-ԍ Public Notice at 5.= Finally, the Bureau asked if there should be a distinction between carriers operating under price caps and carriers that have agreed, for a specified period of time, to limit increases in some or all rates as part of a "social contract" regulatory  X -approach.= x} yO-ԍ Public Notice at 5.=  Xy-x` ` 2. Comments (#  XK-x140.` ` Eligibility in general. Most commenters argue that any telecommunications carrier that meets the eligibility criteria contained in section 214(e)(1) (e.g., offers and advertises universal services throughout the service area) should be eligible to receive  X-universal service support.} {O-ԍ See, e.g., 360 comments at 4; ALTS comments at 1213; Colorado PUC comments at 67; CompTel comments at 16; LCI comments at 5; LDDS comments at 47; NASUCA comments at 2223; NCTA comments at 12; PacTel comments at 13; Sprint comments at 1516; WinStar comments at 10; MFS reply comments at 6;  {O-Ohio Consumers' Council reply comments at 1718. See also California PUC comments at 10 (arguing that all carriers of last resort, defined as those willing to serve all customers in a census block group either with their own facilities or on a resale basis, should be eligible.) Commenters specifically argue that the definition of eligible carriers must be technologically neutral, so that CMRS providers, for example, can become eligible for universal service support, particularly since such companies must contribute to universal service support mechanisms and can be cost efficient providers of services in rural"H *&&dd"  X-areas.Z} {Oy-ԍ See, e.g., 360 comments at 35; CTIA comments at 34; Vanguard comments at 78; Western comments at 14; AT&T reply comments at 1516; Comnet Cellular reply comments at 6; MCI reply comments at 1516; MFS reply comments at 6.  As discussed in section IV above, some commenters suggest that carriers should be eligible to receive support even if they provide only some of the defined core services, at least  X-during a transition period, but that any such carrier's support would be reduced.} {Om-ԍ New Jersey Advocate comments at 16. See also Missouri PSC comments 78 (proposing a fiveyear transition period during which carriers could offer some, but not all, core services). Bell Atlantic argues that eligibility should be determined by which states are high cost, not which carriers are high cost. Funds would then be distributed by eligible states to eligible carriers  X-that provide universal service over their own loops.GD} yO -ԍ Bell Atlantic comments at 10.G  X_-x141.` ` Some commenters maintain that the Commission should issue guidelines to aid  XH-the states in determining which carriers are eligible.H} {O-ԍ See, e.g., AT&T comments at 21; GTE comments at 6; Pennsylvania PUC comments at 22; CompTel reply comments at 13; LDDS reply comments at 6. Several commenters assert that such guidelines should include requiring carriers to provide the core universal services on a stand X -alone basis." . } yO-ԍ AT&T comments at 21; Lincoln reply comments at 67; Ohio Consumers' Council reply comments at  {O-18. See also NASUCA comments at 2223 (proposing that, to receive funds, carriers must agree to provide basic telephone service on an unbundled basis at prescribed rates); NYNEX reply comments at 2 (arguing that services must be provided as a single package).  NECA argues that the Commission's rules should emphasize that support would be available only to carriers who actually serve the entire service area, not simply  X -portions thereof or selected highvolume customers. } {O-ԍ NECA comments at 8. See also SDITC reply comments at 6 (supporting NECA's comments). Some states, however, contend that the designation of eligible carriers should be left entirely to them, perhaps as an adjunct of their  X -certification process.Z } {O-ԍ See, e.g., Florida PSC comments at 13; Ohio Consumers' Council comments at 6. See also SWBT comments at 18 (contending that statute expressly leaves to states to certify eligible carriers and Commission has no role in this process).  X-x142.` ` Other commenters contend that additional requirements must be imposed on carriers before they may receive universal service support. For example, some commenters argue that, as a condition of eligibility, new entrants must meet the same regulatory"bI*&&dd"  X-obligations as are imposed by the states on the incumbent.} {Oy-ԍ See, e.g., Ameritech comments at 12; BellSouth comments at 14 n.26; GTE comments at 67; USTA comments at 23; Tel. Assoc. of Michigan reply comments at 5. Certain commenters contend  X-that these requirements specifically include carrier of last resort (COLR) obligations.2z"} {O-ԍ  See, e.g., California PUC comments at 13; Telec Consulting comments at 14. See also ICORE comments at 89 (viewing section 214 requirements as establishing carrier of last resort requirement for rural LECs); Ameritech reply comments at 45. GTE defines a COLR as a carrier eligible for universal support that undertakes the obligations established by a state agency, within federal guidelines, as a condition of receipt of federal universal service support. GTE comments at 8 n.19. GTE suggests that such obligations might include a ceiling on the rate the COLR can charge, terms and conditions of service and quality standards, limits on the carrier's ability to exit, and an obligation to serve all customer in the area. GTE further comments at 4648.2 GTE argues that universal service support can be competitively neutral only if all carriers receiving  X-such support are subject to the same obligations.Ud } {O -ԍ See, e.g., GTE reply comments at 45.U GTE contends that, without symmetrical regulation of all carriers receiving universal support, new entrants may offer the core services throughout the service area in theory only, while in fact targeting low cost customers by  Xv-quoting them far better prices than it would charge high cost customers.{v } {O-ԍ GTE comments at 67. See also Tel. Assoc. of Michigan reply comments at 5.{ GTE further maintains that, unless new entrants are subject to the same exit barriers imposed on incumbents, new entrants would race to flee an area, rather than become the sole remaining eligible carrier once any other carrier announced its intention to relinquish its eligibility  X -designation pursuant to section 214(e)(4). } {OS-ԍ Letter from Whitney Hatch, GTE, to Mr. William Caton, FCC, September 18, 1996, at 4 (GTE ex  {M-parte).Ĩ Ameritech expresses concern that new entrants that are not required to meet COLR obligations, which it defines as a requirement to serve all customers in an area and a barrier to exit, could nevertheless receive the same level of  X -universal service support as the incumbent, which is subject to such obligations. } yOh-ԍ Ameritech Ex Parte Materials Regarding Competitive Bidding Process, July 31, 1996 at 89. Ameritech argues that such a situation would threaten the incumbent COLR because the new entrant would receive the same level of compensation but with lesser obligations and therefore a  X-lower financial burden.r} yO -ԍ Ameritech Ex Parte Materials Regarding Competitive Bidding Process, July 31, 1996 at 89. Commenters also propose that carriers be required to meet service  Xy-quality standards as a condition of eligibility.y} yO,#-ԍ Alaska PUC comments at 17; CWA comments at 6; GTE comments at 7 n.15; Texas PUC comments at 3. WinStar argues that telecommunications carriers, to be eligible, must meet the minimum broadband capability standards set forth in the"bJZ*&&dd"  X-Rural Electrification Loan Restructuring Act.F} yOy-ԍ WinStar reply comments at 4.F  X-x143.` ` Some commenters would exclude certain classes of carriers from eligibility. Certain rural carriers contend that only statecertified carriers should be eligible for support and that, for the foreseeable future, the incumbent LEC will continue to be the carrier of last  X-resort for rural areas and should be the proper recipient for such support.X} {O-ԍ See, e.g., AlabamaMississippi Tel. Ass'n comments at 6; Farmers Tel. comments at 4; MonCre comments at 4; New Hope Tel. comments at 4. Cincinnati Bell asserts that the new entrants should not be eligible for support because their decisions to enter new markets should be based on market forces, not the availability of subsidies, and because new entrants do not have any of the obligations from past regulatory decisions, such as average pricing, implicit crossproduct subsidies, and depreciation rates that do not reflect a  X -competitive environment.L } yO}-ԍ Cincinnati Bell comments at 1011.L Rural Iowa Indep. Tel. Ass'n argues that only private sector entities should receive universal service support because of Congress's expressed goal of  X -rapidly accelerating private sector deployment of advanced telecommunications.T B} yO-ԍ Rural Iowa Indep.Tel. Ass'n comments at 2.T Frontier argues that only small companies defined as those with less than 50,000 access lines in a  X -state should be eligible for support.  } yOA-ԍ Frontier comments at 6. Frontier achieves this result by proposing that, in determining the service areas that a designated eligible carrier must serve, the states include in that area all of an incumbent LEC's access lines in the state. Any area that is served by an incumbent LEC that serves more than 50,000 access lines would not qualify for high cost support. Frontier comments at 7. Alliance for Public Technology, on the other hand, suggests that small telephone companies should not receive support because they are  X-"uneconomic business enterprises."] } yO-ԍ Alliance for Public Technology comments at 14 n.11.] GVNW responds that excluding small telephone companies from support would discourage the development of advanced telecommunications since small companies provide advanced services to consumers that larger companies  XK-traditionally have not served well.EKJ } yOF -ԍ GVNW reply comments at 34.E x  X-x144.` ` Exclusion of price cap companies. Several commenters argue that carriers  X-subject to price cap regulation should not be eligible for universal service support.} {O$-ԍ See, e.g.,Time Warner comments at 1112; Staurulakis comments at 1112; NCTA further comments at 8; Teleport further comments at 78 . Time"K4*&&dd(" Warner, for example, asserts that carriers subject to incentive regulation, such as price caps, have flexibility and increased earnings opportunities and are expected to accept and anticipate risks from which rateofreturn regulated companies have been insulated. Time Warner argues that price cap regulated companies, having been given the opportunity for increased  X-earnings, should not have increased earnings guaranteed through universal service support.H} yO-ԍ Time Warner comments at 1112.H Teleport maintains that price cap companies should not be eligible because they have agreed that they have full responsibility for their costs. It further contends that permitting universal service subsidies would undermine the incentive of price caps. To retain competitive neutrality, Teleport proposes to exclude any carrier from receiving support in an area where  X1-the incumbent is a price cap carrier and for that reason is excluded from eligibility.K1X} yO: -ԍ Teleport further comments at 78.K  X -x145.` ` Some commenters maintain that, while price cap companies should be eligible for universal service support, such companies should receive different treatment. Some commenters argue price cap companies should not receive high cost support unless they can  X -demonstrate the need for such support on a statewide or companywide basis.x } yOW-ԍ ALTS further comments at 79 (arguing that carriers subject to price cap regulation should not receive universal service support unless and until they can show that without an explicit subsidy the company as a whole will be unable to earn a fair return); AirTouch further comments at 21 (arguing that price cap regulated companies must be required to base claims of high costs on the same level of aggregation as the price cap ceilings, i.e, an RBOC must show high costs on average over its entire multistate service area); SNET further comments at 6 (arguing that "[p]rice cap companies should not be eligible for highcost support unless they meet the highcost support test for their entire service area"). ALTS contends that such different treatment is entirely reasonable given the flexibility that price cap regulation grants these companies and that these companies, by agreeing to price cap regulation, have signalled their ability to manage overall costs and make a reasonable firm Xb-wide profit, even if they operate in some high cost areas.Gb( } yO;-ԍ ALTS further comments at 79.G CFA argues that companies should be eligible for support only if the price cap includes an exogenous factor that would  X4-allow rates to be adjusted up or down if the level of high cost support changes.4 } yO-ԍ CFA further comments at 13. Maine PUC notes that many state price caps expressly provide for rate adjustments following changes in high cost assistance levels. Maine PUC further comments at 17 n.12. CFA further maintains that such an adjustment should not occur if the carrier's loss of revenue is  X-the result of competition rather than a loss or reduction of high cost support.E} yO#-ԍ CFA further comments at 13.E MCI argues that price cap companies should not be treated differently if costs are computed using MCI's proposed methodology but that these companies should not be eligible for high cost support"L*&&dd" that is computed based on the carrier's booked costs as this would dilute the price cap  X-incentives to control costs.!Z} {Ob-ԍ MCI further comments at 1314. See also TCI further comments at 26 (arguing that price cap companies should not be eligible in areas where they face little or no competition and where the universal service subsidy is based on booked costs).! NYNEX, while arguing that price cap companies are eligible to receive support, contends that support should be structured differently for price cap companies. It maintains that the Commission should use a cost proxy model like the Benchmark Cost Model (BCM) to identify areas served by price cap LECs that are likely to have higherthanaverage costs. NYNEX argues that carriers subject to rateofreturn regulation, however, should have universal service support levels based on such company's  X_-"actual" costs determined on a study area basis.S_} yO -ԍ NYNEX further comments at 2021, 2426. S  X1-x146. ` ` Most commenters, however, argue that price cap companies should not be excluded from receiving universal service support or treated differently from other companies  X -receiving such support.F z} {O.-ԍ See, e.g., AT&T further comments at 2627; Ameritech further comments at 2627; BellSouth further comments at 3435; Bell Atlantic further comments at 10; Citizens Utilities further comments at 89; GSA  {O-further comments at 56; GTE further comments at 3133; MFS further comments at 36; Maine PUC further comments at 1618; NECA further comments at 2021; PacTel further comments at 30; Puerto Rico Tel. Co. further comments at 9; RTC further comments at 1819; SWBT further comments at 2425; Sprint further  {O-comments at 89; USTA further comments at 2122; U S West further comments at 15. See also ITC further comments at 1213 (arguing that, while price cap companies should not be excluded, there may be a need for some special cost allocation rules or other minor changes in the way they are treated).  They argue that excluding price cap companies would be contrary to the statute and that the cost characteristics of a particular area and the obligations that the carrier has agreed to undertake, not the carrier's regulatory regime, govern the determination  X -of eligibility. } {O-ԍ See, e.g., BellSouth comments at 3435; Ameritech further comments at 2627; Bell Atlantic further comments at 10; Citizens Utilities further comments at 89; GTE further comments at 3233 (arguing that price cap companies cannot be excluded from eligibility as a matter of law); Maine PUC further comments at 1618; PacTel further comments at 30; SWBT further comments at 2425; Sprint further comments at 89; USTA further comments at 2122. Alliance for Public Technology asserts that price cap regulation is an important tool to promote competition and excluding price cap companies from receiving  X-support would discourage the use of price caps.I:} {O{!-ԍ Alliance for Public Technology further comments at 1012. See also Maine PUC further comments at 17 (excluding price cap companies would have the perverse effect of discouraging the form of regulation the 1996 Act encourages). Alliance for Public Technology also argues that the Commission should utilize the universal service proceeding to address ways to require or ensure that price cap regulation can be used to finance the deployment of advance telecommunications services. Alliance for Public Technology further comments at 1112.I Bell Atlantic contends that excluding price"M*&&dd"  X-cap companies would increase the incentive of such companies to sell high cost exchanges.O} yOy-ԍ Bell Atlantic further comments at 10.O Bell Atlantic also contends that it would be  X-very difficult to define a price cap carrier.X} {O-ԍ Bell Atlantic further comments at 10. See also Citizens Utilities further comments at 9. Citizens Utilities points out that many smaller companies that serve rural, high cost areas are subject to price cap regulation and an exclusion  X-of price cap companies would not just affect the large companies.U} yO? -ԍ Citizens Utilities further comments at 89.U NYNEX contends that,  X-since the Commission has decided in the Local Competition Order to remove most of the access charge revenue stream from the rates for unbundled elements, the price cap LECs will require universal service support to replace the contribution from access charge revenues that  XJ-they have used to support affordable service to high cost areas.GJz} yOu-ԍ NYNEX further comments at 24.G Sprint argues that excluding price cap carriers would result in a policy that is not competitively neutral, since a nonprice cap competitor could receive a subsidy in a high cost area served by the excluded  X -price cap LEC.I } yO-ԍ Sprint further comments at 89.I Sprint also asserts that excluding price cap carriers would violate the statute's directive to make universal service funding explicit because many price cap carriers today maintain internal, implicit subsidies between low cost and high cost areas in their  X -regions.I } yO -ԍ Sprint further comments at 89.I Washington UTC opposes any blanket exclusion of price cap companies and  X -contends that the issue should be decided by state commissions on a casebycase basis.P * } yO-ԍ Washington UTC further comments at 18.P  X{-x147. ` ` Those carriers proposing to exclude or vary the treatment of carriers subject to price cap regulation suggest varying definitions of what would constitute a price cap company for these purposes. Some argue that a price cap company should be defined as a company  X6-subject to price cap regulation at the federal or state level or pursuant to a social contract.]6 } {O-ԍ See, e.g., AirTouch further comments at 22. ] Some commenters also maintain that the definition should include any form of regulation that  X-is, in substance, similar to price cap regulation.L XL } yO#-ԍ ALTS further comments at 9 (companies subject to any plan that gives the carrier sufficient pricing flexibility to warrant different treatment); AirTouch further comments at 22; (any company subject to any plan in which rateofreturn review is suspended); NCTA further comments at 8 (any carrier under a form of regulation, at the federal or state level, that permits it to retain earnings substantially above what it could earn under rateof"]%*&&%"ԫreturn regulation); Teleport further comments at 8 ("If it looks like price caps, then it should be treated like price caps."); Time Warner further comments at 36 (any incentive regulation that offers the incumbent LEC significant regulatory and pricing flexibility and the ability to increase earnings substantially).L ITC contends that only carriers subject to"N*&&ddF"  X-the Commission's price caps should be considered for these purposes.X} yO-ԍ ITC further comments at 1314; SNET further comments at 6 (arguing that, for a federal universal service mechanism, a price cap company should be defined as one under price cap regulation at the federal level). MCI maintains that only companies under the price caps at the federal level should be included if the Commission adopts an interstateonly fund and, if the Commission adopts a unitary fund, then companies  X-under price caps at the state or federal level would be included.H} yOt -ԍ MCI further comments at 1314.H In either case, MCI would include companies under either explicit price caps or a "social contract" to limit price  X-increases.H} yO-ԍ MCI further comments at 1314.H SWBT maintains that a price cap company should be defined, in both the federal and state jurisdictions, as one under price cap regulation with no obligation to share earnings above certain levels with its customers and no price freezes on any of the regulated  XH-services.FH( } yO!-ԍ SWBT further comments at 26.F  X -x148.` ` Ensuring that universal service support is used as intended. In response to the Commission's question concerning how to ensure that carriers use universal service support for its intended purposes, several commenters suggest that carriers certify that the funds  X -received will only be used for their intended purposes,d } yO>-ԍ AT&T comments at 21 n.33; Governor of Guam comments at 12.d or that carriers must follow accounting standards or cost allocation rules required by the 1996 Act and be subject to  X -federal or state audits to ensure that funds are used properly.  H } {O-ԍ See Alaska Tel. reply comments at 3. See also Alaska PUC comments at 17; Pacific Telecom comments at 3 (proposing that recipients of support should demonstrate annually the source and application of the funds).  ALTS contends that the most important thing the Commission can do to ensure that funds are used as intended is to make  Xy-support mechanisms explicit.>y} yO -ԍ ALTS comments at 14.> Moreover, argues ALTS, to the extent that support is set at the "appropriate level," there will be far less ability to use universal service support for  XK-inappropriate purposes.>K2} yO.$-ԍ ALTS comments at 14.> GVNW argues that reimbursing companies on the basis of "actual cost[s]" will ensure that companies have used universal service support for the intended purpose and that it would be extremely difficult to make this determination using a proxy"O*&&dde"  X-model.|} {Oy-ԍ GVNW comments at 1415. See also Montana Indep. Telecom. comments at 1011.| NCTA suggests that using high cost credits or customer vouchers given to the  X-service provider could minimize carrier misuse of funding.>Z} yO-ԍ NCTA comments at 12.> MCI suggests that the Commission require recipients of universal service support to provide specified network features, such as use of digital switches, that will enhance the ability of carriers to provide  X-more advanced and reliable service.@} yO? -ԍ MCI comments at 1617.@ Ohio Consumers' Council argues that the states are best equipped to address whether carriers are misusing funds and no specific, national rules are  Xv-necessary.Rvz} yO -ԍ Ohio Consumers' Council comments at 67.R  XH-x149. ` ` Prohibiting crosssubsidization. Some commenters argue that the prohibition against crosssubsidization contained in section 254(k) can only be enforced if cost data are  X -regularly collected and audited.? } {O-ԍ Michigan Consumer Federation comments at 14; Michigan Library Ass'n comments at 10.  See also NCTA comments at 12 (arguing that stringent reporting rules or cost allocations rules are appropriate); Texas PUC comments at 10 (encouraging further study of incremental costs of telecommunications services and maintaining current monitoring programs such as ARMIS); NorTel reply comments at 6 n.11 (contending that accounting safeguards should be sufficient; separate networks or facilities for universal services are unnecessary).? AirTouch maintains that carefully targeting support to only those groups that need it as opposed to subsidizing local services to everyone will reduce  X -crosssubsidization. } {OY-ԍ AirTouch comments at 7. See also PCIA comments at 14 (suggesting that narrow targeting and limiting of the size of the fund will prevent crosssubsidization). AirTouch further contends that carriers offering noncompetitive services must put in place accounting methods and other nonstructural safeguards to prevent  X -crosssubsidization.J } yO-ԍ AirTouch further comments at 21.J MCI states that competition will ensure that rates are set at the carrier's cost and that the Commission must adopt regulations to ensure that result in noncompetitive  X-markets.=} yO-ԍ MCI comments at 17.= WinStar argues that crosssubsidization can be mitigated by ensuring that universal service support payments not be used to allow less efficient providers to match the  Xb-rates charged by more efficient competitors.Bb6} yOI#-ԍ WinStar comments at 34.B  X4-x150.` ` Ensuring only eligible carriers get support. Few commenters addressed the"4P*&&dd" issue of how the Commission could ensure that only eligible carriers receive universal service support. ALTS argues that the Commission's concerns about ineligible carriers obtaining support are probably unfounded because only carriers found eligible by a state commission  X-would receive support.>} yO4-ԍ ALTS comments at 13.> MCI contends that, as long as carriers must offer services throughout the service area and the area the LEC carrier must serve coincides with the area used to compute support, there should be no problem with ineligible carriers receiving  Xv-support.=vX} yO -ԍ MCI comments at 18.= Ohio Consumers' Council argues that this issue should be left to the states and that the states can provide the Commission with a list of companies they find eligible to  XH-receive support.PH} yO -ԍ Ohio Consumers' Council comments at 6.P  X -x151.` ` Use of a carrier's own facilities. Various commenters address the question of whether the Commission should establish standards concerning compliance with the requirement in section 214(e)(1) that eligible telecommunications carriers provide universal service using their own facilities or a combination of their facilities and resale. Several commenters contend that "facilities" should include any unbundled network elements obtained  X -by the carrier and any network transmission capacity obtained on a leased basis.QZ x} {O-ԍ CompTel comments at 16; Ohio Consumers' Council reply comments at 18. See also LDDS comments at 67 (arguing that the term "facilities" should not only include facilities constructed and deployed by the carrier, but also facilities that are leased from incumbent LECs and other carriers).Q CompTel argues that a carrier is using its own facilities when it purchases unbundled elements at cost  Xy-from the incumbent and creates a local service product using them.Jy} yO-ԍ CompTel reply comments at 1213.J AT&T argues that any carrier using its own facilities, using another carrier's network elements, or using any  XK-combination of such facilities and elements should be eligible.>K* } yO&-ԍ AT&T comments at 21.> Sprint asserts that, while carriers may offer services in part through resold facilities, such carriers must also use some  X-of their own facilities.C } yO -ԍ Sprint comments at 1516.C LDDS contends that a carrier should be eligible as long as at least  X-some portion of its services is not resold service.CJ } yO#-ԍ LDDS reply comments at 4.C  X-x152.` ` TRA argues that carriers that offer service solely through the resale of another carrier's telecommunications services or through the use of unbundled network elements"Q*&&dd"  X-should be eligible to receive universal services support.p} {Oy-ԍ TRA comments at 810. See also CompTel reply comments at 1213.p TRA asserts that resellers should be eligible for universal service support because they have "stepped into the shoes" of the underlying carrier and, by purchasing services or elements, have guaranteed the underlying carrier a return on its investment and thus assumed some of the underlying carrier's risk. It further contends that denying resellers universal service support would provide the underlying  X-carrier with a competitive advantage.ZZ} {O-ԍ TRA comments at 810. But see Colorado Indep.Tel. comments at 5 (maintaining that pure resellers should not be eligible because they have made no investment in the facilities supported by universal service support mechanisms). TRA contends that reading section 214(e) as precluding "pure" resellers would be unduly narrow, but if that reading is valid, the Commission should exercise its forbearance authority to allow universal support to such  XH-carriers.<H|} yOu-ԍ TRA comments at 9.<  X -x153.` ` Other commenters contend that only facilitiesbased carriers should be eligible  X -for support.2 } {O-ԍ See, e.g., Alaska Tel. comments at 3; Minnesota Tel. Ass'n comments at 3; TCA comments at 5; Telec  {O-Consulting comments at 14; United Utilities comments at 1; Siskiyou reply comments at 4. See also Bell Atlantic comments at 10 (proposing that universal service funds should be distributed to eligible LECs that "provide local service using their own loop facilities"); RTC comments at 9 (contending that support "must only go to those carriers that actually own and maintain facilities").2 They argue that, if new entrants are allowed to offer universal service via resale, new entrants could disadvantage incumbents by constructing facilities only for the lowest cost customers in the area and reselling the incumbent's services to serve the high cost  X -customers, creating a potentially confiscatory situation for incumbents.D } yO/-ԍ Alaska Tel. comments at 3.D Still others contend that, while carriers may provide services through a combination of their own facilities and resale, support for the resold services should go to the underlying carrier providing the  Xy-facilities since that carrier bears the cost of building and maintaining those facilities.kZyP } {Oz-ԍ See, e.g., BellSouth comments at 6 n.8; Colorado Indep .Tel. comments at 5; NECA comments at 89; RTC comments at 810; SWBT comments at 2122; NYNEX reply comments at 2 n.6; TCA reply comments at 3 (arguing that eligible carriers should not receive support for the portion of the service provided through resale).k USTA argues that, when eligible carriers resell the incumbent's universal service package, the incumbent should continue to receive the support, but when the eligible carrier purchases unbundled network elements "at the market price" to provide universal service, the new"4Rr*&&ddH"  X-carrier, not the incumbent, should receive the support.} {Oy-ԍ USTA comments at 17 n.24.  See also TCA reply comments at 3 ("If a reseller becomes eligible for funding on a facility that they are leasing from a facilities based carrier, then the rate they pay must be fully costbased"); TCG reply comments at 78 (proposing that universal service support should flow to the reseller when the reseller pays the facilitiesbased carrier the full cost, otherwise the underlying carrier should receive the subsidy). PacTel contends that, if the reseller pays the underlying carrier full deaveraged cost (including some recovery of shared and common costs) and that cost is above the benchmark, the reseller should get the subsidy; if the reseller purchases a line at rates below full deaveraged cost, the underlying facilitiesbased  X-carrier should receive the subsidy.,Zz} {O -ԍ PacTel reply comments at 10.  See also WinStar reply comments at 6 (contending that carriers that purchase unbundled elements at cost should be eligible; pure resellers should be eligible only if they purchase resold service at or above "actual cost")., CompTel maintains that, if the new entrant pays economic costs for the unbundled element, the underlying carrier receives full compensation, and the new entrant, as the retail provider of the services, is entitled to the universal support  X_-payment.G_} yO-ԍ CompTel reply comments at 13.G  X1-x154.` ` Guidelines for advertising. Washington UTC urges the Commission to take an affirmative role and define as narrowly as possible the types and scope of advertising that  X -should be considered as being required by section 214(e)(1).M , } yO-ԍ Washington UTC reply comments at 6.M Washington UTC contends that rateofreturn regulated carriers might seek to justify including in their rates the costs of  X -imageenhancing advertising just because such advertising may mention universal services.O } yOB-ԍ Washington UTC reply comments at 56.O Governor of Guam recommends the development of standards that include a minimum of  X -consumer education through advertising in local media outlets.J L } yO-ԍ Governor of Guam comments at 12.J New Jersey Advocate argues that adequate, understandable information is essential in a competitive market and recommends that the Commission adopt or strengthen standards relating to truthinadvertising; the presentation of clear, written terms of service and rates; and the provision of  XK-bilingual information.MK} yO!-ԍ New Jersey Advocate comments at 13.M Several commenters propose guidelines that require carriers to publicly post information concerning available services and rates at appropriate government agencies and libraries and that ensure that this information is accessible to persons with"Sl*&&ddG"  X-disabilities or language barriers.} yOy-ԍ ACE comments at 7; Catholic Conference comments at 22; Michigan Library Ass'n comments at 1011; Benton reply comments at 16; NAD reply comments at 2122. Florida PSC, on the other hand, suggests leaving to the  X-states the establishment of any guidelines governing advertising.H } yO-ԍ Florida PSC comments at 1314.H MCI argues that no standards are necessary because competition will ensure that LECs make known the services  X-they will offer to their potential customers.=} yO -ԍ MCI comments at 18.=  X-x  X-x` ` 3. Discussion  X_-x155.` ` Determination of eligible carriers. We recommend that the Commission adopt, without further elaboration, the statutory criteria contained in section 214(e)(1) as the rules for determining whether a telecommunications carrier is eligible to receive universal service support. Pursuant to these criteria, a telecommunications carrier would be eligible to receive  X -universal service support if the carrier is a common carrierH @} yO-ԍ The Circuit Court for the District of Columbia defines a common carrier as one that undertakes to carry  {O-for all people indifferently. National Association of Regulatory Utility Commissioners v. FCC, 525 F.2d 630,  {O-64142 (D.C. Cir. 1976), cert. denied, 425 U.S. 992 (1976) (NARUC I); National Association of Regulatory  {OP-Utility Commissioners v. FCC, 533 F.2d 601, 608 (D.C. Cir. 1976) (NARUC II). The NARUC I Court established a test to determine whether a carrier may be regulated as a common carrier. This test requires a determination of "whether there will be a legal compulsion . . . to serve [the public] indifferently, and, if not, . . . whether there are reasons implicit in the nature of . . . [the] operations to expect an indifferent holding out  {Or-to the eligible user public." NARUC  I, 525 F.2d at 642. and if, throughout the service area for which the carrier is designated by the state commission as an eligible carrier, the carrier: (1) offers all of the services that are supported by federal universal service support  X -mechanisms under section 254(c);%Z P } yO-ԍ We recommend, however, that carriers that lack the technical capability to offer toll limitation services  {O-not be required to offer such services to qualifying lowincome consumers, as otherwise provided infra in section VIII.% (2) offers such services using its own facilities or a combination of its own facilities and resale of another carrier's services, including the services offered by another eligible telecommunications carrier; and (3) advertises the availability of and charges for such services using media of general distribution. We agree with the majority of commenters who argue that any carrier that meets these criteria is eligible to receive  XK-federal universal service support, regardless of the technology used by that carrier."Kr} {On#-ԍ See, e.g., 360 comments at 4; ALTS comments at 1213; Colorado PUC comments at 67; CompTel comments at 16; LCI comments at 5; LDDS comments at 47; NASUCA comments at 2223; NCTA comments at 12; PacTel comments at 13; Sprint comments at 1516; WinStar comments at 10; MFS reply comments at 6; Ohio Consumers' Council reply comments at 1718. We"KT\*&&ddI" conclude that this approach best embodies the procompetitive, deregulatory spirit of the 1996 Act and ensures the preservation and enhancement of universal service.  X-x156.` ` We recommend that the Commission not impose eligibility criteria in addition to those contained in section 214(e)(1). For example, some commenters argue that the Commission should require competing telecommunications carriers to meet all the obligations  Xv-imposed by the state on the incumbent LEC, such as COLR requirements or rate regulation.v} {O-ԍ See, e.g., Ameritech comments at 12; BellSouth comments at 14 n.26; GTE comments at 67; USTA comments at 23; Tel. Ass'n of Michigan reply comments at 5. The proponents of this point of view argue that such symmetrical regulation is necessary to prevent new entrants from selectively targeting only the lowest cost customers in an area, and  X1-to prevent unfair treatment of incumbent LECs.1"} {O -ԍ See, e.g., GTE comments at 67; Tel. Ass'n of Michigan reply comments at 5; GTE further comments at 4748; Ameritech Ex Parte Materials Regarding Competitive Bidding Process, July 31, 1996 at 89. We conclude that establishing specific federal rules or guidelines that would impose symmetrical regulatory obligations on all carriers receiving universal service support are unnecessary to protect the incumbent and  X -would chill competitive entry into high cost areas.J |} {O-ԍ We note that, in the Local Competition Order, the Commission concluded that states may not unilaterally  {O-impose on nonincumbent LECs the additional obligations imposed on incumbent LECs in section 251(c). Local  {O-Competition Order at para. 124748. The Commission there ruled that it would not anticipate imposing such additional obligations on nonincumbent LECs absent a clear and convincing showing that the LEC occupies a position in the telephone exchange market comparable to the position held by an incumbent LEC, has substantially replaced an incumbent LEC, and that such treatment would serve the public interest, convenience,  {O-and necessity and the purposes of section 251. Local Competition Order at para. 1248.J The statute already conditions eligibility for support on the requirement that telecommunications carriers be common carriers and offer  X -the defined services "throughout the service area."C } yO3-ԍ 47 U.S.C.  214(e)(1).C The plain meaning of these two requirements is that eligible carriers must hold themselves out to provide the specified services to any customer in the service area. We find that GTE's concern that eligible carriers will fulfill this mandate in theory only and attempt to "cherry pick" customers by offering differential rates is misplaced. The 1996 Act requires carriers to advertise their rates for universal service throughout the service area. Any attempt to "cherry pick" or "cream skim" customers through differential charges would thus be readily detected.  X-x157.` ` We also reject arguments that a carrier must be subject to whatever exit barriers are imposed on the incumbent LEC as a condition of eligibility. The 1996 Act limits the ability of an eligible carrier to exit a market in which there is more than one eligible carrier. Section 214(e)(4) requires an eligible carrier to notify the state of that carrier's intent to relinquish its designation as an eligible carrier. Section 214(e)(4) also requires the state"UT *&&ddR" commission, before permitting the carrier to cease providing service, to ensure that the  X-remaining carriers can serve the relinquishing carrier's customers.C} yOb-ԍ 47 U.S.C.  214(e)(4).C The state commission must also ensure sufficient notice to permit the purchase or construction of adequate facilities  X-by any remaining eligible carrier.CX} yO-ԍ 47 U.S.C.  214(e)(4).C This obligation to serve the entire service area upon the cessation of service by another carrier or carriers applies to incumbents and new entrants alike. We find that additional exit restrictions are unnecessary.  X_-x158.` ` We recommend that the Commission reject arguments to disqualify certain classes of carriers from eligibility. Commenters suggest, for example, that only incumbents  X1-should be eligible for universal service support]1} {O -ԍ See, e.g., Cincinnati Bell comments at 1011.] or that price cap companies should be  X -excluded from eligibility.  z} {OE-ԍ See, e.g., Staurulakis comments at 1112; Time Warner comments at 1112; NCTA further comments at 8; Teleport further comments at 78. We believe that any such wholesale exclusion of classes of carriers from eligibility is inconsistent with the plain language of the 1996 Act. Section 214 contemplates that any telecommunications carrier that meets the eligibility criteria of section 214(e)(1) shall be eligible to receive universal service support. The statute directs a state commission "upon its own motion or upon request [to] designate a common carrier that meets the requirements of [section 214(e)(1)] as an eligible telecommunications carrier for a service  X-area designated by the State commission."C } yO-ԍ 47 U.S.C.  214(e)(2).C Moreover, section 214(e)(2) provides that more than one carrier could be eligible for universal service support in an area. It requires the designation of multiple eligible carriers in areas not served by rural telephone companies as  XK-long as such carriers meet the eligibility criteria of section 214(e)(1).C Kd } yO`-ԍ 47 U.S.C.  214(e)(2).C Even for areas served by rural telephone companies, section 214(e)(2) gives state commissions the discretion to designate more than one common carrier as an eligible carrier, as long as such designation is  X-found by the state commission to be in the public interest.C  } yO -ԍ 47 U.S.C.  214(e)(2).C Moreover, we recommend against limiting eligibility for universal service support to incumbents. We conclude that restricting universal service support to incumbent local exchange carriers would not be in accord with section 214(e).  X-x159.` ` In addition, we recommend that companies subject to price cap regulation be"V *&&dd" eligible to receive universal service support. No persuasive rationale has been advanced to explain why the flexibility and the opportunity for increased earnings that companies obtain  X-when they are subject or price caps } {OK-ԍ See e.g., Teleport comments at 78; Time Warner comments at 1112. See also ALTS further comments at 79 (proposing to treat price cap companies differently). should disqualify such companies from receiving universal service support as long as they otherwise meet the statutory criteria for eligibility. Rather, we agree with those commenters that argue that price cap regulation is an important tool to smooth the transition to competition and that its use should not foreclose price cap  Xv-companies from receiving universal service support.v"} {OI -ԍ See e.g., Alliance for Public Technology further comments at 1012; Maine PUC further comments at 17. Having recommended against the exclusion of price cap companies, we conclude that we need not address how to define precisely which carriers are subject to price cap regulation.  X -x160.` ` Section 214(e)(1) requires that, in order to be eligible for universal service support, a common carrier must offer universal service throughout the statedesignated service area either using its own facilities or a combination of its own facilities and the resale of  X -another carrier's services, including those of another eligible carrier.C } yO:-ԍ 47 U.S.C.  214(e)(1).C We find that the plain meaning of this provision is that a carrier would be eligible for universal service support if it offers all of the specified services throughout the service area using its own facilities or using its own facilities in combination with the resale of the specified services purchased from another carrier, including the incumbent LEC or any other carrier.  XK-x161.` ` We recommend that the Commission reject the arguments of TRA and others that a carrier that offers universal service solely through reselling another carrier's universal  X-service package should be eligible for universal support.pD} {O-ԍ TRA comments at 810. See also CompTel reply comments at 1213.p We find that the statute precludes such a result because it plainly states that a carrier shall be eligible for support only if the carrier offers universal service by using its own facilities and reselling another carrier's  X-services.F} yO_-ԍ 47 U.S.C.  214(e)(1)(A).F Similarly, we recommend that the Commission reject arguments that only those telecommunications carriers that offer universal service wholly over their own facilities should  X-be eligible for universal service.@\f } {O"-ԍ See, e.g., Alaska Tel. comments at 3; Minnesota Tel. Ass'n comments at 3; TCA comments at 5; Telec  {O#-Consulting comments at 14; United Utilities comments at 1; Siskiyou reply comments at 4. See also Bell Atlantic comments at 10; RTC comments at 9.@ The statute precludes this result because section 214 permits a carrier to offer universal service through a combination of its own facilities and"W *&&ddo" resale and still be eligible for support.  X-x162.` ` We also recommend that the Commission reject TRA's request that the Commission exercise its forbearance authority to permit "pure" resellers to become eligible for  X-universal service support. } yO-ԍ TRA comments at 9 (citing 47 U.S.C.  160). In this case, TRA asks the Commission to forbear from the requirement that, in order to be eligible for universal services support, a carrier must offer the supported services through its own facilities or its own facilities in combination with resale. TRA requests that the Commission forbear from applying this provision in order to allow pure resellers to be eligible for support. We find that TRA's pleading does not sufficiently address the statutory criteria for forbearance. TRA's sole argument in support of forbearance is that it is necessary "to avoid discriminatory treatment that might either discourage competitive entry by resale carriers . . . or provide incumbent LECs with an unjustified competitive advantage. . .  XH-."=H} yO -ԍ TRA comments at 10.= Yet, in order to exercise its authority under section 160(a) to forbear from applying a provision of the Act, the Commission must determine that three criteria are met. It must determine that: (1) enforcement of the provision "is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;" (2) enforcement of such provision "is not necessary for the protection of consumers;" and (3) "forbearance from applying such provision . . . is consistent  X -with the public interest."X @} yO-ԍ 47 U.S.C.  160(a). Section 160(b) provides that a Commission determination that forbearance will promote competition may be the basis for a finding that forbearance is in the public interest. 47 U.S.C.  160(b). TRA's pleading fails to show that these criteria are met. For example, it fails to address whether enforcement of the facilities requirement in section 214(e) is not necessary for the protection of consumers.  XK-x163.` ` Other issues related to eligibility. The NPRM sought comment on various other issues related to eligibility. Specifically, it sought comment on whether rules should be developed to: (1) ensure that universal service support be used as intended (i.e., for the "provision, maintenance, and upgrading of facilities and services for which the support is  X-intended");@` } yO -ԍ 47 U.S.C.  254(e).@ (2) ensure that only eligible carriers receive support; and (3) set guidelines for advertising. Because relatively few commenters addressed these issues, there are few detailed proposals in the record on how to resolve them. For the first of these issues, developing rules to ensure that universal service support is used as intended, we believe that concerns about misuse of funds would largely be alleviated once competition arrives. We find that a competitive market would minimize the incentives and opportunities to misuse funds. In the absence of competition, we find that the optimal approach to minimizing misuse of funds is to"eX *&&dd" adopt a mechanism that will set universal support at levels that reflect the costs of providing universal service efficiently. Should additional measures be necessary, we recommend that the Commission, to the extent that states monitor carriers to ensure the provision of the  X-supported services, rely on the states' monitoring.} {O4-ԍ See, e.g., Ohio Consumers' Council comments at 67 (arguing that states are best equipped to address whether carriers are misusing funds). Where necessary, for example, if the state has insufficient resources to support such monitoring programs, we recommend that the Commission conduct periodic reviews to ensure that universal service is being provided. On the question of ensuring that only eligible carriers receive support, we agree with commenters that additional rules are unnecessary because only carriers found eligible by the states will  XH-receive funding.oH"} {O -ԍ See ALTS comments at 13; Ohio Consumers' Council comments at 6.o We recommend no additional rules at this time.  X -x164.` ` We recommend that the Commission not adopt, at this time, any national guidelines relating to the requirement that carriers advertise throughout the service area the availability of and rates for universal service using media of general distribution. We agree with the Florida PSC that states should, in the first instance, establish guidelines, if needed, to  X -govern such advertising.H } yO#-ԍ Florida PSC comments at 1314.H Pursuant to the 1996 Act, the states designate eligible carriers, and areawide advertising is an explicit condition of eligibility. The states may be in the better position to monitor the effectiveness of advertising by carriers offering universal service. We also agree with MCI that competition will help ensure that carriers make known the services  Xb-they offer.=bD} yOW-ԍ MCI comments at 18.= x  X4-x C. Definition of Service Areas  X-x` ` 1. Background  X-x165.` ` Section 214(e)(5) defines the term "service area" as "a geographic area established by a State commission for the purpose of determining universal service obligations  X-and support mechanisms."C} yO/!-ԍ 47 U.S.C.  214(e)(5).C For areas served by a rural telephone company,bd } {O"-ԍ The term rural telephone company is defined supra.b section 214(e)(5) provides that the term "service area" means the rural telephone company's study"Y *&&ddQ"  X-area} yOy-ԍ A "study area" is generally an incumbent LEC's preexisting service area in a given state. The study  {OA-area boundaries are fixed as of November 15, 1984. MTS and WATS Market Structure: Amendment of Part 67  {O -of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985  {O-Lifeline Order) (adopting with minor modifications the Joint Board recommendations issued in MTS and WATS  {O-Market Structure: Amendment of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 49 Fed. Reg. 48,325 (1984)). "unless and until the Commission and the States, after taking into account the recommendations of a FederalState Joint Board instituted under section 410(c), establish a different definition of service area for such company."  X-x166.` ` The Commission sought comment on issues relating to the definition of the service areas for which carriers would receive designation. The Commission asked parties to comment on the appropriate basis to define the "service area" of a rural telephone company, taking into account the possible effect on competition, and requested comment on whether the  XH-Commission should amend its rules to revise existing study area boundaries.";HH} yOA-ԍ NPRM at para. 45.; In the  X1-context of implementing a "procompetitive, deregulatory national policy framework",M1} yO-ԍ Joint Explanatory Statement at 113.M the Commission asked the Joint Board to prepare recommendations regarding the appropriate  X -"service area" boundaries of areas served by a "rural telephone company.";  h } yO-ԍ NPRM at para. 45.;  X -x` ` 2. Comments  X -x167.` ` Service areas for rural telephone companies. Many commenters support retaining the current study areas for rural telephone companies as the service area for  Xy-universal service support.[!Zy } {O"-ԍ See, e.g., Century comments at 1415; Evans Tel. comments at 14; Pacific Telecom comments at 2; Pennsylvania PUC comments at 20; RTC comments at 10; Rural Iowa Indep. Tel. Ass'n. comments at 4; Sprint comments at 15; USTA comments at 18; Fred Williamson comments at 1213; SDITC reply comments at 6.[ Commenters contend that the intent of the statute in retaining existing study areas is to protect rural companies from the effects of competitors entering a  XK-market and serving only the lowest cost portion of a rural telephone company's territory.p"K} {O!-ԍ See, e.g., Evans Tel. comments at 14; SDITC reply comments at 6.p Century asserts that simply retaining a rural telephone company's study area as its new service area may not be sufficient to protect against this sort of "cream skimming" by new entrants. It proposes that, once a new entrant is allowed to compete in a rural telephone company's area, the rural telephone company should be allowed to redistribute its universal service high cost compensation to any geographically disaggregated area within its study area. At the"Z"*&&dd" same time, Century argues, the new entrant should receive support only for its own  X-demonstrably high cost, facilitiesbased locations.D#} yOb-ԍ Century comments at 1415.D Montana Indep. Telecom. similarly argues that areas smaller than study areas will be needed if a competitor begins serving only a portion of incumbent's study area. It recommends that the service area be based on the area  X-of the incumbent's wire centers or exchanges, at least initially.P$X} yO-ԍ Montana Indep. Telecom. comments at 8.P It further asserts that an area smaller than a wire center should be used as the service area in rural areas only upon a  Xv-finding by the state that using such a smaller area is in the public interest.P%v} yO -ԍ Montana Indep. Telecom. comments at 8.P RTC also argues that, in a competitive environment, incumbents must have the option to disaggregate perunit  XH-costs to areas smaller than the study area in order to address "cream skimming" concerns.@&Hx} yOq-ԍ RTC comments at 1314.@ RTC contends that these smaller areas would be used solely for the purpose of targeting support and would not affect the size of the service area that a competitor must serve in order  X -to receive funding as an eligible carrier.B' } yO-ԍ RTC comments at 14 n.27.B It proposes that the support amounts for these smaller areas would be derived from the known and existing "actual cost levels already  X -established for the larger, total study area."@( } yO-ԍ RTC comments at 1314.@  X -x168.` ` Service areas in general. Most commenters addressing the question regarding the appropriate geographic service area for eligibility did not limit their comments to areas served by rural telephone companies. Instead, they address the question of appropriate service area size for all universal service support purposes. Potential competitors argue that, to ensure that the new universal program is competitively neutral, service areas in which new entrants would be designated to serve should not be based on the existing study areas of the incumbent  X-LECs.)( } {O-ԍ See, e.g., 360 comments at 78; ALTS reply comments at 4; Commnet Cellular reply comments at 7 (arguing that the Commission should design service areas so that it would be technically and economically feasible for CMRS providers to serve the subscribers in that service area); MFS reply comments at 67 (contending that it would be anticompetitive to require new entrant's service areas to mimic an incumbent's study area or certified area).  Beyond this, industry and state commenters differed sharply on the appropriate size of the service area.  X-x169. ` ` Missouri PSC recommends using a LEC's entire service area within a state or"[)*&&dd"  X-local access and transport area (LATA).`* } yOy-ԍ Missouri PSC comments at 8. A LATA generally is defined as a "contiguous geographic area" established by a Bell Operating Company (BOC) before the date of enactment of the 1996 Act or an area established or modified after the date of enactment by a BOC and approved by the Commission. 47 U.S.C.  153(25).` It contends that analysis of costs in such a large area best reflects the overall circumstance of each LEC and will prevent a large LEC from receiving universal service funding related to its high cost areas even though the LEC's  X-overall costs are no higher than average.+} {O -ԍ Missouri PSC comments at 8. See also Dell Tel. reply comments at 34 (suggesting inclusion of all operations within a state in order to remove support for large companies). SWBT, however, argues that continuing to use statewide areas would retain the current implicit subsidy flows between low cost areas and high cost areas served by a LEC within a state and will discourage competitive entry into high  Xv-cost areas while concentrating entry in urban population centers.A,v } yO1-ԍ SWBT comments at 1213.A Others oppose using study  X_-areas because they are too large to accurately distribute high cost support.H-_} yO-ԍ Cincinnati Bell comments at 8.H AirTouch maintains that the use of large areas, such as statewide study areas, to determine eligibility will have the effect of "freezing out" new entrants that initially may need to enter a market in  X -more limited areas.G. * } yO-ԍ AirTouch reply comments at 6.G  X -x170.` ` Most commenters support using areas smaller than existing study areas as the  X -service area. New Jersey BPU, for example suggests using countywide areas.H/ } yO@-ԍ New Jersey BPU comments at 3. H NECA  X -asserts that carriers should have the option to disaggregate costs below the study area level.=0 J } yO-ԍ NECA comments at 9.=  X -Various commenters support using census block groups (CBGs)1  } yO2-ԍ The proponents of the BCM define a census block group as "a geographic unit defined by the Bureau of Census which contains approximately 400 households." MCI, NYNEX, Sprint/United Management Co., and U S West, Benchmark Costing Model: A Joint Submission, Copyright 1995, CC Docket No. 80826, filed December 1, 1995, at I1. The Bureau of the Census defines "census blocks" as "small areas bounded on all sides by visible features such as streets, roads, streams, and railroad tracks, and by invisible boundaries such as city, town, township, and county limits, property lines, and short, imaginary extensions of streets and roads." Bureau of the Census, United States Department of Commerce, 1990 Census of Population and Housing A3 (1992). It further defines a "geographic block group" as "generally contain[ing] between 250 and 550 housing units, with the ideal  {Or$-size being 400 housing units." Id. as the appropriate service" \1*&&dd"  X-area.2} {Oy-ԍ See, e.g., California PUC comments at 910 (noting that it will develop costs on a CBG level for intrastate services); PacTel comments at 18 n.33; Sprint comments at 15; Wyoming PSC comments at 8. Sprint, for example, argues that the use of CBGs will better target high cost areas and will keep service areas in line with  X-how costs are developed through the use of cost proxy models.@3"} yO-ԍ Sprint comments at 15.@ Sprint also contends that using CBGs will eliminate the implicit subsidy that occurs when costs are averaged over wire  X-centers, exchanges or larger areas that contain both high cost and low costs areas.F4} yO -ԍ Sprint reply comments at 13.F Opponents of using CBGs contend that they are inaccurate because they bear no relation to  Xv-the actual telecommunications network and associated costs5vB} {Oi -ԍ See, e.g., GSA comments at 810; GVNW reply comments at 14 (arguing that CBGs are inherently inaccurate and administratively costly to use). and, in very sparsely populated  X_-areas, CBGs may be so large that cost may vary greatly within a CBG.j6_} yO-ԍ Alaska PUC comments at 1314; Citizens Utilities comments at 12.j GVNW argues that  XH-using CBGs will be administratively burdensome.D7H, } yO%-ԍ GVNW reply comments at 14.D  X -x171.` ` Some commenters suggest that the service area be based on LEC wire centers  X -(or areas no smaller than wire centers)8 } yOp-ԍ BellSouth comments at 14 (proposing wire centers or groups of wire centers); GSA comments at 910. or exchanges (or areas no larger than exchanges).9 L } {O-ԍ See, e.g., Citizens Utilities comments at 1213 (suggesting that exchanges or wire centers would be appropriate); Montana Indep. Telecom. comments at 8 (same); GVNW reply comments at 14. USTA recommends using an area no larger than a wire center for nonrural telephone  X -companies to determine costs.>: } yO,-ԍ USTA comments at 18.> Proponents of using wire center areas to determine costs contend that such areas are small enough to represent reasonably homogenous cost characteristics and that LECs can disaggregate their costs to those areas much more readily  X-than they can disaggregate costs to the CBG level.O;6} yOw!-ԍ Citizens Utilities comments at 1213.O They argue that wire center boundaries have evolved to reflect the specific characteristics of the telephone plant required to serve an area and thus are a much more accurate area to determine costs than are CBGs, which bear no  XK-direct relationship with how the telephone plant is designed or installed.Z<K} yO%-ԍ GSA comments at 910; GVNW reply comments at 14.Z Teleport"K]V<*&&dd" recommends using areas no larger than a wire center and no smaller than a CBG to establish costs. It contends that establishing service areas at this level will encourage competition by  X-facilitating entry.E=} yOK-ԍ Teleport comments at 1516.E GVNW proposes that, for nonrural companies, support areas smaller than wire centers should be used only after a showing that competition exists only in a portion of a wire center. For rural companies, the decision to use areas smaller than a wire center  X-should be part of the state's public interest determination.D>X} yO-ԍ GVNW reply comments at 14.D  Xv-x  X_-x` ` 3. Discussion  X1-x172.` ` Service areas for areas served by rural telephone companies. We recommend that the Commission retain the current study areas of rural telephone companies as the service areas for such companies. Section 214(e)(5) provides that for an area served by a rural telephone company, the term "service area" means such company's study area "unless or until the Commission and the States, after taking into account the recommendations of a FederalState Joint Board instituted under section 410(c), establish a different definition of service  X -area for such company."C? } yO@-ԍ 47 U.S.C.  214(e)(5).C We find no persuasive rationale in the record for adopting, at this  X-time, a service area that differs from a rural telephone company's present study area.Y@Zx} {O-ԍ See, e.g., Century comments at 1415; Evans Tel. comments at 14; Pacific Telecom comments at 2; Pennsylvania PUC comments at 20; RTC comments at 10; Rural Iowa Indep.Tel. Ass'n comments at 4; Sprint comments at 15; USTA comments at 18; Fred Williamson comments at 1213; SDITC reply comments at 6.Y We note that some commenters argue that Congress presumptively retained study areas as the service area for rural telephone companies in order to minimize "cream skimming" by  XK-potential competitors.pAK} {O-ԍ See, e.g., Evans Tel. comments at 14; SDITC reply comments at 6.p Potential "cream skimming" is minimized because competitors, as a condition of eligibility, must provide services throughout the rural telephone company's study area. Competitors would thus not be eligible for universal service support if they sought to serve only the lowest cost portions of a rural telephone company's study area.  X-x173.` ` We note that the 1996 Act in many respects places rural telephone companies on a different competitive footing from other local exchange companies. For example, rural telephone companies are initially exempt from the interconnection, unbundling, and resale requirements of 47 U.S.C.  251(c). The 1996 Act continues this exemption until the relevant  X|-state commission finds, inter alia, that a request of a rural telephone company for interconnection, unbundling, or resale would not be unduly economically burdensome, would"g^, A*&&dd"  X-be technically feasible, and would be consistent with section 254.CB} yOy-ԍ 47 U.S.C.  251(f)(1).C Moreover, while a state commission must designate other eligible carriers for nonrural areas, states may designate additional eligible carriers for areas served by a rural telephone company only upon a specific  X-finding that such a designation is in the public interest.CCX} yO-ԍ 47 U.S.C.  214(e)(2).C  X-x174.` ` Another reason to retain existing study areas is that it is consistent with our recommendation that the determination of the costs of providing universal service by a rural telephone company should be based, at least initially, on that company's embedded costs. Rural telephone companies currently determine such costs at the studyarea level. We conclude, therefore, that it is reasonable to adopt the current study areas as the service areas for rural telephone companies rather than impose the administrative burden of requiring rural telephone companies to determine embedded costs on a basis other than study areas.  X -x175.` ` Service areas for areas not served by rural telephone companies. We find that sections 214(e)(2) and 214(e)(5) grant to the state commissions the authority and responsibility to designate the area throughout which a carrier must provide the defined core services in order to be eligible for universal service support. We further conclude that, while this authority is explicitly delegated to the state commissions, states should exercise this authority in a manner that promotes the procompetitive goals of the 1996 Act as well as the universal service principles of section 254. The Joint Board thus recommends that the Commission urge the states to designate service areas for nonrural telephone company areas that are of sufficiently small geographic scope to permit efficient targeting of high cost support and to facilitate entry by competing carriers.  X-x176.` ` We recommend that the Commission encourage states, where appropriate to foster competition, to designate service areas that do not disadvantage new entrants. Consequently, we recommend that the geographic size of the state designated service areas should not be unreasonably large. An unreasonably large area may deter entry because fewer competitors may be able to cover startup costs that increase as the size of the area they must serve increases. This would be especially true if the states adopt as the service area the existing study areas of larger local exchange companies, such as the BOCs, which usually include most of the geographic area of a state, urban as well as rural. Additionally, if states simply structure service areas to fit the contours of an incumbent's facilities, a new entrant, especially a CMRSbased provider, might find it difficult to conform its signal or service area  X-to the precise contours of the incumbent's area.D} {O$-ԍ See, e.g., 360 comments at 78; ALTS reply comments at 4; Commnet Cellular reply comments at 7. "_zD*&&dd"Ԍ X-x177.` ` We note that state adoption of unreasonably large service areas could potentially violate section 254(f), which prohibits states from adopting regulations that are  X-"inconsistent with the Commission's rules to preserve and advance universal service."@E} yOK-ԍ 47 U.S.C.  254(f).@ State designation of an unreasonably large service area could also implicate section 253 if it "prohibit[s] or ha[s] the effect of prohibiting the ability of an entity to provide any interstate  X-or intrastate telecommunications service,"@FX} yO-ԍ 47 U.S.C.  253(a).@ and is not "competitively neutral" and "necessary  Xv-to preserve and advance universal service."@Gv} yO -ԍ 47 U.S.C.  253(b).@ x  XH-x178.` ` Even if the state commission were to designate a large service area, however, we believe that it would be consistent with the 1996 Act to base the actual level of support, if any, that nonrural telephone company carriers would receive for the service area on the costs to provide service in subunits of that area. We recommend that the Commission, where necessary to permit efficient targeting of universal support, establish the level of universal service support based on areas that may be smaller than the service area designated by the state. The service area designated by the state is the geographic area used for "the purpose of  X -determining universal support obligations and support mechanisms."CH x} yO-ԍ 47 U.S.C.  214(e)(5).C We find that this language refers to the designation of the area throughout which a carrier is obligated to offer and advertise universal service. It defines the overall area for which the carrier will receive support from the "specific, predictable, and sufficient mechanism established by the  XK-Commission to preserve and advance universal service."@IK} yO-ԍ 47 U.S.C.  254(d).@ We conclude that this language would not bar the Commission from disaggregating the statedesignated service area into smaller areas in order to: (1) identify high cost areas within the service area; and (2) determine the level of support payments that a carrier would receive for the overall service area based on the sum of the support levels as determined by the costs of serving each of the disaggregated areas. x  X-x D. Unserved Areas  X|-x` ` 1. Background  XN-x179.` ` Section 214(e)(3) provides that, if no common carrier is willing to provide the services supported by universal service support mechanisms to a community or portion of a community that requests such services, "the Commission, with respect to interstate services, or" `I*&&dd" a State, with respect to intrastate services, shall determine which common carrier or carriers are best able to provide such service to the requesting unserved community or portion thereof and shall order such carrier or carriers to provide such services for that unserved community  X-or portion thereof."CJ} yO4-ԍ 47 U.S.C.  214(e)(3).C Any carrier so ordered shall be designated as the eligible  X-telecommunications carrier for that community or portion of a community.CKX} yO-ԍ 47 U.S.C.  214(e)(3).C The Joint Explanatory Statement states that section 214(e)(3) "makes explicit the implicit authority of the Commission, with respect to interstate services, and a State, with respect to intrastate  X_-services, to order a common carrier to provide [the supported services]."ML_} yO -ԍ Joint Explanatory Statement at 141.M  X1-x180.` ` The NPRM solicited comment on how the Commission should implement its responsibilities under section 214(e)(3) to designate carriers for unserved areas and whether the Commission and the state commissioners should develop a cooperative program to ensure that all areas receive each of the services supported by federal universal support  X -mechanisms.;M x} yO-ԍ NPRM at para. 47.;  X -x` ` 2. Comments  Xy-x181.` ` Few commenters responded to the Commission's request for comments on whether the Commission and the states should develop a cooperative program to ensure service for unserved areas. Some of these commenters support the concept of a cooperative  X4-program between the Commission and the states.N4} yO-ԍ Alaska Library comments at 5; California PUC comments at 1314; Missouri PSC comments at 9. Some commenters recommend using a competitive bidding system to select carriers to provide universal service to customers in areas  X-that no carrier is serving.OB} yOO-ԍ California PUC comments at 1314. Under California's proposal, the carrier with the lowest bid, or subsidy request, would win and become the carrier of last resort for the area. California PUC comments at 13 {O-14. See also MCI comments at 1819 (advocating use of competitive bidding to select carriers in those few areas that no carrier is willing to serve at the established support level); USTA comments at 1920. USTA recommends that the Commission should adopt a voluntary bidding process to identify carriers willing to serve unserved areas at the lowest cost per line. The carrier submitting the lowest bid would be declared the eligible carrier for both interstate and intrastate services and would receive the universal service support targeted to that area from the high cost support mechanism. USTA comments at 1920. USTA argues that unserved areas should be defined as those areas no carrier is willing to serve voluntarily. Such areas, USTA maintains, should be"aO*&&dd"  X-unique and not combined with any established universal service area.AP} yOy-ԍ USTA comments at 1920.A Some cellular carriers argue that wireless technology can play an important role in ensuring that remote areas receive basic telephone service and that they should be given an opportunity to provide such  X-service in these areas.qQX} {O-ԍ See, e.g., Vanguard comments at 78; Western comments at 57, 14.q AMSC urges the Commission to permit LECs to receive universal service support for the costs of using Mobile Satellite Service technology to provide universal service to remote areas, just as the Commission allows LECs that provide basic exchange  Xv-telecommunications radio systems (BETRS) Rv} yO -ԍ BETRS uses radio frequencies to connect subscribers at fixed locations to LEC central offices. AMSC  {O -comments at 6 (citing Basic Exchange Telecommunications Radio Service, 3 FCC Rcd 214 (1988)).  as a substitute for wireline local service in rural  X_-areas to be eligible for high cost assistance.=S_D} yOT-ԍ AMSC comments at 6.= Washington UTC cautions against adopting rules that will require universal support to every community, no matter how expensive  X1-providing that service would be.MT1} yO-ԍ Washington UTC reply comments at 3.M Washington UTC offers an example of a small community of about a dozen families located on the eastern side of the Cascade Mountains that currently is not receiving even basic telephone service because the installation of facilities would cost about $8,000.00 per customer and would cost approximately $260.00 per access line per  X -month after installation.MU d } yO-ԍ Washington UTC reply comments at 3.M  X -x` ` 3. Discussion  Xy-x182.` ` Other than the requirements contained in section 214(e)(3), we recommend that the Commission not adopt any particular rules to govern how carriers for unserved areas are designated. While a few commenters support the concept of a cooperative state and federal  X4-program to select such carriers,zV4 } {O-ԍ See e.g., Alaska Library comments at 5; California PUC comments at 1314.z no specific program was proposed. Similarly, while several commenters support using competitive bidding to select carriers for unserved areas, no detailed proposal was submitted for use of competitive bidding for this limited purpose. x "b V*&&dd"Ԍ X- vVII. RURAL, INSULAR, AND HIGH COST  X-xA. Overview  X-x183.` ` In this section of the Recommended Decision, we discuss the universal service suppovrt mechanisms for rural, insular, and high cost areas. There are three pieces of information required to calculate the amount of support an eligible telecommunications carrier may draw from federal universal service support mechanisms. The first is the number of subscribers that the carrier is serving in the high cost area. The second is the cost of providing the supported services to those subscribers. The third is the amount of that cost that the carrier must recover from sources other than the federal universal support mechanisms. In this section the Joint Board presents its recommendations concerning the process that should be used to determine the level of support to be provided for the supported services and related issues. We also present our recommendations on how the amount the carrier needs to recover from other sources should be set.  X-x184.` ` We first discuss how to determine the cost of providing the supported services to subscribers. We conclude that the proper measure of "cost" for purposes of calculating universal service support is the forwardlooking economic cost of developing and operating the network facility and functions used to provide services supported under section 254(c)(1). The Joint Board recommends that the Commission work with the state commissions to develop a proxy cost model for calculating these forwardlooking economic costs, and what support, if any, that a carrier should receive for serving a particular geographic area. We believe that all of the costs of the network and retail costs that are incurred to provide the supported services should be included in the cost calculation. We recognize, however, that the use of a proxy model could cause some small carriers to receive levels of support different from what they currently receive. In order to allow those carriers a reasonable period to adjust to the use of proxy models, we recommend that "rural telephone companies," as  X|-defined in the Communications Act, as amended,AW|} yO-ԍ 47 U.S.C.  153(37).A be allowed to continue using embedded costs as the basis for calculating their universal service support levels for three years after  XN-nonrural carriers begin to use proxy models.XXNX} yOW-ԍ #X\  P6G;ɒP# Many of the commenters use the term"embedded costs" when referring to a carrier's historic loop or switching costs. For the purpose of our discussion in this proceeding, we will also use the term "embedded  yO -costs," but note that we mean it to be synonymous with the terms "booked costs" and "reported costs." #X\  P6G;ɒP# We recommend that, during that period, high cost assistance, DEM weighting, and LTS benefits for rural carriers be frozen based on historical perline amounts. At the end of that threeyear period, rural companies will transition to a proxy model over three years. Because of the nature of providing service in Alaska and the insular areas, we recommend that rural carriers serving those areas continue to use embedded costs until further review."cxX*&&dd"Ԍ X-ԙx185.` ` We next discuss the benchmark amount or share of carrier proxyderived cost that must be recovered from other sources. We believe it is desirable that the benchmark be based on the amount the carrier would expect to recover from other services to cover the cost of providing supported services, but final determination of the methodology for selecting the benchmark must also consider the revenue base for universal service contributions. The amount of support a carrier would receive would be calculated by subtracting this benchmark amount from the cost of service determined for that carrier.  XH-x186.` ` Finally, we look at an alternative means of establishing support levels. Competitive bidding would allow the marketplace to determine the level of support by having competing carriers bid for the support level they need to serve high cost areas. We recommend that the Commission, together with the state commissions, continue to explore the possibility of using competitive bidding in the future.  X -x B. Calculation of Cost  X-x` ` 1. Background  Xb-x187.` ` The existing universal service support mechanisms. Currently there are three mechanisms designed expressly to provide support for high cost and small telephone  X4-companies: the Universal Service Fund (high cost assistance fundX01Í ÍX0Í Í),Y4 {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#47 C.F.R.  36.601 et. seq. the DEM weighting  X-program,ZZ yO(-#X\  P6G;ɒP#э #X\  P6G;ɒP#47 C.F.R.  36.125(b). and LTS.[ yO-#X\  P6G;ɒP#э 47 C.F.R.  69.105, 69.502, 69.603(e), 69.612.#Xj\  P6G;ynXP#ѭ  X-x188.` ` The jurisdictional separations rules currently assign 25 percent of each LEC's  X-loop costss\z yO-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Loop cost is the fixed cost of connecting customers to the LEC central office. LECs' local loop costs vary widely due to many factors, including subscriber density, terrain, local exchange size, and labor costs.s to the interstate jurisdiction.] yO[-#X\  P6G;ɒP##X\  P6G;ɒP#э#X\  P6G;ɒP# 47 C.F.R. Part 36.#Xj\  P6G;ynXP# As a result, a portion of each LEC's local loop  X-costs are recovered through rates charged to its customers for interstate services.t^Zb  yO!-#X\  P6G;ɒP#э #X\  P6G;ɒP#Currently, the Commission's access charge rules require that these costs be recovered through subscriber  {O"-line charges and carrier common line charges. The operation of both types of charges is discussed infra in section XII. t For LECs with aboveaverage loop costs, the existing high cost assistance fund shifts a larger percentage of the loop costs to the interstate jurisdiction and permits those LECs to recover this"d ^*&&dd3"  X-incremental allocation from the high cost assistance fund._ yOy-#X\  P6G;ɒP#э #X\  P6G;ɒP#The high cost assistance fund is currently administered by NECA. Each LEC's embedded costs determine the support payments the LEC will receive. Currently, a LEC is eligible for support if its embedded loop costs exceed 115 percent of the national average loop cost.  X-LECs with study areas`X yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#A study area is a geographic segment of a carrier's telephone operations within a state. Carriers perform jurisdictional separations at the study area level.  of 200,000 or fewer loops receive a greater percentage of their  X-aboveaverage loop costs than those with study areas with more than 200,000 loops.X0Í ÍX0Í Ía yO -#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#47 C.F.R.  36.631(c), (d). LECs with study areas of 200,000 or fewer working loops receive an additional interstate allocation of 65 percent of the unseparated cost per loop between 115 percent and 150 percent of the national average cost per loop, multiplied by the number of working loops. This 65 percent additional allocation coupled with the 25 percent allocation for all carriers means that these companies allocate 90 percent of the loop costs between 115 percent and 150 percent of the national average to the interstate jurisdiction. Those carriers receive an additional interstate allocation of 75 percent of the cost per loop that exceeds 150 percent of the national average cost per loop. That additional allocation, coupled with the 25 percent allocation for all carriers, means that carriers with loop costs greater than 150 percent of the national average receive a 100 percent allocation to the interstate jurisdiction for the costs above 150 percent of the national average. In other words, they receive a dollar from the interstate jurisdiction for each dollar of loop costs above 150 percent of the national average loop cost. For LECs with study areas of more than 200,000 working loops, the additional interstate allocation of unseparated loop costs is as follows: 10 percent of such costs between 115 percent and 160 percent of the national average, 30 percent of such costs between 160 percent and 200 percent of the national average, 60 percent of such costs between 200 percent and 250 percent of the national average, and 75 percent of such costs in excess of 250 percent of the national  X-average. This program is funded entirely by IXCs.X0Í ÍX0Í Í&b@ yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Each IXC with at least .05 percent of presubscribed lines nationwide contributes to the fund an amount based on the number of its presubscribed lines. 47 C.F.R.  69.116.&  X-x189.` ` The Commission's jurisdictional separations rules include a second universal  X-service subsidy mechanism known as DEM weighting.c  yO !-#X\  P6G;ɒP#э #X\  P6G;ɒP#47 C.F.R.  36.125(b). Dial equipment minutes, or DEM, are the minutes of holding time of local switching equipment used to originate and terminate a call. The jurisdictional separations rules allocate local switching equipment costs between the interstate and intrastate jurisdictions on the basis of each jurisdiction's relative number of dial equipment minutes of use. At the time the DEM weighting subsidy was created, it was assumed that smaller telephone companies would have higher local switching costs than larger LECs because the smaller companies cannot take advantage"e c*&&ddQ" of certain economies of scale. LECs with fewer than 50,000 access lines are directed to apportion a greater proportion of these local switching costs to the interstate jurisdiction than  X-larger LECs may allocate.d yOK-#X\  P6G;ɒP#э #X\  P6G;ɒP#47 C.F.R.  36.125(b).#Xj\  P6G;ynXP#Ѹ For these small LECs, the actual DEMs are weighted (multiplied by a factor) to shift what would otherwise be intrastate costs to the interstate jurisdiction. DEM weighting applies independent of, and unrelated to, the high cost assistance fund.  Xv-x190. ` ` The LTS program supports carriers with higherthan average subscriber line costs by providing carriers which are members of the NECA pool with enough support to  XH-enable them to charge IXCs only a nationwide average CCL interstate access rate.*eHX yOQ -#X\  P6G;ɒP#э #]\  PCɒP#Prior to 1989 all local exchange carriers were required to participate in a pool of carrier common line costs and revenues. Beginning in April 1989, LECs were permitted to withdraw from the pool, but LECs with below average subscriber line charges that choose to exit the pool are required to contribute enough so that LECs remaining in the pool would be able to charge the same industry average CCL rates they would have charged if  {Oq-the pool were still mandadtory for all LECs. See MTS and WATS Market Structure; Amendment of Part 67 of  {O;-the Commission's Rules and Establishment of a Joint Board, Report and Order, 2 FCC Rcd 2953 (1987).* Under the current LTS support system, NECA annually projects the common line revenue requirement (which includes an 11.25 percent return on investment) for ILECs that participate  X -in the common line pool.fX  yO-#X\  P6G;ɒP#э The actual rate of return that pooling companies earn on a monthly basis is determined by the total rate of return that the pool earns, i.e., the difference between the total costs that the pooling companies submit and the total amount of revenue in the pool, as a percentage of all pooling companies' total common line investment. NECA then computes the total amount of LTS support needed by subtracting the amount pooling carriers will receive in SLCs and CCL charges from the pool's projected revenue requirement (after removing pay telephone costs and revenues). LTS is funded by ILECs that do not participate in the common line pool. Nonpooling ILECs' LTS contributions to the common line pool are set annually based on the total projected amount of LTS, converted to a monthly payment amount. NECA computes the monthly "draws" for the ILEC common line pool members based on the pooling carriers' submissions to NECA of reported cost data (except for average schedule companies, whose monthly payments are based on average schedule data). As a result, each participating pool member receives a draw from the "pooled" common line revenues rather than a "LTS payment."  X-x191.` ` The Commission initiated a rulemaking proceeding in CC Docket No. 80286  X-to modify the current support mechanism for high cost and small telephone companies.g\  {O!-#X\  P6G;ɒP#э #X\  P6G;ɒP#Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Inquiry, 9 FCC Rcd 7404 (1994); Order, 9 FCC Rcd 7962 (1994) (Data Request); Notice of Proposed Rulemaking and  {O&#-Notice of Inquiry, 10 FCC Rcd 12309 (1995) (80286 NPRM). The primary goals of that proceeding were to eliminate barriers to competitive entry, contain the size of the fund at a reasonable level, and promote efficient investment and operation of local"fg*&&ddq"  X-service networks.h {Oy-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#80286 NPRM at para. 5.  X-x192.` ` In the 80286 NPRM, the Commission sought comment on ways to improve the high cost assistance fund, including: (1) using credits to deliver high cost assistance in a competitively neutral manner; (2) excluding administrative costs from the loop costs that form the basis for high cost assistance; (3) basing assistance on the average number of subscriber lines; (4) increasing the threshold for receiving assistance; (5) reconsidering the distinctions in  Xa-the current rules between large and small study areas; (6) adopting a permanent indexed cap; (7) using high cost credits for large carriers' study areas only; and (8) using proxy factors to  X3-compute high cost assistance.i3Z {O> -#X\  P6G;ɒP#э #X\  P6G;ɒP# Id. at paras. 1775. The Commission also proposed to modify DEM weighting by: (1) establishing a high cost test to qualify for DEM weighting; (2) determining DEM weighting factors on the basis of average local switch size; or (3) determining DEM weighting  X -assistance through the use of a scale sliding on the basis of the number of access lines.j  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Id. at paras. 916.  X -x193.` ` NPRM in this Proceeding. In the NPRM, the Commission sought comments to identify methods for determining the level of support required to ensure that carriers are  X-financially able to provide universal service in rural, insular, and high cost areas.k~ yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#NPRM at paras. 2739. The Commission specifically sought comment on whether continuing to use the Commission's jurisdictional separations rules to provide support to LECs with high loop costs, or local switching costs of small LECs, is consistent with Congress's intent "to provide for a procompetitive, deregulatory national policy framework ... opening all telecommunications  X-markets to competition,"l {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#See S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 1 (1996). or with its intent relating to the characteristics of universal service  X-support mechanisms to be adopted pursuant to section 254.m XY-#X\  P6G;ɒP#э#X\  P6G;ɒP# NPRM at para. 30#Xj\  P6G;ynXP#. In addition, the Commission sought comment regarding the statutory requirement "that any support mechanisms continued  X-or created under new section 254 should be explicit."nQ  yO!-#X\  P6G;ɒP#э #X\  P6G;ɒP#47 U.S.C.  254(e)#X\  P6G;ɒP#. The Commission sought comment on whether the DEM weighting assistance mechanism should be retained in light of the principles  X-enunciated in the 1996 Act.o  yO>%-#X\  P6G;ɒP#э #X\  P6G;ɒP# NPRM at para. 30. The NPRM also asked commenters to identify the total amount"gq o*&&dd"  X-of support currently required for each proposed core service.p {Oy-#X\  P6G;ɒP#э #]\  PCɒP# Id. at para. 15.  X-x194.` ` The Commission also incorporated into this proceeding by reference the portion of the record from CC Docket No. 80286 that relates to changing the support mechanisms  X-found in Part 36 of its rules.qZ {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Id. at para. 39. The Commission noted, however, that the legislative history of the 1996 Act indicates that Congress determined that CC Docket No. 80286 was not an  Xv-appropriate foundation on which to base the section 254 universal service proceeding.rv {O -#X\  P6G;ɒP##X\  P6G;ɒP#э #]\  PCɒP#Id. at para. 39 (citing S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 131 (1996)).  XH-x195.` ` Regarding LTS, the NPRM observed that the CCL charges of ILECs not  X1-participating in the NECA pool recover LECs' LTS obligations.s1~ yO`-#X\  P6G;ɒP#э#X\  P6G;ɒP# NPRM at para. 115.#Xj\  P6G;ynXP#ѱ As noted in the NPRM, LTS payments serve to equalize access charges among LECs by requiring larger LECs that no longer participate in the NECA access charge pool to contribute funds sufficient to reduce  X -pooling companies' access charges to the national average.t  X-#X\  P6G;ɒP#э #X\  P6G;ɒP# Id. at para. 115#Xj\  P6G;ynXP#. The NPRM tentatively concluded that "LTS payments, which directly increase interstate access charges assessed by some LECs so as to reduce charges assessed by other LECs, are an identifiable support flow in the existing interstate access charge system" and "propose[d] to eliminate the recovery of  X-LTS revenues through ILECs' interstate CCL charges."u {O-#X\  P6G;ɒP#э#X\  P6G;ɒP# Id. at para. 115.#Xj\  P6G;ynXP#Ѷ  Xb-x196.` ` In the NPRM, the Commission noted that several telecommunications carriers had jointly filed a proxy model to calculate a "benchmark" cost for providing local  X4-telecommunications access in every CBG in the nation.)v4Q  {O6-#X\  P6G;ɒP#э Id. at para. 31 (citing MCI, NYNEX, Sprint/United Management, and U S West, Benchmark Costing  {O-Model: A Joint Submission, Copyright 1995, CC Docket No. 80286, filed Dec. 1, 1995).) As explained in the NPRM, the purpose of that proxy model the BCM is to identify areas where the cost of service is expected to be high enough to require cost support to preserve and advance universal  X-service.w  yOM#-#X\  P6G;ɒP#э #X\  P6G;ɒP#NPRM at para. 32. The Commission incorporated the BCM into the record of this proceeding, and asked for comment on the merits of using a proxy model to calculate universal service support requirements. The Commission sought comment on, among other things, whether the model"h=w*&&dd" could be made technology neutral, whether a proxy model should use embedded costs or forwardlooking costs, what engineering assumptions should be used in the model, and whether the model's choice of CBGs as the geographic unit for calculating the costs of local telephone service was the best alternative. The NPRM also sought comment on a proxy model that had been developed by PacTel for use in the California state universal service  X-proceeding the Cost Proxy Model (CPM).x {O-#X\  P6G;ɒP#э  Id. at para. 33 n.81.#Xj\  P6G;ynXP#ѓ  X_-x197.` ` Public Notice. The Common Carrier Bureau's July 3 Public Notice sought comments on approximately 50 questions regarding the calculation of the cost of providing universal service. The Public Notice requested comment on whether loop costs accurately represent the actual cost of providing services such as access to directory assistance and emergency assistance, and the advanced services that commenters have proposed for inclusion among those services to be supported. To the extent that loop costs do not fully represent the costs associated with including a service in the definition of universal service, the question  X -also asked parties to identify and quantify other costs that should be considered.y Z yO-#X\  P6G;ɒP#э #]\  PCɒP# Public Notice (DA961078) (rel. July 3, 1996) question 5. Parties were also asked to comment on what modifications to the existing universal service support  X-mechanisms, if any, are required to comply with the 1996 Act.z {O+-#X\  P6G;ɒP#э #X\  P6G;ɒP#Id., question 26. The Public Notice also asked for comment on how existing support mechanisms could be better targeted for rural  Xb-areas.{b| {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Id., question 27.  X4-x198.` ` Twentyeight questions in the Public Notice dealt with proxy models 15  X-asked about proxy models in general,| {O-#X\  P6G;ɒP#э#X\  P6G;ɒP# Id,, questions 3448.#Xj\  P6G;ynXP#Ѻ eight asked about the BCM,} yOn-#X\  P6G;ɒP#э Public Notice, questions 5663.#Xj\  P6G;ynXP#ї and five asked about  X-the CPM.~0  {O-#X\  P6G;ɒP#э#X\  P6G;ɒP# Id., questions 5663.#Xj\  P6G;ynXP#Ѻ Further comment was requested on what, if any, activities were being undertaken to harmonize the proposed proxy models; and, how support should be calculated  X-for insular areas and Alaska, which were not included in the BCM.  {OK#-#X\  P6G;ɒP#э #X\  P6G;ɒP#Id., questions 36, 41, 4548. Comment was sought on how the costs calculated by the BCM compare to the book costs of ILECs for the same"iT *&&dd"  X-geographic areas; what the default inputs were for the BCM (e.g., the fill factors); Xy-#X\  P6G;ɒP#э #X\  P6G;ɒP#A fill factor represents the percentage of the loop facility that is currently being used#Xj\  P6G;ynXP#. and, whether it is possible to integrate the grid cell structure used in the CPM into the BCM  X-model.y yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Public Notice, questions 56, 60, 63#X\  P6G;ɒP#. Comment was sought on whether the CPM could be used on a nationwide basis and  X-whether it could be modified to identify terrain and soil type by grid cell.l  {Ou-#X\  P6G;ɒP#э Id., questions 65, 66.l  X-x199.` ` Cost Models Public Notice. On July 10, 1996, the Common Carrier Bureau released another Public Notice (Cost Models Public Notice) on the proxy models that had been filed in this proceeding the BCM, a revised version of the BCM (BCM2), the CPM,  XH-and the Hatfield model7"H yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#The BCM was submitted by MCI, NYNEX, Sprint, and U S West. The BCM2 was submitted by Sprint  yO\-and U S West. The CPM was submitted by PacTel. The Hatfield model was submitted by MCI and AT&T.   {O$-See Public Notice, Common Carrier Bureau Seeks Further Comment on Cost Models in Universal Service Notice of Proposed Rulemaking, CC Docket 9645, DA 961094 (rel. July 10, 1996)("Cost Models Public Notice").7 and gave notice on how interested parties could obtain copies of  X1-the models.1  {Og-#X\  P6G;ɒP#э #X\  P6G;ɒP#See Cost Models Public Notice. That Public Notice also set out procedures for interested parties to file  X -comments on the models.   {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#See Id.  X -x200.` ` Data Request. On August 2, 1996, the Common Carrier Bureau sent a letter to each of the proponents of the BCM2, CPM, and Hatfield models requesting additional  X -information about the models.0"  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#See Letters from John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau to (1) Glenn Brown, Executive DirectorPublic Policy, U S West, Inc., (2) Alan Ciamporcero, Vice PresidentFederal Regulatory Relations, PacTel, (3) Mike Pelcovits, Chief Economist, MCI, and Joel Lubin, Vice  yOr-PresidentLaw and Government Affairs, AT&T (dated Aug. 2, 1996).#X\  P6G;ɒP#0 The letter asked how the costs calculated by the model compare with actual embedded loop costs of incumbent local exchange carriers and asked each proponent to submit the results from its model for three specific study areas. The letter also requested further information needed to answer modelspecific questions, such as how the current versions compared to the previous versions of these models.  X4-x` ` 2. Comments  X-x` `  a. Cost of Providing Universal Services "j*&&dd "Ԍ X-x201.` ` Loop Costs. MCI and NYNEX maintain that loop costs represent the actual  X-costs of providing core services for the purpose of universal service. yOb-#X\  P6G;ɒP#э#]\  PCɒP# MCI further comments at 3 (arguing, however, that some trunking costs may also be involved for providing services such as 911); NYNEX further comments at 5. Bell Atlantic argues that the local loop is the principal component of supported services, and thus, loop costs are a reasonable surrogate for the costs of all supported services in determining relative costs  X-among exchange carriers.  yOu-#X\  P6G;ɒP#э#]\  PCɒP# Bell Atlantic further comments at 2. According to Bell Atlantic, the costs of providing nonloop core services should not affect the state wide average costs enough to change the amount of universal service support flowing to the states, nor should these costs vary significantly among  X_-carriers._ {O -#X\  P6G;ɒP#э #]\  PCɒP# Id. at 2. Similarly, CompTel argues that access to supported services is provided by the loop and that loop costs do not vary according to the services the end user connects through  X1-the use of the loops.1B yO$-#X\  P6G;ɒP#э#]\  PCɒP# CompTel further comments at 9. USTA argues that the local loop cost is the actual cost of providing  X -access to emergency services and directory assistance.  yO-#X\  P6G;ɒP#э #]\  PCɒP# USTA further comments at 8.  X -x202.` ` NCTA and the Washington UTC contend that it is not appropriate to allocate 100 percent of loop costs to universal service because not all of loop costs are attributable to  X -the provision of supported services, but are also used to provide toll and other services.y\ b  {O-#X\  P6G;ɒP#э #]\  PCɒP#NCTA further comments at 3; Washington UTC further comments at 6 (citing Washington Utilities and  {O-Transportation Commission v. U S West Communications, Inc., Docket No. UT950200, Fifteenth Supplemental Order, April 11, 1996).y MFS argues that additional costs should not be included in loop costs for purposes of calculating universal service support unless the costs of providing a particular service vary by  Xy-census block and contribute to making a census block a high cost area.ly  yO-#X\  P6G;ɒP#э MFS further comments at 13.l  XK-x203.` ` Costs in Addition to Loop Costs. Several parties, however, contend that loop  X4-costs do not represent the total cost involved in providing core services.fZ4 {O!-#X\  P6G;ɒP#э See, e.g., Florida PSC further comments at 8; Maine PUC further comments at 5; New York DOE further comments at 5; PacTel further comments at 12; SWBT further comments at 4; Sprint further comments at 3; Time Warner further comments at 15; Vitelco further comments at 4.f Commenters assert"4k8*&&ddf"  X-that other joint, common and residual costs must be included in calculating total costs.r yOy-#X\  P6G;ɒP#э Ameritech further comments at 11.r  X-Commenters contend that switching,1XX yO-#X\  P6G;ɒP#э AT&T further comments at 6; Citizens Utilities further comments at 4; Florida PSC further comments at 8; Maine PUC further comments at 5; RTC further comments at 10; SWBT further comments at 4; Vitelco further comments at 4.1 transportx yO-#X\  P6G;ɒP#э Citizens Utilities further comments at 4; Maine PUC further comments at 6; RTC further comments at 10; Vitelco further comments at 4. or transmission,l yOj -#X\  P6G;ɒP#э AT&T further comments at 6.l signaling,``  {O -#X\  P6G;ɒP#э Id. at 6.` unbundled  X-element costsa  {Ou-#X\  P6G;ɒP#э Id. at 6. a and other coststX  yO-#X\  P6G;ɒP#э Florida PSC further comments at 9 (billing and collections costs); SWBT further comments at 6 (services expenses and support costs); Sprint further comments at 3 (maintenance, depreciation and overhead expenses); Vitelco further comments at 4 (information services costs and billing costs).t are implicated in the provision of a service. For example, Ameritech argues that the cost of singleparty, voice grade service includes not only the cost of the loops, but also a portion of the local switch, as well as maintenance and other joint and  X-common costs and residual costs.r yO-#X\  P6G;ɒP#э Ameritech further comments at 11.r In addition, USTA argues that the provision of voice grade access to the public switched network, touchtone and singleparty service entail  X_-switching and transport costs in addition to loop costs.l_4 yOD-#X\  P6G;ɒP#э USTA further comments at 8.l SWBT asserts that providing operator service requires substantial costs for facilities and the provision of customer  X1-assistance.o1 yO-#X\  P6G;ɒP#э SWBT further comments at 5, 7.o Maine PUC contends that even basic services such as the ability to connect with  X -the interexchange network require switches and trunks at the local wire center.q T yO-#X\  P6G;ɒP#э Maine PUC further comments at 5.q  X -x204.` ` A few parties argue that support for high switching costs associated with low volume switching, which are currently compensated through DEM weighting, should be  X -maintained.UX  yOS$-#X\  P6G;ɒP#э Century further comments at 1011 (arguing that the Joint Board should develop an explicit high cost mechanism to reduce the disparity between traffic sensitive access charges in rural and urban areas); NECA further comments at 5; USTA further comments at 8. U In addition, RTC maintains that the Commission should provide support for" l*&&dd "  X-access charges that cause significant disparities between rural and urban areas. yOy-#X\  P6G;ɒP#э RTC further comments at 10 (arguing that such support would facilitate toll rate averaging required by 47 U.S.C.  254(g) and promote long distance competition). RTC also maintains that support must be available for any network upgrades that rural telephone  X-companies will have to undertake to offer number portability.-X  yO-#X\  P6G;ɒP#э RTC further comments at 11 (arguing that carriers will have to develop and install software and hardware to provide number portability even if they have no customer requesting the service from whom to recover the costs).- NECA argues that the current method for assigning loop costs, wherein loop costs include not only the direct costs of providing physical loop plant facilities but also a portion of other costs such as general and administrative costs, must be maintained as part of any new universal service support  Xv-mechanism.lv@ yOg -#X\  P6G;ɒP#э NECA further comments at 5.l  XH-x205.` ` Costs of Additional Services. Few parties commented on the costs associated with advanced services. SWBT asserts that the provision of ISDN requires special switching  X -equipment and that the cost of that equipment should be supported.l  yO-#X\  P6G;ɒP#э SWBT further comments at 5.l USTA contends that access to some advanced services may require a different form of loop connection, such as fiber optic cable, and, thus, loop cost would not represent the actual cost of providing the  X -service in those instances.l `  yO-#X\  P6G;ɒP#э USTA further comments at 8.l We note that a few parties state or reiterate their belief that support should be limited to core services, with no universal service support going toward  X -advanced services.  yOH-#X\  P6G;ɒP#э Citizens Utilities further comments at 5; GCI further comments at 3.  Xy-x` `  b. Existing Universal Service Support Mechanisms  XK-x` `   i. Retain existing Universal Service mechanisms x  X-x206.` ` In General. Commenters greatly disagree on whether to retain the current universal service support mechanisms. Most small and rural LECs insist that the existing high  X-cost assistance fund should be retained in its current form.?  {O #-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., Century comments at 10; MonCre comments at 34; Montana Indep. Telecom. comments at 6; John Staurulakis comments at 7; SDITC reply comments at 3; Vitelco reply comments at 1. ? Many IXCs, large LECs, and others, however, criticize the existing support mechanisms as contrary to the principles and"m*&&dd"  X-goals of the 1996 Act. {Oy-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., Ad Hoc Telecom. Users comments at 12; NARUC comments at 1315; Texas PUC comments at 9; AT&T reply comments at 67.  They contend that the current system encourages inefficiencies and inhibits competition.  X-x207.` ` Continue using embedded costs. Supporters of the current program contend  X-that it has successfully achieved the goals of universal service." {Ow-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., Harris comments at 12; Minnesota Indep. Coalition comments at 13; OITAWITA comments at 1112. They argue that the current accounting and jurisdictional separation rules are the most accurate method for computing  Xv-support levels.v| {O -#X\  P6G;ɒP#э #X\  P6G;ɒP# Park Region Tel. comments at 4. See also MonCre comments at 34; New Hope Tel. Coop. comments at 34; Ragland Tel. Co. comments at 34. In addition, Ft. Mojave Telecom. asserts that the current program is  X_-"equitable and nondiscriminatory."_ yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Ft. Mojave Telecom. comments at 4. West Virginia Consumer Advocate insists that the existing universal service fund is an explicit support mechanism as contemplated in section  X1-254(e).1f  yPH-#X\  P6G;ɒP#э#c PE37 P# # X\  P6G;ɒP# West Virginia Consumer Advocate comments at 910. While acknowledging that the current jurisdictional separations rules may not advance the cause of creating a procompetitive, deregulatory policy framework, Montana PSC argues that they do "advance the cause of keeping rural rates and services comparable to urban rates and services, and therefore the Commission should maintain these subsidies during  X -the transition to a competitive market."  yO}-#X\  P6G;ɒP#э #X\  P6G;ɒP#Montana PSC comments at 10. Michigan Library Ass'n offers that inefficiencies  X -can be audited by state and Commission staff.  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Michigan Library Ass'n comments at 10. Meanwhile, SDITC states that it objects to the idea that universal service is a subsidy because it believes it is a "quid pro quo" for artificially capping at 25 percent those common costs which are allocated between interstate and intrastate jurisdictions, implying that the interstate allocation does not sufficiently recover  Xb-its costs.%b {O* -#X\  P6G;ɒP#э #X\  P6G;ɒP#SDITC reply comments at 10 (citing Smith v. Illinois Bell Tele. Co., 282 U.S. 133 (1930) and Decision  {O -and Order, 96 FCC 2d 781, 789 (1984)). % This commenter also argues that the current system should be maintained because  XK-"local competition is unlikely to occur in rural America for some time."Ks yOo#-#X\  P6G;ɒP#э #X\  P6G;ɒP# SDITC reply comments at 4.  X-x208.` ` Furthermore, many commenters maintain that any new universal service support"n*&&dd"  X-mechanisms must continue to be based on embedded costs.L {Oy-#X\  P6G;ɒP#э See, e.g., 360 comments at 78; BellSouth comments at 2; Frederick & Warinner comments at 23; Keystone comments at 7; LDDS comments at 1112; Maine PUC comments at 4; Michigan PSC comments at 2; OITAWITA comments at 1112; Rock Port Tel. comments at 2; Rural Iowa Indep. Tel. Ass'n comments at 2; SWBT comments at 1314; South Carolina PSC comments at 2; Staurulakis comments at 7; TCA comments at 5; Telec Consulting comments at 4; United Utilities comments at 1; Fred Williamson comments at 1213.L These commenters dispute the  X-reliability of proxy models to set adequate support levels.z {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., Ameritech comments at 12; NECA comments at 6. NECA argues further that allowing support levels to be set on the basis of competitive bids or proxy models would trigger a "race for the bottom" because competitors would seek to capture funding without  X-maintaining or improving the quality of service or investing in new technology.  {Oa -#X\  P6G;ɒP#э #X\  P6G;ɒP#NECA comments at 6. See also ITC comments at 4; TCA reply comments at 2, 5. Alaska PUC, Vitelco, and Puerto Rico Tel. Co. contend the peculiar topography and extreme weather in their service areas result in high loop costs and argue that any resulting loss of revenues  X_-from the existing fund levels would greatly increase local rates._ yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Alaska PUC comments at 12; Puerto Rico Tel. Co. comments at 89; Vitelco reply comments at 4. In addition, some commenters assert that small rural companies will not be able to compete under a system that  X1-does not use embedded costs.1.  {O-#X\  P6G;ɒP#э See, e.g., Alaska Tel. comments at 4; Harris comments at 11; OITAWITA comments at 1112; SDITC reply comments at 5.  X -x209.` ` Some commenters rely on particular interpretations of the 1996 Act to support their position that universal service mechanisms must be based on an incumbent carrier's embedded costs. Western Alliance asserts that the 1996 Act and the Fifth Amendment of the U.S. Constitution require a system of universal service supports based on embedded costs of  X -service."  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Western Alliance comments at 1 (citing Duquesne Light. Co. v. Barasch, 488 U.S. 299, 307 (1989) to argue that the implementation of any system that results in a sharp reduction of universal service support will effectively confiscate incumbent LECs' investments without just compensation in violation of the 5th Amendment). Alaska claims that nothing in the legislative history of the 1996 Act requires abolition of jurisdictional separationsbased support mechanisms and not all support  Xy-mechanisms are required to be explicit.UXyr yO!-#X\  P6G;ɒP#э #X\  P6G;ɒP#Alaska comments at 89 (citing  103(d) of the Senate bill, 141 Cong. Rec. S 8570, S 8575 (daily ed. June 16, 1995) and interpreting the prefaced phrase, "To the extent possible, .." of the Joint Explanatory Statement.U Moreover, Alaska Tel. argues that the embedded"yo*&&dd"  X-costs method is necessary to meet the sufficiency requirement of section 254(b)(5). yOy-#X\  P6G;ɒP# Alaska Tel. comments at 4. Section 254(b)(5) of the 1996 Act states that "[T]here should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service." In addition, Cincinnati Bell contends that the LECs' obligations under the 1996 Act as COLRs  X-for universal service obligations mandate the recovery of their investment in facilities.  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Cincinnati Bell comments at 11. See also Western Alliance comments at 4. Alaska Tel. concludes that the requirement for cost allocation rules and accounting safeguards found in the 1996 Act clearly demonstrates Congress's intent to use historical costs as a basis  X-for determining universal service support. yO -#X\  P6G;ɒP#э #X\  P6G;ɒP#Alaska Tel. reply comments at 3.  X_-x210.` ` Many commenters contend that a universal service mechanism based on embedded costs, rather than costs determined using a proxy model, will be the easiest to administer when CLECs want to serve a study area that already receives universal service  X -support. B {O -#X\  P6G;ɒP#э S#X\  P6G;ɒP#ee, e.g., Ardmore Tel. comments at 3; BellSouth comments at 1014; Bledsoe Tel. comments at 3;  {O-Hopper comments at 3; Ragland Tel. Co. comments at 3; Puerto Rico Tel. Co. further comments at 8. But see, USTA further comments at 2021 (arguing that a competitive carrier in a rural area should receive support based on its own costs to discourage cream skimming and a competitive carrier in high cost areas served by nonrural telephone companies should use the incumbent's costs to encourage competition). Pacific Telecom states that basing payments on the embedded costs of ILECs has the advantages of (i) being "specific, predictable and sufficient" for rural needs; (ii) being auditable; (iii) preventing overrecovery and incentives for gaming the system; (iv) being technologically neutral; and (v) serving as the best economic signal for potential competitive  X -entry.  yOe-#X\  P6G;ɒP#э #X\  P6G;ɒP#Pacific Telecom further comments at 89. Washington UTC suggests that this method might encourage the resale of embedded LEC facilities, while allowing competition, because it argues that competitors are more likely  X-to want to use ILEC facilities if they are compensated for doing so.Z  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Washington UTC further comments at 1718. Washington UTC, however, also notes that the disadvantages of using the incumbents embedded costs are that those costs may not reflect newer, less expensive  {OW-technology and would result in over recovery by the competitors. See also AT&T further comments at 2526.  BellSouth further contends that, when CLECs with lower enduser rates receive the same support as the incumbent, they lower the enduser cost. BellSouth explains that the enduser rates would eventually fall due to competition and the support could be adjusted to reflect the lower  X4-rates.4 yO#-#X\  P6G;ɒP#э #X\  P6G;ɒP#BellSouth further comments at 3334. Vitelco advocates that a CLEC that meets all COLR obligations should be entitled to high cost funds based on its own embedded costs, subject to a cap at the embedded costs of"p8*&&ddG"  X-the incumbent. yOy-#X\  P6G;ɒP#э #X\  P6G;ɒP# Vitelco further comments at 7.  X-x211.` ` Discontinue use of embedded costs. Commenters who maintain that LEC embedded costs are not a reasonable basis for determining support express concern that this  X-method does not encourage companies to operate efficiently.QX {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., TRA comments at 11. But see, Western Alliance further comments at 5 (arguing that no commenter has ever demonstrated that the high cost fund has led to abuse or inefficiency by rural carriers).Q MCI contends that the ILECs embedded costs are likely to include many inefficiencies, and thus be higher than necessary.  Xv-This would result in a competitor receiving more support than required.v {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#MCI further comments at 12. See also Citizens Utilities further comments at 8. In addition, AirTouch asserts that the use of embedded costs would create incentives for inefficient bypass of ILEC networks and manipulation and inflation of the costs, as well as an increase in the  X1-burden borne by subscribers.1D yO&-#X\  P6G;ɒP#э #X\  P6G;ɒP#AirTouch further comments at 2021. NARUC contends that an ILECs embedded costs do not reflect the true cost of providing local service. It reports that many states have determined that cost studies produced by LECs overstate the costs significantly by assuming that the cost of a local loop is the real cost of local service, even though the loop cost is a joint cost shared among many services, and by including costs associated with redesign of network for non X -basic services.  yOC-#X\  P6G;ɒP#э #X\  P6G;ɒP#NARUC comments at 1315. Ad Hoc Telecom. Users argues that the LECs have deployed more  X -transmission capacity than required to provide one line per household. d  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Ad Hoc Telecom. Users comments at 12. Moreover, Time Warner contends that the use of embedded costs does nothing to cure what it considers the fundamental problems with using embedded costs as the basis for universal service support. These include verification of embedded costs, obsolete past engineering practices and investment decisions, past investment initiatives that were not undertaken to serve any  X4-legitimate universal service objective, and no incentive to control or reduce expenses.4  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Time Warner further comments at 3233.  X-x212.` ` Moreover, commenters assert that the use of embedded costs does not promote  X-competitive neutrality.  {O$#-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., Ad Hoc Telecom. Users comments at 6; California PUC reply comments at 5; Time Warner further comments at 31. RUS argues that historical costs as a basis of support is inconsistent with the goals of the 1996 Act because this method would provide no incentive"q*&&dd"  X-for competition. yOy-#X\  P6G;ɒP#э #X\  P6G;ɒP#RUS reply comments at 13. AT&T contends that forcing the recovery of embedded costs distorts the competitive market and allows the ILEC to thwart entry by other more efficient  X-competitors.X yO-#X\  P6G;ɒP#э #X\  P6G;ɒP# AT&T further comments at 2326. Time Warner asserts that allowing rural companies to retain universal service  X-support based on embedded costs, in combination with the section 251(f) exceptions,M yOT-#X\  P6G;ɒP#э #X\  P6G;ɒP#Section 251(f) of the 1996 Act exempts rural carriers with fewer than 2 percent of nationwide subscriber lines from complying with all of the interconnection requirements of subsections (b) and (c) of section 251.M creates a protected environment that would operate to consumers' longterm detriment by insulating  X-these companies from competitive pressure to lower costsX0Í ÍX01Í Í.@ yO~ -#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Time Warner further comments at 31. In addition, MCI argues that ILECs are not entitled to a guaranteed complete recovery of their past investments, any more  X_-than is any other competitive firm. _ {O-#X\  P6G;ɒP##X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP# MCI reply comments at 11. See also ALTS reply comments at 12.  Teleport further contends that prior investment is not an implicit subsidy and an ILECs ability to recover its investment will not be hindered by the  X1-development of competition.1b  yOD-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Teleport reply comments at 56.  X -x213.` ` ITA/EMA argue that the collection of universal service support through interstate access charges would violate the express mandate of the 1996 Act that all universal  X -service supports be made explicit.  yOx-#X\  P6G;ɒP#э #X\  P6G;ɒP#ITA/EMA comments at 11. RUS also contends that the use of embedded costs fails to provide for the future evolution of telecommunications services and fails to ensure  X -affordable service by ignoring probable revenue losses from the appearance of new entrants.  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#RUS reply comments at 13. AT&T also argues that this method would result in state commissions having to undertake  Xy-frequent, unwieldy and expensive inquiries into the value and prudence of claimed costs.y {O<-#X\  P6G;ɒP#э #X\  P6G;ɒP# AT&T further comments at 2326.  See also TCI further comments at 2526. TCI also argues that targeting the support only to high cost areas under the embedded costs  XK-approach will be difficult because ILECs report costs on a study area basis.K yO"-#X\  P6G;ɒP#э #X\  P6G;ɒP#TCI further comments at 2526.  X-x214.` ` Use of ILEC costs for CLECs. Some ILEC commenters support the use of embedded costs to calculate assistance for ILECs to determine the universal service support"r4*&&dd"  X-they would receive, but oppose their use for calculating such support to CLECs.QZ {Oy-#X\  P6G;ɒP##X\  P6G;ɒP#э See, e.g., Minnesota Indep. Coalition comments at 13; PacTel further comments at 30; RTC further comments at 18 (it is unlawful, uneconomic and unfair to base high cost payments to CLECs on the ILECs costs).Q Alaska Tel. claims that providing payments to a competitor based on the embedded costs of an incumbent is not lawful because it contends that the language of section 254 is explicit in limiting the use of universal service support only for the provision, maintenance, and  X-upgrading of facilities and services for which the support is intended. yO? -#X\  P6G;ɒP##X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Alaska Tel. further comments at 10. Minnesota Indep. Coalition contends that basing the support for CLECs on the incumbents embedded costs may lead to payments to the new competitors that are far in excess of the costs of providing service and that these payments would unreasonably subsidize new competitors and cause  XH-uneconomic investment. "Hz {Os-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Minnesota Indep. Coalition comments at 10. See also NYNEX further comments at 24 (noting that because CLECs tend to concentrate initial entry on areas with loop costs below the statewide average cost, basing the support for a CLEC on the ILECs study area average book cost would give windfall profits to the competitor); PacTel further comments at 30.  SWBT argues that such a system of competition would not reflect the competitors actual costs, would reduce incentives for efficiency, would disadvantage  X -ILECs by requiring cost studies, and would require continued monitoring and regulation. d  yO/-#X\  P6G;ɒP#э #X\  P6G;ɒP# SWBT further comments at 2324. At the same time, SWBT asserts that new entrants should only receive support for an area if an ILEC receives support, but limited to costs associated with its own facilities. Moreover, SWBT states that competitors should have the same reporting requirements as ILECs and be required to justify their own costs. It maintains that the ILECs costs should be the cap on support levels. It notes, however, that allowing a new entrant to use an ILECs costs would be simple to administer, and each carrier would receive the same level of support.  Several other commenters, including IXCs, large LECs, and nonwireline telecommunication companies, also oppose the use of an ILECs embedded costs as a basis for calculating the support to be provided to a CLEC for the same reasons they criticize the use of embedded  X -costs generally.Z  {OK-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., AT&T further comments at 7; AirTouch further comments at 26; Ameritech further comments at 26; Citizens Utilities further comments at 8; MCI further comments at 12; NCTA comments at 3233; Sprint further comments at 7; TCI further comments at 2526; U S West further comments at 13.  Ameritech and NCTA maintain that the incumbents embedded costs bear  X -no relationship to the new entrants costs.  yOV!-#X\  P6G;ɒP#э #X\  P6G;ɒP#NCTA comments at 3233; Ameritech further comments at 26. NYNEX, however, argues that the CLEC should use the ILEC's booked costs only if it offers universal service throughout the ILEC's study  Xy-area.y yO$-#X\  P6G;ɒP#э#X\  P6G;ɒP# NYNEX further comments at 20. Time Warner contends that, if the embedded costs methodology is maintained, CLECs should be allowed to use the ILEC's embedded costs in order for the fund to be"bs*&&dd"  X-competitively neutral. yOy-#X\  P6G;ɒP#э #X\  P6G;ɒP#Time Warner further comments at 27.  X-x` `  ii. Modify the Existing High Cost Assistance Fund  X-x215.` ` In General. Commenters in both the current proceeding and the CC Docket No. 80826 proceeding have suggested modifications to the current system that would continue to use embedded costs to determine the level of support. The proposed modifications that appear to enjoy more widespread support include: adjusting the existing support formula by increasing the qualifying threshold; reducing the support percentages; eliminating specific ILECs from eligibility; excluding particular categories of administrative and overhead expenses for calculating loops; readjusting study areas; and changing the methodology of counting loops.  X -x216.` ` Increasing the threshold for receiving assistance. NYNEX contends that the current threshold is too low to distinguish a high cost area from an average cost area  X -effectively. X yO-#X\  P6G;ɒP#э #X\  P6G;ɒP# NYNEX further comments at 1820. AT&T, Time Warner, and Citizens Utilities join NYNEX in supporting raising  X-the eligibility threshold from the current 115 percent to 130 percent yO)-#X\  P6G;ɒP#э #X\  P6G;ɒP#This would be the approximate equivalent of one standard deviation above national average loop costs perline. above national average  Xy-loop costs perline to target the support more effectively.\y@ {Oj-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, AT&T further comments at 24, App. A; Citizens Utilities further comments at 67; NYNEX further comments at 1820; Time Warner further comments at 28. These four commenters also continue to oppose the  {O-use of embedded costs in calculating the support levels. See also Bledsoe Tel. 80286 NPRM comments at 5.  In response to the 80-286 NPRM, the Maine PUC and Vermont DPS agreed with this modification because it would more  XM-accurately target funding.^Md  {Ob-#X\  P6G;ɒP#э #X\  P6G;ɒP# Maine PUC 80286 NPRM comments at 3; Vermont DPS 80286 NPRM comments at 22. See also Ad  {O,-Hoc Telecom. Users 80286 NPRM comments at 12; Frontier 80286 NPRM comments at 69; Sprint 80286  {O-NPRM comments at 1014; Teleport 80286 NPRM comments at 1618; Time Warner further comments at 28. In the 80286 proceeding, SWBT, however, opposed increasing the perline threshold because it claimed that this would shift over $200 million to the state  X-jurisdiction and would harm small ILECs.  {OZ!-#X\  P6G;ɒP#э #X\  P6G;ɒP#SWBT 80286 NPRM comments at 4652, Att. 1.  See also Ohio PUC 80286 NPRM comments at 911. Century argued in the 80286 proceeding that increasing the threshold does not better target high cost assistance, but simply reduces the size  X-of the fund. {O$-#X\  P6G;ɒP#э #X\  P6G;ɒP#Century 80286 NPRM comments at 1821 "t*&&dd"Ԍ X-x217.` ` Lower the high cost fund payout percentages. Citizens Utilities proposes that  X-the current payout percentages of up to 75 percent yOb-#X\  P6G;ɒP#э #X\  P6G;ɒP#If a company has 200,000 or fewer lines in its study area, for its loop costs in excess of 150 percent of the national average, an additional 75 percent of the LEC's costs may be recovered from the interstate jurisdiction. As 25 percent of its loop costs are already recoverable under the regular jurisdictional separations rules, the additional 75 percent support from the high cost assistance fund allows that LEC to recover 100 percent of their incremental loop costs in excess of the national average from the interstate jurisdiction. recovery that applies when an ILEC with 200,000 or fewer loops has perloop costs in excess of 150 percent of the national average be  X-reduced in order to encourage efficiencies in operation.#x S -#&a\  P6G; u&P#э # X\  P6G;ɒP#Citizens Utilities further comments at 67. See also Great Plains 80286 NPRM comments at 11112;  {O -MCI 80286 NPRM comments at 1016.# In response to the 80286 NPRM, GVNW argued that reducing the payout percentage to 70 percent will reduce the size of the  X-fund. {O"-#X\  P6G;ɒP#э #X\  P6G;ɒP#GVNW 80286 NPRM comments at 34. Arvig Enterprises in the 80286 proceeding suggested that the current payout percentage be reduced to 65 percent to eliminate the perception that current cost  Xa-methodologies discourage efficient operation.at  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Arvig 80286 NPRM comments at 4. In response to the 80286 NPRM, SWBT, however, contended that reducing the recovery level in this manner violated the Commission's proper targeting principle by reducing support to those companies most in need of  X -assistance.1   {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#SWBT 80286 NPRM comments at 4652, Att. 1. See also GTE 80286 NPRM comments at 4352;  {O-North Carolina UC 80286 NPRM comments at 34.1  X -x218.` ` Eliminate the inclusion of administrative costs. To integrate efficiency incentives, AT&T recommends eliminating the inclusion of administrative costs in the  X -calculations of loop costs receiving high cost support.\ b  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#AT&T further comments at 24, App. A. See also ACTA 80286 NPRM comments at 9; MFS 80286  {O-NPRM comments at 12; Sprint 80286 NPRM comments at 1014 (arguing that this will help deter "gold plating"); Washington UTC further comments at 17. Ad Hoc Telecom. Users contends that administrative expenses, such as advertising and sales, should be eliminated because they  X-are not necessary for the provision of universal service. {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#Ad Hoc Telecom. Users comments at 12.  See also MCI 80286 NPRM comments at 1016. New York DPS also advocates eliminating the inclusion of any costs not necessarily related to the provision of subscriber  Xf-loops.f {O/$-#X\  P6G;ɒP#э #X\  P6G;ɒP# New York DPS comments at 6. See also NASUCA 80286 NPRM comments at 1112; Nebraska PSC  {O$-80286 NPRM comments at 7. Missouri PSC proposes that, instead of using actual administrative costs, an average administrative cost perline imputed to the carrier should be used to prevent ILECs from"Out*&&dd"  X-obtaining high cost support for excessive administrative costs. {Oy-#X\  P6G;ɒP#э #X\  P6G;ɒP#Missouri PSC comments at 9. See also Florida PSC 80286 NPRM comments at 910. Meanwhile, SDITC recommends replacing the compensation of administrative expenses with compensation for "telephone plant investment" to encourage development of advanced telecommunications  X-facilities in all areas.Z yO-#X\  P6G;ɒP#э #X\  P6G;ɒP# SDITC reply comments at 3, 7. NECA, however, suggests that, if the Commission is concerned about excessive levels of general and administrative expenses in the high cost assistance fund, the Commission could consider using statistical measures, such as a twostandarddeviation test to  Xv-limit the amount of such expenses.v {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#NECA further comments at 19. See also Pacific Bell 80286 NPRM comments at 6; USTA 80286  {O -NPRM comments at 2425.  XH-x219.` ` Eliminate de minimis loop cost support. AT&T and Time Warner propose that high cost assistance to LECs receiving less than $1.00 in universal service support per loop  X -be eliminated to reduce the size of the fund. F {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#AT&T further comments at 24, App. A; Time Warner further comments at 28. See also MCI 80286  {O-NPRM comments at 1016. Maine PUC also favors this proposal on the  X -basis that these payments are too low to make much difference to the recipients.U  {OX-#X\  P6G;ɒP#э #X\  P6G;ɒP# Maine PUC comments at 10. See also Alaska PUC 80286 NPRM comments at 1617; Iowa Utilities  {O"-Board 80286 NPRM comments at 25; Nebraska PSC 80286 NPRM comments at 710.U In  X -response to the 80286 NPRM, Cincinnati Bell and SWBT also supported elimination of de  X -minimis assistance since applying this modification to large ILECs will pose the least potential  X -harm to small LECs, while still reducing the size of the high cost support mechanism.  {Os-#X\  P6G;ɒP#э #X\  P6G;ɒP#Cincinnati Bell 80286 NPRM comments at 10; SWBT 80286 NPRM comments at 4652, Att. 1. In  X -their response to the 80286 NPRM, however, GTE, Pacific Bell, and BellSouth opposed  X-eliminating de minimis loop cost support.  {O-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#GTE 80286 NPRM comments at 4352. BellSouth contended that the Commission's proposal to withdraw assistance to ILECs receiving less than $1.00 per month is predicated on the "fiction" that, if the carrier is large, it can internalize the subsidies. BellSouth said this "easy way out" is no longer available and argued that, if the Commission eliminates high cost support below $1.00, the rules should be modified to permit the eliminated amount to be  X'-assessed as an end user surcharge.'" {O"-#X\  P6G;ɒP#э #X\  P6G;ɒP#BellSouth 80286 NPRM comments at 2023.  X-x220.` ` Eliminate or reduce support to large carriers. AT&T, Time Warner, and"v*&&dd'"  X-SDITC promote the proposal of disqualifying Tier 1 LECsk| yOy-#X\  P6G;ɒP#э #X\  P6G;ɒP#For tariff review purposes, the term Tier 1 LEC has traditionally referred to a company having annual revenues from regulated operations of $100 million or more. For accounting purposes, the Commission uses the terms Class A and B companies as defined in 47 C.F.R.  32.11(a)(1) and (2) to differentiate large and small carriers. Pursuant to section 402(c), the revenue threshold of Class A LECs has been indexed to inflation using  {O-the Gross Domestic ChainType Price Index (GDPCPI). See, Implementation of the Telecommunications Act of  {Oc-1996, Reform of Filing Requirements and Carrier Classifications, Order and Notice of Proposed Rulemaking, CC Docket 96193, FCC 96370 (Sept. 12, 1996). k from receiving high cost support  X-to target the support more appropriately.(  yO -#X\  P6G;ɒP#э #X\  P6G;ɒP#SDITC reply comments at 8; AT&T further comments at 24, App. A; Time Warner further comments  {On -29. See also NCTA 80286 NPRM comments at 2, 23. ( In response to the 80286 NPRM, ICORE recommends disqualifying Class 1 and Class 2 LECs from eligibility to target funding to  X-smaller ILECs.f  {O -#X\  P6G;ɒP#э #X\  P6G;ɒP# ICORE 80286 NPRM comments at 1617. Alaska PUC supported the adoption of a slidingscale distinction between  X-small and large ILECs to target high cost support better.  {OO-#X\  P6G;ɒP#э #X\  P6G;ɒP# Alaska PUC 80286 NPRM comments at 1718. See also TCA 80286 NPRM comments at 1517. Missouri PSC also supported  X-implementing a sliding scale in the 80286 NPRM proceeding on the basis that it would  Xz-eliminate the need to reconsider the distinction between large and small companies.z  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP# Missouri PSC 80286 NPRM comments at 1316. In addition, Montana PSC and New York DPS stated that limiting the higher levels of assistance to study areas with 100,000 lines or less might be more consistent with the goal of targeting  X5-assistance to smaller LECs.?5 {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Montana PSC 80286 NPRM comments at 56; New York DPS 80286 NPRM comments at 78. See  {O-also Northeast Florida Tel. Coop. 80286 NPRM comments at para. 42.? Frontier recommended capping the amount of assistance to  X -study areas with 50,000 or less lines. x {OG-#X\  P6G;ɒP#э#X\  P6G;ɒP# Frontier 80286 NPRM comments at 69. Roseville Tel., however, opposed limiting higher levels of assistance to study areas with 100,000 or fewer lines, arguing that to suggest that large companies serving high cost areas do not need high cost support assumes the large company's ability to continue internal subsidies from rates in low cost areas to rates in high cost areas. It stated that it cannot be assumed that this situation will continue in the face of  X -growing competition.  {Of!-#X\  P6G;ɒP#э #X\  P6G;ɒP# Roseville Tel. 80286 NPRM comments at 59. See also Vitelco reply comments at 1011.  X}-x221.` ` Readjust study areas. NYNEX states that some large carriers have been able to qualify for assistance intended for small carriers by maintaining small study areas within a state. Thus, it recommends combining study areas within a state that are owned by the same"Ow*&&dd"  X-ILEC to apply the high cost assistance mechanisms uniformly and consistently.< {Oy-#X\  P6G;ɒP#э #X\  P6G;ɒP# NYNEX further comments at 19. See also Bell Atlantic 80286 NPRM comments at 811; MCI 80286  {OC-NPRM comments at 1016; AT&T further comments at 24, App. A. < Missouri PSC also promotes combining such study areas because it contends that the analysis of such broad areas will best reflect the overall circumstances of each ILEC. It explains that currently smaller study areas might permit a large ILEC to receive high cost assistance related to its  X-high cost areas even though the ILEC's overall costs were no higher than average.$ {Oy-#X\  P6G;ɒP#э #X\  P6G;ɒP#Missouri PSC comments at 8.  See also Iowa Utilities Board 80286 NPRM comments at 25; Nebraska  {OC -PSC 80286 NPRM comments at 7. In  X-response to the 80286 NPRM, GSA, however, opposed this proposal on the basis that it does not address the problem of internal subsidization of supporting high cost areas with revenues  Xa-from low cost areas.a {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#GSA 80286 NPRM comments at 67. New York DPS also opposed combining loop costs for affiliated companies within a state because several small affiliated companies operate in New York and each company operates in a distinct service territory and charges rates unique to that  X -company.  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#New York DPS 80286 NPRM comments at 67. Pennsylvania PUC also stated that it was opposed to combining all affiliated study areas in a state because this would immediately disqualify large carriers from high cost  X -assistance even though they have high cost areas within a study area.  {OC-#X\  P6G;ɒP#э #X\  P6G;ɒP#Pennsylvania PUC 80286 NPRM comments at 1114.  X -x222.` ` Citizens Utilities and BellSouth recommend using a smaller geographic area  X -than a study area, such as a wire center,, 6  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#A wire center is the location where the telephone company terminates subscriber outside cable plant (i.e. their local lines) with the necessary testing facilities to maintain them., as the basis for determining eligibility to target the  X-support better and reduce the size of the fund.^  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#BellSouth further comments at 32; Citizens Utilities further comments at 7. See also Ameritech 80286  {O-NPRM comments at 1314; Cincinnati Bell 80286 NPRM comments at 6; NASUCA 80286 NPRM comments at  {Oe-89, 19; SWBT 80286 NPRM comments at 19, Att. 1. Cincinnati Bell, in response to the 80286  X}-NPRM, stated that wire centers are appropriate because they are a compromise between study  Xh-areas and CBGs.h {O!-#X\  P6G;ɒP#э #X\  P6G;ɒP#Cincinnati Bell 80286 NPRM comments at 6. Also, Ameritech argued that collecting data by wire center may be less  XQ-difficult than collecting data by CBG.QF {OH$-#X\  P6G;ɒP#э #X\  P6G;ɒP# Ameritech 80286 NPRM comments at 1314. BellSouth asserted that the use of a wire center as the geographic basis for determining support would eliminate the need to divide carriers into":x*&&dd"  X-large and small categories. {Oy-#X\  P6G;ɒP#э #X\  P6G;ɒP# BellSouth 80286 NPRM comments at 2023.  X-x223.` ` GTE proposes using a unit smaller than a wire center, such as a CBG, because, it states, this will result in better targeted support, minimize the amount of support provided,  X-and send more accurate price signals to new entrants.JZ {O-#X\  P6G;ɒP#э #X\  P6G;ɒP# GTE comments at 10. See also Jones Intercable 80286 NPRM comments at 45; Pennsylvania PUC 80 {Oy-286 NPRM comments at 79, 1415; Sprint 80286 NPRM comments at 1014.J In response to the 80286 NPRM, California PUC also advocating the use of CBGs, stated that the CBG is small enough to make the costs of an area more homogenous while keeping the distribution of the fund  Xa-manageable.a {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#California PUC 80286 NPRM comments at 4. Bell Atlantic, however, opposed the use of CBGs to identify high cost areas. It argued that attempting to administer a national CBGbased high cost support mechanism  X3-would become overly complex and cumbersome.3H {O,-#X\  P6G;ɒP#э #X\  P6G;ɒP#Bell Atlantic 80286 NPRM comments at 811. BellSouth also opposed the use of CBGs. It claimed that CBGs have no relationship to a local service obligation, have nothing to do with local service areas as defined by state commissions, and have no operational significance  X -to ILECs, and that no credible evidence exists that they bear any relationship to costs.  {Oy-#X\  P6G;ɒP#э #X\  P6G;ɒP#BellSouth 80286 NPRM comments at 811, 2628. See also Alaska PUC 80286 NPRM comments at 79.  X -x224.` ` Adjust Rate Structure. GTE advocates imposing a rate ceiling to achieve specific level of enduser prices. It proposes that the level of support must initially be based  X-upon a measure of the cost of service with a rate ceiling.X4  yOw-#X\  P6G;ɒP#э #X\  P6G;ɒP#GTE comments at 89. GTE also asserts that the support should fund the difference when the rate ceiling is less than the embedded costs. A competitive bidding process should replace this costbased comparison to determine the support amount once carriers enter the market. In the 80286 NPRM proceeding,  X}-the California PUC stated that it is addressing rate caps in certain areas as well.}T  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#California PUC 80286 NPRM comments at 4. ALLTEL recommended implementing rate rebalancing to reduce the fund size by allowing ILECs with a perline contribution of less than $1.00 to increase their SLCs, especially if the proposal to  X8-eliminate de minimis support is adopted.8 {O"-#X\  P6G;ɒP#э #X\  P6G;ɒP# ALLTEL 80286 NPRM comments at 7.  See also BellSouth 80286 NPRM comments at 2023; Citizens Utilities further comments at 7.  X -x225.` ` Implement additional accounting safeguards. Washington UTC proposes that" y@*&&ddF" the Commission implement additional accounting safeguards to book, track, and report appropriate revenues to explicit accounts to ensure that high cost funds are used for intended  X-purposes. yOK-#X\  P6G;ɒP#э #X\  P6G;ɒP#Washington UTC further comments at 16.` `  X-x226.` ` Make the support portable. BellSouth and AT&T propose making the universal service support fully "portable" so that the support should move with the customer. They state that this will encourage competition and eventually reduce enduser rates for local  X_-service._X {Oh -#X\  P6G;ɒP#э #X\  P6G;ɒP#BellSouth comments at 1014; AT&T further comments at 20.  See also Sprint 80286 NPRM comments at 1014.  X1-x227.` ` Adopt an indexed cap. AT&T recommends adopting an indexed cap on the growth of the universal service support to reduce the size of the fund and encourage efficient  X -operation.B  {Of-#X\  P6G;ɒP#э #X\  P6G;ɒP#AT&T further comments at 24, App. A. See also Frontier 80286 NPRM comments at 69; MCI 80286  {O0-NPRM comments at 1016; Sprint 80286 NPRM comments at 1014.B In response to the 80286 NPRM, Alaska PUC expressed concern that a  X -permanent cap would reduce support available to needy companies in an arbitrary manner.&  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Alaska PUC 80286 NPRM comments at 1718. See also USTA 80286 NPRM comments at 3132;  {Ow-Vermont DPS 80286 NPRM comments at 2728.&  X -x228.` ` Implement usagesensitive support. ITC and ETEX Tel. Coop. propose implementing a "usagesensitive" universal service mechanism, based on a company's embedded costs, that lowers the high cost assistance funding as the usage perminute for each access line increases. These commenters contend that this methodology will promote toll and resale competition in rural areas while maintaining monopoly efficiencies of lowdensity rural  XM-areas.Mj  yOh-#X\  P6G;ɒP#э #X\  P6G;ɒP#ITC comments at 10; ETEX Tel. Coop. reply comments at 2.  X-x229.` ` Change current assessment structure. Many commenters recommend changing the current assessment structure to promote competitive neutrality to make the contribution  X-mechanism more equitable. For example, ACTA in the 80286 NPRM proceeding argued that preserving high cost assistance should not be the burden of one segment of the  X-telecommunications industry, namely the interexchange segment.  {Op#-#X\  P6G;ɒP#э #X\  P6G;ɒP#ACTA 80286 NPRM comments at 9. AT&T, GTE, NYNEX, and Lincoln propose that high cost support be funded on the basis of a single, uniform surcharge to all enduser telecommunications services. Thus, all telecommunications service"z *&&ddo" providers, including IXCs, ILECs, CLECs, wireless carriers, and resellers, would finance high  X-cost support. yOb-#X\  P6G;ɒP#э #X\  P6G;ɒP#AT&T comments at 7; GTE comments at 89; Lincoln reply comments at 7; NYNEX further comments at 20. AT&T contends that this surcharge will foster greater efficiency and new  X-entry that will result in lower prices for customers.   yO-#X\  P6G;ɒP#э #X\  P6G;ɒP# AT&T comments at 8. Citizens Utilities recommends creating  X-a contribution mechanism that assesses all interstate carriers, instead of just IXCs.  yO -#X\  P6G;ɒP#э #X\  P6G;ɒP#Citizens Utilities further comments at 7. In  X-response to the 80286 NPRM, Nebraska PSC proposed that the current threshold should be eliminated and all telecommunications carriers should contribute to support high cost assistance based on a percentage of gross revenues that would "establish that large carriers  Xa-support the fund but small carriers would also invest in the fund." a@ {OR-#X\  P6G;ɒP#э #X\  P6G;ɒP# Nebraska PSC 80286 NPRM comments at 6.  X3-x230.` ` Redefine current small and large company distinction. In response to the 80 X -286 NPRM, Pennsylvania PUC and BellSouth supported changing the definition of a small  X -study area to be one with 100,000 loops or fewer to target the support better.)   {O-#X\  P6G;ɒP#э #X\  P6G;ɒP# BellSouth 80286 NPRM comments at 2023; Pennsylvania PUC 80286 NPRM comments at 1114. See  {OV-also MCI 80286 NPRM comments at 1016.) In order to achieve the goals of high cost support, however, Maine PUC recommends eliminating the  X -200,000 line distinction between large and small companies in defining the level of support.J  .  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP# Maine PUC comments at 9. See also Ohio PUC 80286 NPRM comments at 911; SWBT 80286  {O-NPRM comments at 4652, Att. 1; Vermont DPS 80286 NPRM comments at 2227.J  X -x231.` ` Use of average loop counts. In response to the 80286 NPRM, Florida PSC, Montana PSC, and Nebraska PSC supported the determination of high cost support eligibility based on the average lines per year rather than on a count at the end of the year as a more  Xj-accurate method to calculate loop costs.Pj  {O-#X\  P6G;ɒP#э #X\  P6G;ɒP# Florida PSC 80286 NPRM comments at 911; Montana PSC 80286 NPRM comments at 5; Nebraska  {Oo-PSC 80286 NPRM comments at 7.  See also ACTA 80286 NPRM comments at 1213.P In that proceeding, USTA contended that using the average number of lines over a year instead of the year end number would impose a substantial administrative burden on small exchange carriers that do not have mechanized line  X%-counts.w% {O#-#X\  P6G;ɒP#э USTA 80286 NPRM comments at 25.w USTA argued that this could also understate loop counts for carriers that are declining in size and overstate loop costs for growing carriers. USTA maintained that a better approach would be to permit exchange carriers involved in mergers and acquisitions to adjust"{x*&&dd'" expense levels for the year in which a transaction occurred to produce a consistent match  X-between expenses and loops investment data. {Ob-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP# Id. at 25.  X-x` `   iii. DEM Weighting Program  X-x232.` ` Maintain existing DEM weighting program. Several commenters, including  Xv-many small and rural ILECs, want the existing DEM weighting program to continue.(vZ {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., MonCre comments at 34; New Hope Tel. comments at 34; RTC comments at 15; Telec Consulting comments at 68; West Virginia Consumer Advocate comments at 910.( Siskiyou argues that the DEM weighting program is a valid and appropriately focused program because switching costs are three or more times higher per access line in small rural  X1-exchanges than they are in larger exchanges.1 yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#Siskiyou reply comments at 3. OITAWITA explain that switching costs are higher for small ILECs because they are forced to buy components of a switch sized for 10,000 customers, even though they might be serving only 1,000 customers. Moreover, these commenters state that they are disadvantaged because they are too small to implement volume  X -discounts.7 D {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#OITAWITA comments at 710. See also Northeast Florida Tel. Co. 80286 NPRM comments at para.  {O-10; Rural Iowa Indep.Tel. Ass'n 80286 NPRM comments at 1.7 Some commenters argue that eliminating the DEM weighting program or  X -combining it with the Federal universal service support would raise rural rates.   {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#Century comments at 12. See also Alaska Tel. comments at 4; ICORE comments at 1012; MidRivers  {O-Tel. Coop. 80286 NPRM comments at 26.  Century also asserts that eliminating or modifying this program would make universal service support methods less specific and violate the 1996 Act "by creating an internal crosssubsidy between distinct service elements that [flies] in the face of the Act's preference for unbundling in a  Xb-competitive environment."b  {O-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP# Century comments at 14 (citing 47 U.S.C.  251 (c)(3)). In addition, ICORE contends that the DEM weighting program  XK-is not a subsidy or assistance mechanism.K  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#ICORE comments at 1012.  X-x233.` ` Modify the current DEM weighting rule. Commenters proposed several modifications to the current rule. NYNEX, Maine PUC, Citizens Utilities, BellSouth, and New York DPS recommend combining switching and loop costs in one high cost "fund" to make the support for switching costs explicit by removing the revenue requirements associated"|*&&dd"  X-with it from smaller ILECs' interstate switched access rates. $ yOy-#X\  P6G;ɒP#э #X\  P6G;ɒP# BellSouth comments at 1014; Maine PUC comments at 11; New York DPS comments at 7; Citizens  {OA-Utilities further comments at 67; NYNEX further comments at 22. See also GSA 80286 NPRM comments at  {O -34; Pacific Bell 80286 NPRM comments at 1; Staurulakis comments at 7; Texas PUC 80286 NPRM comments at 34; Lincoln reply comments at 4.  Maine PUC also adds that this will reduce the size of the fund because companies with high loop costs but low switching  X-costs will not receive as much assistance. yO7-#X\  P6G;ɒP#э #X\  P6G;ɒP# Maine PUC comments at 11. In response to the 80286 NPRM, Colorado PUC, however, opposed combining DEM weighting with high cost support. It claimed that this action would merely shift the targeted support among recipients and it would be particularly  X-harmful to small ILECs.D {O -#X\  P6G;ɒP#э #X\  P6G;ɒP#Colorado PUC 80286 NPRM comments at 78. NECA and ICORE also argue that DEM weighting should not be combined with the universal service support mechanisms because they serve different purposes  Xa-and the administration of both programs would be burdensome.a yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#ICORE comments at 1012; NECA further comments at 1819. Instead, they advocate replacing the current stepped formulas to calculate DEM weighting amounts for study areas  X3-between 10,000 and 50,000 access lines using a "slidingscale" approach.c3f  {OJ-#X\  P6G;ɒP#э #X\  P6G;ɒP#ICORE comments at 1012; NECA further comments at 1819. See also Missouri PSC 80286 NPRM  {O-comments at 67; South Dakota PUC 80286 NPRM comments at 1; USTA 80286 NPRM comments at 41.c United Utilities argues that the current program should be changed to more accurately reflect the use of  X -Category 3 switching costs,  {Ox-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Category 3 switching costs are the costs associated with operating local switching equipment. See 47 C.F.R.  36.125. the amount of Category 3 switching costs eligible for universal  X -service support should be determined and the DEM weighting factors should be revised.  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP#United Utilities comments at 34.  X -x234.` ` Eliminate the DEM weighting program. New Jersey Advocate, Time Warner, AT&T, and Lincoln contend that the DEM weighting mechanism creates an implicit subsidy because it is embedded in interstate access charges, and is therefore, contrary to the 1996  X{-Act's mandate that all subsidies be explicit.X01Í ÍX0Í ÍX0Í ÍX0Í Í{ yO -#X\  P6G;ɒP#э #X\  P6G;ɒP# New Jersey Advocate comments at 12; Lincoln reply comments at 4; AT&T further comments at 24, App. A; Time Warner further comments at 28. AT&T further argues that the current DEM weighting mechanism has "no economically sound costbased or needbased eligibility  XM-requirement" and recommended eliminating the DEM weighting program altogether.9M {O%-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP# AT&T further comments at 24, App. A. See also Frontier 80286 NPRM comments at 3; MCI 80286  {O%-NPRM comments at 37.9 Time"M}`*&&dd" Warner also contends that it is unclear that the average cost per access line varies significantly with switch size and that there is no evidence that eliminating the support provided through  X-DEM weighting would make local service less affordable.  yOK-#X\  P6G;ɒP#э #X\  P6G;ɒP#Time Warner further comments at 40. Moreover, New Jersey Advocate argues that subsidizing switching costs may no longer be appropriate because central office switches are now largely special purpose computers that are widely available at very  X-standardized prices.!X yO-#X\  P6G;ɒP#э #X\  P6G;ɒP# New Jersey Advocate comments at 12. Meanwhile, Lincoln questions the need to subsidize any switching costs because it maintains that switching is a service, and asserts that services do not need to  X_-be subsidized. It states that only access to services should receive a subsidy."_ yO -#X\  P6G;ɒP#э #X\  P6G;ɒP# Lincoln reply comments at 4. Thus, these  XH-commenters recommend eliminating the DEM weighting program.#Hx yOq-#X\  P6G;ɒP#э #X\  P6G;ɒP#New Jersey Advocate comments at 12; AT&T further comments at 24, App. A; Time Warner further comments at 28.  X -x235.` ` In response to the 80286 NPRM, Sprint argued that DEM weighting should be eliminated because modern digital switches have almost completely eliminated the switching cost differentials between large and small study areas that originally motivated the adoption of DEM weighting and that this program creates a powerful economic incentive to miscategorize  X -certain equipment costs in order to qualify for additional subsidies.$  {OA-#X\  P6G;ɒP#э #X\  P6G;ɒP# Sprint 80286 NPRM comments at 78. Teleport, Ad Hoc  X -Telecom. Users, and GCI in the 80286 NPRM proceeding recommended a gradual  X-elimination of this program over five years to comply with the principles stated in the 80286   X-NPRM.<%b  {O-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP#Ad Hoc Telecom. Users 80286 NPRM comments at 1; GCI 80286 NPRM comments at 25; Teleport  {O\-80286 NPRM comments at 45.<  Xj-x` `   iv. Long Term Support  X<-x236.` ` No party appears to have attempted to refute the NPRM's tentative conclusion  X%-that LTS represents an impermissible implicit support mechanism.&%  X -ԍ #]\  PCɒP#See NPRM at para. 115.#o\  PCynXP#є A few commenters assert that the collection of LTS could be restructured to be consistent with the 1996 Act's  X-nondiscrimination requirements.'o  X$-Ѝ#X\  P6G;ɒP# Missouri PSC comments at 21; Pennsylvania PUC comments at 24; Winnebago Tel. comments at 1.#Xj\  P6G;ynXP# Missouri PSC argues that retaining the LTS mechanism"~ '*&&dd "  X-in some form will increase interexchange competition in rural and high cost areas._( Xy-ԍ #X\  P6G;ɒP#See Missouri PSC comments at 2021. Missouri PSC observes that the LTS system has historically  {Ob-served to reduce pressure on IXCs to de-average rates. Id. The 1996 Act requires IXCs to charge geographically averaged rates, however, and the Commission recently adopted rules implementing this provision.  {O-47 U.S.C.  254(g); See also Policy and Rules Concerning the Interstate, Interexchange Marketplace, Report and Order, CC Docket No. 9661, FCC 96331 (rel. August 7, 1996). Missouri PSC argues that, under a mandate to deaverage rates and absent access charges equalized by LTS, IXCs might choose not to serve high cost areas.  yON-Missouri PSC comments at 21.#Xj\  P6G;ynXP#_ Several argue that any elimination of LTS should occur over time or through some other type of  X-transition mechanism.L)- X -ԍ#X\  P6G;ɒP# Citizens Utilities comments at 79;#X\  P6G;ɒP# Florida PSC comments at 22; Montana Indep. Telecom. comments at  yO -7; West Virginia Consumer Advocate comments at 1213.#Xj\  P6G;ynXP#L Finally, a few commenters contend that proposals to change LTS  X-payments are outside the scope of the universal service proceeding.*  X-ԍ #X\  P6G;ɒP#Rural Iowa Indep. Tel. Ass'n comments at 6; Fred Williamson comments at 1718.#Xj\  P6G;ynXP#  X-#X\  P6G;ɒP#X0Í ÍX0Í Í#Xj\  P6G;ynXP#  Xv-x` `  c. Proxy Models  XH-x237.` ` In General. Numerous parties propose to determine the cost of service on  X1-which to base universal service support on a proxy model, rather than embedded costs. +1W " {O9-ԍ See, e.g., Citizens Utilities comments at 1314; Frontier comments at 6; Ad Hoc Telecom. Users reply comments at 6. They argue that the use of forwardlooking costs in a proxy model, rather than historic costs,  X -best represents the costs for providing universal service over an efficient network., " {Oe-ԍ See, e.g., ALTS comments at 11; Ohio PUC comments at 5; AARP reply comments at 19; AirTouch reply comments at 5. NTIA argues that forwardlooking costs should be used since a subsidy based on book costs weakens  X -the carrier's incentive to be efficient in the deployment of its network.- " {O-ԍ NTIA reply comments at 1617. See also TCI comments at 1112; CPI reply comments at 7. Proponents also argue that use of a proxy model is competitively neutral because it does not use the costs of the incumbent carrier to determine support levels, but instead uses the projected costs for an  X-efficient new entrant into that market.." {O!-ԍ See, e.g., Florida PSC comments at 10; NYNEX comments at 10; MFS reply comments at 6. Some parties, however, note that until proxy models incorporate wireless technology cost structures their results may be too high because they are  Xb-not predicated on the use of the most efficient network to deliver services.a/b/" yOB%-ԍ Texas OPUC comments at 14; WinStar reply comments at 2.a Commenters"b/*&&dd" also argue that use of a proxy model is administratively efficient since it would not require incumbent carriers to keep accounting records at levels below the current study area and would not require new entrants, who may not have reporting requirements, to file cost reports  X-with regulators.;0Z" {O4-ԍ See, e.g., Citizens Utilities comments at 13; contra Telec Consulting (FCC will face administrative burdens in handling complaints by those who claim they are aggrieved by proxy cost determination); CPI reply comments at 7; Cathey, Hutton reply comments at 7.;  X-x238.` ` Other parties contend, however, that proxy models do not satisfy the  Xv-requirements of the 1996 Act that support be specific, predictable, and sufficient.R1v" {O -ԍ See 47 U.S.C.  254(b)(5), (d).R They argue that, unless the universal service support covers the embedded cost of the carrier to  XH-provide service in the area, it is not sufficient support under the 1996 Act.2H|" {Ou-ԍ See, e.g., Rural Iowa Indep. Tel. Ass'n comments at 4; Cathey, Hutton reply comments at 67; Century reply comments at 7; Minnesota Indep. Coalition reply comments at 78. Opponents state that, because the models project the costs of facilities needed to connect the serving wire center to customers if the network were to be built now, rather than the recorded costs of  X -facilities that are being used, proxy models are not based on a "real" network._3 " {O-ԍ See BellSouth comments at 2; CBT comments at 9._ They argue that incumbent carriers often cannot realize the efficiencies assumed in a proxy model because  X -they have built their networks over time.u4 h " {O-ԍ See Fred Williamson comments at 1213; Dell Tel. reply comments at 6.u They also argue that the proxy models are not reliable, and point to the divergent costs calculated by the various proxy models for the same service area and the difference between those results and the costs currently embedded by the  X-carriers for determining universal service support today.5 " {O;-ԍ See MonCre comments at 34; Minnesota Indep. Coalition reply comments at 1112. GSA claims that, because of the wide variations in the costs calculated through proxy models and the historic costs of service, some high cost areas that need support would not be served because the proxy indicates no  XK-subsidy is warranted, while other areas would get unneeded support.C6K " yO-ԍ GSA reply comments at 11.C  X-x239.` ` Some commenters also argue that, before a proxy model can be used, it will need to be thoroughly tested and produce results that are consistent with a carrier's embedded  X-costs.7" {O$-ԍ See, e.g., Ardmore Tel. comments at 4; Blountsville Tel. comments at 4; Farmers Tel. comments at 34. Ameritech argues that, before a proxy model is adopted, the Commission should undertake a systematic evaluation of the models and put the results in the public record for"7*&&dd"  X-industrywide review.C8" yOy-ԍ Ameritech comments at 12.C ITC argues that support should be costbased so that carriers are  X-obligated to install plant as a condition precedent to receiving any funding.<9X" yO-ԍ ITC comments at 4.< Some parties also expressed concern that the results of proxy models, unlike embedded costs, are not  X-auditable.r:" {OT-ԍ See Harris comments at 10; Michigan Library Ass'n comments at 10. r Western Alliance is concerned that the use of proxies will discourage investment  X-in high cost areas.n;z" {O -ԍ Western Alliance comments at 5.  See also GVNW comments at 12.n  Xv-x240.` ` Small, rural telephone companies are particularly concerned about the use of a  X_-proxy model to determine universal service support for high cost areas.<_ " {O-ԍ See, e.g., SDITC reply comments at 3,5; Siskiyou reply comments at 34; TCA reply comments at 5; Virginia CC reply comments at 2. In addition to the general concerns set out above, the small companies argue that the proxy models are not  X1-appropriate for them because these were developed for large companies.=1f " {OH- e Ѝ See, e.g., CITA comments at 4; Telec Consulting comments at 8; Century reply comments at 7. According to the small companies, the averages used in a proxy model would adversely affect them since they  X -have a smaller customer base over which to spread costs.w> " {O-ԍ See Montana Tel. Ass'n comments at 56; Park Region Tel. comments at 4.w Consequently, they contend that  X -only large companies should be required to use proxy models.? " {O'-ԍ See, e.g., Evans Tel. comments at 12; Alaska PUC further comments at 34; USTA cost model comments at 5.  X -x241.` ` Some of the LEC proponents of the proxy models agree, and propose that proxy models be used only for large carriers, with small, rural carriers continuing to use their  X-embedded costs to determine universal service support levels.@" {O%-ԍ See, e.g., NYNEX comments at 10 (asserting that BCM should only be used to calculate support amounts for LECs subject to price cap regulation); PacTel further comments at 32 (stating that bifurcation may be most practical way to move to new support mechanism); U S West further comments at 1516 (urging that price cap company support be based on proxy model, while nonprice cap companies receive support based on embedded costs). Winnebago Tel. argues that"@*&&dd"  X-small telephone companies should be allowed, but not required, to use proxy models.AZ" {Oy-ԍ Winnebago Tel. comments at 1. See also Montana Tel. Ass'n comments at 6; Vitelco reply comments at 5; GTE further comments at 3435 (arguing that company should have onetime option to proxy model determination of costs). CPI proposes the use of three groupings for carriers. Large carriers, those with over 2 percent of the nation's access lines, would move to a total service long run incremental cost (TSLRIC) approach immediately. The smallest LECs would continue to use embedded costs for one year, and then be transitioned to TSLRIC over seven years. Mediumsize carriers, those with less than 2 percent of the nation's access lines, would have a fouryear transition to a TSLRIC  X_-approach.SB_" {O -ԍ CPI ex parte at 56 (Oct. 4, 1996).S  X1-x242.` ` Other parties argue that the same methodology should be used to determine universal support for all carriers, although they diverge over which system should be used  X -embedded costs or proxy models.C |" {O0-ԍ See, e.g., BellSouth further comments at 36; Bell Atlantic further comments at 10; NCTA further comments at 8. Ameritech argues that universal service support should  X -be based on the characteristics of the service area, not the size of the carrier.D " {Os-ԍ Ameritech further comments at 28. See also Pacific Telecom comments at 6 (asserting that the Joint Board and Commission should separately undertake to study the proxy models). GCI and MCI raise concerns that a bifurcated system could encourage the sale of exchanges to maximize the  X -subsidy received for those areas.aE 0 " yO-ԍ GCI further comments at 9; MCI further comments at 14. a Some parties argue that small carriers should not be required to use a proxy model initially, either from a concern about potential disruption to the carriers' support or because the proxy models need to be further refined for use for small  Xy-carriers before they move to proxy models.DFy " yO-ԍ OITAWITA comments at 13. D OITAWITA argues that the transition should not occur until the proxy models have been refined to reflect the cost structure of small  XK-companies.GKP " {OL -ԍ See, e.g., Century further comments at 20; Maine PUC further comments at 1819; RTC further comments at 20. Other commenters propose that companies move from embedded costs to a  X4-proxy model when a competitor enters the market or after a set period of time.;HZ4" {O#-ԍ See, e.g., AT&T further comments at 27 (transition when another carrier determined to be eligible for support); CFA further comments at 15 (three year transition); MCI further comments at 15 (three year transition); NCTA further comments at 8 (three year transition).; Most"4H*&&ddf" parties agree that, if a bifurcated system is used, the Commission should apply the 1996 Act's  X-definition of "rural telephone company"GI" yOb-ԍ 47 U.S.C.  153(37).G to determine which telephone companies would  X-continue to draw universal service support based on their book costs.J$X" {O-ԍ See, e.g., Alaska Tel. further comments at 9; Citizens Utilities further comments at 10; NECA further  {O-comments at 22; RTC further comments at 20. But see AT&T further comments at 27 (arguing in favor of the use of the definition in 47 U.S.C.  251(f)(1)); U S West further comments at 16 (arguing that whether company is regulated under price caps should determine whether proxy model defines universal service support).  X-x243.` ` Parties in Alaska and insular areas are particularly concerned that the proxy models are inappropriate for determining the costs of service for those areas. These groups  Xv-note that Alaska and insular areas were not even included in the original BCM.KvD" {Ok -ԍ See, e.g., Alaska Tel. comments at 5; CNMI comments at 17; Matanuska Tel. Ass'n comments at 23. US West notes that BCM2 includes all fifty states, as well as Puerto Rico, the Virgin Islands and  XH-Micronesia.xLH" {O-ԍ U S West further comments at 19. See also Sprint further comments at 12. MCI also submitted estimates for Alaska, Hawaii, Puerto Rico, Guam, and the Mariana Islands using the Hatfield model. MCI notes, however, that the cost per line was approximated by taking the weighted average for the RBOCs in the Hatfield model, and are not specific to those areas. Consequently, according to MCI, the estimates for these areas are only "ballpark estimates." Letter from Kimberly M. Kirby, Senior Manager, FCC Affairs, MCI, to William F. Caton, Acting Secretary, FCC (dated Oct. 25, 1996).x Alaska PUC claims, however, that the conditions in Alaska are so unique  X1-(e.g., permafrost, glaciers, extreme remoteness) that the factors used in the BCM2 cannot  X -adequately capture the costs incurred in serving Alaska.NM P " yO-ԍ Alaska PUC cost model comments at 3.N Likewise, Vitelco argues that insular areas are not adequately represented because none of the models reflects their unique circumstances, such as the added corrosion from sea water or damage from hurricanes and  X -other tropical storms.KN " yOh-ԍ Vitelco further comments at 911.K Because of those unique characteristics, those parties argue that insular areas and Alaska should continue to use embedded costs to calculate universal service  X -support, even if other areas use proxy models.O\ p" {O-ԍ See, e.g., Alaska Tel. further comments at 1112; Alaska PUC further comments at 58; Puerto Rico Tel.  {O -Co. further comments at 1314. See also NYNEX further comments at 33 (to extent insular areas and Alaska are served by small telephone companies, they should continue to have support based on embedded costs).  X{-x244.` ` Some of the states have noted that they are currently reviewing versions of the proxy models proposed in this proceeding in their state proceedings on universal service. The California PUC filed an Administrative Law Judge's (ALJ) proposal that discussed a version"MO*&&dd"  X-of the Hatfield model and the CPM that were filed in the state proceeding.P" yOy-ԍ California PUC cost model comments (attaching Proposed Decision of ALJ Wong, Cal. P.U.C. R.9501020/I.9501021 (Aug. 5, 1996)). The ALJ proposed to use the CPM, with modifications to the model's inputs, as the basis for determining the costs on which to base the California state universal service fund for large  X-carriers in the state.Q " yO-ԍ Small carriers would remain under the current state universal service mechanism, which is based on their embedded costs as reported to the California PUC. (Subsequently, the California PUC adopted an order which uses the CPM to calculate the cost of service in particular geographic areas in California, but makes  X-several modifications to the model as submitted by PacTel in that proceeding.^Rx" yO -ԍ Cal. P.U.C. R.9501020/I.9501021 (Oct. 25, 1996).^) New York and Pennsylvania are also currently reviewing versions of the Hatfield model that have been  X_-submitted in their respective state universal service proceedings.gS_" yO-ԍ New York DPS comments at 78; Pennsylvania PUC comments at 6.g  X1-x245.` ` The Benchmark Costing Model. The BCM was filed in the record of the CC  X -Docket No. 80286 proceeding, and was incorporated into this proceeding.ET " {Oc-ԍ See NPRM at para. 31.E The BCM is an engineering cost model designed to produce "benchmark" costs for the provision of basic telephone service in each CBG within a state. According to its proponents, the model uses current technology and efficient engineering and design criteria to build a stateoftheart loop  X -and switching network to serve consumers from existing incumbent switching locations.U * " {O-ԍ See MCI comments at 1011; NYNEX comments at Exh. A; Sprint comments at 1214; U S West comments at 8.  X -The model is meant to identify CBGs with higher than average costs of providing service.V " {O-ԍ See NYNEX comments at 10; Sprint comments at 1213; U S West reply comments at 89; but cf. MCI comments at 10 (BCM can be used to determine the universal service support level).  Xy-x246.` ` Its proponents explain that the BCM develops investment costs for loop plant and switches, and then adds an annual charge factor. The estimation of the outside plant cost begins with the determination of the distance between the center of the CBG and the nearest wire center. The feeder cable is sized on the basis of the number of loops to be served and an estimate of spare capacity. The fill factor, the number of wire pairs in use as a percent of the total wire pairs placed, determines the spare capacity. The distribution cable is sized based on the assumption that customers are uniformly distributed within the CBG. There is a separate fill factor for the distribution cable. The cost of support structures (conduit and poles) and placement (e.g., digging the trenches) is determined by multiplying the cable"V*&&dd" investment by various factors. These factors are functions of soil conditions, depth of water table, and other geographic conditions. Switching costs are estimated assuming all lines are served by Northern Telecom DMS 100 digital switches. Costs include a fixed cost per  X-switch plus a cost that varies according to the number of lines served. W\" {O4-ԍ See MCI Communications, Inc, NYNEX Corporation, Sprint/United Management Co., and U S West.,  {O-Inc, Benchmark Costing Model: A Joint Submission, Copyright 1995, CC Docket No. 80286, filed Dec. 1, 1995 at section IV.  An annual charge factor for determining expenses and overhead loadings associated with basic telephone service is then applied to determine the cost of service for a CBG. The BCM presents monthly costs results using two alternative annual charge factors. One is based on historical accounting  X_-data, and the other is based on a Hatfield/MCI study.^X_" {O -ԍ See Id. at I2; NYNEX comments at Exh. A, p.1.^   X3-x247.` ` Several parties, including some of the BCM's proponents, suggest modifications to the model. MCI, for instance, notes that the BCM assumes a uniform distribution of households within a CBG. It states that this presumption is probably not true for rural  X -areas.=Y ~" yO-ԍ MCI comments at 11.= NCTA commissioned a study of the BCM by Economics and Technology, Inc. (ETI) that, while commending the proponents, suggests several changes to the BCM to correct what ETI terms key engineering/economic assumptions and input data upon which the BCM is constructed. Among the modifications proposed by ETI are: adjustments to the fill factors on the assumption that residential service does not require the excess capacity needed to offer other services, such as business service, and using a forwardlooking, rather than historic, expense factor. ETI also argued that the BCM does not use an economic least cost method for determining the fibercopper crossover point in deciding how the feeder line would be deployed. ETI also states that the model unrealistically deploys DMS 100 switches in all  X-instances and uses a historical cost per switch.Z" yO-ԍ NCTA comments at 9, Att. A ("The Cost of Universal Service: A Critical Assessment of the Benchmark Cost Model," Susan M. Baldwin, Lee Selwyn (April 1996)).  X-x248.` ` In their reply comments, the proponents, while stating their continued support for the BCM, acknowledge some of these criticisms of the model, and state that many of  X-those concerns will be addressed in a subsequent version of the BCM.l[f " {O!-ԍ See MCI reply comments at 78; U S West reply comments at 5.l They argue that it is inappropriate for parties to criticize the BCM for developing cost numbers that are different  X-from the ILEC's embedded costs.l\ " {O>%-ԍ See MCI reply comments at 47; U S West reply comments at 3.l U S West explains that the model was not meant to" \*&&ddQ"  X-calculate the historic costs of service, but merely to identify high cost areas.G]" yOy-ԍ U S West reply comments at 7.G U S West notes that the BCM does not include many components necessary to provide local service, and  X-that urban distribution costs are underestimated.\^X" {O-ԍ Id. at 89; U S West further comments at 24.\ It also defends the use of CBGs, stating that CBGs should be used rather than wire centers. According to U S West, using wire centers would allow new entrants to receive high cost support without necessarily serving high  X-cost customers, by serving only customers located near the wire center._" {O( -ԍ U S West reply comments at 34; U S West further comments at 2425. See also Sprint further comments at 15.  X_-x249.` ` The Benchmark Costing Model Version 2. On July 3, 1996, Sprint Corporation  XH-and U S West submitted BCM2.`HD" {O=-ԍ See Letter from Jay C. Keithley, Sprint, and Glenn Brown, U S West, to William F. Caton, Acting Secretary, FCC, in regard to CC Docket 9645 (dated July 3, 1996). According to its proponents, BCM2 was developed to respond to the comments on the BCM in this proceeding and a series of workshops held by  X -the proponents, and to address the misuse of the model as a proxy for historic costs.a " yOi-ԍ U S West further comments at 27; Sprint cost model comments at 6; U S West cost model comments at 3. They contend that BCM2 significantly enhances the engineering and costing assumptions in the  X -original version, and allows users to input their own underlying cost factors and user prices.mb " yO-ԍ Sprint cost model comments at 6; U S West cost model comments at 3.m  X -x250.` ` BCM2 follows the same organizational structure as the original model, but makes several changes to the assumptions upon which the model is based. According to the proponents, BCM2, unlike the BCM, includes all cost elements necessary for the provision of basic telephone service. Among the changes made, BCM2 no longer assumes a uniform distribution of households in lowdensity areas. Instead it assumes that all households are located within 500 feet of either side of roadways and adjusts the CBGs to remove areas with little or no households. BCM2 also increases the feeder and distribution fill factors, and uses estimates of total residential lines and business lines rather than equating lines to households. The model now uses five different digital switch sizes, each with unique fixed or start-up costs. Urban cost elements, e.g., conduit, street cutting, boring, are now included. In addition, BCM2 uses four annual expense factors, which are based on 1995 ARMIS data. BCM2 constrains loop costs to be less than $10,000.00; it assumes that wireless technologies  X-would be an economically reasonable substitute for loops of higher costs.{c " {O%-ԍ See Sprint cost model comments at 57; U S West cost model comments at 34.{"c*&&dd"Ԍ X-ԙx251.` ` Most of the commenters agree that the BCM2 is an improvement over the original version. BellSouth and GTE state that the cost numbers generated by BCM2 are  X-close to their embedded costs of providing service.kd\" {OK-ԍ BellSouth cost model comments at 34; GTE cost model comments at 5, 20. See also Maine PUC  {O-further comments at 23; but cf. Alaska PUC cost model comments at 56 (under BCM2, Alaska would receive substantially less universal support than the state receives under the current system).k SWBT notes that the BCM2 shows  X-significantly higher service costs than the original model.Fe" yOX-ԍ SWBT further comments at 32.F NECA filed studies, however, that show that the average loop cost calculated by BCM2 is higher than the average under the existing universal service support mechanism, and on a service area basis the loop costs calculated using BCM2 ranges from 90 percent below the current support levels to 728  X_-percent above.Hf_|" yO -ԍ NECA cost model comments at 5.H  X1-x252.` ` NYNEX finds that, while BCM2 is an improvement, there are still further refinements that could be made to approximate the costs of the local network more closely. For example, NYNEX contends that BCM2 still does not take into account all of the  X -additional costs incurred to install cable in urban areas.Ig " yO-ԍ NYNEX cost model comments at 6.I AT&T states that BCM2 still has many of the problems of the original model, including unrealistic fill and capacity  X -assumptions.Ih " yO -ԍ AT&T cost model comments at 24.I MCI complains that the source of the business line estimate used in BCM2 is  X -not identified.Gi , " yO-ԍ MCI cost model comments at 5.G Maine PUC argues that BCM2 still vastly underestimates the impact on loop  X-length caused by slope.Pj " yO-ԍ Maine PUC cost model comments at 3, 5.P RTC and Maine PUC also question the model's assumption that households are located within 500 feet of a roadway, and that the model adequately identifies  Xb-costs associated with terrain and other factors.XkbL " {O_-ԍ Id. at 8; RTC cost model comments at 14.X The commenters also question the assumption in BCM2 that, if loop costs exceed $10,000.00, wireless technologies would be  X4-used.l4" yO"-ԍ NCTA further comments at 14; Maine PUC cost model comments at 8; NYNEX cost model comments at 6. "6l*&&dd"Ԍ X-x253.` ` In response to the Common Carrier Bureau's information request,m" yOy-ԍ Letter from John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, to Glenn Brown, Executive DirectorPublic Policy, U S West (dated Aug. 2, 1996). the proponents, U S West and Sprint, provided additional information about the model and cost  X-runs using BCM2.n " yO-ԍ Letter from Glenn H. Brown, U S West, and Warren D. Hannah, Sprint Corporation, to William F. Caton, Acting Secretary, FCC (dated Aug. 22, 1996). The response includes cost runs showing the difference in cost calculations between BCM2, CPM, and the current universal service cost information provided by NECA. They also provided study area comparisons between the original BCM and BCM2  X-for the three study areas requested by the Bureau.ox" yO -ԍ The Bureau requested that all the proponents of the three different proxy models provide study area  {O~ -results for Pacific Bell, GTE SWArkansas, and Southwestern BellTexas. See Letters from John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau to (1) Glenn Brown, Executive DirectorPublic Policy, U S West, Inc., (2) Alan Ciamporcero, Vice PresidentFederal Regulatory Relations, Pacific Telesis, (3) Mike Pelcovits, Chief Economist, MCI Telecommunications, Inc., and Joel Lubin, Vice PresidentLaw and Government Affairs, AT&T Corporation (dated Aug. 2, 1996). The proponents also submitted results for those study areas using the Commission's Part 32 uniform system of accounts. They explained that switching costs were calculated using generic switch investments because it was not possible to use detailed pricing due to the proprietary nature of manufacturers' switch prices. In addition, the proponents provided examples of cable and wire statistics for the original BCM and BCM2. Finally, the proponents stated that the significant enhancements to the original BCM found in BCM2 reflect actual engineering practices followed in the development of a local network and also cause the increase in projected costs over the costs  X -projected by the original version of the model.p " {Ox-ԍ See Letter from Glenn H. Brown, U S West, and Warren D. Hannah, Sprint Corporation, to William F. Caton, Acting Secretary, FCC (dated Aug. 22, 1996).  X -x254.` ` The Cost Proxy Model. The CPM was filed as part of PacTel's comments in this proceeding. In its comments, PacTel notes that the California PUC was currently conducting a proceeding to establish a new state universal service mechanism that would be  Xb-nondiscriminatory and competitively neutral.wqbL " {O_-ԍ PacTel comments at 15 (citing Cal. P.U.C. D.9507050 (July 19, 1995)).w According to PacTel, in its proceeding the California PUC was considering two proxy models, including the CPM, which was jointly  X4-developed by Pacific Bell and INDETEC, International.@r4" yO"-ԍ PacTel comments at 16.@ PacTel suggests that the CPM could be used at the federal level to implement a competitively neutral model for high cost"nr*&&dd)"  X-area funding,:s" {Oy-ԍ Id. at 17.: and submitts a design overview of the model.>tZ" {O -ԍ Id. at App. D.>  X-x255.` ` According to PacTel, the major advantage of the CPM is its flexibility. PacTel states that a variety of inputs can be used with the model, including publicly available  X-information.Cu" yOA -ԍ PacTel comments at 1617.C As described by PacTel, the CPM examines the network components that are combined to form the customer's service, e.g., cost per foot of aerial and buried copper, cost perline terminations, cost per switched minutes of use. Customer information is derived from using approximately fourtenths of a square mile (3,000 ft by 3,000 ft) grids and census data to determine the location of households, and the distance from the households to the carrier's switches. The values of the cost components are adjusted based on the specific characteristics of the grid area, including density, terrain, and soil type. Using that information, the investment cost for the household is determined. Once investment costs are derived, companyspecific estimates of operating costs per line are applied, e.g., average monthly repair costs. Once the costs are derived for the grids, they can be aggregated to correspond to  X -any larger geographic unit, such as CBGs or serving wire centers (SWCs).Hv |" {O-ԍ See Id. at App. D.H  X-x256.` ` Many parties argue that the major advantage of the CPM over other proxy models is its use of grid cells, rather than CBGs, to calculate the cost of providing service. The commenters argue that the use of grid cells allows for more precision in determining where households are, particularly in sparselypopulated areas, and consequently will lead to more accurate distances of the loops between the households and switches the basis upon  X-which the costs in the model are derived.ww" {O-ԍ See BellSouth further comments at 52; Maine PUC further comments at 29.w PacTel notes that use of grid cells along with wire center boundaries minimizes the likelihood of misassigning households to the wrong wire  X-center or to the wrong carrier.Kx" yO@-ԍ PacTel further comments at 5455.K GTE advocates a hybrid approach that uses CBGs for high X-density areas and grids for lowdensity areas.Jy0 " yO!-ԍ GTE cost model comments at 68. J NCTA, however, states that use of grid cells  X-does not improve the accuracy of customer locations of terrain.Iz " yO2$-ԍ NCTA further comments at 2122.I NECA states that, while grids provide more accuracy in identifying population distribution in sparsely populated areas,"P z*&&dd"  X-there still remains mapping problems for some areas served by small carriers.F{" yOy-ԍ NECA further comments at 35.F Sprint notes that talks are ongoing between the proponents of BCM2 and PacTel to integrate the use of  X-grid cells into BCM2.8|ZX" {O-ԍ Sprint further comments at 17. See also NYNEX further comments at 42 (an industry task force is exploring integrating the grid cell structure into BCM2); USTA cost model comments at 4 (incumbent exchange industry is working together to harmonize the two models). 8  X-x257.` ` MCI argues that CPM should not be used because it relies upon proprietary  X-data, and has only been developed for California, not the entire nation.t}z" {O -ԍ MCI cost model comments at 1213. See also CPI reply comments at 7.t NCTA agrees that the CPM is not suitable for use outside of California because it is based on Pacific Bell's  X_-network.I~_ " yO-ԍ NCTA further comments at 2223.I NASUCA states that the BCM is superior to the CPM because, unlike CPM, it relies on public data. NASUCA claims that parties in the California proceeding have not been able to verify how the CPM derived the costs in that proceeding because of its use of  X -proprietary data.C " yOg-ԍ NASUCA comments at 2021.C PacTel replies that the CPM can be used to calculate the costs of service on a national level; all that is needed is to obtain the proper householdlocation data for the  X -nation.H , " yO-ԍ PacTel further comments at 56.H PacTel also argues that, while it used companyspecific data to calculate costs in the California proceeding, the CPM allows for variable inputs through which a user can  X -modify the cost inputs to reflect either a carrier's specific cost structure or average costs.f " yO+-ԍ PacTel reply comments at 56; PacTel further comments at 58.f  X-x258.` ` In reviewing the CPM in response to the Cost Models Public Notice, parties discusses many specific concerns. For instance, AT&T claims that the CPM is inconsistent in  Xb-its use of terrain modifying factors, which artificially inflate loop investment costs.IbL " yO_-ԍ AT&T cost model comments at 30.I AT&T also states that the CPM bases central office switch and feeder costs solely on average population density of the grid, ignoring the number of lines served by the switch, and uses  X-unrealistically short depreciation lives.:" {O#-ԍ  Id. at 31.: BellSouth compared the results of BCM2 and CPM for Georgia and Florida and found that, when the two models are compared on a wire center"n*&&ddd"  X-basis, they arrive at similar results.W" yOy-ԍ BellSouth cost model comments at 45, Att. 1.W GTE raises a concern that switching costs in the CPM do not fully capture the difference in unit costs between large and small switches. GTE also notes that the costs used by PacTel in the CPM are not representative of those experienced by  X-other carriers because they reflect PacTel's negotiated prices.HX" yO-ԍ GTE cost model comments at 18.H  X-x259.` ` In response to the Common Carrier Bureau's information request," yO& -ԍ Letter from John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, to Alan Ciamporcero, Vice PresidentFederal Regulatory Relations, Pacific Telesis (dated Aug. 2, 1996). PacTel provides additional information and cost runs on the model. For some of the material it submitted, however, PacTel requested confidential treatment because the information contains  XH-Pacific Bell's cost studies for California.H@" yO9-ԍ Letter from Nancy C. Woolf, Attorney, Pacific Telesis, to John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, FCC (dated Aug. 16, 1996). PacTel provides a comparison between the costs calculated using CPM, and the current universal service costs provided by NECA only for  X -Arkansas, California, and Texas. " yOc-ԍ Letter from Nancy C. Woolf, Attorney, Pacific Telesis, to John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, FCC (dated Aug. 22, 1996). PacTel has subsequently provided the costs calculated by  X -the CPM for all fifty states and the District of Columbia. " yO-ԍ Letter from Alan C. Ciamporcero, Vice President, Pacific Telesis, to William F. Caton, Acting Secretary, FCC (dated Oct. 17, 1996). PacTel also argues that, contrary to the assertions of critics, the CPM is a standalone model, and that for future runs for the  X -whole nation the model will not rely on PacTel proprietary data. H " yO-ԍ Letter from Nancy C. Woolf, Attorney, Pacific Telesis, to John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, FCC (dated Aug. 16, 1996).  X -x260.` ` In California, the California PUC has recently decided to use the CPM to  X-calculate costs for the state universal service program.[" yO-ԍ Cal. PUC R.9501020/I.9501021 (Oct. 25, 1996).[ Comparing the CPM and Hatfield  Xy-models,y0" {OZ"-ԍ The California PUC reviewed a Hatfield Model which is based on the BCM. See Id. at 113. the California PUC found that the CPM is a more appropriate model for estimating the cost of providing basic service in California than the Hatfield model, in part because  XK-CPM's grid cell design is more conducive to an accurate representations of costs.RK" yO%-ԍ Cal. PUC R.9501020/I.9501021 at 124.R The"KR*&&dd"  X-California PUC, however, made a number adjustments to the CPM as submitted by PacTel.C" {Oy-ԍ See id. at 124161.C For example, the California PUC changed the fibercopper break point for feeder from 9,000 feet to 12,000 feet. This change resulted in a $78 million decrease in the annual support  X-requirement as calculated by the CPM.;Z" {O-ԍ Id. at 137.; The California PUC also changed the allocations for shared and common costs that PacTel had proposed in the CPM, with the result of  X-decrease of $400 million in the support requirement.?" {O* -ԍ Id. at 156157.? The result of the adjustments to the CPM mandated by the California PUC was to decrease the amount of support determined by  X_-the model by $1.116 billion. Z_~" {O -ԍ See id. at 124125, App. C. Overall, all the changes required by the California PUC, including raising the benchmark, result in the size of the California state fund being reduced from $1.7 billion, as submitted by PacTel, to $352 million.   X1-x261.` ` The Hatfield Model. The Hatfield model has been developed by Hatfield  X -Associates, Inc under the sponsorship of AT&T and MCI. " {Ok-ԍ There have been several prior versions of the Hatfield model. See AT&T cost model comments at 4 n.5. On June 7, 1996, the proponents submitted the Hatfield 2.2, Release 1 model for the Joint Board's consideration in this  X -proceeding. 2 " yO-ԍ Letter from Leonard S. Ceca, MCI, to William F. Caton, Acting Secretary, FCC (dated June 7, 1996). They have subsequently submitted a later version, Hatfield 2.2, Release 2."Z " yO_-ԍ Letter from Richard N. Clarke, AT&T, to William F. Caton, Acting Secretary, FCC (dated Aug. 27,  {O'-1996). See also letter from Richard N. Clarke, AT&T, to William F. Caton, Acting Secretary, FCC (dated Sept. 10, 1996)."  X -x262.` ` According to AT&T, the Hatfield model is "a flexible, publicly available engineering model that estimates the economic costs of providing basic narrowband telephone  X-services to consumers in any and all geographic areas in the United States."H" yO%-ԍ AT&T cost model comments at 3.H As described by the proponents, the Hatfield model uses seven modules to compute the costs of the network. The Input Data File module contains information on households, businesses, terrain, and the location of central offices. Estimates of the loop costs for each CBG are determined by the Loop Module and the Data Module, which calculate feeder, subfeeder, and distribution cable"4t*&&ddf"  X-lengths.[X" yOy-ԍ The Data and Loop Modules use components of a BCM derivative, "BCM+," developed by MCI. BCM+ has useradjustable inputs, uses 1995 household data, bases zone density categories on the number of lines in a CBG, and modifies BCM's estimate of business lines. AT&T cost model comments at 4 n.4, Appendix A.[ The Wire Center Module computes the costs associated with switching, signaling, and interoffice transport, based on the outputs from the Loop and Input Data modules. The Convergence Module combines the investment computed in the Loop and Wire Center Modules and adds investment in servicing area interfaces, the network interface devices, and the subscriber drops. The Expense Module takes that investment and converts it into monthly  X-costs based on asset lives and capital cost, and adds certain administration costs.7Z" {O& -ԍ See AT&T cost model comments at 414; MCI cost model comments at 24. The changes between Hatfield 2.2.1 and 2.2.2 are outlined in AT&T cost model comments at App. A. The default inputs used in Hatfield 2.2.2 are set forth in AT&T cost model comments at App. B.7 According to the proponents, the use of this modular architecture allows users to modify data inputs as  X_-necessary to reflect new or statespecific data.H_ " yO-ԍ AT&T cost model comments at 5.H  X1-x263.` ` Critics of the Hatfield model make several arguments against using the model for calculating the cost of providing universal service. Initially, many parties complain that it has been difficult to analyze the Hatfield model because it is constantly changing and contains  X -algorithms that have not been disclosed. " {O7-ԍ See, e.g., BellSouth further comments at 44; PacTel cost model comments at 17; U S West cost model comments at 5. Parties also argue that, since Hatfield is based, at  X -least in part, on BCM, it, like BCM, is flawed.{ " {Oz-ԍ See, e.g., BellSouth further comments at 39; RTC cost model comments at 11.{ The proponents, however, claim that the  X -model is publicly available, uses public data, and allows for user specific inputs.h " yO-ԍ AT&T further comments at 36; AT&T cost model comments at 3, 5.h They also note that the model no longer relies on input from BCM, but uses refined inputs, which they  X-call "BCM+."a" {OW-ԍ See AT&T cost model comments at 4, App. A p. 12.a  Xb-x264.` ` GTE argues that the Hatfield model is not really a forwardlooking cost model.  XK-According to GTE, Hatfield's use of historical expense factors makes it backwardlooking.K" yO"-ԍ GTE cost model comments, Att. 1 ("A Critique of the Hatfield Model" by Gregory M. Duncan, NERA) at 8.  X4-PacTel also argues that Hatfield uses embedded cost factors.U4" yO%-ԍ PacTel cost model comments at App. B, p. 3.U"4*&&dd"Ԍ X-ԙx265.` ` LECs also complain that the Hatfield model uses an unrealistic network  X-configuration to calculate costs." {Ob-ԍ See BellSouth cost model comments, Att. 3 (Comments of William E. Taylor and Anirudda Banerjee, NERA) at 78; According to SWBT, these flawed assumptions about ILECs' networks lead to faulty costfactor assumptions and invalid estimates of capital and  X-operating expenses.I"" yO-ԍ SWBT cost model comments at 12.I PacTel argues that Hatfield does not model the way that distribution  X-plant is actually engineered.K" yO -ԍ PacTel cost model comments at 10.K RTC opposes the Hatfield model, in part, because it assumes that all ILECs have fully deployed SS7, when, according to RTC, some small, rural carriers  Xv-have not deployed SS7.HvB" yOi -ԍ RTC cost model comments at 19.H MCI responds that it is irrelevant that the model may not reflect an ILEC's actual network because it is meant to calculate the cost of an efficient network, not  XH-the cost of an existing network.wH" {O-ԍ MCI cost model comments at 4. See also AT&T cost model comments at 20.w AT&T states that the model does not start with a "blank slate," but uses actual minutes of use and access lines embedded by ILECs and models the  X -network from the existing wire centers and STP locations.I d " yO/-ԍ AT&T cost model comments at 15.I  X -x 266.` ` Parties also argue that Hatfield uses improper cost inputs, which leads to unrealistic cost calculations. For example, NYNEX argues that the model uses excessive fill  X -factors. " {Oc-ԍ NYNEX cost model comments at 11, Att. C (Rebuttal Statement of Timothy J. Tardiff) at 61014. See  {O--also SWBT cost model comments at 12; U S West cost model comments at 8. PacTel argues that the Hatfield model understates switch investment and switching  X -prices.K P " yO-ԍ PacTel cost model comments at 10.K They also argue that the depreciation rates used in the model are too low. " yO8-ԍ NYNEX cost model comments at 11; PacTel cost model comments at 11; SWBT cost model comments at 12. MCI states that the model uses depreciation lives and cost of capital that have been approved by  Xy-the Commission and state commissions.Gy8" yOb"-ԍ MCI cost model comments at 4.G AT&T claims that the model reflects all the forwardlooking costs of installing, maintaining, and operating facilities to provide residential  XK-service, including a reasonable share of joint and common costs.IK" yO%-ԍ AT&T cost model comments at 16.I"KX*&&dd"Ԍ X-ԙx 267.` ` In response to the Common Carrier Bureau's information request,0X" yOy-ԍ Letter from John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, to Mike Pelcovits, Chief Economist, MCI Telecommunications, Inc., and Joel Lubin, Vice PresidentLaw and Government Affairs, AT&T Corporation (dated Aug. 2, 1996).0 the proponents AT&T and MCI provide additional information and costs runs on Hatfield 2.2.2. The proponents state that from Hatfield 2.2.1 to Hatfield 2.2.2 there have been significant improvements to the modeling logic and descriptive outputs. Among those changes Hatfield 2.2.2 uses an MCIdeveloped derivative of the original BCM called  X-BCM+." yO& -ԍ BCM+ has useradjustable inputs, uses 1995 household data, bases zone density categories on the number  {O -of lines in a CBG, and modifies BCM's estimate of business lines. See Letter from Michael Pelcovits, Chief Economist, MCI Telecommunications Corporation and Joel Lubin, Regulatory Vice President, AT&T Corp., to John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, FCC (dated Aug. 19, 1996). The changes allows Hatfield 2.2.2 to compute investment explicitly for aerial, buried, and underground cable, for both feeder and distribution facilities. The proponents also argue that the improvements embedded in Hatfield 2.2.2 make it superior to BCM2. For example, they contend that Hatfield 2.2.2 has more detailed cost components than BCM2. Hatfield 2.2.2 also includes investment in Serving Area Interfaces that BCM 2 does not. The proponents explain the fill factors used in Hatfield 2.2.2, noting that the effective fill factor is  X -substantially lower than the maximum engineered fill.(X " yON-ԍ Letter from Michael Pelcovits, Chief Economist, MCI Telecommunications Corporation and Joel Lubin, Regulatory Vice President, AT&T Corp., to John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, FCC (dated Aug. 19, 1996).( The proponents also compare the costs calculated by Hatfield 2.2.2 for the BOCs and for SNET. They explain that, because the model uses ARMIS data that are only embedded by Class A LECs, the proponents are  X -currently unable to run the model for nonClass A LECs.(X " yO)-ԍ Letter from Michael Pelcovits, Chief Economist, MCI Telecommunications Corporation and Joel Lubin, Regulatory Vice President, AT&T Corp., to John S. Morabito, Deputy Chief, Accounting and Audits Division, Common Carrier Bureau, FCC (dated Aug. 26, 1996).(  X-x` ` 3. Discussion  Xb-x` `  a. Overview  X4-x 268.` ` We cannot recommend that any of the proxy models submitted in this proceeding thus far the BCM, the BCM2, the CPM, and the Hatfield model should be used to determine universal service support levels. While the proxy models continue to evolve and improve, none of those submitted in this proceeding are sufficiently developed to allow us to recommend a specific model at this time. We do believe, however, that a properly crafted proxy model can be used to calculate the forwardlooking economic costs for"*&&ddq" specific geographic areas, and be used as the cost input in determining the level of support a carrier may need to serve a high cost area. The Joint Board therefore recommends that the Commission continue to work with the state commissions to develop an adequate proxy model that can be used to determine the cost of providing supported services in a particular geographic area, and in calculating what support, if any, a carrier should receive for providing services designated for universal service support.  X_-x 269. ` ` We recommend that a proxy model be developed such that it can be adopted by the Commission by May 8, 1997, the statutory deadline for the Commission to implement our recommendations in this proceeding. It is understood that, in the time between this Recommended Decision and the Commission's final order, the Commission "shall afford the  X -State members of the Joint Board an opportunity to participate in its deliberations . . ."? " yO| -ԍ 47 U.S.C. 410(c).? As a practical matter, this means that the federal and state staffs should coordinate and consult to the fullest extent necessary, and that the State members of the Joint Board are free to communicate their views, orally or in writing, together or separately, at any time. In particular, it is expected that the state and federal staffs will work collaboratively to conduct workshops with interested parties on the issues associated with the proxy models. To the extent that there may be independent State views on the proxy models, the state members of the Joint Board shall, at a minimum, submit a report on the outcome of the Joint Board staff efforts with sufficient time for the Commission to review prior to the issuance of an Order implementing this Recommended Decision. Such input would supplement the ongoing cooperative, consensusoriented teamwork of the Joint Board members and staff.  X-x 270.` ` We find that forwardlooking economic costs should be used to determine the cost of providing universal service. Those costs best approximate the costs that would be incurred by an efficient competitor entering that market. We believe that support should be based on the cost of an efficient carrier and should not be used to offset the costs of inefficient provision of service, or costs associated with services that are not included in our definition of supported services, such as private lines, interexchange services, and video services. For purposes of administering a national universal service system, proxy models are the most efficient method for determining forwardlooking costs, and provide other benefits, such as the ability to determine costs at smaller geographic levels than would be practical using the existing cost accounting system. The actual level of support that a carrier receives from federal universal service support mechanisms, if any, would be based on the difference between the cost of service as determined by a proxy model and the benchmark amount, which we discuss in section VII.C.  X!-x271.` ` While we recommend the use of proxy models in general, we recognize that the operations of some carriers could be placed at risk if their support was immediately determined by the use of a proxy model. As suggested by various commenters, the proposed"#X*&&dde"" proxy models' designs do not reflect the special characteristics of these carriers. First, none of the models adequately represents the costs for rural carriers as all the models are currently based on expense data for large LECs, serving predominantly urban areas. Second, small carriers, with their limited revenue streams, will be significantly affected if the model does not accurately reflect their costs. Third, the proxy models should be refined and modified to reflect the special characteristics of rural carriers before requiring those carriers to move to a proxy model for determining universal service support.  XH-x272.` ` We therefore recommend that rural telephone companies, as defined in the  X1-1934 Act, as amended,A1" yO -ԍ 47 U.S.C.  153(37).A be allowed to continue using embedded costs as the basis for calculating universal service support for three years after the nonrural companies begin to use proxy models, which we anticipate would be on January 1, 1998. This would allow time to make any necessary refinements to the proxy model to tailor the model for rural companies. We recommend that the Commission include a review of the proxy model to ensure the appropriateness of the proxy model for rural carriers before requiring them to use a proxy model. In order to minimize any disruption or adverse impact of this change on the rural carriers, we recommend that during this threeyear period rural carriers receive support from the high cost assistance, DEM weighting, and LTS based on historical per line amounts. At the end of the threeyear period, rural companies would begin a transition to the use of a proxy model for determining their costs of providing the supported services. That transition would occur over three years. The unique nature of service in Alaska and the insular areas causes us to recommend that rural companies in those areas should not be shifted to a proxy model at that time, but should continue to receive support based on their embedded costs per line pending further review of their situation. x  X-x` `  b. Which costs to support  X-  X|-x273.` ` We recommend basing the universal service support for the nonrural eligible carriers on the forwardlooking cost of providing the network used to provide the services included in our list of services recommended for universal service support pursuant to section 254(c)(1). The Joint Board recommends that the forwardlooking economic cost of providing supported services should include all of the costs of the telephone network elements that are used to provide supported services. We acknowledge that the loop is essential for the provision of all services, not just those supported by the federal universal service mechanisms. We note, however, that supported services include not only local service but also access to interexchange service. The cost of loop can vary depending on the type of services provided. We recognize that the provision of ISDN and video services could increase the cost of the loop, but the additional loop costs incurred to provide these services should be excluded from""X*&&dd!"  X-costs considered here. " {Oy-ԍ See, e.g., SWBT further comments at 5; USTA further comments at 8. We note that the Commission intends to initiate another proceeding to address the directive in Section 254(k) to "establish any necessary cost allocation rules, accounting safeguards and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services." 47 U.S.C.  254(k).  In the proxy models, the fibercopper crossover point determines the relative share of fiber in the loop plant. We believe that the reasonable crossover point should reflect the least cost provision of the supported services rather than the provision of video or advanced services.  X-x274.` ` Bell Atlantic and CompTel argue that the cost of providing supported services does not vary with nonloop costs, and thus, these costs do not affect average cost enough to  X_-change the amount of support received by any carrier._z" yO -ԍ Bell Atlantic further comments at 2; CompTel further comments at 9. Nonloop costs include switching, transport, signaling, corporate overheads, and billing and collection and other retail costs. We disagree with their argument. Even if nonloop costs do not vary across density zones, we must still include nonloop costs in the cost estimate in order to estimate the total cost of providing the supported services. We note that, if any parts of the switch can be separately identified as required for only specific advanced services, such as a packet switch auxiliary used to process the ISDN signaling channel, then the costs associated with that part of the switch should not be included as costs of supported services.  X -x` `  c. Use of a proxy model  X-  Xy-x275.` ` In order to ensure that a universal service support mechanism provides the correct signals for entry, investment, and innovation in the longrun, it is vital that the Commission use forwardlooking economic costs as the basis for determining support levels. If support is based on embedded costs for the longrun, then incumbents and new entrants alike will receive incorrect signals about where they should invest. Where embedded costs are above forwardlooking costs, support of embedded costs would direct carriers to make inefficient investments that may not be financially viable when there is competitive entry. Where embedded costs are below forwardlooking costs, support only of embedded costs will drive firms from the market, because the revenue per customer plus the support will be less than the forwardlooking cost of providing the supported services. Therefore, support based on embedded costs could jeopardize the provision of universal service.  Xe-x276.` ` We conclude that setting support at forwardlooking economic cost levels will allow us to construct a universal service support mechanism that will preserve and advance universal service and encourage efficiency. Competitive firms will provide service using an approximately efficient level of resources because, in those instances when revenues are not sufficient, the support mechanism will provide the additional funds required to maintain" *&&dd=" service. In principle, using cost estimates generated by proxy models is a reasonable technique for determining forwardlooking costs. Proxy models, because they are not based on any individual company's costs, provide a competitively neutral estimate of the cost of providing supported services. In addition to estimating the forwardlooking economic cost of deployment and operation of network facilities used to provide services supported under section 254(c), any proxy model adopted by the Commission should also include an estimate of forwardlooking common costs so that universal service support based on such a model will cover a reasonable share of common costs and that together all services allow for recovery of all forwardlooking costs.  X -x277.` ` We recommend that the Commission consider the following criteria in order to evaluate the reasonableness of any proxy model that it would use to estimate the forwardlooking economic cost of providing the supported services:  X -x(1)` ` Technology assumed in the model should be the leastcost, most efficient and reasonable technology for providing the supported services that is currently available for purchase, with the understanding that the models will use the incumbent LECs' wire centers as the center of the loop network for the reasonably foreseeable future.(#`  X4-x(2) ` ` Any network function or element, such as loop, switching, transport, or signaling, necessary to produce supported services must have an associated cost.(#`  X-Xx(3)X` ` Only forwardlooking costs should be included. The costs should not be the embedded cost of the facilities, functions or elements.(#`  X-Xx(4)X` ` The model should measure the longrun costs of providing service by including a forwardlooking cost of capital and the recovery of capital through economic depreciation expenses. The long run period used should be a period long enough that all costs are treated as variable and avoidable.(#`  X7-Xx(5)X` ` The model should estimate the cost of providing service for all businesses and households within a geographic region. This includes the provision of multiline business services. Such inclusion allows the models to reflect the economies of scale associated with the provision of these services.(#`  X -Xx(6)X` ` A reasonable allocation of joint and common costs should be assigned to the cost of supported services. This allocation will ensure that the forwardlooking costs of providing the supported services do not include an unreasonable share of the joint and common costs incurred in the provision of both supported and nonsupported services, e.g., multiline business and toll services.(#` "Q%*&&dd $"Ԍ X-Xx(7)X` ` The model and all underlying data, formulae, computations, and software associated with the model should be available to all interested parties for review and comment. All underlying data should be verifiable, engineering assumptions reasonable, and outputs plausible.(#`  X-x(8)` ` The model should include the capability to examine and modify the critical assumptions and engineering principles. These assumptions and principles include, but are not limited to, the cost of capital, depreciation rates, fill factors, input costs, overhead adjustments, retail costs, structure sharing percentages, fibercopper crossover points, and terrain factors. The models should also allow for different costs of capital, depreciation, and expenses for different facilities, functions or elements. (#`  X -x278.` ` The parties have brought three models to our attention in this proceeding. In general, the models submitted are based on a local exchange telephone network designed to meet the total demand on the network, where demand is measured by the number of lines served and minutes of use. The network consists of outside plant facilities and central office equipment. Investment is expressed as an annual expense by applying annual charge factors to the models' estimates of investment. Joint and common costs and retail costs are added to  XK-the plant related costs to define the total cost of service.XK" yO-ԍ Letter from Glenn Brown, U S West, to William F. Caton, Acting Secretary, FCC (dated Sept. 4, 1996). Letter from Richard N. Clarke, AT&T, to William F. Caton, Acting Secretary, FCC (dated Sept. 10, 1996). PacTel comments at App. D.  X-x279.` ` While the models hold much promise, at this time, we cannot endorse a specific model as the tool the Commission should use for calculating costs of supported services. We conclude that the BCM2 and the Hatfield Model Version 2.2. Release 2 (Hatfield Model) are the best available basis for future development of an acceptable proxy model at this time We cannot evaluate the CPM at this time, because a complete working version of the model, that includes all formulae and data, has only recently been filed in this  X-proceeding."" yO,-ԍ On October 25, 1996, PacTel filed a demonstration CD ROM disk of the national run of the CPM. However, because, according to PacTel, the software contains trade secrets, PacTel filed it with a Request for Confidential Treatment, and included a software license agreement that parties must sign before being able to  {O -obtain a copy of the CD ROM. See Letter from Alan Ciamporcero, Vice President, Pacific Telesis, to William F. Caton, Acting Secretary, FCC (dated Oct. 25, 1996)." The CPM suffers from the flaw that significant amounts of input values and  X|-information are considered proprietary.|" yO#-ԍ Letter from Alan F. Ciamporcero, Pacific Telesis, to William F. Caton, Acting Secretary, FCC (dated Oct. 25, 1996). "e *&&dd"Ԍ X-x280.` ` Appendix F contains a cursory review of the models and highlights some of the differences between BCM2 and the Hatfield model. Among the issues that will need to be addressed before a specific proxy model can be accepted are the different assumptions regarding basic input levels; the relationships between the inputs; why certain functionalities included in one model are not present in the other models; and the unique set of engineering design principles in each model. Until we can establish reasonable values for the assumptions and technical relationships that underlie the models we cannot recommend the adoption of a particular model or combination of the models.  X1-x281.` ` We urge the Commission to conduct a series of workshops at which federal and state staff can work with industry participants to refine the models so that it could become possible to select or create a proxy model that could then be used in calculating universal service support. We recommend that these workshops begin no later than January 1997.  X -x282.` ` The state members of the Joint Board will submit a report to the Commission on the use of proxy models and their application in this proceeding for funding universal service. The report of the state members will be filed prior to a Commission decision in this proceeding on proxy models. The Commission and state members should continue to work cooperatively and remain integrally involved in the development of an acceptable proxy model.  X-x` `  d. Rural Carriers  X-x283.` ` While we recommend using forwardlooking economic costs calculated through the use of a proxy model to determine high cost support for all carriers, we are concerned that moving small, rural carriers to a proxy model too quickly may result in large changes in the support that they receive. Since rural carriers generally serve fewer subscribers relative to the large incumbent LECs, serve more sparsely populated areas, and do not generally benefit from economies of scale and scope as much as nonrural carriers, they often cannot respond to  Xe-changing operating circumstances as quickly as large carriers.e" {O- #X\  P6G;ɒP#э See, e.g., Alaska Tel. comments at 4; Harris comments at 11; OITAWITA comments at 1112; SDITC reply comments at 5. We therefore recommend that those carriers not move immediately to a proxy model, but transition to a proxy over six years. For three years, starting on January 1, 1998, high cost assistance, DEM weighting and LTS benefits for rural carriers will be frozen based on historical per line amounts. Rural carriers would then transition over a three year period to a mechanism for calculating support based on a proxy model. Prior to that transition, however, we recommend that the Commission, working with the state commissions, review the proxy model to ensure that it takes into consideration the unique situations of rural carriers. We emphasize our recommendation that, after the transition, the calculation of support for rural telephone companies should be based on a proxy model, although we recognize that alternative support"""*&&dd!" mechanisms, such as competitive bidding, may also promote efficient service provision. Further, we recommend that, on request, any rural carrier should be permitted to elect to use a proxy model to determine its support level, and that any carriers electing to use the proxy model not be allowed to use the embedded cost approach thereafter.  X-x284.` ` As we stated in discussing the use of a proxy model, we conclude that a properly designed cost proxy model would allow carriers serving high cost areas to charge affordable rates. We thus disagree with those who contend that using embedded costs is the only way to set the level of universal service support needed to accomplish affordable rates because no statutory or economic reason exists for calculating high cost support based on embedded costs. We are also not persuaded that, as Cincinnati Bell asserts, a carrier of last  X -resort must recover its costs through an embedded cost methodology.U " {O| -ԍ See Cincinnati Bell comments at 11. U  X -x285.` ` We find, however, that, because of the difficulty in precisely modelling small, rural carriers' costs, they should continue to draw high cost support calculated based on an embedded cost methodology until we have more experience with the proxy models. We therefore recommend that rural carriers transition to the proxy methodology adopted for calculating high cost support in areas served by nonrural incumbent LECs. The Joint Board recommends that rural carriers should begin shifting to a proxybased system three years after the implementation of a proxybased methodology for nonrural LECs and the Commission, working with the state commissions, has reviewed the appropriateness of using a proxy model for rural carriers. At that time, rural carriers will begin draw an increasing percentage of their high cost support based upon a proxybased system during the subsequent three years. The Joint Board concludes, however, that rural companies operating in Alaska and insular areas should not be required at this time to use a proxy model until further review. Thus, at the end of a sixyear period after proxies are initiated for large LECs, all LECs including rural LECs, but excepting LECs in Alaska and insular areas, will be on a proxybased system.  X|-x286.` ` The Joint Board recommends, however, that rural carriers be able to move to a proxybased system earlier if they choose to do so. We recognize that rural carriers will choose to move earlier only when the proxy cost is greater than the embedded cost. Providing the rural carriers this opportunity is necessary to ensure that rural carriers have an incentive to invest in the facilities required to provide the supported services. The alternative, limiting rural carriers to embedded costs when forwardlooking economic costs are greater than embedded costs, would encourage rural carriers to withdraw service in high cost areas or require rural carriers to incur an economic loss in the provision of the supported services.  X!-x287.` ` We recommend that the Commission define "rural" as those carriers that meet"!Z*&&dd "  X-the statutory definition of a "rural telephone company."h" yOy-#X\  P6G;ɒP#э 47 U.S.C.  153(37).h In order for the administrator to know which carriers are to receive support payments based on the proxy model or their embedded costs, we recommend that carriers notify the Commission and the state commissions that for purposes on universal service support determinations they meet the definition of a "rural telephone company." Carriers should make such a notification each year prior to the beginning of the payout period for that year. The carriers may also use that notification as the means by which to let the Commission, the state commissions, and the administrator know if they have chosen to voluntarily move to a proxy model before the end of the transition period.  X -x288.` ` Although many of the suggestions on how to improve the existing high cost support mechanisms provided by the commenting parties have merit, we do not find it appropriate to radically change the method of calculating such support in light of the short time period that will elapse between now and when rural carriers receive support based on a proxy methodology. We also find that LTS payments constitute a universal service support mechanism. As the Commission noted in the NPRM, LTS payments serve to equalize LECs' access charges by raising some carriers' charges and lowering others'. While some commenters have noted the beneficial purposes currently served by LTS, no commenter argued that LTS was not a support flow.  X4-x 289.` ` We therefore recommend that beginning in 1998 and continuing to the end of the year 2000, support payments for high cost assistance, DEM weighting and Long Term Support, be frozen for each carrier at the same amounts paid on a per line basis to qualifying carriers. High cost support would be based on the assistance received in 1997, and DEM weighting and LTS benefits received during calendar year 1996. Beginning in the year 2001, and through the year 2003, we recommend that support be gradually shifted to a proxybased methodology. In the year 2001, support would be based on 75 percent frozen levels and 25 percent proxy; in 2002 support will be based on 50 percent frozen levels and 50 percent proxy; in 2003 support will be based on 25 percent frozen levels and 75 percent proxy. Beginning in 2004 support will be 100 percent based on a proxy methodology. The total period for transition for rural carriers to a proxy based system is six years.  X -x!290.` ` Freezing support will encourage rural carriers to operate efficiently because no additional support will be provided for increased costs. We recognize that the number of subscribers served by rural carriers could increase and associated with such increases is an increase in costs. Therefore, we recommend that support not be frozen at a total dollar amount, but instead, at a per line amount. Rural carriers would receive additional support at the same amount per line as the number of subscribers increase. A frozen level of high cost support will prepare these LECs for both their move to a proxy model and the advent of a more competitive marketplace."#X*&&dde""Ԍ X-ԙx"291.` ` High cost assistance to carriers with high loop costs that will be paid during 1997 are based on those carriers' 1995 embedded costs. Additionally, loop counts to determine the 1995 average costs per loop for each carrier are based on yearend 1995 loop counts. To determine the amount of frozen high cost support per line for carriers with high loop costs, we recommend that the total amount paid to each carrier during 1997, based on 1995 embedded costs, be divided by the number of loops served at the end of 1995. The amount of high cost assistance to be paid in 1998 will then be the same per line amount paid in 1997 multiplied by the year end loop count for 1996. Calculation of payments would continue in this manner throughout the transition period.  X -x#292.` ` Currently, DEM weighting assistance is an implicit support mechanism that is recovered through the switched access rates charged to interexchange carriers by those carriers serving less than 50,000 lines. In order to calculate the perline DEM weighting benefit, we recommend that the amount of additional revenues collected by each carrier above what would be collected without DEM weighting, be calculated for the calendar year 1996. That amount, divided by the number of loops served at the yearend 1996 would be the basis for the frozen per line support to be paid beginning in 1998. Until December 31, 1997, DEM weighting benefits would continue under the present rules. Although we could have recommended the calendar year 1997 as the basis for determining the frozen perline amount for DEM weighting benefits during the transition period, we find that sufficient time will be needed for the fund administrator to gather the data and calculate payments before frozen DEM weighting benefits begin in 1998. We chose to use yearend 1996 loop counts because this calculation would have already been made for loop high cost assistance purposes. For 1999, the amount of frozen DEM weighting support would be based on the frozen per line amount multiplied by the number of lines served for the yearend 1997. Calculation of payments would continue in this manner throughout the transition period.  X-x$293.` ` LTS payments are currently determined by comparing the amount pool members will receive in SLCs and CCL charges to the pool's projected revenues requirement. In order to determine the frozen LTS payment for the Common Line pool members, we recommend that each member be allocated a percentage of the total LTS contribution from the nonpooling LECs. We recommend that the allocation be made on the basis of each member's common line revenue requirement relative to the total common line pool revenue requirement. We recommend that the frozen LTS payments to pool members during the year ending 1996 and the loop counts at yearend 1996 be used as the historical basis for computing the frozen per line LTS payment beginning in 1998. For 1999, the amount of frozen LTS payments would be based on the frozen per line amount multiplied by the number of lines served for the yearend 1997. Calculation of payments would continue in this manner throughout the transition period.  Xh$-x%294.` ` We recognize that, unlike the current LTS system, the frozen LTS mechanism will not result in CCL charges for ILECs participating in the NECA pool being set equal to"Q%*&&dd $" the national average CCL charge for all ILECs. Currently, LECs that contribute to LTS support recover those funds by increasing their own CCL charges. Under the frozen LTS mechanism, the funds for this support will come instead from all carriers providing interstate telecommunications services based on their revenues.  X-x&295.` ` We also recognize that we have limited participation in the frozen LTS mechanism to rural telephone companies, as defined in the 1996 Act, that currently participate in the NECA pool. We find that this limitation is proper because we have also recommended that ILECs not qualifying as rural telephone companies should receive high cost universal service support based on a proxy model for costs, including loop costs. Because the proxy model includes the total unseparated loop costs, nonrural ILECs would receive double compensation if they also received frozen LTS payments.  X -x'296.` ` Support Levels for Competitive Carriers. We recommend that the Commission make frozen support payments portable. A CLEC should be allowed to receive support payments to the extent that it is able to capture subscribers formerly served by carriers eligible for frozen support payments or to add new customers in the ILEC's study area. Because we have recommended that frozen support payments be computed on the basis of working loops, ILECs will, under our recommendation, automatically lose frozen support payments for loops serving subscribers lost to a competitor. We find that competition would best be served if the frozen support payment attributable to that line were paid instead to the CLEC that won the subscriber. Likewise, a CLEC should receive support for new customers that it serves in the ILECs study area. In order to avoid creating a competitive disadvantage for alternative facilitiesbased LECs, we recommend that frozen support payments shift to the CLEC  X-irrespective of whether the CLEC actually uses the ILEC's loop to serve the subscriber.[" xPQ-#c PE37 P## c PE37 P#Ѝ The CLEC might use the ILEC's loop to serve the customer by obtaining access to that loop through  zP-unbundling or resale. See 47 U.S.C.  251. See also Local Competition Order.[ Since rural ILECs have the option at any time to convert their support basis to a proxy methodology, we find that a CLEC should also have the opportunity to choose proxybased support when it enters a rural ILEC's study area.  Xe-x(297.` ` We conclude that using the rural ILECs' embedded costs to calculate universal service support for all eligible telecommunications carriers serving customers within that rural LEC's study area will be the easiest way to administer the support mechanism. Besides using a proxy or embedded costs system, the alternative for calculating support levels for such CLECs consists of requiring the CLECs to submit cost studies. Compelling a CLEC to use a proxy methodology without requiring the ILEC's support to be calculated in the same manner, however, could place either the ILEC or the CLEC at a competitive disadvantage. Also, requiring CLECs to submit cost studies would be problematic because CLECs are not required to follow Commission accounting and jurisdictional separations rules and thus would be unlikely to produce information by which a meaningful comparison could be made. We thus"""*&&dd!" disagree with Alaska Tel.'s claim that providing support to CLECs based on the incumbents' embedded costs would violate Section 254(e). CLECs, as well as ILECs, will be expected to adhere to Section 254(e) which provides that "[a] carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended." We also disagree with the Minnesota Indep. Coalition's claim that basing support to CLECs on the incumbents' embedded costs may compensate the CLEC in excess of its costs. Because CLECs must provide service to and advertise its service throughout the entire study area, consistent with section 254(e), the CLEC cannot "cream skim" or only serve low cost areas. If the CLEC can serve the entire study area at a much lower cost than the incumbent, this may be an indication of a less than efficient operation of the ILEC. Because support would be provided on a per line basis, if a customer chooses to receive service from a CLEC rather than an ILEC, only the CLEC would receive the support.  X -x)298.` ` Alaska and Insular areas. We propose that rural carriers in Alaska and in insular areas not be required to shift to a support system in which support levels are calculated based on a proxy model at this time. Many commenters explain why rural carriers in Alaska and insular areas face circumstances unlike those encountered by other rural carriers  Xy-in the continental United States.)y" {O-#X\  P6G;ɒP#э #X\  P6G;ɒP#See, e.g., Alaska PUC cost model comments at 3; Alaska Tel. comments at 5; Matanuska Tel. Ass'n  yO-comments at 23.#Xj\  P6G;ynXP#) For example, the extreme remoteness of many communities in Alaska and the unique climatological problems Alaskan carriers encounter, such as permafrost, limit the period in which carriers can construct and perform maintenance on their facilities, and thus make the cost of providing service in those areas different than in  X-other rural areas."" {O-#X\  P6G;ɒP##X\  P6G;ɒP#э #X\  P6G;ɒP# See Alaska PUC, Public Hearing, Aug. 22, 1996.#Xj\  P6G;ynXP# In addition, the proxy models did not originally include Alaska and insular areas, and even now only BCM2 claims to be able to consider the unique cost  X-calculations that rural carriers in Alaska and insular areas face.\B" yOT-ԍ PacTel has provided cost calculations from the CPM model for Alaska, but not for the insular areas other  {O-than Hawaii. See letter from Alan Ciamporcero, Vice President, Pacific Telesis, to William F. Caton, Acting Secretary, FCC (dated Oct. 17, 1996). MCI has provided estimates of the universal service support that would be required for Alaska, Hawaii, Puerto Rico, Guam, and the Mariana Islands. MCI notes, however, that the cost per line was approximated by taking the weighted average for the RBOCs in the Hatfield model, and are not specific to those areas. Consequently, according to MCI, the estimates for these areas are only "ballpark estimates." Letter from Kimberly M. Kirby, Senior Manager, FCC Affairs, MCI, to William F. Caton, Acting Secretary, FCC (dated Oct. 25, 1996).\ Therefore, while we believe that proxy models may provide an appropriate determination of costs on which to base high cost support, we are less certain that they may do so for rural carriers in Alaska and insular areas. Consequently, we recommend that rural carriers serving Alaska and insular areas should be able to continue to use embedded costs to determine their costs of offering universal service. We further recommend that this system for rural carriers in Alaska and"| *&&dd" insular areas be revisited in the future to determine whether changes in proxy models allow them to be utilized effectively in Alaska and insular areas.  X-x C. Determining the Level of Support Using a Benchmark  X-x*299.` ` We recommend that the Commission establish a benchmark to calculate the support that eligible telecommunications providers will receive when a proxy model is used to calculate the costs of providing services designated for support from universal service mechanisms. We believe it is desirable that the benchmark be based on the amount the carrier would expect to recover from other services to cover the cost of providing supported services in rural, insular, and high cost areas, but final determination of the methodology for selecting the benchmark must also consider the revenue base for universal service contributions. Those eligible telecommunications providers for which the cost of providing supported services exceeds the benchmark would be permitted to receive universal service support.  X-x` ` 1. Background  Xb-x+300.` ` Under the Commission's existing high cost support assistance rules,<b" yO-ԍ 47 C.F.R. Part 36.< LECs with unseparated loop costs greater than 115 percent of the nationwide average loop cost may  X4-allocate an additional share of their local loop costs to the interstate jurisdiction.@4X" yO=-ԍ 47 C.F.R.  36.631.@ The threshold amount equal to 115 percent of nationwide average loop costs operates like a benchmark with the main difference being carriers receive support under the current system if their costs exceed the threshold, whereas under a proxy model approach, the level of universal service support is determined by the difference between forwardlooking costs and the benchmark.  X-x,301.` ` The NPRM also requested comment on how to ensure that any new universal service support mechanism is simple to administer, technologyneutral, and designed to identify the minimum subsidy required to achieve the statutory goal of affordable and  XN-reasonably comparable rates throughout the nation.;N" yO -ԍ NPRM at para. 27.; The NPRM also sought comment on the relationship between affordability and the benchmark that would be one component of a proxy model approach to calculating support for eligible telecommunications carriers serving rural, high cost or insular areas. In its Public Notice, the Commission's Common Carrier  X-Bureau asked, inter alia, for comment on the advantages and disadvantages of using a specific national benchmark rate for services designated for support with a proxy model to calculate"x*&&dd" high cost support as the standard for determining whether core service rates meet the  X-"affordability" requirement of section 254(i).E" yOb-ԍ Public Notice, question 3. E  X-x` ` 2. Comments  X-x-302.` ` Nationwide Benchmark Based on Affordability. Several parties advocate the establishment of an "affordability benchmark" that would also be used to calculate high cost  X_-support.m_X" {Oh -ԍ See, e.g., USTA comments at 1416; MCI further comments at 2.m Many of these commenters support the creation of a federal benchmark that would  XH-set the maximum rate an average residential subscriber would pay for local serviceDH" yO -ԍ Time Warner comments at 7.D and the  X1-level above which a carrier can seek universal service support.1z" yO\-ԍ Ameritech comments at 10; PacTel comments at 20; Sprint comments at 9; USTA comments at 1415; U S West comments at 8; NCTA further comments at 2. For example, GTE proposes a plan wherein an initial threshold level that is equal to the maximum desired rate for core  X -services triggers the availability of funding for core services.? " yO-ԍ GTE comments at 78. ? Sprint maintains that such a benchmark would enable the Commission to assure a reasonable rate to consumers regardless  X -of where they live.G b " yO-ԍ Sprint further comments at 2.G AT&T argues that a national benchmark will prevent states from attempting to obtain additional federal support by setting their own benchmarks at unduly low  X -levels.z " {OJ-ԍ AT&T further comments at 4. See also Florida PSC further comments at 56.z Some parties believe a national affordability benchmark would be easy to  X-administer. " {O-ԍ See, e.g., CompTel further comments at 67; GCI further comments at 2; MCI further comments at 2; TCI further comments at 8. BellSouth also favors the administrative simplicity of a national benchmark, but  Xy-contends that the federal benchmark should reflect average state incomes.Jy" yO -ԍ BellSouth further comments at 3.J TCI contends that business planning for carriers will become simpler and less expensive under a national  XK-benchmark than it would be under a more complex, localized system.DKn" yOj#-ԍ TCI further comments at 9.D In addition, Florida PSC maintains that because all the information necessary to derive a national affordability"4*&&dd"  X-benchmark is in the public domain, such information would be easy to obtain and use.L" yOy-ԍ Florida PSC further comments at 6.L  X-x.303.` ` Some commenters oppose basing a national benchmark on affordability because, they argue, such a benchmark would not account for local circumstances that affect  X-affordability.;ZX" {O-ԍ See, e.g., Citizens Utilities further comments at 3; ITC further comments at 2; MFS further comments at 11; NECA further comments at 3; NYNEX further comments at 12; RTC further comments at 8; Time Warner further comments at 10; Washington UTC further comments at 5.; For example, the Alaska Tel. argues that a national benchmark based on  X-affordability cannot be reflective of small companies and circumstances found in rural areas.Lz" yO -ԍ Alaska Tel. further comments at 6.L In addition, the Media Access Project contends that a single national affordability benchmark would leave services unaffordable for many lowincome customers while providing an  XH-unnecessary subsidy for wealthier consumers.FH " yO-ԍ MAP further comments at 23.F Teleport suggests that, instead of establishing a nationwide affordability benchmark, the Commission should establish guidelines for the  X -states to follow in prescribing rates within their jurisdictions.I " yOe-ԍ Teleport further comments at 3.I  X -x/304.` ` Other opponents of a national affordability benchmark include PacTel, which argues that the plain language of the statute calls into question any effort to establish a  X -national affordability standard.G * " yO-ԍ PacTel further comments at 8.G Further, PacTel contends that states might raise their local  X -rates to the national benchmark in order to qualify for federal universal service support.: " {O-ԍ Id. at 11.: PacTel maintains that, if a national affordability benchmark were to be compared to the results of a proxy model for purposes of determining how much interstate support a carrier should receive, as it believes the third question of the Public Notice implies, jurisdictional  XK-separations problems could result.~ KL " yOH -ԍ PacTel further comments at 89 (arguing that changes in jurisdictional separations, a trueup of other interstate prices, or restricting a company's high cost federal funding to current levels of federal CCL and universal service funding would be required if support was determined by comparing a national benchmark rate with proxy costs). ~ NECA contends that the establishment of a nationwide affordability benchmark might be viewed as a significant expansion of federal regulation into  X-an area traditionally regulated by state commissions.E4" yO&-ԍ NECA further comments at 4.E In addition, MFS argues that the Joint"*&&dde" Board should not attempt to incorporate an affordability benchmark into a proxy model, but,  X-instead, should base support amounts on the costs generated by the models.F" yOb-ԍ MFS further comments at 67.F Washington UTC argues that a nationwide benchmark rate might be higher than those rates produced in a  X-competitive market.OX" yO-ԍ Washington UTC further comments at 4.O  X-x0305.` ` Methodologies. Commenters propose various methods for setting an affordability benchmark, linked either to loop costs, telephone rates, or consumer income. For example, USTA advocates an interstate affordability benchmark that is equal to the  XH-nationwide average loop cost.>H" yO -ԍ USTA comments at 15.> Ameritech argues in favor of basing an affordability benchmark on statewide average rates or costs for "core" services, or a specified percentage of  X -statewide median income.C x" yOC-ԍ Ameritech comments at 10.C Citizens Utilities advocates the establishment of a national price  X -affordability standard for each universal service "basket" of similar services.L " yO-ԍ Citizens Utilities comments at 10.L Under Citizens Utilities' plan, a national price affordability standard would be based on the total unseparated cost to end users for the service, and would be set at one standard deviation above the national average for the services within a given "basket" plus the federal subscriber line  X -charge.< " {O-ԍ Id. at 1011.<  Xy-x1306.` ` Some commenters advocate basing an "affordability benchmark" on existing rates. For example, Florida PSC asserts that an initial affordability benchmark should be the nationwide average rate for residential service, which, it states, equals approximately  X4-$20.00.4* " {O-ԍ Florida PSC further comments at 4 (citing FCC publication entitled Reference Book: Rates, Price  {O-Indexes and Household Expenditures for Telephone Service). West Virginia Consumer Advocate concludes that either existing rates or an amount equal to 115 percent of the national average rates should be designated as the  X-affordability benchmark.X " yO="-ԍ West Virginia Consumer Advocate comments at 9.X OITAWITA suggests that a benchmark be developed from  X-existing rates on a nationwide or statewide basis.F" yO$-ԍ OITAWITA comments at 1516.F Similarly, Time Warner proposes establishing an affordability benchmark at the highest rate currently being charged by the"*&&dd&"  X-ILEC, on a local basis." {Oy-ԍ Time Warner comments at 7. See also, Time Warner further comments at 10 (opposing the establishment of a nationwide affordability benchmark). Under Time Warner's plan, service would be deemed affordable if the price is set at or below the highest rate level applicable for any exchange within a given jurisdiction for which residential penetration is within five percentage points of the  X-jurisdictionwide average.D"" yO-ԍ Time Warner comments at 7.D Sprint supports creating a benchmark based on the national  X-average for basic residential telecommunications service in urban areas.f\" yO -ԍ Sprint comments at 4, 9 (arguing that the urban rate may be determined by considering the  {O -Commission's residential service prices in Trends in Telephone Service or the service prices collected by Balker  {O -and published by NARUC in Exchange Service Telephone Rates). f Siskiyou argues  X-that any affordability benchmark for rural areas should be based on urban rates.G" yO-ԍ Siskiyou reply comments at 2.G AT&T favors a nationwide affordability benchmark based on the weighted average of current local  X_-rates for Tier 1 territories, plus the SLC.o_f " yOv-ԍ AT&T comments at 1617 (also arguing in favor of increasing the SLC).o  X1-x2307. ` ` RevenueBased Benchmark. Some parties suggest that the benchmark be based on the revenuesperline earned by the carrier. AARP argues that all sources of revenue should be considered in determining how to establish the amount a carrier may receive from  X -the universal service support fund.> " yO-ԍ AARP comments at 19.> AARP states that carriers generate revenues from a variety of services, such as CLASS services, and that, since those services use the loop, they should help cover its costs. Therefore, AARP asserts that the revenues from all services that use the loop should be included when determining whether carriers in high cost areas need  X-support to maintain the loop.= " {O-ԍ Id. at 1920.= Ad Hoc Telecom Users also contends that total revenues  Xy-must be considered in determining the amount of support a carrier should receive.Oy" yOB-ԍ Ad Hoc Telecom. Users comments at 13.O Ad Hoc Telecom Users suggests that the Commission look at yellow pages revenues, as well as the revenues from the entire package of service purchased by residential customers in connection  X4-with the purchase of the dialtone line.:4" {O#-ԍ Id. at 17.:  X-x3308.` ` Other. Maine PUC maintains that proxy models are engineering models that":*&&ddd"  X-estimate costs, but do not use rates as an input nor predict rates as an output.J" yOy-ԍ Maine PUC further comments at 4.J Maine PUC recommends that the Commission base universal service support on the costs of providing  X-universal service support, not upon rates.9X" {O-ԍ  Id. at 4.9 NYNEX states that high cost support should be provided through the use of a benchmark level. It states that the Commission could decide, for instance, to use a number of levels of support based on the cost of providing service in a CBG. For example, carriers could be given $10.00 per month in support for CBGs that have total monthly cost of $60.00 to $70.00, $15.00 per month for CBGs that have costs of $70.00  X_-to $80.00, and so on.?_" yO -ԍ NYNEX comments at 14.? U S West suggests the establishment of a Federal Funding Benchmark (FFB), and recommends that FFB be set at $30.00 per month since that would result in a fund of approximately $5 billion according to the original BCM with the ARMIS  X -expense factor.B z" yOE-ԍ U S West comments at 12.B In addition, several parties argue that, regardless of whether an affordability benchmark is established, current amounts of high cost support must be retained to ensure  X -affordable rates in rural areas. " {O-ԍ See, e.g., NECA comments at 1112; New Hope Tel. comments at 1; Ragland Tel. Co. comments at 1; SDITC reply comments at 45; Minnesota Indep. Coalition further comments at 67.  X -x` ` 3. Discussion  X-x4309.` ` We believe that it is desirable for the Commission to set a nationwide benchmark to use in calculating the amount of support eligible telecommunications providers will receive. This is consistent with comments filed by several parties. Final determination of this issue, however, must also take into consideration the contribution base for the federal universal service mechanisms. We recommend that the benchmark the Commission adopts should be easy to administer and should be set to minimize the probability that residential rates would increase while the new support mechanisms are being implemented. The carrier's draw from the federal universal service support mechanism for serving a customer would be based on the difference between the costs of serving a subscriber calculated using a proxy model and the benchmark. A carrier could draw from the fund for providing supported services to a subscriber only if the cost of serving the subscriber, as calculated by a proxy model, exceeds the benchmark.  Xe-x5310.` ` There are essentially three approaches to setting such a nationwide benchmark to be used with the proxy model for calculating support. In setting a benchmark, the Commission could use average revenues per line, average rates, or relative cost. We"7d *&&dd" recommend that the Commission adopt a benchmark based on the nationwide average revenueperline. We agree with those commenters who argue that revenues from local exchange and access services should be considered in determining support payments. They argue effectively that revenues from discretionary services are tied to the purchase of  X-supported services." {O-ԍ AARP comments at 1920; Ad Hoc Telecom. Users comments at 17; CPI ex parte at 6 (dated Oct. 4, 1996) Revenuesperline are the sum of the revenue generated by local,  X-discretionary,"" yO` -ԍ Discretionary services include services that are added on to basic local service, e.g., call waiting, call forwarding or caller ID. access services and others as found appropriate divided by the number of loops served. In determining the level of the benchmark, we must be cognizant of the potential effect from competition on these anticipated revenues. In particular, competition could drive the rates for local, discretionary and exchange access services towards incremental cost, thereby reducing the revenues per line; alternatively, it could spur carriers to offer new services that could increase their revenues. We therefore also recommend that the Commission review the benchmark on a periodic basis, and consider the need to make appropriate adjustments.  X -x6311.` ` We believe that setting the benchmark at the nationwide average revenueperline is desirable because that average reflects a reasonable expectation of the revenues that a telecommunications carrier would be reasonably expected to offset its cost, as estimated in the proxy model. A revenue benchmark should be based on local, access, and other telecommunications revenues. The cost estimated by the proxy models includes the cost of  XK-the facilities used to provide those services.Kz" yOv-ԍ Letter from Glenn Brown, U S West, to William F. Caton, Acting Secretary, FCC (dated Sept. 4, 1996). Letter from Richard N. Clarke, AT&T, to William F. Caton, Acting Secretary, FCC (dated Sept. 10, 1996). For example, the total forwardlooking cost of the loop is included in the costs estimated by the proxy models rather than assigned to the various services that use the loop. The proposed proxy models' switch costs include the cost of the software that allows the switch not only to process a local call but also to provide the entire array of discretionary services. But other costs are not included in the proposed proxy models, such as the cost of tandem switches used to provide interexchange toll service or other costs of a toll network, and thus revenue from toll services should not be included in the benchmark. A revenueperline benchmark, therefore, would be consistent with the cost estimation process used to determine the cost of service in high cost support areas.  Xe-x7312.` ` We find that it is advisable to construct two benchmarks, one for residential service and a second for single line business service, since we are recommending that primary residential and single business lines be supported. The residential benchmark, if ultimately adopted by the Commission, should be set equal to the sum of the revenue generated by local, discretionary, and access services provided to residential subscribers divided by the" *&&dd[" number of residential lines. The single line business benchmark should be set equal to the sum of the revenue generated by local, discretionary, and access services provided to single line business subscribers divided by the number of single line business lines.  X-x8313.` ` Once the form of revenue benchmark is selected, a decision must be made as to whether the benchmark is set at the nationwide average or by some other method. Using the nationwide average revenue would encourage carriers to market and introduce new services in high cost areas. Carriers that successfully introduce and market new services will benefit from doing so, and those carriers that fail to introduce new services or who lose customers to their competitors will not receive universal service support funds to replace the foregone revenue. This decision will provide carriers the incentive to upgrade their service offerings in high cost areas, and therefore, maintain high quality service in rural areas that is comparable to the service offered in urban areas.  X -x9314.` ` We are unpersuaded by the argument of some commenters that the benchmark  X -should vary in accordance with the average household income in each state.a " yO -ԍ SWBT comments at 912; BellSouth further comments at 3.a We note that the telephone penetration rate is relatively constant across large ranges of income, except that  Xy-telephone penetration decreases significantly for lowincome households.yX" yO-ԍ Monitoring Report, CC Docket No. 87339, May 1996, Prepared by Federal and State Staff for the FederalState Joint Board in CC Docket No. 80286, Table 1.4. Therefore, we conclude that the impact of household income should be addressed through programs directed at helping lowincome households obtain and retain telephone service, rather than as part of  X4-our high cost mechanism.G4" {O-ԍ See infra section VIII.G We agree with commenters' arguments that a national benchmark would enable the Commission to assure a reasonable support level to all carriers,  X-and would be easier to administer than state or local benchmarks.B" {O-ԍ See, e.g., CompTel further comments at 67; GCI further comments at 2; MCI further comments at 2; Sprint further comments at 2; TCI further comments at 8. Final determination of this issue, however, must also take into consideration the revenue base for universal service contributions.  X-x:315.` ` We also do not support tying the benchmark to average rates for residential and single line business service because residential and single business service are only two of the services provided over the facilities for which costs are included in the proxy model cost"|*&&dd"  X-estimates." yOy-ԍ The average residential flat service rate including the SLC and excluding taxes, 911, and other surcharges is currently approximately $17.20, while the average lowest generally available rate is $10.14. Monitoring Report, CC Docket No. 87339, May 1996, Prepared by Federal and State Staff for the FederalState Joint Board in CC Docket No. 80286, Table 5.7. (The table shows average rates, including SLC and taxes and other surcharges, for 95 urban areas across the nation.) Therefore, a rate benchmark would be inconsistent with the method we are recommending for determining the cost of providing the network used to provide the supported services. The average rate benchmark ignores the revenue generated from the customer that contributes to the joint and common costs of providing both that service and those services designated for support. Setting the benchmark equal to average residential and single line business rates would allow carriers to recover revenue for some discretionary services twice, once from the customer and once from the universal service fund. We are also concerned with proposals that tie the benchmark to rates because some proposals are tied to the highest available residential rate and others are tied to the weighted average of all  X1-residential rates.1x" {OZ-ԍ See, e.g., OITAWITA comments at 1516; Time Warner comments at 7; West Virginia Consumer Advocate comments at 9; Florida PSC further comments at 4.  X -x;316. ` ` Using a national benchmark set at the average local rate will also result in a outcome that is inappropriate in conjunction with a proxy cost model. Use of such an amount will tend to produce a universal service fund that will over compensate the provider of service. Such an amount could create a large universal service fund that ultimately will be recovered from customers through higher rates, and may result in some customers having to drop off the network.  Xb-x<317.` ` We do not believe that a benchmark that is tied to average cost calculated by  XK-the proxy models should be relied on at this time.XK" yO-ԍ Ameritech comments at 10; USTA comments at 15.X In order to establish the need for support it is best to compare revenue to cost rather than to examine only the cost side of the equation. Other service revenue can offset the high cost so that residential and single business  X-rates remain affordable even in above average cost areas.b " yO-ԍ For example, rural telephone companies often have low local exchange rates, but high access revenues. We recognize, however, that in the future the use of nationwide average revenues may no longer be appropriate because of the changing nature of the telecommunications marketplace. Some carriers may package local and long distance services as part of their array of service offerings to the public in order to distinguish themselves from other providers of telecommunications services. At such time it might be necessary to reevaluate the use of a benchmark based on average nationwide revenues per line for local, discretionary, and access services. We note that the California PUC recently decided to use such a cost benchmark to determine support levels for the"e *&&dd"  X-California state universal service fund.h" {Oy-ԍ See Cal. P.U.C. R.9501020/I.9501021 (Oct. 25, 1996).h x  X-#X\  P6G;ɒP#X0Í ÍX0Í Í#Xj\  P6G;ynXP# xD. Competitive Bidding  X-x` ` 1. Background  Xv-x=318.` ` The NPRM sought comment on whether competitive bidding could be used to  X_-set the level of universal service support in rural, insular, and high cost areas.;_Z" yOj -ԍ NPRM at para. 35.; Specifically, the Commission asked whether relying on competitive bidding would be consistent with section 214(e), the provision that specifies the circumstances under which telecommunications  X -carriers are eligible to receive universal service support.3 " {O-ԍ Id.3 The NPRM sought comment on a competitive bidding system in which carriers offering all of the services supported by universal service mechanisms would bid on the level of assistance per line that they would need to provide such services. The NPRM explained that such an approach would attempt to harness competitive forces to minimize the cost of universal service. The NPRM suggested that the level of support that any eligible carrier could receive would be set by the lowest bid. To induce competitors to underbid one another, rather than merely accepting the established level of assistance, the NPRM suggested that the low bidder might receive an "incentive  Xb-bonus."@b|" {O-ԍ Id. at para. 36.@ Finally, the Commission acknowledged that the level of competition in high cost  XK-areas may not warrant using competitive bidding yet.@K" {O -ԍ Id. at para. 37.@  X-x>319.` ` In its Public Notice, the Common Carrier Bureau sought further comment about implementing a competitive bidding system. The Bureau sought comment on whether a competitive bidding plan should be altered when applied to areas in which there is little competition; what safeguards, if any, should be adopted to prevent collusion or the use of competitive bidding by large carriers to drive out small incumbents; what safeguards, if any, are needed to ensure quality of service; how to provide incentives to ensure aggressive bidding; and how to determine the appropriate geographic area for which eligible carriers bid  X|-for universal service support.=|" yO#-ԍ Public Notice at 7.= "e0 *&&dd1"Ԍ X-x` ` 2. Comments  X-x?320.` ` General comments. The commenters are divided in their views on whether to adopt a competitive bidding system. A few LECs and some industries that would potentially compete with ILECs to provide local service, such as wireless and cable companies, support  X-the use of competitive bidding." {O-ԍ See, e.g., ALTS comments at 12; AirTouch comments at 1213; Frontier comments at 9; GTE comments at 11; NCTA comments at 11; PCIA comments at 1516; Time Warner comments at 1011; Western comments  {O-at 1213; Comnet Cellular reply comments at 6. See also CSE Foundation comments at 1112; LDDS comments at 1213 (arguing that bidding cannot take place until competitors enter the market until then, the Commission should continue to rely on the ILEC's underlying costs of service); Alliance of Public Technology further comments at 12 (contending that competitive bidding can speed the development of advanced networks). Opponents of using a competitive bidding system include  Xv-most LECs and some IXCs, such as AT&T and MCI.BvD" {Ok -ԍ See, e.g., ACTA comments at 7; AlabamaMississippi Tel. Ass'n comments at 6; Alaska Tel. comments at 8; BellSouth comments, Att. 1 at 3535; GVNW comments at 13; NYNEX comments at 10 n.15; OITAWITA comments at 1415; RTC comments at 17; SWBT comments at 1617; Telec Consulting at 1112; Teleport comments at 910; United Utilities comments at 2; Fred Williamson comments at 14; NECA reply comments at 13; AT&T further comments at 36; Ameritech further comments at 37; MCI further comments at 24; MFS further comments at 44; Minnesota Indep. Coalition further comments at 1516; TCI further comments at 3132; USTA further comments at 2930; U S West further comments at 23; Western Alliance further comments at 13.  PacTel argues that competitive bidding could be used to adjust the level of universal support to any given area once the  XH-initial support level has been set using the CPM.HHN " yOG-ԍ PacTel further comments at 44.H PacTel recommends that the Commission open a further proceeding to address questions on how competitive bidding could be  X -structured fairly and appropriately.: " {O-ԍ  Id. at 44.: GSA believes that the Commission should approve the concept of competitive bidding and should leave its implementation to the individual state  X -commissions.C p" yO -ԍ GSA reply comments at 13.C The few state agencies that commented on this issue also have divergent  X -views. " {O-ԍ Compare New York CPB comments at 11 (arguing that the Commission should consider a bidding process in areas where more than one provider is willing to offer core services); Wisconsin PSC comments at 10 (contending that bidding should be considered where competition is evolving between legitimate, established and  {O!-comparable providers), with CNMI comments at 18 (maintaining that markets most in need of support are unlikely to see competition and bidding would be of no utility in uncompetitive markets); New Jersey Advocate comments at 13 (suggesting that bidding may not focus on problems requiring support).  California PUC, for example, agrees with the Commission's statement in the NPRM that market conditions may not warrant the introduction of a competitive bidding plan" |*&&dd "  X-at present.H" yOy-ԍ California PUC comments at 12.H Florida PSC, although finding merit in competitive bidding after entry has occurred, expresses concern that any bidding plan that explicitly or implicitly results in exclusion of carriers may be inconsistent with section 214(e). Florida PSC concludes that this  X-question need not be resolved now.HX" yO-ԍ Florida PSC comments at 1112.H  X-x@321.` ` Several commenters recommend that a competitive bidding system be used only for the more limited purpose of selecting carriers to serve areas that no carrier is serving or for areas that no carrier is willing to serve at the subsidy level established through another  XH-mechanism.H" {O -ԍ See, e.g., California PUC comments at 1314; USTA comments at 20; AT&T further comments at 37; MCI further comments at 2122. California PUC contends that such a limited use of competitive bidding is  X1-appropriate and administratively feasible.H1B" yO$-ԍ California PUC comments at 14.H AT&T contends that unserved areas are likely to have few customers, making it economical for service to be offered by only one carrier that  X -can be selected through a bidding process.F " yO-ԍ AT&T further comments at 37.F MCI suggests that bidding be used only in "those few areas" where a carrier becomes unwilling or unable to offer service at the price  X -and universal service support level determined by the proxy model.E b " yO-ԍ MCI further comments at 21.E  X -xA322.` ` Supporters of adopting a competitive bidding system argue that it best comports  X-with the procompetitive principles of the 1996 Act because it is a marketbased approach. " {O3-ԍ See, e.g., Frontier comments at 9; GTE comments at 11 (arguing that bidding is consistent with intent of  {O-the 1996 Act to maximize reliance on market forces and minimize regulation); Western comments at 1213. See  {O-also NCTA comments at 11 (arguing that competitive bidding would give new entrants a reasonable opportunity to receive funds); CSE Foundation reply comments at 6 (maintaining that bidding would encourage competition); Comnet Cellular reply comments at 6 (contending that competitive bidding would put all prospective eligible carriers on an equal footing). Many commenters that support a competitive bidding system contend that it would reduce the  Xb-costs of universal services support.Zbp" {O"-ԍ See, e.g., ALTS comments at 12; AirTouch comments at 1213; Frontier comments at 9; GTE comments at 11; NCTA comments at 11; PCIA comments at 15; Western comments at 1213; Comnet Cellular reply comments at 6. CSE Foundation argues that, because of the importance of understanding the true costs of providing service, the appropriate level of support for high cost areas should be determined whenever possible through a process of competitive bidding"4*&&dd"  X-for a specific geographical area, possibly CBGs.K" yOy-ԍ CSE Foundation comments at 1112.K Time Warner asserts that, with an appropriately structured incentive, competitive bidding can best assure that areas are served by  X-telecommunications carriers in the most economically efficient manner possible.H X" yO-ԍ Time Warner comments at 1011.H GTE contends that competitive bidding has advantages over the use of proxy cost models. These advantages include the elimination of the need to modify cost models over time and the incorporation of nonprice considerations, such as regulatory burdens, that are not captured by  Xv-the models.= v" yO -ԍ GTE comments at 11.=  XH-xB323.` ` Some commenters supporting a competitive bidding proposal argue that only  X1-carriers willing to accept COLR obligations. 1x" yOZ-ԍ GTE defines a COLR as a carrier eligible for universal support that undertakes the obligations established by a state agency, within federal guidelines, as a condition of receipt of federal universal service support. GTE comments at 8 n.19. GTE suggests that such obligations might include a ceiling on the rate the COLR can charge, terms and conditions of service and quality standards, limits on the carrier's ability to exit, and an obligation to serve all customers in the area. GTE further comments at 4648.. should be allowed to bid to serve an area. 1( " {O -ԍ See, e.g., CSE Foundation comments at 12; GTE comments at 89; GTE further comments at 4647.  {O-See also Ameritech Ex Parte Materials Regarding Competitive Bidding Processes, July 31, 1996 at 6 (arguing that universal support must be portable only to other COLRs); GSA further comments at 1112; SWBT further comments (erratum) at ii (stating that, although it opposes use of competitive bidding system, if one is adopted, all winning bidders must be willing to be bound by all of the carrier of last resort and other obligations imposed on the incumbent LEC). GTE argues that a COLR requirement is essential to establishing a competitive bidding plan that would be consistent with the 1996 Act. It contends that a bidding plan would not be competitively neutral if one carrier, most likely the incumbent, were required to meet COLR obligations, while a new entrant would receive the same level of universal service support  X -without those same obligations.E  " yO-ԍ GTE further comments at 46.E Moreover, GTE asserts, a competitive bidding plan that does not have a COLR requirement would never be "sufficient" to preserve universal service as required by the 1996 Act. It maintains that the incumbent, subject to COLR requirements, would never be able to sustain its obligation to serve all customers in the service area in the face of entry by other carriers that could selectively serve only the customers they wished, yet  XK-receive the same level of funding.=K4" {O0$-ԍ Id. at 4647.= Finally, GTE contends that, although section 214 requires as a condition for receiving universal service support that a carrier agree to provide"4*&&ddH"  X-the core universal services to all customers in the service area,R" {Oy-ԍ See 47 U.S.C  214(e)(1) & (2).R the Commission and the states must specify the terms and conditions of that obligation. GTE maintains that the most important of these conditions is that all carriers receiving support be required to meet the  X-same obligations.IZ" yO-ԍ GTE further comments at 4748. I GSA argues that a competitive bidding system is beneficial only if it supports universal service, minimizes the level of support payments and maintains competitive neutrality which can be accomplished only if universal service support is restricted to  Xv-carriers agreeing to be COLRs.Hv" yO -ԍ GSA further comments at 1112.H  XH-xC324.` ` The commenters opposing adoption of a competitive bidding system raise various arguments. Some commenters argue that competitive bidding would degrade service  X -quality because carriers would achieve low bids by reducing quality. z" {OE-ԍ See, e.g., Ardmore Tel. comments at 45; MonCre comments at 34; NECA comments at 11; RTC comments at 17; Western Alliance comments at 67; NECA further comments at 29. Other commenters contend that a competitive bidding system would be costly, difficult to administer, and not  X -likely to be an improvement over other methods of establishing costs." " {Oq-ԍ See, e.g., BellSouth comments, Att. 1 at 3536; NYNEX comments at 10 n.15 (contending that bidding would be costly and not necessarily better than proxy system); SWBT comments at 1617 (maintaining that the costs of properly structuring a bidding process, even if could be done, could best be spent elsewhere); Teleport comments at 910 (arguing that auctions are inferior to using cost proxy models to set support levels).  Several commenters  X -contend that a competitive bidding system would be susceptible to "gaming,"T " {OD-ԍ See, e.g., SWBT comments at 17 n.29.T either by the  X -ILEC who might set artificially low bids to keep competitors out,o P " {O-ԍ See, e.g., Merit comments at 3; United Utilities comments at 2.o or by large carriers with  X -ample resources that might underbid smaller incumbents in order to drive them out. " {O:-ԍ See, e.g., OITAWITA comments at 1415; RUS comments at 5; United Utilities comments at 23. BellSouth argues that a new entrant, a major IXC for example, that would provide service primarily through resale, could enter a very low bid in order to effectively eliminate support  Xb-to the underlying facilitiesbased competitor.Nbt" yO"-ԍ BellSouth further comments at 4546.N SWBT contends that a new entrant might construct facilities only to serve the lowest cost customers and serve the remainder by resale  X4-of the ILEC's services or by use of the ILEC's network elements.F4" yO%-ԍ SWBT further comments at 36.F It argues that the new"4*&&dd" entrant would have an unfair advantage in the bidding process because, as a result of its lower facilities costs to serve a select few customers, it can underbid the ILEC that must provide  X-facilities for all remaining higher cost customers.3" {OK-ԍ Id.3  X-xD325.` ` Many rural and smaller LECs assert that setting support levels through competitive bidding would be disastrous for ILECs that have deployed significant infrastructure to serve high cost areas and that rely on the current level of support for  X_-financial viability.=Z_Z" {Oj -ԍ See, e.g., GVNW comments at 13 (arguing that bidding process might result in "death spiral" for incumbent LECs that have deployed significant infrastructure and rely on current level of support for financial viability); Montana Indep. Telecom. comments at 910 (same). = Fred Williamson argues that bidding could be unfair to ILECs that have been required by regulatory authorities to build facilities for future use and might not be able  X1-to obtain funds for those facilities if a competitive bidding system were used.O1|" yO^-ԍ Fred Williamson comments at 1314. O NECA contends that issues of confiscation could arise if ILECs are required to provide facilities or services at noncompensatory rates established by unrealistic bids submitted by new  X -entrants.I " yO-ԍ NECA further comments at 2930.I NECA also argues that competitive bidding would require "unprecedented  X -Commission involvement in intrastate issues such as local service quality and monitoring.: " {O"-ԍ Id. at 29.:  X -xE326.` ` Opponents of competitive bidding also argue that it is inconsistent with the  X-1996 Act.. " {Oo-ԍ See AlabamaMississippi Tel. Ass'n comments at 6 (arguing that bidding is of "doubtful legality"). RTC, for example, contends that, because the 1996 Act grants to the states the authority to designate carriers eligible for universal service support, the Commission does not  Xb-have the authority to compel states to use a competitive bidding process.QZb " {O-ԍ RTC comments at 17. See also United Utilities comments at 2 (supporting a federal competitive bidding scheme that has the Commission designating carriers eligible for support by awarding highcost assistance to the successful bidder usurps the role assigned to the states in section 214).Q Century contends that the Commission does not have authority to establish the size of a service area for competitive bidding purposes that would differ from the size of the service area established by  X-the state pursuant to section 214(e)(5).I " yO#-ԍ Century further comments at 28.I GVNW argues that a bidding process will likely not meet the 1996 Act's mandate for the establishment of specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service as required by"r *&&dd'"  X-sections 254(b) and 254(d).!"" {Oy-ԍ GVNW comments at 1314. See also ITC further comments at 21 (arguing that the result of any auction will not fulfill the requirement of "predictable" support); NECA further comments at 29 (contending that the levels set by bidding would likely result in insufficient support payments, in violation of section 254); RTC further comments at 26 (maintaining that bidding would not be a predictable mechanism). AT&T contends that competitive bidding is fundamentally at odds with the 1996 Act's procompetitive goals if its result is the award of exclusive rights to  X-one carrier, thus denying consumers the choice of service providers.I"" yO5-ԍ AT&T further comments at 3637.I  X-xF327.` ` Competitive bidding proposals. Among commenters offering competitive bidding proposals, GTE submitted the most comprehensive, detailed competitive bidding plan. Under GTE's proposal, the initial level of support for the incumbent would be based on the difference between the rates the incumbent COLR is allowed to charge and the "estimate of  XH-the market rate derived from a proxy cost model."E#HB" yO;-ԍ GTE further comments at 44.E Under this plan, once other carriers want to enter a given market and are willing to accept all the COLR obligations imposed on the incumbent LEC, a competitive bidding process would replace the proxybased system used to establish universal service support levels in that market. Competitors that wish to become  X -COLRs in a given area would submit a notice of intent to bid to the state commission.:$ " {Oo-ԍ  Id. at 44.: The notice would trigger for that area an auction process that GTE proposes be held at regular  X -intervals, perhaps twice a year.:% d " {O-ԍ  Id. at 44.: The form of the auction would be a sealed bid, single X -round auction.%&Z " {ON-ԍ Id. at 45. Under this form of auction, each bidder tenders a single sealed bid. Bidders would not know what others are bidding and the bidders would have only one opportunity to submit a bid for an area. GTE further comments, Att. 1 at 2122.% The auction process would be administered by the states subject to Federal  X-guidelines.C'" yOY-ԍ GTE reply comments at 19.C GTE proposes that an entrant could nominate a set of CBGs as the area it  Xy-wishes to serve.H(y" yO -ԍ GTE further comments at 5455.H Those companies making nominations would be required to establish their  Xb-qualifications to satisfy the COLR requirement.M)b8" yOK#-ԍ GTE further comments, Att. 1 at 18.M Subject to penalties, bidders would be  XK-permitted to withdraw winning bids.M*K" yO%-ԍ GTE further comments, Att. 1 at 19.M"KX**&&dd"Ԍ X-ԙxG328.` ` GTE proposes that, initially, the Commission or the states would establish a maximum support rate for the area to be auctioned based on a multiple of the predicted cost  X-under an adopted proxy cost model.M+" yOK-ԍ GTE further comments, Att. 1 at 17.M In order to induce aggressive and low bidding, only those carriers that bid within a specified range of the lowest bidder would be eligible to  X-receive support.@,X" yO-ԍ GTE comments at 1112.@ The support levels would be the same for each of the carriers in this  X-range and would be set equal to the highest accepted bid in that range.M-" yO& -ԍ GTE further comments, Att. 1 at 4. M If the auction results in a new COLR for the area, either in addition to the incumbent or in place of the incumbent, the support levels and obligations for that area would be frozen for three years. No new entrants could receive universal support during this time, although they could enter and provide service without such support. After the threeyear period, the area could be bid  X -upon again.M. x" yOC-ԍ GTE further comments, Att. 1 at 18.M  X -xH329.` ` MCI contends that GTE's proposal will reduce both actual and potential competition because subsidies would not be available to carriers that lose the auction or do  X -not bid./ " yOw-ԍ Letter from Kimberly M. Kirby, Senior Manager of FCC Affairs for MCI, to William F. Caton, Secretary, FCC, October 25, 1996. It also argues that the proposal hampers the ability of carriers to enter multiple markets and thus recognize potential cost synergies and interferes with their ability to implement their entry strategies. This could occur, states MCI, if a bidder is among the winners for some areas, but not in others, that the carrier deems important to its entry strategy. MCI contends that GTE's solution to this problem allowing bidders to withdraw bids if the failure to win in one or more areas interferes with the entrant's global entry strategy would not be effective. MCI also argues that, by forcing new entrants to participate in an auction for each market it wants to enter, GTE's proposal would raise new entrants' costs and thus would create a barrier to entry. MCI also raises questions about how GTE's auction proposal would affect the rates charged for unbundled network elements. Finally, MCI asserts that, as "in any regulatory regime that prohibits entry," regulators would have to monitor carriers to ensure a specified level of performance. MCI asks what remedies regulators would have if the carrier fails to adequately perform if other carriers do not have access to universal service support for that market. MCI concludes that, if all firms have  X|-access to such support, the need to monitor performance would be substantially reduced.0|` " yO$-ԍ Letter from Kimberly M. Kirby, Senior Manager of FCC Affairs for MCI, to William F. Caton, Secretary, FCC, October 25, 1996."| 0*&&dd2"Ԍx  X-xI330.` ` A few other commenters offered general proposals or suggestions on how to structure a competitive bidding process. CSE Foundation, while generally supportive of the  X-competitive system initially outlined in GTE's comments,1" yO4-ԍ GTE's proposal underwent modifications after filing the initial comments upon which CSE Foundation's analysis is based. identified certain potential problems with GTE's proposal and suggested possible solutions. It argues that basing bids on small areas like CBGs, as GTE proposes, might prevent carriers from enjoying the economies of scale or scope that could be obtained from bidding on larger areas. To assist carriers in bidding for larger areas, CSE Foundation suggests an open, multipleround auction that would allow bidders to gain information about the costs of providing services to different areas as  X1-the carrier learns what other carriers have bid on those areas.O21 " yO -ԍ CSE Foundation reply comments at 89.O It also recognizes that incentives must be developed to encourage low cost providers to bid aggressively. CSE Foundation asserts that GTE's proposal to provide universal support payments only to bidders within a specified range of the low bid could provide such an incentive, but may be  X -problematic if it restricts entry.:3 " {O6-ԍ  Id. at 11.: Alternatively, CSE Foundation suggests that higher bidders  X -obtain reduced universal service support.4  B" yO-ԍ CSE Foundation suggests reducing the subsidy for higher bidders by an amount equal to the difference between their submission and the lowest bid. Thus, if the lowest bid is for $30.00 in support, then eligible providers bidding $40.00 would receive $10.00 less than the winner's amount of support, for total persubscriber support of $20.00 ($30.00 minus $10.00). CSE Foundation reply comments at 11.  Finally, because the need to finance an investment over many years is particularly important when largescale, capitalintensive projects are involved, CSE Foundation argues that it is important that the universal service support be guaranteed over some period of time, perhaps five years. It expresses concern, however, over GTE's proposal to exclude from support any new provider during the period of time the support level is guaranteed. As a solution, CSE Foundation tentatively suggests that  X4-the right to receive support for a particular market be made transferable.5 4* " yO-ԍ CSE Foundation reply comments at 1214. Under its proposal, a recipient (or multiple recipients) would still receive a set subsidy for each subscriber it serves. If an alternative carrier without such a subsidy discovers a lowercost means to provide the same service, the alternative carrier could buy the subsidy rights from any currently eligible provider. CSE Foundation reply comments at 1314.  X-xJ331.` ` Time Warner proposes that the ILEC or any other certificated LEC could  X-submit bids on areas identified by a proxy cost model as high cost areas.H6" yO$-ԍ Time Warner comments at 911. H Time Warner notes that the 1996 Act appears to preclude using an auction to award exclusive rights to"6*&&dd" receive universal support for serving a high cost area. Therefore, an incentive to encourage low bids other than exclusive rights must be designed. Time Warner proposes an incentive bonus structure in which the winning (lowest) bidder would receive 100 percent high cost  X-support while all other bidders would receive a smaller percentage.*7" {O4-ԍ Id. at 11. See also TCE further comments at 3 (stating that an incentive payment to the lowest bidder could be considered but would add cost and complexity to the bidding scheme). Time Warner argues that its bonus approach could be enhanced by combining a percentagebased penalty for LECs with nonwinning bids with a variable penalty, based on the difference between the low bid and the other LEC's high bid. Time Warner offers this example: Assume a contest in which the low bid, by Carrier A, is $10.00, and the two other participants, Carriers B and C, bid $12.00 and $15.00, respectively. As a starting point, Carriers B and C should receive no more than 80 percent of the winning (low) support amount. Then, in addition, there should be an incremental discount to that support, based on how much the bids by Carriers B and C exceeded the low bid (i.e., some portion of the $3.00 and $5.00 dollar differential between their bids and Carrier A's $10.00 bid). Time Warner further comments at 42.* Time Warner also contends that a competitive system cannot work unless all participants have equal access to relevant information. Time Warner thus proposes to require ILECs to disclose fully  Xv-information about the market, including costs and revenues.M8vb " yO-ԍ Time Warner further comments at 42.M Finally, Time Warner recommends periodic rebidding of areas to ensure support levels reflect current costs and  XH-competitive conditions.=9H " {O-ԍ Id. at 4243.= x  X -xK332.` ` Century opposes a bonus incentive plan. It argues that a winner's premium to induce low bidding would conflict with the 1996 Act's requirements for high cost compensation that is sufficient and that does not allocate an excessive share of costs to  X -universal service.r: " {O -ԍ Century further comments at 26 (citing 47 U.S.C.  254(e), (k).r Century also contends that a winner's premium would be shifted to ratepayers, would give the winning bidder an unwarranted competitive advantage, and would ensure that losing bidders would not recover the amount they had bid as necessary and  X-sufficient to provide universal service.I;" yOW-ԍ Century further comments at 26.I  Xb-xL333.` ` MCI proposes a bidding system only for those few areas that are not served or  XK-areas where a carrier becomes unwilling to serve at the established universal support level.Y<K" yO"-ԍ MCI comments at 1819; MCI reply comments at 2.Y MCI suggests that the Commission and the state should together hold the auction that will"46<*&&ddH"  X-determine the level of support available in the area.@=" yOy-ԍ MCI comments at 1819.@ The state would certify the carriers eligible to participate in the auction, and the eligible carriers would bid the amount of support  X-they require to serve the area.:>X" {O-ԍ Id. at 19.: Any carrier willing to provide service in that area would then be eligible to receive support at the level submitted by the lowest bidder. If the incumbent was not the winning (low) bidder, it would have to make its network available for  X-resale at net book value to the winning bidder.H?" yO( -ԍ MCI further comments at 2122.H  X_-xM334.` ` Other commenters addressed, in general, the question of how to provide incentives for carriers to submit low bids. CFA proposes that the lowest bidder should be the  X1-only carrier permitted to obtain universal support in the area.E@1z" yO\-ԍ CFA further comments at 21.E MCI, on the other hand, notes that a competitive bidding system is effective in a winnertakeall situation but may be less effective in this situation because, under section 214(e), all eligible carriers would be  X -entitled to receive universal support at the level determined by the lowest bid.EA " yO-ԍ MCI further comments at 24.E NCTA contends that carriers would have sufficient incentives to offer lower bids because the total  X -level of funding will be reduced for all parties, not just the low bidder.FB " yO -ԍ NCTA further comments at 16.F NCTA also argues that the bidding system should be structured so that the total funding level would not increase  X-over that of today.:C* " {Ok-ԍ Id. at 16.:  Xb-xN335.` ` Areas without competition. Some commenters argue that competitive bidding  XK-should not be allowed, or would not be feasible, in areas with no competition.DZK " {O-ԍ See, e.g., Century further comments at 2526; GSA further comments at 11; MCI further comments at 2324; NCTA further comments at 16; RTC further comments at 26 (arguing that bidding in a noncompetitive area violates the 1996 Act). Others propose alternative ways to set the level of support in these circumstances: use the level set  X-by the adopted proxy model;E" {O#-ԍ  See, e.g., CFA further comments at 21; GTE further comments at 45; Time Warner further comments at 41. use the level set by competitive bidding in comparable"8E*&&dde"  X-areas;`F" {Oy-ԍ See, e.g., Bell Atlantic further comments at 14.` use some combination of these;[GZ" {O -ԍ See, e.g., AirTouch further comments at 24.[ or use the level bid by the  X-sole bidder.;HZ" {O-ԍ See, e.g., Ameritech further comments at 3738. Ameritech further argues that if only one company bids, it should be the sole recipient of universal support if it is the only carrier taking on carrier of last resort obligations. Ameritech further comments at 3738.;  X-xO336.` ` Safeguards. The Public Notice asked what safeguards, if any, should be adopted to ensure that large carriers do not submit excessively low bids as a way to drive out  X-competition.=I" yOL -ԍ Public Notice at 7.= Most commenters responding to this question argue that specific safeguards  Xv-are unnecessary.Jzv" {O-ԍ See, e.g., AirTouch further comments at 25; Alliance for Public Technology further comments at 13 (contending that existing antitrust laws are sufficient); Ameritech further comments at 38; Bell Atlantic further comments at 14 (arguing that there is no reason to believe large companies would bid so low as to lose money and, if they submit compensatory bids, smaller companies, which may have lower costs, should be able to compete); MCI further comments at 2425; NCTA further comments at 16 (suggesting that, if there is a concern about predatory pricing in a particular case, the courts and regulatory agencies should be available to address such concerns); Time Warner further comments at 44. Some commenters argue that there would be no incentive for large  X_-companies to submit excessively low bids.K_" {O-ԍ See, e.g., Ameritech further comments at 3839; Time Warner further comments at 44. AirTouch asserts that predation would be  XH-unlikely,MLHr" yOk-ԍ AirTouch further comments at 2526.M and it argues that any form of a price floor on bidding would undermine the central goal of a bidding process to reduce support levels by encouraging companies to bid  X -down to the underlying service costs and to engage in innovation.:M " {O-ԍ Id. at 25.: Time Warner agrees, arguing that, if a company is willing to serve an area with little or no support, support levels should not be increased for the purpose of attracting other providers who are not willing to  X -provide service without higher subsidies.MN " yO!-ԍ Time Warner further comments at 44.M AirTouch and others contend that one potential problem might involve winning bidders that underbid and then try to renegotiate their support levels upward after the auction closes. To address this problem, they propose precluding  X-winning bidders from renegotiating their bids.iO$" yOe%-ԍ AirTouch further comments at 2526; CFA further comments at 21.i ITC recommends comparing bid costs with"O*&&dd" either actual costs or a proxy and investigating significant deviations as a way to expose  X-predatory conduct.EP" yOb-ԍ ITC further comments at 22.E Finally, Century asserts that this question exposes a problem with competitive bidding not limited to circumstances of predation, namely that high cost compensation based on the winning (low) bidder's cost is likely to eliminate the ability of the losing companies to provide universal service and to leave their actuallyincurred costs  X-uncompensated.LQX" yO-ԍ Century further comments at 2627.L The result, argues Century, would be to reduce competition and defeat the 1996 Act's intent to make universal service support available to multiple carriers in large and  X_-urban LEC service areas.:R_" {O -ԍ Id. at 27.:  X1-xP337.` ` The Bureau asked what safeguards should be adopted to ensure service quality  X -under a competitive bidding system.=S z" yOE-ԍ Public Notice at 7.= Many commenters addressing this question suggest that quality standards should be part of the bidding process so that bidders would know in  X -advance what level of quality was required and then bid accordingly.T " {O-ԍ See, e.g., AirTouch further comments at 26; Ameritech further comments at 39; CFA further comments at 22; MCI further comments at 25. Additionally, some commenters suggest that carriers be penalized, perhaps by a reduction in support, for failure  X -to meet quality standards.U d " {O-ԍ See, e.g., Bell Atlantic further comments at 14; CFA further comments at 22; ITC further comments at 22; MCI further comments at 25; Time Warner further comments at 45. AT&T contends that, in those limited circumstances in which it would support competitive bidding, state commissions should verify the credentials and  X-capabilities of bidding carriers.FV " yO-ԍ AT&T further comments at 39.F GTE asserts that the requirement in its bidding proposal that carriers comply with state imposed COLR obligations as a condition of obtaining support  Xb-obviates the need for additional measures.HWbN " yOa-ԍ GTE further comments at 5354.H GTE further argues that quality of service concerns attributable to insufficient support levels are more likely to arise because of errors in cost models than when the support level is set by the carriers themselves through the bidding  X-process.:X" {O#-ԍ Id. at 54.: ITC maintains that standards, which must be applied to all carriers, should cover installation speed, repair response, transmission quality, dialtone availability, emergency"pX*&&ddd"  X-response, billing quality, and call completions (in areas where concentrators are used).EY" yOy-ԍ ITC further comments at 22.E Time Warner proposes that, as a condition of being certified as a winning bidder, the carrier  X-must agree to meet the prevailing state quality of service standards.ZX" {O-ԍ Time Warner further comments at 45.  See also NCTA further comments at 16 (arguing that state quality of service standards should be applied to a system of competitive bidding). TCI argues that competition should reduce incentives to lower quality, but any lingering concerns can be  X-diminished by relying on the states to establish safeguards.H[" yO -ԍ TCI further comments at 3334.H Finally, some commenters reiterate their concern that a competitive bidding system would invariably result in quality  Xv-degradation.\vB" {Oi -ԍ See, e.g., RTC further comments at 2829; RUS further comments at 52.  See also Western Alliance further comments at 14.  XH-xQ338.` ` Potential collusion. The Bureau also asked how collusion could be avoided in  X1-a competitive bidding system.=]1" yO~-ԍ Public Notice at 7.= Some commenters suggest that the Commission rely on its experience in operating the spectrum auctions to devise similar protections against collusion  X -for universal service support auctions.^$ , " {O-ԍ See, e.g., Bell Atlantic further comments at 14; NCTA further comments at 16; TCI further comments at  {O-34; Western Alliance further comments at 14. See also MCI further comments at 25 (proposing that, as with PCS auctions, Commission must adopt rules against collusion and advise all bidders that the Commission and the Department of Justice will enforce those rules). Time Warner agrees that the Commission must impose stringent penalties for collusion and that the Commission should rely on its experience  X -with other auctions to formulate fair and efficient bidding rules.M_ " yO-ԍ Time Warner further comments at 46.M Consumer Federation of America argues that collusion would violate criminal statutes and should be fully  X -prosecuted.F` " yO-ԍ CFA further comments at 22. F GTE asserts that its proposed sealedbid, singleround auction would minimize collusion because, under such a system, there would be powerful incentives for carriers to  Xy-defect from any prebid collusive agreement.Say8" yOb"-ԍ GTE further comments at 54, Att. 1 at 22.S TCI contends that the Commission set the  Xb-bonus for the winning (low) bidder at a level sufficient for parties to forgo collusion.Ebb" yO$-ԍ TCI further comments at 34.E Ameritech contends that there is little incentive to collude. It asserts that companies would"KXb*&&dd" not submit predatorily low bids because, if successful, the carrier would have to provide service below cost, a difficult tactic to sustain, even if the company could engage in crosssubsidization. Ameritech further argues that companies have no incentive to collude to increase support levels because all companies must contribute to universal service support  X-mechanisms and would seek to keep the overall contribution low.Kc" yO-ԍ Ameritech further comments at 39.K  Xv-xR339.` ` Auction structure. The Public Notice sought comment on whether the structure  X_-of the auction should differ if there are fewer bidders and, if so, how.=d_X" yOh -ԍ Public Notice at 7.= Most commenters that address this specific point argue that there is no reason to change the structure of the  X1-auction if there are only a few bidders.%eZ1" {O -ԍ See, e.g., Ameritech further comments at 54; Bell Atlantic further comments at 14; ITC further comments at 23; NCTA further comments at 17; Time Warner further comments at 47. Time Warner assumes that the normal case will involve few bidders. % GTE contends that its auction proposal will work even if there are only two qualified bidders and, if only one qualified bid is received, the  X -auction would be cancelled.If " yO-ԍ GTE further comments at 45, 54.I Several commenters, however, do recommend changing the structure of the auction and offer some general suggestions. MCI asserts that the structure of the auction should be geared to the anticipated number of bidders, as is the case in the PCS auctions. Thus, for example, the greater the number of bidders, the fewer rounds there should  X -be in a day, as bidders need more time to assess the information in the bids.Eg " yO-ԍ MCI further comments at 25.E TCI argues that the risk of collusion increases as the number of bidders decreases and, to mitigate this risk, the Commission may need to increase the bonus payment to the winning bidder if there  Xb-are only a few bidders.Ehb* " yO=-ԍ TCI further comments at 34.E Western Alliance asserts that auctions should not be held unless  XK-there is large of pool of bidders, perhaps 20, with at least five bidding in each round.RiK " yO-ԍ Western Alliance further comments at 14.R Finally, AT&T contends that the fact that there might be few bidders or only one bidder in a  X-serving area is further indication that a bidding system is inefficient.FjJ " yO"-ԍ AT&T further comments at 39.F  X-xS340.` ` Service area. The Bureau also sought comment on how it should determine the size of the areas for which eligible carriers bid for universal service support and what would be the optimal basis for determining the size of those areas, in order to avoid giving an unfair"j*&&dd"  X-advantage to either the incumbent LEC or competitive carriers.=k" yOy-ԍ Public Notice at 7.= Commenters support using geographic areas of different size for bidding purposes. Some argue that the optimal area on  X-which to bid should be the wire center,l"X" {O-ԍ See, e.g., Ameritech further comments at 40; NCTA further comments at 17 (proposing that, although competitive bidding should take place at the wire center level, no carrier should be required to serve an entire wire center nor would any geographic restrictions on service boundaries be appropriate); Time Warner further comments at 4849. and some suggest exchange areas,kmB" yO -ԍ Bell Atlantic further comments at 14; CFA further comments at 23.k while others  X-propose using CBGsEn" yO> -ԍ GTE further comments at 54.E or some combination.ob " yO -ԍ ITC further comments at 23. ITC proposes that a combination of a wire center and a community of interest within which the population shares common economic, social and political structures should be used as a starting point. If greater granularity is needed, ITC proposes using portions of an exchange or perhaps using a grid as proposed by PacTel, but notes that the smaller the area, the greater the administrative burdens. ITC further comments at 2324. Ameritech argues that the size of the area should be competitively neutral and bear a reasonable relationship to the way  X-telecommunications services are technically provided.Kp" yOP-ԍ Ameritech further comments at 40.K Ameritech contends that a wire center is the optimal serving area because it is the basis on which the network is engineered  X_-and costs incurred.3q_" {O-ԍ  Id.3 GTE argues that entrants should be able to nominate a set of CBGs as  XH-the area they wish to serve.HrH4" yO--ԍ GTE further comments at 5455.H It contends that the use of CBGs allows bidding to establish separate support levels that would capture differences in costs among areas. It also contends that bidding on a CBG basis will facilitate entry because the requirement to serve a small area  X -will not create an unreasonable barrier for prospective carriers of last resort.=s " {Ox-ԍ Id. at 54. = Time Warner, on the other hand, contends that only incumbents can efficiently serve areas as small as CBGs, giving incumbents an unfair advantage if that were the size of the area used for  X -bidding.Pt V" yO"-ԍ Time Warner further comments at 4849.P CFA contends that using smaller areas, such as CBGs, creates unrealistic market definitions and additional complexity because all network functionalities needed to provide telecommunications services for a CBG, transport and switching for example, should be"t*&&dd"  X-included in the bid.Eu" yOy-ԍ CFA further comments at 23.E Finally, several commenters contend that the Commission has no authority to designate service areas for competitive bidding because the 1996 Act grants that  X-authority to the states, at least for areas not served by a rural telephone company.vX" {O-ԍ See, e.g., Century further comments at 28; NECA further comments at 31; RTC further comments at 29. Some commenters reiterate their position that competitive bidding should be used only for unserved  X-areas and that the states should identify such areas.3wZ" {O? -ԍ See, e.g., AT&T further comments at 3940; MCI further comments at 2526 (proposing that bidding should be used only for areas that no carrier will serve at the level of support established through a proxy model; auction areas should be no smaller than CBGs).3  Xv-x` ` 3. Discussion  XH-xT341.` ` We recommend that the Commission not adopt any specific competitive bidding plan at this time. While the record in this proceeding persuades us that a properly structured competitive bidding system could have significant advantages over other mechanisms used to determine the level of universal service support for high cost areas, we find that the information contained in the record does not support adoption of any particular competitive bidding proposal at this time. We recommend that the Commission, together with the state commissions, continue to explore the possibility of using competitive bidding for determining the level of federal universal support.  Xy-xU342.` ` Perhaps the greatest advantage of competitive bidding is that it holds the promise of using a marketbased approach to establishing the level of universal service support for any given area. A properly designed competitive bidding system would reduce the role of regulators in determining the costs of providing universal service once an area becomes subject to bidding. The support level would reflect the bidding carriers' assessment of the costs of serving the market as well as their assessment of revenues, including current and future followon net revenues, which may well be harder for regulators to assess than costs. Such assessments would be wellsuited to capture the effect of new technologies on service costs. In addition, these assessments could reflect many more factors, such as regulatory burdens or market opportunities, than can be incorporated into a cost model. We thus concur with those commenters that argue that competitive bidding comports with the  X|-intent of the 1996 Act to rely on market forces and to minimize regulation.rx| " {O9"-ԍ See, e.g., GTE comments at 11; CSE Foundation reply comments at 6.r Moreover, as stated by one of the commenters, competitive bidding would put all prospective eligible  XN-carriers on an equal footing.NyN" yO%-ԍ Comnet Cellular reply comments at 6.N "N. y*&&dd"Ԍ X-ԙxV343.` ` Another potential advantage of a properly structured competitive bidding system is that it could reduce the amount of overall support needed for universal service. Competitive bidding should encourage more efficient carriers to submit bids that reflect their lower costs. The bids reflecting the lower costs of the more efficient carriers would be used to set the level of universal service support for the entire service area. Additionally, competitive bidding would convert the efficiency gains from new technologies or improved productivity into cost savings for universal service.  XH-xW344.` ` Whether these and other potential advantages of competitive bidding can be realized will depend, of course, on the structure of the competitive bidding process. Commenters proposed both a broad use of competitive bidding to set support levels for areas  X -subject to competitionmz " {O| -ԍ See, e.g., GTE comments at 1011; Time Warner comments at 10.m and a more limited use of competitive bidding to select carriers for areas that are currently unserved or in which no carrier, not even the incumbent, would serve  X -at the established support levels.{ Z" {O-ԍ See, e.g., California PUC comments at 1314; USTA comments at 20; AT&T further comments at 37; MCI further comments at 2122. With regard to the latter proposal, competitive bidding could be viewed as a marketbased mechanism to correct for potential errors arising from reliance on a proxy cost model to set support levels. We do not agree, however, that a carrier should be automatically allowed to withdraw service solely on the basis of how the support level is established.  XK-xX345.` ` We find that sections 254 and 214(e) and the record developed in this proceeding provide some guidance about how competitive bidding should be structured. We recommend that any competitive bidding system be competitively neutral and not favor either the incumbent or new entrants. Any carrier that meets the eligibility criteria for universal service support should be permitted to participate in the auction. Any competitive bidding proposal must be consistent with the goals and requirements of the 1996 Act, including that  X-universal service support be "specific, predictable and sufficient."J|" {O&-ԍ See 47 U.S.C.  254(d).J Any competitive bidding system adopted should minimize the ability of bidders to collude. Various commenters, for  X-example, urge the Commission to establish and enforce stiff penalties against collusion,z}F" {O -ԍ See, e.g., CFA further comments at 22; Time Warner further comments at 46.z while others suggest that the Commission rely on its experience with spectrum auctions to  Xe-devise protections against collusion.}~e" {O#-ԍ See, e.g., Bell Atlantic further comments at 14; NCTA further comments at 16.} We recommend that any final competitive system be designed to minimize the incentives to collude and that any colluding carrier be subject to stiff penalties. "7j ~*&&dd"Ԍ X-ԙxY346.` ` Various commenters contend that service quality standards should be built into  X-the competitive bidding process." {Ob-ԍ See, e.g., AirTouch further comments at 26; Ameritech further comments at 39; CFA further comments at 22; MCI further comments at 25. We conclude that the question of quality standards is not unique to competitive bidding. We have stated above that competition will give carriers the incentive to provide quality service. Moreover, we have recommended that the Commission  X-monitor service quality by relying upon service quality data collected at the state level.E"" {Ow-ԍ See supra Section IV.E To the extent that the definition of core services incorporates any standards for the provision of such services, carriers must comply with such standards in order be eligible for universal service support and to participate in any auction process.  X1-xZ347.` ` There is little support in the record for changing the structure of the bidding process in the event that there are few bidders. A few commenters, however, raise the issue  X -of how many bidders would be required to have an effective auction. " {Oh-#X\  P6G;ɒP#э See e.g., Western Alliance further comments at 14 (arguing that auctions should not be held unless there are large number of bidders). GTE contends that  X -its bidding system would be effective even with only two bidders.I " yO-ԍ GTE further comments at 45, 54.I We recommend that any final competitive bidding proposal should either specify the minimum number of bidders required for the auction to be effective, or be designed to be effective for any number of bidders. Finally, we recommend that, in determining the geographic area on which carriers would be bidding, any final proposed bidding plan use areas sized to promote competition and target universal service support efficiently.  XK-x[348.` ` We find that GTE's proposal poses serious questions that warrant further inquiry. These questions would be applicable to any proposed competitive bidding plan. For example, should only those carriers willing to accept carrier of last resort obligations in addition to those obligations contained in section 214(e) be permitted to bid, as proposed by GTE? Should all bidding carriers be eligible for universal service support? Some commenters argue that any bidding plan that excludes carriers may be inconsistent with  X-section 214(e)." {O!-ԍ See, e.g., Florida PSC comments at 1112. Florida PSC also concludes that this issue need not be resolved at this time. Finally, GTE's proposal assumes that carriers may designate the geographic areas, based on aggregating CBGs, that they wish to serve. This aspect of GTE's proposal raises the issue of whether bidders may designate areas for auction that differ from" *&&ddQ"  X-the service areas designated by the states pursuant to section 214(e)(5).Z" {Oy-ԍ See, e.g., Century further comments at 28.Z We emphasize that we have reached no conclusions and make no recommendations concerning these issues but  X-cite them because they highlight the need for further inquiry and investigation. 0 (#(#X  X-x\349.` ` We recommend that the Commission continue to investigate how to structure a  X-fair and effective competitive bidding system.Z" {O-ԍ See, e.g., PacTel further comments at 44. See also California PUC comments at 12; Florida PSC comments at 1112; GSA reply comments at 13. GTE is the only commenter to propose a detailed competitive bidding plan in this proceeding, and it amended its proposal during the course of this proceeding. Its most recent proposal was submitted as part of its response to the further questions posed by the Common Carrier Bureau's Public Notice and has not been subject to further public comment. Even this proposal was characterized by GTE as an  X -outline rather than a final, fixed proposal.L " yO-ԍ GTE further comments, Att. 1 at 1.L  X -x E. High Cost Transition  X -x` ` 1. Background  X-x]350.` ` Section 254(b) requires the Joint Board to recommend a specific timetable for  Xy-the completion of its recommended decision.CyD" yOn-ԍ 47 U.S.C.  254(a)(1).C In the NPRM, the Commission requested comment on whether there should be a transition period from the existing universal service fund to the new mechanism established in this proceeding. A transition would allow carriers that are receiving funding through the existing mechanisms an opportunity to adjust to the  X-requirements of the 1996 Act and rules adopted in this proceeding.;" yO-ԍ NPRM at para. 40.;  X-x^351.` ` The NPRM also sought comment on whether the interim cap on the growth of the existing universal service fund should be extended until the completion of this  X-proceeding.3d " {O!-ԍ Id.3 The cap was due to expire on July 1, 1996. This Joint Board issued a Recommended Decision on June 19, 1996, recommending that the cap be extended until the  X-new universal service rules adopted in this proceeding become effective. " {O:%-ԍ FederalState Joint Board on Universal Service, Recommended Decision, FCC 96J1 (rel. June 19, 1996). The Commission" *&&ddo" agreed with our recommendation, and on June 26, 1996, amended its rules to extend the cap  X-until the rules adopted in this proceeding become effective." {Ob-ԍ FederalState Board on Universal Service, Report and Order, FCC 96281 (rel. June 26, 1996).  X-x` ` 2. Comments  X-x_352.` ` Many commenters argue that there needs to be some transition period before the new universal service support mechanism takes full effect. Some commenters argue that if carriers currently receiving subsidies lose that support abruptly, then rate shock will  XH-result.HZ" {OS -ԍ See, e.g., Montana PSC comments at 3; Telec Consulting comments at 13; Washington UTC comments at 12; Wisconsin PSC reply comments at 7. Small and rural carriers are especially worried about the potential impact of any  X1-changes to the support mechanisms on their local service rates.1" {O-ԍ See OITAWITA comments at 14; Dell Tel. reply comments at 67. See also Colorado PUC comments at 8. Alaska PUC argues that any changes should be implemented for large carriers before they are applied to small  X -carriers.G " yO-ԍ Alaska PUC comments at 1617.G NARUC notes that there have been several NARUC resolutions that expressly  X -contemplate a transition period to any new universal service support mechanisms.? " yO;-ԍ NARUC comments at 11.?  X -x`353.` ` The parties have different views on how long any transition should last. The  X -Idaho PSC argues that a short transition is appropriate.C . " yO-ԍ Idaho PSC comments at 10.C GVNW, Oregon PUC, and Iowa  X-Tel. Ass'n state that a transition period should last several years.z " yO-ԍ GNVW comments at 14; Iowa Tel. Ass'n. comments at 3; Oregon PUC comments at 67.z USTA proposes that its  Xy-plan be phased in over four years.>yN " yOx-ԍ USTA comments at 18.> Montana Tel. Ass'n states that the transition period  Xb-should be at least five years.Kb" yO -ԍ Montana Tel. Ass'n comments at 8.K United Utilities suggests a ten year transition.Pbn" yO"-ԍ United Utilities reply comments at 10.P Alaska Tel. and Western Alliance argue that a transition should be long enough to allow carriers to fully  X4-recover the embedded costs of their existing facilities.k4" yO%-ԍ Western Alliance comments at 10; Alaska Tel. reply comments at 6.k CPI proposes the use of three"4*&&dd" groupings of carriers for any transition process. Large carriers, those with over 2 percent of the nation's access lines, would move to a TSLRIC approach immediately. The smallest LECs would continue to use embedded costs for one year, and then be transitioned to TSLRIC over seven years. Mediumsize carriers, those with less than 2 percent of the nations  X-access lines, would have a four year transition to a TSLRIC approach.S" {O-ԍ CPI ex parte at 56 (Oct. 4, 1996).S  Xv-xa354.` ` Several commenters disagree, however, and assert that no transition period is  X_-needed._Z" {Oj -ԍ  See, e.g., Cincinnati Bell comments at 10; CompTel reply comments at 14; WinStar reply comments at 5. MCI argues that the new support mechanisms should be instituted without delay. It claims that the reduction in subsidy burden will lead to an immediate reduction in rates to  X1-consumers.=1" yO-ԍ MCI comments at 13.= AT&T contends that there will be no significant rate shock since existing local service rates in most areas are already compensatory. In addition, AT&T argues that a long transition period, such as the four years proposed by USTA, would be inconsistent with the  X -1996 Act since it would maintain implicit subsidies of the current support mechanisms.D D" yO-ԍ AT&T reply comments at 11.D Some argue that some of the changes, but not necessarily all, should be done immediately. For example, Ameritech argues that DEM weighting should be eliminated immediately, but  X -that a transition period may be necessary for other changes.F " yO,-ԍ Ameritech comments at 1213.F  Xy-x` ` 3. Discussion  XK-xb355.` ` The Joint Board recommends that the new universal service support mechanism for rural, insular, and high cost areas that we have set out in this section of the Recommended Decision take effect beginning January 1, 1998. The current universal service support mechanisms operate on a calendar year, and January 1, 1998 will be the beginning of the first  X-calendar year after the Commission adopts rules establishing the new support mechanisms.d " yO -ԍ Under section 254(a)(2), the Commission has fifteen months from the date of enactment (on or before May 8, 1997) to implement the recommendations of this Joint Board. 47 U.S.C.  254(a)(2). Starting at that date, carriers other than rural telephone companies would begin to receive support based upon the proxy model. Rural telephone companies would not immediately use a proxy model to determine their costs, but would have their support based on the per line support those carriers received from the high cost assistance, DEM weighting, and LTS mechanisms for a twelve month period prior to 1998."| *&&ddP"Ԍ X-ԙxc356.` ` The changes that we recommend to the universal service support mechanisms may lead to changes in the support levels currently received by some carriers. We find that a short transition period will expedite achieving the requirements of the 1996 Act, with minimal adverse impact on carriers. The recommended changes to the system will likely not have an adverse impact on the nonrural carriers or require any rate restructuring because nonrural carriers generally do not receive a significant portion of their revenues from the universal service support mechanisms. Consequently, we believe it is appropriate to move nonrural carriers to a proxy model first. We agree with the commenters that argue that there should be  XH-a transition for small, rural carriers.H" {O -  Ѝ See, e.g., Alaska PUC comments at 1617; Colorado PUC comments at 8; Dell Tel. reply comments at 67. Therefore we have recommended that rural carriers continue to use embedded costs for three years after the nonrural companies begin to use proxy models. During that period, carriers would receive a payment based on the support they received from the high cost assistance, DEM weighting, and LTS mechanisms for a twelvemonth period prior to 1998. The payments to the rural carriers may vary if the numbers of lines they serve change, but the payment level per line would remain constant. At the end of that period, rural carriers will then shift to proxy models for calculating their draw from universal service funds for providing designated services to customers in rural, insular,  X-and high cost areas over three additional years."" yOc-ԍ The rural companies will have the option to voluntarily change to the proxy model system before the end of the fiveyear period. This will allow rural carriers time to adjust to the new system and to minimize any possible rate shock to their customers. In addition, due to the unusual nature of providing service in Alaska and the insular areas, we are not requiring rural companies serving those areas to transition to a proxy model, subject to later review.  X- VIII. SUPPORT FOR LOWINCOME CONSUMERS x  X-x A. Overview  X-xd357.` ` The 1996 Act states that lowincome consumers should have access to telecommunications services at rates that are just, reasonable, and affordable, and comparable  Xe-to rates charged in urban areas.Cez" yO!-ԍ 47 U.S.C.  254(b)(3).C Section 254(i) requires that rates for universal service be "just, reasonable, and affordable." Since 1985, the Commission has, pursuant to its general authority under Titles I and II of the 1934 Act, and in cooperation with state regulators and local telephone companies, administered two programs designed to increase subscribership by assisting lowincome consumers. The Commission's Lifeline Assistance program ("Lifeline")"  *&&dd[" reduces qualifying consumers' monthly charges by waiving all or part of the federal SLC and requires a matching reduction in state rates. The Lifeline Connection Assistance program ("Link Up") provides federal support to reduce qualifying consumers' initial connection charges by up to one half. Currently, the cost of both programs is recovered from IXCs with at least .05 percent of presubscribed lines. Section 254(j) provides that "[n]othing in [section 254] shall affect the collection, distribution, or administration of the Lifeline Assistance  Xv-Program provided for by the Commission."@v" yO-ԍ 47 U.S.C.  254(j).@  XH-xe358. ` ` In this section, we consider lowincome universal service support in light of the 1996 Act. Pursuant to sections 254(a), (b)(1) and (b)(3), we first discuss what telecommunications services and rules should be supported for lowincome consumers. Next, we consider the extent to which the Joint Board should recommend that the Commission modify its current programs to comply more fully with Congress's mandate to provide lowincome universal service support "in all regions of the Nation" and through explicit, competitivelyneutral support mechanisms. We therefore recommend that the Lifeline and Link Up programs be modified to make them competitively neutral and to ensure their availability to lowincome consumers in all regions of the nation.  Xb- xB. Services to be Supported for LowIncome Consumers  X4-x ` ` 1. Background  X-xf359.` ` In the NPRM, the Commission sought comment on what services should be supported for lowincome consumers, and referred these issues to the Joint Board. The Commission proposed a number of services to receive federal universal support in rural,  X-insular, and high cost areas.;X" yO-ԍ NPRM at para. 15.; The Commission also proposed that these same services be  X-supported with respect to lowincome consumers.;" yOC-ԍ NPRM at para. 50.; The services identified in the NPRM were: (1) voicegrade access to the public switched network, with the ability to place and receive calls; (2) touchtone; (3) singleparty service; (4) access to emergency services; and (5) access to operator services. The Commission also sought comment on whether additional services such as access to interexchange services and directory assistance should receive  X7-universal service support,;7x" yO`#-ԍ NPRM at para. 23.; and whether these services should be available to and supported  X -for lowincome consumers.; " yO%-ԍ NPRM at para. 50.; The Commission also sought comment on what additional" *&&dd" services, if any, meeting one or more of the criteria enumerated in section 254(c)(1), would  X-be particularly appropriate for lowincome consumers.;" yOb-ԍ NPRM at para. 50.; x  X-xg360. ` ` In the NPRM, the Commission also sought comment on whether tolllimitation  X-services and reduced service deposits should be supported for lowincome consumers.?X" yO-ԍ NPRM at para. 54, 56.? As the Commission noted in the NPRM, tolllimitation services include both toll blocking, which prevents the placement of long distance calls for which the subscribers would be charged, and tollcontrol services, which limit the toll charges subscribers can incur during a billing  XH-period.;H" yO -ԍ NPRM at para. 54.; Based on studies indicating that disconnection for nonpayment of toll charges is a significant barrier to universal service, the Commission observed that toll blocking and toll  X -limitation might significantly affect subscribership.; x" yOC-ԍ NPRM at para. 56.; The Commission also recognized the potential tension between providing consumers with the ability to receive tolllimitation services and the principle set forth in the 1996 Act that consumers should possess access to  X -"telecommunications and information services, including interexchange services."i " {O-ԍ NPRM at para. 54 n.120 (citing 47 U.S.C.  254(b)(3)).i As the  X -Commission observed in the NPRM, recent studies indicate that, i n addition to disconnection for nonpayment of toll charges, the high deposits carriers charge as a condition for reestablishing service may be more significant barriers to universal service than the cost of local  Xy-service itself.ry" {O-ԍ NPRM at para. 56 (citing Subscribership Notice at 1300306).r The NPRM noted that the Commission's Subscribership Notice suggested that LECs generally require deposits before connecting or reconnecting subscribers, which  XK-presents a formidable obstacle to initiating service for lowincome individuals.lK, " {O(-ԍ NPRM at para. 56 (citing Subscribership Notice at 1300305).l In the NPRM, the Commission sought comment on whether tolllimitation services and reduced  X-service deposits meet the criteria enumerated in section 254(c)(1).h " {O -ԍ NPRM at paras. 54, 56 (citing 47 U.S.C.  254(c)(1)).h  X-xh361.` ` In addition, the Commission noted in the NPRM that there may be several ways to advance the statutory principle set forth in section 254(b)(3) to ensure that "low X-income consumers . . . have access to . . . interexchange services."cP " {O%-ԍ NPRM at para. 55 (citing 47 U.S.C.  254(b)(3)).c In particular, the"*&&dd" Commission solicited comment on whether and how it should encourage domestic IXCs to provide optional calling plans for lowincome consumers to promote the statutory principles enumerated in section 254(b)(3). Additionally, the Commission sought comment on the  X-potential impact of such plans on subscribership to telecommunications services.:" yO4-ԍ NPRM at para 55.: x  X-xi362.` ` The Commission asked whether free access to information about telephone service for lowincome consumers should be included in the group of services receiving  X_-universal service support.`_X" {Oh -ԍ NPRM at para. 52 (citing 47 U.S.C.  254(i)).` Such free telephone access primarily would benefit measuredrate subscribers who are charged for each local call on either a perminute or percall basis. Additionally, the Commission suggested that Lifeline and Link Up customers could benefit  X -significantly from free access to information regarding those programs.; " yO-ԍ NPRM at para. 52.; x  X -xj363.` ` Because consumers' access to certain basic information regarding their telephone service may be a prerequisite to maintaining service, the NPRM also sought comment on whether, like access to the loop itself, access to telephone service information is essential to public health and safety and is otherwise consistent with the public interest,  X-convenience, and necessity.jz" {O-ԍ NPRM at para. 53 (citing 47 U.S.C.  254(c)(1)(A),(D)).j The types of information that the Commission suggested might fall into this category include information regarding service activation and termination,  Xb-repairs, and lowincome support programs.;b " yO-ԍ NPRM at para. 53.;  XK- x  X4-xk364.` ` In the past, the Commission's universal service policies have focused on the rates charged for traditional residential service. Nevertheless, the Commission recognized in the NPRM that people who move frequently or have no residence, such as seasonal workers and homeless individuals, do not have ready access to residential service. Therefore, the Commission sought comment on specific services that would enable such lowincome  X-individuals to gain access to the telecommunications network.;" yO!-ԍ NPRM at para. 57.; The NPRM offered several examples of such services, including community phone banks, community access centers, special discounted service plans for shortterm subscribers, and support for voice mail  X|-services.H|, " {OY%-ԍ NPRM at para. 57 n. 128.H The Commission asked parties to address the potential for wireless carriers to"| *&&ddP"  X-provide services to highly mobile groups.;" yOy-ԍ NPRM at para. 57.; Finally, the Commission sought comment on whether the suggested services meet the criteria set forth in section 254(c)(1)(A)(D), so as to  X-be eligible for inclusion in the list of supported services.;X" yO-ԍ NPRM at para. 57.;  X-x ` ` 2. Comments  Xv-xl365.` ` Designated Services. Nearly every commenter agrees that lowincome consumers should receive, at a minimum, the same services designated for universal service  XH-support for other subscribers.H" {O -ԍ See, e.g., CNMI comments at 1920; Florida PSC comments at 1415; Georgia PSC comments at 811; ITA/EMA comments at ii, 4; Michigan Consumer Federation comments at 20. Georgia PSC, for example, recommends limiting supported  X1-services for lowincome consumers to those supported in rural and high cost areas.D1B" yO$-ԍ Georgia PSC comments at 8.D Nat'l Black Caucus, which stated that it was pleased that the NPRM recognized that the services supported for rural, insular, and high cost areas should also be supported for lowincome consumers, notes that these groups are not mutually exclusive, because certain urban areas are  X -also high cost areas.M " yOX-ԍ Nat'l Black Caucus comments at 79.M Similarly, Edgemont maintains that underserved inner city neighborhoods must receive access and affordable rates @VIII-@in a manner comparable to the receipt  X -of such access and rates in rural and insular areas.H b " yO-ԍ Edgemont reply comments at 6. H  Xy-xm366.` ` Less Than Designated Services. Other commenters suggest supporting fewer services for lowincome consumers than are designated for other subscribers. Georgia PSC opposes providing universal service support for access to operator services for lowincome  X4-people.F4 " yO-ԍ Georgia PSC comments at 78.F Michigan PSC suggests a special lowincome local service package with low prices and very limited features, including toll restriction and limited local calling plus free  X-calls to schools and medical and emergency services.E " yO9"-ԍ Michigan PSC comments at 2.E  X-xn367.` ` StateDetermined Services. Some commenters recommend against providing federal universal service support for any new services, including the designated services,"*&&dd"  X-targeted to lowincome consumers.|$" {Oy-ԍ  See, e.g., Cincinnati Bell comments at 7; NARUC comments at 7; PacTel comments at 23; TCI  {OC-comments at 1718; Washington UTC comments at 13. See also Texas OPUC comments at 1213 (stating that the proposals in the NPRM will increase rates, resulting in the need for additional lowincome support programs).| Cincinnati Bell claims that state commissions and local authorities should fund services for lowincome consumers because they are best suited to  X-develop responses to specific populations.H" yO7-ԍ Cincinnati Bell comments at 7.H Additionally, NARUC, TCI, and PacTel argue that states must be permitted to continue developing and redefining the universal service policies that best meet the needs of subscribers in their jurisdictions, as long as they do not  X-conflict with federal statutory mandates.lD" yO -ԍ NARUC comments at 7; PacTel comments at 23; TCI comments at 1718.l Washington UTC contends that a special definition of universal service for lowincome consumers that identifies individual services will confine universal service policy to today's technology and services and claims that such a  XH-definition is @VIII-@inconsistent with competitive neutrality.KH" yO-ԍ Washington UTC comments at 7, 13.K  X -xo368.` ` TollLimitation Services. Some parties argue that toll limitation  d " yO/-ԍ As the Commission noted in the NPRM, tolllimitation services include both tollblocking services, which prevent toll calls billed to the subscriber's telephone number, and tollcontrol services, which allow subscribers to preset toll spending limits during a given billing period. NPRM at para. 54. We observe that toll blocking is a form of toll limitation. We will refer to both services generically as "toll limitation," or to each respective service by name, as relevant.  helps subscribers maintain access to telecommunications services by helping them control their  X -expenditures.:Z " {O-ԍ See, e.g., Bell Atlantic comments at 15 (suggesting making toll limitation available to all consumers, and subsidizing it for lowincome consumers); California PUC comments at 15; Florida PSC comments at 1516; Illinois CC comments at 5; Indiana URC comments at 34.: These commenters point to studies showing that the main reason subscribers  X -lose their telephone service is excessive toll bills. Z 6" {O-ԍ See, e.g., Benton comments at 2; California PUC comments at 15; Illinois CC comments at 5; Indiana URC comments at 34; Missouri PSC comments at 13; OPCDC comments at 1213; Rural Iowa Indep. Tel. Ass'n comments at 5.  A large majority of commenters addressing the issue of toll limitation or toll blocking agree that support should be provided for these services in some form, with commenters fairly evenly divided between those  X-advocating it as a service that should be available to all consumers,X" {O$-ԍ See, e.g., Alaska PUC comments at 2, 6; Benton comments at 23; Georgia PSC comments at 8 (supporting toll blocking/limitation as designated service, but not mandatory); Indiana URC comments at 24. and those advocating it"*&&dd"  X-as a service to be supported for lowincome users only. Z" {Oy-ԍ See, e.g., CNMI comments at 1920; California Dept. of Consumer Affairs comments at 23; California PUC comments at 15; New Jersey BPU comments at 2; Oregon PUC comments at 5; Rural Iowa Indep. Tel. Ass'n comments at 5.  Edgemont asserts that tolllimitation services should be offered to lowincome subscribers without charge and on a voluntary basis, so as not to frustrate the purpose of the 1996 Act by cutting off access to  X-interexchange services.B" yOV-ԍ Edgemont comments at 17.B Iowa Utilities Board, noting that toll blocking often restricts access to operator assistance, states that the Commission should draft rules so that, if access to operator services is made a designated service, it does not preclude lowincome customers  Xv-from choosing tollblocking services.Mvz" yO -ԍ Iowa Utilities Board comments at 5.M Benton proposes a service program with three options under which customers are guaranteed incoming calls and access to emergency  XH-numbers even when there has been failure to pay tolls.IH " yO-ԍ Benton reply comments at 1214.I With respect to involuntary toll limitation, NARUC maintains that if involuntary toll blocking is instituted for nonpayment, it  X -should be limited to the unpaid service or unpaid provider, if possible.> " yOe-ԍ NARUC comments at 8.>  X -xp369.` ` CompTel argues that offering toll limitation to lowincome consumers could  X -result in increased universal service costs.D * " yO-ԍ CompTel comments at 1718.D BellSouth maintains that such services fall short of the compelling public interest test that would justify their inclusion in universal service, and are not widely subscribed to by residential customers nor essential to education, public  X-health or safety.I " yO-ԍ BellSouth comments at 12 n. 22.I GTE says toll limitation should not be a mandatory component of service  Xy-for lowincome customers because not all such customers want or need toll limitation.@yJ " yOt-ԍ GTE comments at 2223.@ Time Warner supports universal service support for voluntary toll blocking but not toll limitation. Time Warner argues that toll limitation is more expensive to provide, more difficult to administer, and the ability to offer such services may vary according to switching  X-technology and billing systems.E" yO#-ԍ Time Warner comments at 13.E Georgia PSC favors toll blocking or limitation, but believes that these services should not be services designated for universal service support"j*&&ddd"  X-because competitive forces will assure their availability.m" {Oy-ԍ Georgia PSC comments at 89. See also Sprint comments at 21.m Pennsylvania PUC, New York DPS, and NARUC maintain that state public utility commissions should decide whether to  X-offer such services.Z" yO-ԍ NARUC comments at 8; New York DPS comments at 1314; Pennsylvania PUC comments at 22.  X-xq370.` ` Reduced Service Deposits. Commenters assert that service deposits constitute a barrier to service for lowincome consumers because many lowincome consumers cannot afford to pay the service deposits charged by carriers to initiate service, particularly to  X_-reinstate service disconnected for nonpayment._" {O -ԍ See, e.g., Edgemont comments at 17; OPCDC comments at 1213; Virginia CC comments at 4. Thus, some commenters suggest providing  XH-universal service support to reduce or eliminate service deposits.H|" {Ou-ԍ See, e.g., AT&T comments at 13 n.16; California Dept. of Consumer Affairs comments at 2021; Michigan Consumer Federation comments at 2022; Virginia CC comments at 4. Florida PSC suggests letting consumers preset their spending limit for toll usage in exchange for a reduced or eliminated deposit, and argues that this would provide an incentive for service providers to  X -make toll limitation available.H " yO-ԍ Florida PSC comments at 1516.H Other commenters also recommend linking reduced service deposits to voluntary toll limitation and blocking, with companies providing reduced service  X -deposits to those customers who accept toll limitation.m f " {O-ԍ See, e.g., CNMI comments at 1920; Georgia PSC comments at 8.m CompTel opposes any reduced service deposits, suggesting that they "would add unknown costs to universal service with  X -unproven results," work against the public interest, and cause higher overall rates.D " yOP-ԍ CompTel comments at 1719.D GTE argues that if service deposits are reduced or eliminated, LECs should be reimbursed for such reduction because universal service support should be explicit, as required by section  Xb-254(e).=b " yO-ԍ GTE comments at 23.= Noting that many states already offer such plans, Pennsylvania PUC, NARUC, and  XK-New York DPS also oppose the Commission's mandating reduced service deposits.K" yO!-ԍ NARUC comments at 58; New York DPS comments at 1314; Pennsylvania PUC comments at 22.(#(#X  X-xr371.` ` Access to Telephone Service Information at No Charge. Offering lowincome consumers free access to information about telephone service (such as service activation and termination and lowincome support programs) is favored by many commenters as a service"*&&ddE"  X-deserving universal service support." {Oy-ԍ See, e.g., CNMI comments at 1920; Edgemont comments at 1112; Florida PSC comments at 1415; Indiana URC comments at 34; Michigan Consumer Federation comments at 2021; Missouri PSC comments at 1213; NARUC comments at 8; NCTA comments at 13; New Jersey Advocate comments at 18; New Mexico AG comments at 4; North Dakota PSC comments at 2; OPCDC comments at 9; Ohio Consumers' Council comments at 1617; PacTel comments at 22. These commenters appear to be concerned that lowincome consumers will be unable to place calls to gain telephone service information if the calls would otherwise be an inregion toll call, or, more commonly, if the state's Lifeline program allows only a limited number of free calls. Commenters maintain that access to the LEC's (both ILECs and CLECs) customer service center is important to the public health and  X-safety and is in the public interest.Wz" {O -ԍ  See, e.g., Louisiana PSC comments at 3.W NCTA recommends providing free access to  Xv-information for certified lowincome consumers only.Av " yO3-ԍ NCTA comments at 1314.A No state directly opposes free access to information, but Georgia PSC and Washington UTC assert that no new programs are  XH-needed.fH" yO-ԍ Georgia PSC comments at 45; Washington UTC comments at 45.f NAD advocates that, because many information numbers are not accessible directly to TTYs (a typewriterstyle device for communicating alphanumeric information over telecommunications networks), TTY users must use relay services for access to such numbers; therefore, relay users should not be charged for relay calls to numbers providing LEC service  X -information.F , " yO-ԍ NAD reply comments at 2223.F NYNEX, Frontier, and GTE, however, do not favor universal service support for service calls. These carriers assert that support for this service is unnecessary and contrary to Congress's deregulatory intent, and the decision to make such support available is better  X -left to states' discretion.p " yO-ԍ Frontier comments at 56; GTE comments at 2224; NYNEX comments at 17.p  Xy-xs372.` ` No Disconnection for Nonpayment of Toll. Several commenters advocate  Xb-prohibiting disconnection of local service for nonpayment of toll charges.bL " {O_-ԍ  See, e.g., AARP comments at 2223; NASUCA comments at 6; NTIA reply comments at 1017. Based on analysis of Census Bureau data from 1994, NTIA concludes that telephone subscribership appears to be consistently higher in states with a policy of no disconnection for nonpayment  X-of toll charges.H" yO#-ԍ NTIA reply comments at 1017. H NTIA further maintains that lowincome consumers benefit the most from"n*&&ddG"  X-a policy of no disconnection for nonpayment of toll charges. OPCDCA" yOy-ԍ OPCDC comments at 26.A maintains that disconnection of local service for nonpayment of toll charges runs afoul of the four criteria in  X-section 254(c)(1). X" yO-ԍ Those criteria are "the extent to which such telecommunications are essential to education, public health or public safety; have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers; are being deployed in public telecommunications networks by telecommunications carriers; and are consistent with the public interest, convenience, and necessity." It asserts that households with young children, elderly residents, and  X-handicapped individuals are in need of access to basic telephone service.?@" yO -ԍ OPCDC comments at 4.? Therefore, it  X-favors a policy prohibiting disconnection for nonpayment of toll.?" yO% -ԍ OPCDC comments at 6.? Sprint, PacTel, and  X-CompTel, however, oppose no disconnection for nonpayment of toll.r` " yO-ԍ CompTel comments at 18; PacTel comments at 22; Sprint comments at 2122.r Sprint contends that competitors will strive to meet the needs of the marketplace and will respond by developing  X_-programs to encourage customers to use their services.C_ " yO-ԍ Sprint comments at 2122.C Sprint argues that telecommunications service providers have an inherent incentive to keep customers on the network, and that this incentive will increase as competition develops in the local exchange  X -marketplace.C " yOK-ԍ Sprint comments at 2122.C x  X -xt373.` ` Other Services. The Governor of Guam and New Mexico AG, among others,  X -advocate supporting interexchange and advanced services for lowincome subscribers.f " {O-ԍ Governor of Guam comments at 1213; New Mexico AG comments at 4. See also Alaska comments at 56 (noting that because of difficult topographic and climatologic conditions, a sparse population, and low incomes, penetration would be extremely low if not for programs promoting universal service); CNMI comments at 911 (noting that the mixed domestic/international treatment afforded CNMI ratepayers results in very high telecommunications rates being imposed on subscribers whose income levels rank among the lowest in the nation); Guam Tel. Authority comments at 7.f The Governor of Guam notes that while lowincome consumers in Guam may receive access to interexchange services that are reasonably comparable to services provided elsewhere, they may not be affordable; thus, universal service support should be provided for affordable  Xy-interexchange and advanced services for lowincome individuals.y" yP$-ԍ#c PE37 P# Governor of Guam comments at 13.# c PE37 P#ј "b*&&dd"Ԍ X-xu374.` ` Several commenters support subsidizing specialneeds equipment for lowincome people with disabilities (such as speech, hearing, mobility, and cognitive  X-disabilities).Z" {OK-ԍ  See, e.g., Michigan PSC comments at 2; New York DPS comments at 15; Council of Organizational Representatives reply comments at 3; NAD reply comments at 8; United Cerebral Palsy Ass'n reply comments at 2. New York DPS submits that disabled people are often poor, and while they  X-may qualify for Lifeline service," {OV-ԍ For a description of the federal Lifeline program, see section VIII. C., infra. they may be unable to purchase the equipment to access  X-the network.F|" yO -ԍ New York DPS comments at 15.F NENA maintains that 911, E911, and DTMF should receive universal service support in areas where state and local authorities have previously approved the emergency  Xv-service system.v " yO3-ԍ NENA reply comments at 1 (arguing that any costs incurred by carriers in providing E911 access should be eligible for support unless it would result in double recovery). National Telecommuting Institute proposes that employers that hire lowincome, homebound individuals with disabilities should receive a waiver for all voice and data line charges incurred between the employee and the company, with the service provider  X1-receiving support from universal service support mechanisms.21d " yOF-ԍ Letter from M.J. Willard, Ed.D., Executive Director, National Telecommuting Institute, Inc., and the President's Committee on Employment of People with Disabilities, to William F. Caton, Acting Secretary, FCC  {O-(National Telecommuting Institute, Inc. Ex Parte) (also recommending that if training is necessary to prepare a homebound individual for a telecommuting position, the cost of connecting the trainee to the trainer via telephone lines be covered by universal service support mechanisms).2  X -xv375.` ` NTIA advocates universal service support to enable lowincome individuals to  X -receive caller ID at a reduced rate in addition to the designated services.C " yO-ԍ NTIA reply comments at 7.C At least one commenter, Benton, maintains that the procompetitive spirit of the 1996 Act, which will result in multiple services and facilities offered to consumers, requires that lowincome consumers be allowed to choose which services meet their needs and are entitled to  X-support.?" yO-ԍ Benton comments at 3.? For example, Benton notes that voice telephony is useless to deaf consumers.E6" yOw!-ԍ Benton comments at 3.E Consistent with the 1996 Act's requirement that funding mechanisms be predictable, Benton suggests that the Commission set an allowance or some other mechanism under which a user  XK-could choose from an array of services.EK" yO%-ԍ Benton comments at 3.E"KV*&&dd"Ԍ X-ԙxw376.` ` Edgemont, PacTel, Ohio Consumers' Council, and Montana Indep. Telecom. recommend a "soft dial tone" or "warm line," which enables an otherwise disconnected phone line to be used to contact emergency services (911), as well as the provider's central business  X-office." {O4-ԍ  See, e.g., Edgemont comments at 16; Ohio Consumers' Council comments at 1617; PacTel comments at 22. Access to emergency services, commenters assert, is essential to public health and  X-safety.R"" {Ow-ԍ See, e.g, Edgemont comments at 17.R  Xv-xx377.` ` Texas OPUC advocates providing support for lowincome consumers' buying  X_-optional services at regular rates.D_" yO -ԍ Texas OPUC comments at 17.D Some commenters suggest providing universal service  XH-support for Internet access for lowincome consumers.HD" {O=-ԍ  See, e.g., Bar of New York comments at 914; Edgemont comments at 1315; Kinko's comments at 510. Brite advocates universal service support for information services (news via satellite to community distribution sites and to individual consumers via mobile phones), speech activation (voice recognizing services to  X -complement DTMF services), and twoway paging and shorttext messaging.@ " yOR-ԍ Brite comments at 12.@ In addition, some commenters address which services should be supported for lowincome individuals in  X -their general discussion of what services should receive universal service support. . " {O-ԍ See, e.g., Matanuska Tel. Ass'n comments at 2; PULP comments at 1117; West Virginia Consumer Advocate comments at 6. Such comments are addressed in Part IV of the Recommended Decision.  X-xy378.` ` Commenters assert that all consumers should receive adequate information  Xy-about lowincome assistance programs.y " {O-ԍ  See, e.g., La Raza comments at 67; Virginia CC comments at 4; Ohio Consumers' Council reply comments at 16. Many suggest requiring carriers to provide  Xb-consumer awareness information describing the programs that are implemented.b" {O -ԍ See, e.g., Catholic Conference comments at 22; NASUCA comments at 6; Ohio Consumers' Council reply comments at 16. La Raza states that the Commission should require carriers to develop marketing plans directed at lowincome and multilingual communities and to provide multilingual information regarding"4<*&&dd"  X-billing and the availability and rates of services.x" {Oy-ԍ La Raza reply comments at 45. See also Public Advocates comments at 6.x  X- x` ` 3. Discussion x  X-xz379.` ` As we have observed, Congress in section 254(b) instructs the Joint Board and the Commission to base policies for the preservation and advancement of universal service on the principle that universal service should be available for lowincome individuals in all  X_-regions of the nation._Z" yOj -ԍ 47 U.S.C.  254(b)(3). We also find that the principle of affordable rates in section 254(b)(1) is relevant to our policies with respect to lowincome consumers. At the same time, however, Congress included section 254(j), which provides that "[n]othing in [section 254] shall affect the collection, distribution, or  X1-administration of the Lifeline Assistance Program provided for by the Commission."@1" yO-ԍ 47 U.S.C.  254(j).@  X -x{380.` ` We find that the provisions of section 254(j) can be reconciled with other sections of 254 regarding competitive neutrality and support for lowincome consumers in all regions of the nation. As an initial matter, we believe that Congress did not intend for section 254(j) to codify the existing Lifeline program. Had Congress intended for section 254(j) to have that effect, it would have chosen clearer, less equivocal language. Instead, Congress  X-simply provided that nothing in section 254 should affect the collection, distribution, or  X{-administration of the program.{B" yOn-ԍ The Commission established the Lifeline program in 1985 pursuant to its authority under Titles I and II  {O6-of the 1934 Act, as amended. See MTS and WATS Market Structure; Amendment of Part 67 of the  {O-Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985). See also MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a  {O-Joint Board, 51 Fed. Reg. 1371 (1986). Congress did not restrict the Commission's authority in this area in the 1996 Act. We therefore conclude that the Commission possesses the authority, separate from section 254, to  {O$-modify the Lifeline program. See Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S. Ct. 1023, 1030 (1994), citing  {O-Lorillard v. Pons, 434 U.S. 575, 580 (1978) (Congress is presumed to be aware of an administrative or judicial  {O-interpretation of a statute). See also Goodyear Atomic Corp. v. Miller, 486 U.S. 174, 184 (1988) (Congress is presumed to know the existing law pertinent to the legislation it enacts). This also bolsters our conclusion that  yOJ-Congress would have chosen stronger language in section 254(j) had it intended to codify the Lifeline program. ą We therefore conclude that Congress intended, in section  Xd-254(j), to give the Joint Board and the Commission permission to leave the Lifeline program in place without modification, despite its inconsistencies with other provisions of section 254 and the 1996 Act generally.  X -x|381.` ` We further conclude that a necessary corollary to this interpretation of section 254(j) is that this Joint Board has the authority to recommend, and the Commission has the authority to adopt, changes to the Lifeline program to make it more consistent with"*&&dd" Congress's mandates in section 254 if such changes would serve the public interest. We arrive at this conclusion in part because the existing Lifeline program is supported solely by IXCs and is unavailable to lowincome consumers in areas where the incumbent LEC or the  X-state regulatory authorities have chosen not to participate." yO4-ԍ The states without Lifeline programs are: Delaware; Indiana; Iowa; Kansas; Kentucky; Louisiana; Nebraska; New Hampshire; New Jersey; and Puerto Rico. Given these circumstances, we find that the current Lifeline program is inconsistent with sections 254(b)(3) and (4).  Xv-x}382.` ` We find no statutory basis to recommend continuing to fund the federal Lifeline program in a manner that places some IXCs at a competitive disadvantage, or that provides no support for lowincome consumers in several portions of the nation. We conclude that our recommendations would make universal service support mechanisms for lowincome individuals more consistent with Congress's express goals without fundamentally changing the basic nature of the existing Lifeline program. Moreover, this approach is consistent with Congress's expression of approval for the current Lifeline program in section 254(j).  X -x~383.` ` The Joint Board agrees with the vast majority of commenters and recommends that, through universal service support mechanisms, lowincome consumers should have access  Xy-to the same services designated for support for rural, insular, and high cost areas.y " {OJ-#A\  PɒP#э For a discussion of the services designated for support, see supra section IV. Our recommendation is based, in part, on the statutory principle that access to services should be  XK-available to [c]onsumers in all regions of the Nation, including lowincome consumers.lK" yO-#A\  PɒP#э 47 U.S.C.  254(b)(3). l We find that the overarching universal service goals may not be accomplished if lowincome universal service support is provided for services inferior to those supported for other subscribers. We further recommend that the services listed above should be made part of the  X-modified Lifeline Assistance program that we recommend adopting in section VIII. C., infra. Thus, lowincome consumers eligible for Lifeline Assistance would receive, at a minimum, the designated services.  X-x384.` ` In the NPRM, the Commission also sought comment on providing universal service support for tolllimitation services in light of studies demonstrating that a primary reason subscribers lose access to telecommunications services is failure to pay long distance  XP-bills.lPB" {OC#-ԍ NPRM at para. 54 (citing Subscribership Notice at 1300506).l Many commenters support tolllimitation services for lowincome individuals.P" {O$-ԍ See, e.g., Florida PSC comments at 1516; California PUC comments at 15; Indiana URC comments at 34; Illinois CC comments at 5; Bell Atlantic comments at 15. In"P. *&&dd" a number of jurisdictions, however, it appears that voluntary tolllimitation services may not be affordable for lowincome consumers. The Joint Board recommends that the Lifeline Assistance program for eligible lowincome consumers include voluntary toll limitation, in addition to the services mentioned above. Because voluntary toll blocking allows customers to block toll calls, and toll control allows customers to specify in advance a certain amount of toll usage per month or billing cycle, these services assist customers in avoiding involuntary termination of their access to telecommunications services. Therefore, we find that providing voluntary toll limitation free of charge to lowincome consumers should help increase subscribership among lowincome consumers. Furthermore, we find that tolllimitation  X1-services are "essential to education, public health or public safety"F1" yO -ԍ 47 U.S.C.  254(c)(1)(A).F and "consistent with the  X -public interest, convenience, and necessity"F X" yO# -ԍ 47 U.S.C.  254(c)(1)(D).F in that they maximize the opportunity of customers to remain on the telecommunications network. x  X -x385. ` ` We recommend, however, that only carriers that currently possess the capability of providing these services be required to provide them to Lifelineeligible consumers and receive universal service support for such services. We understand that most carriers are  X-currently capable of providing tollblocking service," yO)-ԍ Some of the carriers offering toll blocking include: Ameritech, Bell Atlantic, BellSouth, GTE, NYNEX, Pacific Telesis Group, and Southwestern Bell Telephone Company. and that some carriers are capable of  Xy-providing toll control.y@" yOj-ԍ The following are some of the carriers offering toll control: Bell Atlantic Pennsylvania; Denver and Ephrata Telephone and Telegraph Company; Southwestern Bell Telephone Company; and Pacific Telesis Group. Eligible telecommunications carriers that are technically incapable of providing any tolllimitation services should not be required to provide either service, and such an incapability should not affect their designation as eligible telecommunications carriers. We recommend, however, that eligible telecommunications carriers not currently capable of providing these services be required to add the capability to provide at least toll blocking in any switch upgrades (but we do not recommend that universal service support be provided for such switch upgrades). We further recommend that carriers offering voluntary tolllimitation services receive support based on the incremental cost of providing those services.  X-x386.` ` We do not recommend, as some commenters suggest," {O!-ԍ  See, e.g., Alaska PUC comments at 2, 6; Benton comments at 23; Indiana URC comments at 24. providing support for tolllimitation services for consumers other than lowincome consumers. We find that subscribership levels among lowincome consumers are well below the national average and that a principal reason for service termination is the failure to pay toll charges. Therefore, we conclude that tolllimitation services should be supported only for lowincome consumers at"N* *&&dd" this time.  X-x387. ` ` Further, the Joint Board recommends that the Commission prohibit carriers receiving universal service support for providing Lifeline service from disconnecting such  X-service for nonpayment of toll charges." yO-ԍ This recommendation should not be construed to affect the ability of the states to implement a policy prohibiting disconnection of local service for nonpayment of toll charges for nonLifeline customers. As the NPRM noted, recent studies suggest that  X-disconnection for nonpayment of toll charges is a significant barrier to universal service.l " {O^ -ԍ NPRM at para. 56 (citing Subscribership Notice at 1300506).l We find that lowincome consumers should not be prevented from making local telephone calls because they did not pay long distance charges, because such local calls could be emergency telephone calls or calls to schools, government offices, or health care providers. We conclude that this requirement is consistent with section 254(c) because access to calls is "essential to education, public health, or public safety" and "consistent with the public interest,  X -convenience, and necessity."K " yOf-ԍ 47 U.S.C.  254(c)(1)(A), (D).K We also find that a rule prohibiting carriers from disconnecting Lifeline subscribers' local service for nonpayment of toll charges will create an incentive for carriers to offer lowincome consumers tolllimitation services to manage their toll expenditures.  X-x388. ` ` We further recommend, however, that the Commission provide state utilities regulators with the authority to grant carriers a limited waiver of this requirement if the carrier can establish that: (1) it would incur substantial costs in complying with such a requirement; (2) it offers tolllimitation services to its Lifeline subscribers at no charge; and (3) telephone subscribership among lowincome consumers in the carrier's service area is at least as high as the national subscribership level for lowincome consumers. We recommend that this waiver be extremely limited and that a carrier should be required to meet a very heavy burden to obtain a waiver. Furthermore, we recommend that the waiver would terminate after two years, at which time carriers could reapply for the waiver.  X-x389.` ` The Joint Board also recommends, in its discussion of Link Up in section VIII.  X-C., infra, that the Commission implement a national policy prohibiting telecommunications carriers from requiring Lifelineparticipating subscribers to pay service deposits in order to  Xg-initiate service if the subscriber voluntarily elects to receive toll blocking. gB" yOZ"-ԍ Our recommendation does not address the issue of whether states may allow a LEC to request a service deposit from a customer with an outstanding balance owed to another LEC.  X9-x390.` ` Some commenters suggest that free access to information about telephone"9 *&&dd"  X-service for lowincome consumers should receive universal service support. " {Oy-ԍ See, e.g., CNMI comments at 1920; Edgemont comments at 12; Michigan Consumer Federation comments at 20. These commenters appear to be concerned that lowincome consumers will be unable to place calls to gain telephone service information if the calls would otherwise be an inregion toll call, or if the state's Lifeline program allows only a limited number of free calls. Similarly, NAD suggests that universal service support mechanisms should provide support so that TTY users  X-can make free relay calls to numbers providing LEC service information.C "" yO` -ԍ NAD reply comments at 22.C We conclude that the states are best suited to determine, pursuant to section 254(f), whether to require carriers to provide free access to information about telephone service for lowincome consumers, because they are most familiar with the number of consumers in their state affected by charges for these calls and may do so pursuant to 254(f) through their own universal service support mechanism. We also find that the record in this proceeding is inadequate to permit a recommendation on this subject that would comport with competitive neutrality by assuring consumers' access to such information for all service providers. We find that the same concerns militate against providing support for lowincome consumers with disabilities making relay calls to gain access to LEC service information.  X-x391.` ` Some commenters favor universal service support for usage of interexchange  Xy-and advanced services for lowincome consumers. y" {O-ԍ See, e.g., Brite comments at 12; Governor of Guam comments at 1214; New Mexico AG comments at 4. We find, however, that it is unclear whether providing support for such services is necessary at this time. We believe the steps we suggest today for ensuring universal service for lowincome consumers are likely to increase their access to interexchange and advanced services. In the event that lowincome consumers lack access to such services in the future, impeding the achievement of universal service goals, we recommend that the Commission revisit this issue.  X-x392.` ` Other commenters propose support for specialneeds equipment for lowincome  X-subscribers with disabilities.  " {O~-ԍ See, e.g., Council of Organizational Representatives reply comments at 3; Michigan PSC comments at 2; NAD reply comments at 8; New York DPS comments at 15; United Cerebral Palsy Ass'n reply comments at 2. We note, however, that the 1996 Act specifically addresses access to telecommunications services and equipment by individuals with disabilities outside  X-the context of section 254.Gf " {O#-ԍ See 47 U.S.C.  255.G We therefore conclude that these matters need not be addressed by this Joint Board because they will be addressed in a separate proceeding to implement section 255."e *&&dd"Ԍ X-ԙx393.` ` Commenters propose other services and functionalities for lowincome consumers that they assert should be supported through universal service support mechanisms,  X-such as caller ID at a reduced rate,C" yOK-ԍ NTIA reply comments at 7.C "soft dial tone" or "warm line,"jX" {O-ԍ  See, e.g., Edgemont comments at 16; PacTel comments at 22.j support for optional  X-services at regular rates,D" yOV-ԍ Texas OPUC comments at 17.D and multilingual information regarding billing and rates.z" {O -ԍ See, e.g, La Raza comments at 67; Virginia CC comments at 4; Ohio Consumers' Council reply comments at 16; . Although these proposed services may benefit lowincome customers, we find that the states are best positioned to ascertain, pursuant to section 254(f), whether these types of proposed support should be provided to lowincome customers, due to the states' greater familiarity with regional and local demographic, socioeconomic, and ratemaking factors and may do so pursuant to 254(f) through their own universal service support mechanism.  X -x394.` ` Moreover, the inclusion of additional services and functionalities beyond those necessary to effectuate a comprehensive federal universal service policy would be inappropriate and may have the effect of unreasonably and unnecessarily expanding all  X -carriers' universal service obligations, with inevitable effects on rates.% " yOZ-#A\  PɒP#э Increases in the size of the fund, regardless of the magnitude, will in most cases be reflected through increased rates. This result, of course, negatively affects the overall affordability of rates. % Therefore, we limit  X -our recommendation to the services and rules described supra and the modifications to  X -Lifeline and Link Up described infra. @  X}-xC. Reevaluation of Existing LowIncome Support Programs  Xf-  XO-x` ` 1. Background  X!-x395.` ` Section 254(b)(3) states that consumers in all regions of the Nation, including lowincome consumers, "should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available  X-at rates that are reasonably comparable to rates charged for similar services in urban areas."C, " yO"-ԍ 47 U.S.C.  254(b)(3).C Section 254(b)(1) provides that telecommunications services should be "affordable," and section 254(d) requires all providers of interstate telecommunications service to contribute to universal service support on an equitable and nondiscriminatory basis. Section 254(j)," *&&dd" however, provides that "[n]othing in [section 254] shall affect the collection, distribution, or administration of the Lifeline Assistance Program provided for by the Commission under regulations set forth in section 69.117 of title 47, CFR, and other related sections of such  X-title."" yO4-ԍ 47 U.S.C.  254(j). Section 69.117 of the Commission's rules addresses the conditions and mechanisms for waiver of the subscriber line charge for Lifeline participants. 47 C.F.R.  69.117.  X-x396.` ` As noted in the NPRM, the Commission's Lifeline program currently provides support that reduces the charges lowincome consumers in participating jurisdictions incur for some statespecified level of local service that includes access to the public switched  XH-telephone network (PSTN) and some local calling.H " yO -ԍ 47 C.F.R.  69.104(j)(l). Currently, 41 states plus the U.S. Virgin Islands and the District of Columbia participate. States may choose to participate in either of two Lifeline Assistance plans. Under Plan 1, an eligible subscriber's monthly telephone bill is reduced by an amount equal to the $3.50 federal subscriber line charge  X -imposed on such subscribers.C x" yO,-ԍ 47 C.F.R.  69.104(j).C Half of the reduction comes from a 50 percent waiver of the charge; the other half comes from the participating state, which matches the federal contribution by an equal reduction in the local rate. Under this plan, subscribers who satisfy a statedetermined means test may receive assistance for a single telephone line in their principal residence. Under Plan 2, which expands Plan 1 to provide for waiver of the entire residential SLC (up to the amount matched by the state), a subscriber's bill may be reduced  Xy-by twice the SLC (or more, if the state more than matches the value of the federal waiver).Cy" yO2-ԍ 47 C.F.R.  69.104(k).C The state contribution may come from any intrastate source, including state assistance for basic local telephone service, connection charges, customer deposit requirements, or state  X4-taxes. Under both plans, the interstate portion of Lifeline is billed to IXCs by NECA.@4" yO}-ԍ 47 C.F.R.  69.117.@ While Plan 2 requires the verification of participating subscribers' eligibility, Plan 1 requires  X-only that subscribers' eligibility be "subject to verification."C( " yO-ԍ 47 C.F.R.  69.104(j).C Of the 43 states or other jurisdictions participating in Lifeline, only California offers a Lifeline program under Plan  X-1.&\ " {OA#-ԍ Indus. Analysis Div., FCC, Monitoring Report May 1995 CC Docket No. 87339, at tbl. 2.1 (1995)  {O $-(Monitoring Report). California allows subscribers to selfcertify their eligibility to participate in the Lifeline program.& "*&&dd"Ԍ X-x397.` ` Link Up helps lowincome subscribers initiate telephone service by paying half  X-of the first $60.00 of installation charges.@" yOb-ԍ 47 C.F.R.  36.711.@ Where a LEC has a deferred payment plan, Link  X-Up will also pay the interest on any balance up to $200.00, for up to one year.FX" yO-ԍ 47 C.F.R.  36.711(a)(2).F To be eligible for this program, subscribers must meet a stateestablished means test, and may not,  X-unless over 60 years old, be another's dependent for federal income tax purposes.C" yO= -ԍ 47 C.F.R.  36.711(b).C  Xv-x398.` ` The NPRM sought comment generally on whether "changes to our Lifeline and Link Up programs should be made as part of an overall mechanism to ensure that quality  XH-services are available at just, reasonable, and affordable rates for lowincome subscribers.";Hx" yOq-ԍ NPRM at para. 65.; The NPRM proposed to amend the Link Up program by removing it from the jurisdictional separations rules through which it is now funded for lowincome subscribers of incumbent LECs and funding the program through a new universal service mechanism consistent with sections 254(d) and (e). In the NPRM, the Commission also sought "comment and a Joint  X -Board recommendation on how to define eligible lowincome customers.";  " yO-ԍ NPRM at para. 59.; The NPRM observed that the states currently determine Lifeline eligibility based on meanstested criteria  X -they select.;! " yO-ԍ NPRM at para. 61.;  Xy-x399.` ` In its Public Notice, the Commission's Common Carrier Bureau asked: (1) whether the new universal service fund should provide support for Lifeline and Link Up in order to make the subsidies technologically and competitively neutral, and (2) if so, whether  X4-the amount of the Lifeline subsidy still should be tied to the amount of the SLC.G"4( " yO -ԍ Public Notice at Question 71.G  X- x` ` 2. Comments  X-x400.` ` Retain Lifeline and Link Up in their Current Form. A majority of commenters support the Lifeline and Link Up programs, with most asking only that support for these" "*&&dd"  X-programs be maintained or increased.#" {Oy-ԍ See, e.g., Farmers Tel. comments at 45; Michigan PSC comments at 2; MonCre comments at 5; Ohio PUC comments at 7 (advocating expanding Lifeline to waive the entire subscriber line charge); South Dakota comments at 17; Sprint comments at 21 (suggesting that more effort be made to educate lowincome consumers about the existence of Lifeline and Link Up); TCA comments at 5; Telec Consulting comments at 15; Winnebago Tel. comments at 1; U S West further comments at 31 (supporting the programs but believing the Commission should reexamine the caps placed on these programs as rates are rebalanced).  Missouri PSC, Washington UTC, and Ohio PUC  X-support Lifeline and Link Up in their current form.}$B" yO-ԍ Missouri PSC comments at 12; Ohio PUC comments at 7; Washington UTC comments at 12.}  X-x401.` ` Effect of Section 254(j). A few commenters appear to read section 254(j) as  X-precluding the Commission from making any changes to the Lifeline program.%" {O' -ԍ See, e.g., Ad Hoc Telecom. Users comments at 2 n.1; Associated Communications comments at 3; PacTel comments at 22; Washington UTC comments at 14; Puerto Rico Tel. Co. further comments at 22. Bell Atlantic, however, interprets section 254(j) to permit the Commission to leave the Lifeline program in place if it wishes to do so, even though the program may currently conflict with  X_-other goals in the statute._&_, " {O<-ԍ See, e.g, Bell Atlantic further comments at 15._  X1-x402.` ` Change Lifeline and Link Up. NTIA and Citizens Utilities propose changes to the Lifeline program. Some commenters suggest mandating that all states participate in the  X -Lifeline program.j' " yOr-ԍ Citizens Utilities comments at 17; NTIA reply comments at 1415.j NTIA, for example, maintains that the 1996 Act appears to require federal support for lowincome consumers regardless of whether the state in which they live  X -matches federal lowincome support.G( N " yO-ԍ NTIA reply comments at 1415.G NTIA observes, however, that removing the matching requirement might reduce the incentive for currentlyparticipating states to continue providing support, and therefore advocates reducing the matching requirement to 25 percent of  X-the federal support level.G)" yO-ԍ NTIA reply comments at 1415.G North Dakota PSC would make participation in Lifeline and  Xy-Link Up a condition for carriers to receive any type of universal service support.K*yn" yO!-ԍ North Dakota PSC comments at 23.K Michigan PSC proposes that the Commission modify the programs so that federal and the state funds would each contribute 50 percent of customers' costs associated with Link Up, Lifeline, and special needs equipment; federal support mechanisms and the provider would each contribute 50 percent of customers' costs associated with a special lowincome local service package"**&&dde"  X-including, among other options, toll restriction.E+" yOy-ԍ Michigan PSC comments at 2.E Western Alliance notes that while rural subscribers may pay only $10.00 per month for local, flatrate calling, they may pay at least twice that much for shorthaul toll calls to the nearest schools, hospitals, local government  X-offices, and other destinations.R,X" yO-ԍ Western Alliance further comments at 16.R Western Alliance therefore suggests that Lifeline support  X-be provided for such toll calls.R-" yO= -ԍ Western Alliance further comments at 16.R  Xv-x403.` ` Change Lifeline and Link Up to Support Competitive Neutrality. A large number of commenters argue for changing the way Lifeline and Link Up are funded in order  XH-to achieve competitive neutrality..Hx" {Oq-ԍ  See, e.g., CompTel comments at 1920; GTE comments at 22; MCI comments at 56; RTC further comments at 3435; USTA further comments at 3132; Vitelco further comments at 15. Specifically, many commenters contend that the new  X1- universal service support mechanism should provide support for Lifeline and Link Up because having all telecommunications providers not just IXCs contribute will make the subsidies  X -competitively neutral./ " {O-ԍ See, e.g., AT&T reply comments at 21 (adding that states can establish separate statespecific funds if they deem it necessary); Ameritech further comments at 47; BellSouth further comments at 56; CompTel further comments at 14; CFA further comments at 27; GSA further comments at 16; GTE further comments at 60; MCI further comments at 3233; MFS further comments at 53; NYNEX further comments at 48; Sprint further  yO-comments at 19.` `  Additionally, several commenters suggest basing contributions on a contributor's revenue rather than on the carrier's number of presubscribed lines, as the current Lifeline and Link Up programs do. They assert that this change would make the assessment  X -more competitively neutral.0 " yO-ԍ CompTel comments at 1920; NECA further comments at 39; USTA further comments at 3132; Vitelco further comments at 15. But other parties, such as NCTA, PacTel, and SNET, propose that Lifeline and Link Up should not receive support through universal service support  X-mechanisms.1" {O-ԍ See, e.g., NCTA further comments at 25; PacTel further comments at 59; SNET further comments at 7; SWBT further comments at 46. PacTel and SNET oppose changing the current contribution mechanism because the current programs are explicit support mechanisms specifically targeted to  Xb-individual subscribers.2b6" yOI#-ԍ PacTel further comments at 59 (also stating that all Lifeline and Link Up providers should be potential recipients of funds); SNET further comments at 7.  X4-x404.` ` Commenters suggest that in addition to changing the way in which Lifeline and"42*&&dd" Link Up funds are collected, the Commission should alter the basis on which Lifeline benefits  X-are determined for lowincome consumers in order to further competitive neutrality.3Z" {Ob-ԍ See, e.g., Ameritech further comments at 47; CompTel further comments at 14; MCI further comments at 32; Time Warner further comments at 56; U S West further comments at 31; Professor Patricia Worthy further comments 811.  X-Specifically, some commenters suggest not basing the amount of support on the SLC.4" {Om-ԍ  See, e.g., Ameritech further comments at 47; CompTel further comments at 14; MCI further comments at 32. These commenters propose several alternatives for determining support for lowincome individuals. For example, some commenters suggest that Lifeline support should be based on  X-a rate determined to be affordable by lowincome consumers.5D" {O -ԍ See, e.g., Puerto Rico Tel. Co. reply comments at 711; Professor Patricia Worthy further comments at 811. Professor Patricia Worthy proposes a federal lowincome rate set at one percent of the federal minimum wage, based on research showing that lowincome consumers spend approximately one percent of their  XH-incomes on telephone service.6H" {O-ԍ Professor Patricia Worthy further comments at 811. See also USTA comments at 16 n.21 (concluding that Americans spend an average of one percent of their income on universal services). Universal service support mechanisms would provide support for the difference between one percent of the minimum wage and a lowincome  X -subscriber's monthly bill.7 " yO-ԍ Professor Patricia Worthy further comments at 811. Alternatively, Professor Worthy would set the federal lowincome rate at the average of current state Lifeline rates. This would mean lowincome consumers should pay a maximum rate of $8.93 per month for telephone service (which would include a flat rate with a 120free call allowance, DTMF, access to emergency services, access to operator services and 12 free calls per month, access to long distance carriers, a white pages listing, free toll  X -blocking, and blocking for 900, 976, and 976like services).[8 P " yO-ԍ Professor Patricia Worthy further comments at 10.[  X-x405.` ` Puerto Rico Tel. Co. recommends giving a LEC an $8.00 per month universal  Xy-service support payment for each customer living below the poverty line.V9y" yO -ԍ Puerto Rico Tel. Co. reply comments at 710.V The LEC would credit the customer's account $6.00 per month and keep $2.00 to cover costs. Based on the average residential service rate of $15.00 per month (excluding the SLC, taxes, and DTMF  X4-service), lowincome consumers' monthly rates would be approximately $9.00.:4p" {OU$-ԍ Id. (also suggests stimulating network expansion of services to lowincome people by providing incentive payments to eligible carriers that extend service to previously unserved residential subscribers). "4:*&&ddf"Ԍ X-ԙx406.` ` LCI recommends providing lowincome consumers a subsidy that is the difference between prevailing rates for the package of designated services and the rate level at  X-which these services become affordable.<;" yOK-ԍ LCI comments at 7.< It states that under the 1996 Act, explicit and predictable support mechanisms must be developed to ensure that lowincome individuals can  X-afford the designated services.<<X" yO-ԍ LCI comments at 7.< It argues that the best way to determine who is eligible for  X-lowincome support is through the existing Lifeline and Link Up programs.==" yO& -ԍ LCI comments at 7. =  X_-x407.` ` MCI maintains that Lifeline and Link Up should be tied to the total costs of the  XH-loop, rather than the SLC.H>Hx" yOq-ԍ MCI further comments at 3233.H Under MCI's proposal, support would be determined by the  X1-difference between the nationwide average local rate and the economic cost of the service.?1" {O-ԍ MCI further comments at 3233. See also Sprint further comments at 19 (advocating delinking the amount of support from the SLC and tying it to a specified percentage of local rates). Citizens suggests expanding support beyond the SLC to cover an eligible consumer's total  X -monthly cost of universal service.L@ b " yO-ԍ Citizens Utilities comments at 17.L MFS proposes that Lifeline support be fixed at current levels and adjusted as the Commission believes necessary to address the needs of lowincome  X -individuals.EA " yOx-ԍ MFS further comments at 53.E  X -x408.` ` Some commenters advocate keeping the amount of support for lowincome  X-consumers tied to the SLC.BZ " {O-ԍ See, e.g., Bell South further comments at 56; Florida PSC further comments at 17 (at least at the outset tied to the subscriber line charge); NCTA further comments at 25; SWBT further comments at 46; TCI further comments at 40. GSA takes this position because the SLC is the portion of the  Xy-subscriber's local service bill that is subject to federal regulation.ECy" yO -ԍ GSA further comments at 16.E BellSouth and TCI argue that keeping support linked to the SLC will prevent increases to lowincome consumers' bills  XK-if the SLC is otherwise increased.gDK4" yO0$-ԍ BellSouth further comments at 56; TCI further comments at 40.g If the SLC increases, BellSouth, Ohio Consumers' Counsel, Wisconsin PSC, Maine PUC and USTA maintain that Lifeline support should"4D*&&dd"  X-increase accordingly.E" yOy-ԍ BellSouth comments at 13; Maine PUC comments at 21; Wisconsin PSC comments at 1112; Ohio Consumers' Council reply comments at 16; USTA reply comments at 9.  X-x409.` ` Some commenters advocate making Lifeline benefits "portable," i.e., assignable  X-to the provider of the subscriber's choice.F" " {O-ԍ  See, e.g., California PUC comments at 1617; CompTel comments at 1920; MCI comments at 19 (allowing consumers to select the services they want); New Jersey BPU comments at 5; PCIA comments at 15; PacTel further comments at 60 (suggesting that a flexible credit applicable to a call control/spending feature may be of more value to consumers); Time Warner further comments at 56. Because the federal component of Lifeline currently is a waiver of the SLC, Lifeline benefits cannot be applied to services without a SLC (such as wireless services or voice mail). GTE suggests that Lifeline customers receive a credit that can be applied to any telecommunications service they select, whether wireline or  X_-wireless.EG_ " yO-ԍ GTE further comments at 22.E GTE further contends that the amount of the credit should equal at least the subscriber line charge and be linked to an inflation index so that the passage of time does not  X1-dilute the effectiveness of the program.HZ1" {O|-ԍ GTE further comments at 22 n.47. See also Time Warner further comments at 56 (supporting "portable" subsidies expressed as specific dollar amounts, rather than as percentage "discounts" off the regular price of the service).  360 recommends giving the subsidy directly to consumers through vouchers consumers could use with the telecommunications provider of  X -their choice.<I " yOp-ԍ 360 comments at 8.< TIA and Michigan Consumer Federation also suggest vouchers, with the  X -latter emphasizing that vouchers should be convenient and nonstigmatizing.mJ L " yO-ԍ Michigan Consumer Federation comments at 23; TIA comments at 2 n.2.m AT&T maintains that small, rural carriers should be exempted from a portability requirement because  X -the administrative costs of portability could outweigh the benefits.KX " yOK-ԍ AT&T comments at 9 n.12 (once a state commission determines that it is in the public interest for a rural carrier to interconnect with new entrants in their territory pursuant to  251(f)(1)(B), however, the subsidy should become portable).  X-x410.` ` Modify Link Up. Some commenters also propose modifications to the Link Up program. MCI, NCTA, and LDDS, for example, suggest modifying the Link Up program so that it is no longer based on jurisdictional separations rules, and therefore all  XK-telecommunications carriers can be required to participate.hLK" yO$-ԍ LDDS comments at 19; MCI comments at 56; NCTA comments at 15.h PULP argues that support should be increased so that qualifying customers pay no more than $10.00 in installation"4L*&&dd"  X-charges.>M" yOy-ԍ PULP comments at 20.> Texas OPUC suggests that the Link Up program be supported by new universal  X-service support mechanisms, rather than by IXCs.DNX" yO-ԍ Texas OPUC comments at 17.D Catholic Conference would amend Link  X-Up to provide assistance for more than one initiation of service per year.O" {Ok-ԍ Catholic Conference comments at 22. See also NTIA reply comments at 1819 (suggesting allowing subscribers to receive more frequent assistance with installation charges if they accept toll blocking).  X-x411.` ` Who Should Determine Eligibility. Most states and state public utility commissions argue that the states should determine eligibility criteria for universal service  Xv-lowincome support.PvB" {Oi -ԍ  See, e.g., Alaska comments at 14; Ohio PUC comments at 11 (but recommending that no household earning more than 150 percent of the poverty level be eligible for support); Virginia CC comments at 4. Michigan Consumer Federation argues that states should possess wide  X_-latitude to tailor eligibility criteria to reflect local needs and circumstances.VQ_" yO-ԍ Michigan Consumer Federation comments at 19.V It maintains that use of national standards could result in support that is too generous for some states and  X1-insufficient for others.\R1, " yO-ԍ Michigan Consumer Federation comments at 19.\ Other commenters note that the states should base eligibility on  X -enrollment in a federal program.S " {O-ԍ See, e.g., AT&T comments 1718 n.22; Virginia CC comments at 4 (advocating reliance on existing identifiers, e.g., Medicaid and Food Stamps, rather than inventing new definitions). AT&T maintains that states initially should set the maximum income threshold to establish eligibility and then identify one or more assistance  X -programs in which a consumer must participate in order to qualify.FT " yO-ԍ AT&T comments at 1718 n.22.F NCTA, however, maintains that lowincome customers eligible for support should be defined consistently across  X -the country, rather than on a statebystate basis.>U " yO-ԍ NCTA comments at 14.>  X-x412.` ` Bases on Which to Determine Eligibility. Commenters suggest a variety of methods to determine eligibility for support. Florida PSC recommends providing support to  Xb-individuals who receive state assistance.EVb6" yOI#-ԍ Florida PSC comments at 17.E NCTAAWb" yO$-ԍ NCTA comments at 1416.A suggests basing eligibility on whether the consumer receives federal assistance from one of the four major assistance programs: Aid"KVW*&&dd"  X-to Families with Dependent Children (AFDC);FXX" yOy-ԍ AFDC provides transitional financial assistance to needy families. Federal and state governments share the cost. The federal government provides broad guidelines and program requirements, and states are responsible for program formulation, benefit determinations, and administration.F Supplemental Security Income (SSI);Y" yO-ԍ SSI provides financial assistance to people who are 65 or older, blind, or have a disability and who meet certain income guidelines.  X-Food Stamps;=ZX@" yO-ԍ The Food Stamp Program is designed to increase the food purchasing power of eligible lowincome households. Benefits are available to nearly all households that meet federal eligibility tests. Recipients of AFDC and SSI generally are automatically eligible for food stamps.= and Medicaid.[X` " yO -ԍ States are required to provide Medicaid coverage for most individuals who receive federally assisted income maintenance payments, such as AFDC and SSI. In addition, states have the option of providing Medicaid coverage to other groups. PULP proposes to include customers receiving either federal or statefunded assistance, while providing the states with the ability to include consumers who have incomes slightly above the levels required to receive federal government  X-assistance.>\ " yO-ԍ PULP comments at 19.> MPSC, among others, emphasizes that enrollment should be automatic, so that  X-recipients of AFDC, for example, are automatically enrolled in Lifeline.D]" yON-ԍ Montana PSC comments at 5.D New York DPS supports automatic enrollment and reevaluating eligibility using merged telephone company  X_-and social service agency databases.F^_" yO-ԍ New York DPS comments at 14.F New York DPS claims that the merged databases reduce costs by terminating support to ineligible households, while also increasing  X1-subscribership among qualifying households.L_10" {O-ԍ New York DPS comments at 14.L Other commenters suggest providing support  X -to people who receive an Earned Income Credit on their tax returns.E` " yO-ԍ Florida PSC comments at 17.E Community Colleges  X -maintains that community colleges should be considered lowincome consumers.Ka R" yO -ԍ Community Colleges comments at 5.K Catholic  X -Conference recommends extending subsidies to schools and shelters that supply telephone service free of charge to the indigent, homeless, migrant workers, and victims of domestic  X -violence.Pb " yOQ$-ԍ Catholic Conference comments at 2122.P La Raza advocates providing support to nonprofit charitable organizations that" rb*&&dd> "  X-offer advanced telecommunications services to lowincome consumers.Dc" yOy-ԍ La Raza comments at 1718.D  X-x413.` ` Several commenters suggest that households living below a certain percentage  X-of the poverty line should be eligible for support.=d\X" {O-ԍ  See, e.g., AARP comments at 2021 (advocating selfcertification, with verification, for qualifying  {O-households); Puerto Rico Tel. Co. comments at 10; Edgemont reply comments at 4. See also NASUCA comments at 7 (advocating selfcertification). = Puerto Rico Tel. Co. uses the poverty  X-line as the demarcation of eligibility for support.Ne|" yO -ԍ Puerto Rico Tel. Co. comments at 10.N AARP, for example, suggests that households with income below 125 percent of the poverty line are eligible for support, while  Xv-Edgemont advocates a 150 percent demarcation level._fv " yO3-ԍ AARP comments at 2021; Edgemont reply comments at 4._ Several parties explicitly oppose  X_-using poverty levels as the determining factor.sg_" {O-ԍ See, e.g., Virginia CC comments at 34; NCTA reply comments at 17. s NCTA believes that poverty levels do not  XH-define with sufficient certainty who is covered and, ultimately, the size of the subsidy.>hH. " yO'-ԍ NCTA comments at 17.>  X -x414.` ` Ameritech, NYNEX, MFS, and NCTA emphasize that universal service support should be specifically targeted to only those customers who in fact need assistance to obtain  X -the designated services.i " yO[-ԍ NCTA comments at 17; NYNEX comments at 13; Ameritech reply comments at 17; MFS reply comments at 3. In this way, Ameritech contends, assistance for lowincome  X -consumers can work in tandem with the affordability benchmark rate for high cost areas.Ij " yO-ԍ Ameritech reply comments at 17.I  X -x415.` ` La Raza recommends that the Commission set a universal service goal with  X-regard to lowincome consumers to give effect to section 254(b).Fk" yO-ԍ La Raza reply comments at 4.F The goal La Raza  Xy-advocates would be that carriers in each state should work to achieve the statewide average rate of subscribership among lowincome, minority, and limitedEnglishspeaking communities  XK-in that state.LlK6" yO2$-ԍ La Raza reply comments at 4.L Similarly, NTIA recommends that the Commission adopt a "National Subscribership Goal" to ensure that the number of households with telephones among low"4l*&&dd"ԫ X-income households is at least equal to the national average.Dm" yOy-ԍ NTIA reply comments at 12.D  X-x ` ` 3. Discussion  X-x` `  a. Lifeline  Xv-x416.` ` We continue to be concerned about the low subscribership levels among lowincome consumers. Current penetration rates are only 87.1 percent among households with annual incomes less than $10,000.00 and 75 percent among households with annual incomes  X1-less than $5,000.00.n1X" {O: -ԍ Indus. Analysis Div., FCC, Monitoring Report May 1995 CC Docket No. 87339 (1996) (Monitoring  {O -Report). Affordable access is also an issue in insular jurisdictions, where the cost of providing service is high and incomes are often low. In Puerto Rico, which has a higher than average percentage of lowincome consumers, telephone subscribership is 72  X -percent, compared to almost 94 percent in the rest of the United States.Mo " yOQ-ԍ Puerto Rico Tel. Co. comments at 8.M Additionally, the Governor of Guam maintains that lowincome consumers in Guam may not have access to  X -interexchange and advanced services at affordable rates.Mp D" yO-ԍ Governor of Guam comments at 1213.M Subscribership levels among lowincome consumers indicate that changes in the current Lifeline program are warranted.  Xy-x417.` ` Currently, only 41 states, the District of Columbia and the U.S. Virgin Islands  Xb-participate in Lifeline.Uq\b" {O-ԍ Indus. Analysis Div., FCC, Monitoring Report May 1995 CC Docket No. 87339, at tbl. 2.1 (1996)  {O-(Monitoring Report). The states without Lifeline programs are: Delaware; Indiana; Iowa; Kansas; Kentucky; Louisiana; Nebraska; New Hampshire; New Jersey; and Puerto Rico. U Therefore, the Joint Board recommends modifying the federal  XK-Lifeline program to reach lowincome consumers in every state.rK " yO-ԍ Hereinafter, "states" will refer to all states, territories, and commonwealths within the jurisdiction of the United States. We further recommend that, in order to be eligible for support from the new national universal service support mechanism pursuant to section 214(e)(1), carriers must offer Lifeline assistance to eligible lowincome customers. We find that these modifications will serve as a means of fulfilling the statutory principle that telecommunications services should be available to lowincome  X-consumers "in all regions of the Nation."CsP " yO$-ԍ 47 U.S.C.  254(b)(3).C Moreover, we conclude that these proposed changes are consistent with section 254 and the procompetitive goals of the 1996 Act. The"s*&&dd" Commission's current Lifeline program requires states to provide support from intrastate sources to reduce Lifeline subscribers' bills by an amount at least equal to the amount of federal support. As a result, lowincome consumers in states choosing not to provide such matching support lack the opportunity to benefit from the Lifeline program. We recommend that the Commission modify the Lifeline program to ensure that lowincome consumers may  X-receive Lifeline support without regard to the state in which they reside.t" {O-ԍ See 47 U.S.C.  254(c)(3) (establishing a policy of universal service support for "[c]onsumers in all regions of the Nation, including lowincome consumers"). We are reluctant, however, to recommend mandatory participation by states or carriers in a program that requires states to generate support from the intrastate jurisdiction.  X1-x418. ` ` One possible solution to this problem would be to eliminate the requirement of intrastate matching support as a condition of receiving federal support for Lifeline. We are concerned, however, that eliminating the matching requirement might reduce a state's incentive to provide intrastate support to reduce Lifeline rates further. Although the current Lifeline program, which provides for total reductions of at least $7.00 in Lifeline subscribers'  X -bills (including state matching support)Du "" yO-ԍ All states that currently participate in Lifeline participate in Plan 2, which provides for a full waiver of the $3.50 SLC and requires state matching (for a total of $7.00 in support), with the exception of California.  {O!-See FCC Monitoring Report, CC Docket No. 80286, Table 2.1 (rel. May 1996). Although California participates in Plan 1, and therefore receives only $1.75 in federal support per subscriber, California generates intrastate support to allow Lifeline rate reductions of at least $7.00 in total.D has been successful,v " yOC-ԍ Its success is demonstrated by commenters' widespread support of the program, as well as Congress's endorsement of it in section 254(j). we are uncertain whether $3.50 in federal support, absent state matching, would reduce lowincome consumers' monthly bills sufficiently to achieve our goals here. Moreover, we find that it would be desirable to maintain a state role in the Lifeline program, to the extent possible, because of the states' greater familiarity with income levels, demographic patterns, and other factors affecting lowincome subscribership.  X-x419. ` ` In order to reconcile our finding that Lifeline support should be extended to all states with our desire to maximize states' incentives to generate matching intrastate support for the program, we recommend that the Commission eliminate the state matching requirement and provide for a baseline level of federal support that would be available to lowincome consumers in all states. In order to ensure adequate Lifeline support in states that choose not to generate intrastate matching funds, we believe this baseline federal support level should exceed the current $3.50. To maximize matching incentives, however, we believe the baseline support level should be less than $7.00. We therefore propose a baseline federal level halfway between the two figures at $5.25, and recommend that the Commission seek additional information on this issue before establishing a precise baseline level. To create"N, v*&&dd" further incentives for matching, we recommend that the Commission provide for additional federal support equal to one half of any support generated from the intrastate jurisdiction, up to a maximum of $7.00 in federal support.  X-x420. ` ` Although we believe this recommendation will best reconcile our competing objectives of providing adequate nationwide support and maximizing state matching incentives, we are concerned that the implementation of this recommendation could have no direct effect on Lifeline subscribers' rates in many populous states with existing Lifeline programs, and could instead result only in a larger percentage of the total support being generated from federal sources. Therefore we recommend that the Commission seek additional information on ways to avoid this unintended consequence before implementing this recommendation.  X -x421. ` ` We also find it essential that the state members of the Joint Board maintain a continuing role in refining specific aspects of the Lifeline program. The state members of the Joint Board will submit a report to the Commission on Lifeline issues. The report of the state members will be filed prior to the Commission's decision on the Lifeline program in this proceeding. Thereafter, the Commission and the state members should continue to work cooperatively and remain integrally involved in refining the Lifeline program.  X4-x422.` ` We observe that many states currently generate their matching funds through the rateregulation process. These states allow incumbent LECs to recover the revenue the carrier loses from charging Lifeline customers less by charging other subscribers more. This creates two potential problems. First, this mechanism represents an implicit subsidy, with nonLifeline subscribers paying more to support Lifeline subscribers. Second, it raises the question of how states would meet their matching requirement for carriers whose rates they do not regulate. Thus, we recommend that matching funds from the intrastate jurisdiction must be generated in a manner that is not inconsistent with the Commission's rules to preserve and  X|-advance universal service.Jw|" {O-ԍ See 47 U.S.C.  254(f).J  XN-x423.` ` To make the Commission's Lifeline program competitively neutral, the Joint Board recommends that support for eligible lowincome consumers no longer be achieved through charges levied on only IXCs. We recommend that the programs be supported by a fund to which all telecommunications carriers that provide interstate service contribute on an equitable and nondiscriminatory basis as a function of their revenues, consistent with sections 254(d) and (e). Thus, for example, LECs, wireless carriers, and other interstate telecommunications service providers would contribute. Delinking Lifeline from the Commission's Part 69 rules would promote competitive neutrality by allowing the participation of carriers who do not charge SLCs, such as CLECs and wireless providers. Some commenters oppose changing the current contribution mechanism because the current"#Zw*&&dde""  X-programs are specifically targeted to individual subscribers.dx" yOy-ԍ PacTel further comments at 59; SNET further comments at 7.d Nevertheless, we conclude, as  X-do many commenters,y"X" {O-ԍ See, e.g., AT&T reply comments at 21; Ameritech further comments at 47; BellSouth further comments at 56; CFA further comments at 27; CompTel further comments at 14; GSA further comments at 16; GTE further comments at 60; MCI further comments at 3233; MFS further comments at 53; NYNEX further  yOL-comments at 48; Sprint further comments at 19.@ that the new funding mechanism we recommend will be more competitively neutral than the current system, which passes the entire federal burden of lowincome support to IXCs, without sacrificing the targeting that has characterized the current program. We also conclude that lowincome consumers will continue to benefit directly under our recommendation.  X_-x424.` ` In addition to changing the contribution method for the Lifeline program, we recommend amending the program to enable all eligible telecommunications carriers, not just LECs, to be eligible to receive support for serving qualified lowincome consumers. Currently, only ILECs serving eligible lowincome consumers can receive support. With the approval of state utility commissions, ILECs offer eligible lowincome individuals reduced local rates, with reductions equal to at least the full amount of the SLC ($3.50), or more,  X -depending on the level of state support.:z B" {O-ԍ See supra.: The Commission currently certifies state programs based on a demonstration that they offer eligible subscribers a Lifeline rate that is discounted  X -by at least twice the level of SLC waiver that is requested (to account for state matching).M{ " {O,-ԍ See 47 C.F.R.  69.203(g).M Currently, NECA bills IXCs and disburses funds to the ILECs to compensate them for SLCs  Xy-not recovered from end users.@|yf " yO-ԍ 69 C.F.R.  69.117.@ We find, however, that eligible telecommunications carriers other than ILECs should have the ability to compete to serve lowincome consumers and in turn receive Lifeline support in a manner similar to the current program. We recommend that in order to participate, a carrier must demonstrate to the public utility commission of the state in which it operates that it offers a Lifeline rate to qualified individuals. We recommend that the Lifeline rate be the carrier's lowest comparable nonLifeline rate reduced by at least the $5.25 amount of federal support. We further recommend that support be provided directly to carriers based on the number of eligible consumers they serve under administrative procedures  X-determined by the fund administrator.X} " {Oh#-ԍ See infra section XIII (Administration).X In the interest of administrative ease, we  X-recommend against the use of vouchers, as proposed by some commenters.~ " {O%-ԍ See, e.g., 360 comments at 8; Michigan Consumer Federation comments at 23; TIA comments at 2 n.2."~*&&dd"Ԍ X-ԙx425.` ` Currently, state agencies or telephone companies administer customer eligibility  X-determinations pursuant to narrowlytargeted programs approved by the Commission.Q" {Ob-ԍ  See 47 C.F.R.  69.104(j)(k).Q We recommend that the Commission maintain this basic framework for administering Lifeline eligibility in states that provide matching support for the Lifeline program. We believe such criteria provide states with sufficient flexibility to target support based on each state's particular needs and circumstances. We also recommend that the Commission require states that provide matching funds to base eligibility criteria solely on income or factors directly related to income (such as participation in a lowincome assistance program). Currently, some states only make Lifeline assistance available to lowincome individuals who, for example, are elderly or have disabilities. We find that Congress's intent would best be served if all low X -income consumers had access to Lifeline assistance. We further recommend that the Commission adopt specific meanstested eligibility standards to apply in states that choose not to provide matching support from the intrastate jurisdiction. Specifically, we recommend that lowincome consumers participating in a stateadministered, lowincome welfare program (and who are not considered dependents for federal income tax purposes, with the exception of dependents over the age of 60) would be eligible for Lifeline assistance.  X-  Xy-x ` `  b. Link Up  XK-x426.` ` The Joint Board recommends that the Commission adopt the changes to the  X4-Link Up program's funding mechanism proposed in the NPRM.;4Z" yO?-ԍ NPRM at para. 64.; We recommend that the Link Up funding mechanism be removed from the jurisdictional separations rules, and that the program be funded through equitable and nondiscriminatory contributions from all interstate telecommunications carriers. Funding the program through contributions from all interstate carriers will allow for an explicit and competitively neutral funding mechanism consistent with sections 254(d) and (e).  X-x427.` ` We recommend that the Commission amend its Link Up rules to make the present level of Link Up support available to qualifying lowincome consumers requesting service from any telecommunications carrier providing local exchange service. Support would be available only for the primary residential connection. As amended, the Link Up rules should thus provide that any eligible telecommunications carrier may draw support from the new Link Up funding mechanism described above if that carrier offers to eligible customers a reduction of its service connection charges equal to one half of the carrier's customary connection charge or $30.00, whichever is less. Where the carrier offers eligible customers a deferred payment plan for connection charges, we recommend that the Commission provide support to reimburse carriers for waiving interest on the deferred charges for eligible subscribers as Link Up currently provides for incumbent LECs' charges. To ensure that the"!*&&dd " opportunity for carrier participation is competitively neutral, we recommend that the Commission's rules be amended to eliminate the requirement that the commencementof X-service charges eligible for support be filed in a state tariff.M" {OK-ԍ See 47 C.F.R.  36.711(d).M In the absence of evidence that increasing the level of Link Up support for connecting each eligible customer would significantly further universal service goals, however, we recommend that the level of support  X-for Link Up not be increased.OZ" {O-ԍ See, e.g., PULP comments at 20.O  X_-x428.` ` With respect to subscribers' eligibility to participate in the Link Up program, the Joint Board recommends that the same modifications be made to the Link Up program that we have recommended for the Lifeline program. That is, we encourage states to set meanstested eligibility criteria, and we recommend that a federal eligibility "floor" be established that would serve as eligibility criteria in states that choose not to define means X -tested eligibility criteria of their own. Consistent with some commenters' proposals,^ " {O-ԍ See, e.g., Catholic Conference comments at 22.^ we also recommend that the Commission prohibit states from restricting the number of service connections per year for which lowincome consumers who relocate can receive Link Up support.  Xy-x429.` ` We find that carriers' high service deposits deter subscribership among low Xb-income consumers.;b~" yO-ԍ NPRM at para. 56.; Research suggests that carriers often require customers to pay high service deposits in order to initiate service, particularly when customers have had their service  X4-disconnected previously.l4" {O-ԍ NPRM at para. 56 (citing Subscribership Notice at 1300506).l We recommend that the Commission address this barrier to lowincome consumers' gaining or regaining access to the network for primary residential channels. We recommend that the Commission implement a national rule prohibiting telecommunications carriers from requiring Lifelineparticipating subscribers to pay service deposits in order to initiate service if the subscriber voluntarily elects to receive toll blocking.  X-We recommend in section VIII. B., supra, that universal service support be provided so that toll blocking is made available to all Lifeline participants at no additional charge. Although this rule regarding service deposits would not be a part of the Link Up program itself, it would serve the goal of assisting lowincome consumers to gain access to the network. GTE maintains that if service deposits are reduced or eliminated, LECs should be reimbursed for  XP-such reduction because universal service support should be explicit.=P" yO%-ԍ GTE comments at 23.= We find, however,"P0 *&&dd" that our recommendation will not place an undue burden on carriers because service deposits currently serve primarily to guard against the risk of nonpayment of toll charges, which many ILECs bill to customers on behalf of IXCs. This same protection will be created by the customer's election to receive toll blocking, a precondition to the restriction against requiring  X-service deposits.  X_- IX.xISSUES UNIQUE TO INSULAR AREAS  X1-x A. Background  X -x430. ` ` The 1996 Act states that consumers in insular areas should have access to telecommunications and information services, including interexchange services, advanced telecommunications services, and information services, (1) that are reasonably comparable to those services provided in urban areas and (2) that are available at rates that are reasonably  X -comparable to rates charges for similar services in urban areas.q " yO -ԍ#X\  P6G;ɒP#x47 U.S.C.  254(b)(3).q Congress stated that the Joint Board and the Commission were to consider consumers of insular areas, such as the Pacific Island territories, when developing support mechanisms for consumer access to  Xb-telecommunications and information services.{bX" yOk-ԍ#X\  P6G;ɒP#xJoint Explanatory Statement at 131.{ In the NPRM, the Commission requested  XK-comment on all issues affecting rural, insular and high cost areas.K" {O-ԍ#X\  P6G;ɒP#xSee, e.g., NPRM at paras. 1517, 2327. The Common Carrier Bureau's Public Notice asked three questions concerning consumers in insular areas: what, if any, programs (in addition to those aimed at high cost areas) are needed to ensure that insular areas have affordable telecommunications service; if a proxy model is used to determine the amount of universal service support, what, if any, measures are necessary to ensure that urban rates and rates in rural, insular, and high cost areas are reasonably comparable, as required in section 254(b)(3); and how should support be calculated for those areas (e.g., insular areas  X-and Alaska) that are not included under the proxy models.tz" yO-ԍ#X\  P6G;ɒP#xPublic Notice at question 6.t  X-  X|-xB. Comments  XN-x431. ` ` In General. Several commenters present special circumstances or issues pertaining to insular areas. Guam Tel. Authority states that insular areas are particularly affected by distancesensitive costs and suggests that the Joint Board and Commission create support for services that are most likely to be affected by distance. For example, it suggests"  *&&ddy" including Guam in flat, nondistancesensitive calling plans, and supporting services that may be prohibitively expensive due to distance, such as tollfree calling, calling card, directory  X-assistance, credit card verification, and number portability." {OK-ԍ#X\  P6G;ɒP#xGuam Tel. Authority comments at 67. See also Governor of Guam comments at 67; Vitelco reply comments at 67. The Governor of Guam notes that distancesensitive rates are high in Guam, because it is over 6,000 miles from San Francisco and 3,700 miles from Honolulu. The Governor of Guam advocates that differences in the cost of providing service due to remoteness or distance be offset by universal service  Xv-support mechanisms.v"" yOI -ԍ#C\  P6QɒP#xGovernor of Guam comments at 4, 67, 18. The Governor supports total and seamless rate and service integration, domestic rate averaging and universal support between Guam, other insular areas,  XH-and all U.S. locations.wH" yO -ԍ#C\  P6QɒP#xGovernor of Guam comments at 2.w Since Guam does not contain any urban areas, the Governor suggests that rates within Guam be compared to rates in urban areas located on the U.S. west  X -coast.} B" yO -ԍ#X\  P6G;ɒP#xGovernor of Guam reply comments at 5.}  X -x432. ` ` TollFree Access. CNMI suggests universal service support should be provided for access to tollfree services in insular areas. Currently, the Pacific Island territories are not part of the North American Numbering Plan (NANP). Consequently, in order for residents of the Northern Mariana Islands to place tollfree calls to the U.S., they must pay 99 cents per minute to the Micronesia Telephone Company, which places international (011+1880) calls to Hawaii, where the link to the U.S. domestic 800 network occurs. Thus, tollfree calls in the  Xb-islands are not currently tollfree.:b" yO-ԍ#X\  P6G;ɒP#xLetter from Thomas K. Crowe, Counsel for the Commonwealth of the Northern Mariana Islands, to  {O-William F. Caton, Secretary, FCC, September 24, 1996 (Commonwealth of Northern Mariana Islands Ex Parte). : CNMI expresses concern that once the Northern Mariana Islands are part of the NANP, businesses that use tollfree numbers (800, 888) will not want to incur the expense of serving the islands. CNMI suggests, that if that happens, its residents will be cutoff from tollfree services because, under the Commission's paypercall rules Micronesia Telephone Company will not be able to charge for transporting a call to Hawaii where the call could be linked to the business's tollfree number, as currently occurs. CNMI asserts that Section 254(b)(3), which mandates that all consumers should have access to interexchange services, authorizes the Joint Board and the Commission to ensure that genuine tollfree service without paid access charges is available in insular areas, like  X-CNMI.t, " {Op$-ԍ#X\  P6G;ɒP#xCNMI ex Parte at 2, 5.t "| *&&ddP"Ԍ X-x433. ` ` Similarly, CNMI notes that calls to information service providers located in the U.S. are subject to the same charges as "tollfree calls" and therefore are considerably more  X-expensive than rates for information services in the continental U.S.l" yOK-ԍ#X\  P6G;ɒP#xCNMI comments at 14.l CNMI asserts that Section 254(b)(3), which requires that all consumers have access to information services at comparable rates, also authorizes the Joint Board and Commission to support access to  X-information services in the Northern Mariana Islands.qX" {O-ԍ#X\  P6G;ɒP#xCNMI Ex Parte at 5.q Furthermore, CNMI states that telecommunications service costs are extraordinarily high in the Northern Mariana Islands because international ratemaking practices apply to long distance calls between the Northern Mariana Islands and offisland points, including the U.S.; IXCs are subject to high carrier  X1-access charges,1" yO -ԍ#X\  P6G;ɒP# xGTE's terminating premium carrier common line charge in CNMI is $0.0835754 per minute. This rate  {O-is 7.66 times higher than GTE's rate in Alaska. See CNMI comments at 10. and, although consumers must place international calls to reach the U.S.,  X -Northern Mariana Islands' consumers are assessed domestic subscriber line charges.n D" yO-ԍ#X\  P6G;ɒP#xCNMI comments at 910.n  X -  X -x C.` ` Discussion  X -x434. ` ` We recognize the special circumstances faced by carriers and consumers in the insular areas of the United States, particularly the Pacific Island territories. We note at the outset that carriers in these areas, like all other carriers, will be eligible for universal service support if they serve high cost areas. In their comments, Vitelco and Puerto Rico Tel. Co. set out some of the problems that carriers in insular areas face in providing telephone service, such as increased costs of shipping equipment and damage caused by hurricanes and tropical  X4-storms.4" {O-ԍxSee Puerto Rico Tel. Co. reply comments at 12; Vitelco further comments at 911. The Hawaii Division of Consumer Advocacy also notes because of Hawaii's remoteness from the mainland carriers faces high costs and technical obstacles in providing  X-service.f " {O-ԍxState of Hawaii Division of Consumer Advocacy, ex parte (dated Oct. 9, 1996). For those reasons, we recommend that rural carriers serving high cost insular  X-areas, as well as rural carriers serving high cost areas in Alaska,8Z " yO!-ԍ Carriers in Alaska also confront unique circumstances in providing service, such as limited construction  {O`"-periods and the extreme remoteness of the many rural communities. See Alaska Public Utilities Commission, Public Hearing, August 22, 1996.8 should continue to receive universal service support based on their embedded costs. We also note that lowincome residents living in these areas would benefit from the modifications that we have recommended to the Lifeline and Linkup programs. Likewise, schools, libraries, and rural"*&&dd" health care providers in insular areas will benefit from the programs we recommend for providing telecommunications services to those institutions.  X-x435. ` ` We recommend that the Commission take no specific action regarding cost support for toll service to the Northern Mariana Islands at this time, but revisit this issue at a later date. Guam and the Northern Mariana Islands will be included in the North American  Xv-Numbering Plan by July 1, 1997. To implement section 254(g),Gv" yO-ԍx47 U.S.C.  254(g).G the Commission will require interstate carriers serving the Pacific Island territories to integrate their rates with the  XH-rates for services that they provide to other states no later than August 1, 1997.DHX" yOQ -ԍxAn interexchange carrier must establish rates for services provided to the Northern Mariana Islands and Guam consistent with the rate methodology that it employs for services it provides to other states. Carriers can choose among several ways to integrate the rates for services to these islands, including expanding mileage bands, adding mileage bands or offering postalized rates. A carrier must also offer optional calling plans, contract tariffs, discounts, promotions, and private line services using the same rate methodology and structure  {O9-that it uses in offering those services to subscribers on the mainland. Policy and Rules Concerning the Interstate,  {O-Interexchange Marketplace, Implementation of Section 254(g) of the Communications Act of 1934, as amended, Report and Order, 11 FCC Rcd 9564, 959697 (1996). x  X -x436. ` ` Once those carriers integrate their rates, the residents of Guam and the Northern Mariana Islands will be able to make 1+ calls to the mainland United States at domestic instead of international rates. Residents of Guam and the Northern Mariana Islands will also have direct access to tollfree (e.g., 800, 888) services. The decision whether to provide tollfree services to a specific area, such as the Pacific Island territories, is a business decision of the carrier's business customer, weighing the cost of toll charges to the islands against the economic benefit of providing toll free access. Businesses currently make that same determination in deciding in which areas to provide toll free access within the fifty  Xb-states, and, for business reasons, some of them choose to limit access to certain areas.axbd " yOw-ԍ AT&T sells printed yellow page directories of 800 numbers. For each 800 number, the directory indicates whether the number is accessible from the entire U.S. or from only selected geographic areas. Where the number is accessible only from certain states, the relevant states are listed. Geographic restrictions are more common for firms tending to serve specific geographic areas (for example, home improvement contractors) than for firms serving more widely distributed customers (for example, hotels). See AT&T Toll-Free 800 Directory: 1993 Business Edition. a Similarly, information service providers make the same type of business decision as to whether to locate in a certain area or provide tollfree access to an area. Until the islands join the NANP and are included in carriers' rate averaging, it is difficult for businesses to make such judgments as to whether, and how, to serve the islands.  X-x437. ` ` We are concerned that residents of Guam and the Northern Mariana Islands"*&&ddr" have access to toll free service and information services. We therefore recommend that the Commission revisit the question of comparable access and rates for tollfree and information services at some time after the Pacific Island territories have been included in the NANP and have integrated rates to determine whether there is any need to support these services. We also note that there will periodic review of the definition of universal service and that any change in that definition may justify providing support for these services.  XH- X. SCHOOLS AND LIBRARIES  X -x A. Overview  X -  X -x438.` ` The 1996 Act explicitly designates elementary and secondary schools and  X -libraries among the entities eligible to receive the benefits of universal service support.x " {ON-#X\  P6G;ɒP#э See generally 47 U.S.C.  254.x Specifically, section 254(c)(3) defines universal service for schools and libraries as  X -telecommunications services and any "additional services" designated by the Commission,C Z" yO-ԍ 47 U.S.C.  254(c)(3).C and section 254(h)(2) defines universal service in terms of access to "advanced  Xy-telecommunications and information services."Fy" yO-ԍ 47 U.S.C.  254(h)(2)(A).F Section 254(h)(2) requires the Commission to establish competitively neutral rules designed to enhance access, "to the extent technically feasible and economically reasonable," to advanced telecommunications and information  X4-services for elementary and secondary school classrooms and libraries.m4z" yO_-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(A).m The joint conferees stated that they expected the Joint Board to consider the specific needs of schools and libraries  X-in defining the services eligible for universal service support.M " yO-ԍ Joint Explanatory Statement at 133.M  X-x439.` ` Section 254(h)(1)(B) provides that services within the definition of universal service shall be provided to schools and libraries at a discount. The discount shall result in  X-"rates less than the amounts charged for similar services to other parties,"m" yO!-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m and be sufficient  X-to ensure affordable access to and use of such services.m* " yOn$-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m Section 254 also places several restrictions on schools and libraries receiving services funded by universal service support"| *&&ddn" mechanisms. Schools and libraries must meet statutory eligibility criteria, may not resell any services provided under section 254, must make a bona fide request for the services, and must  X-use the services for educational purposes.m" yOK-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m Carriers providing services to eligible schools and libraries shall be compensated for any discount they are required to grant through either an offset to their universal service obligations or reimbursement from universal service  X-support mechanisms.mX" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m  X_-x440.` ` In this section, we recommend that, consistent with section 254(h), all eligible schools and libraries may receive discounts of between 20 and 90 percent on all telecommunications services, Internet access, and internal connections, subject to a $2.25 billion annual cap. In addition, any funds that are not disbursed in a given year may be carried forward, and may be disbursed in subsequent years without regard to the cap. We find that this recommendation provides schools and libraries with the maximum flexibility to purchase the package of services they believe will be most effective to meet their respective communications needs. We also conclude that economically disadvantaged schools and libraries, as well as schools and libraries located in high cost areas, should receive greater discounts to ensure that they have affordable access to telecommunications and information services. Further, we recommend that schools and libraries be required to comply with several selfcertification requirements, designed to ensure that only eligible entities receive universal support and that they have adopted plans for securing costeffective access to and use of all of the services purchased under section 254(h).  X-x B. Functionalities/Services Eligible for Support x` ` 1. Background  X-  X-x441.` ` Section 254 defines the services that are to be supported for schools and  X-libraries in terms of "telecommunications services,"j" yO,-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(1).j "special" or "additional" services,Cx" yO-ԍ 47 U.S.C.  254(c)(3).C  X|-and access to "advanced telecommunications and information services."F|" yO5"-ԍ 47 U.S.C.  254(h)(2)(A).F Specifically, section 254(c)(3) states that "in addition to the services included in the definition of universal service under paragraph [c] (1), the Commission may designate additional services for such"*&&dd" support mechanisms for schools, [and] libraries . . . for the purposes of subsection [254]  X-(h)."w" {Oy-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(3). w Section 254(h)(2) states that "[t]he Commission shall establish competitively neutral rules to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public and nonprofit  X-elementary and secondary school classrooms . . . and libraries."mq" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(A).m  Xv-x442.` ` Congress recognized the importance of telecommunications and related services to schools and libraries when it enacted the 1996 Act: x` ` The provisions of subsection [254] (h) will help open new worlds of x` ` knowledge, learning and education to all Americans x` ` rich and poor, rural and urban. They are intended, for example, x` ` to provide the ability to browse library collections, review the x` ` collections of museums, or find new information on the x` ` treatment of illness, to Americans everywhere via schools and x` ` libraries. This universal access will assure that no one is barred  X-x` ` from benefiting from the power of the Information Age.w" yOB-#X\  P6G;ɒP#э Joint Explanatory Statement at 13233.w  Xb-x443.` ` In terms of specific services that Congress anticipated would be included in the definition of section 254(h)(2) "advanced telecommunications and information services," Congress enumerated the following possibilities: XxX` ` For example, the Commission could determine that telecommunications(#` XxX` ` and information services that constitute universal service for classrooms(#` XxX` ` and libraries shall include dedicated data links and the ability to obtain(#` XxX` ` access to educational materials, research information, statistics, information(#` XxX` ` on Government services, reports developed by Federal, State, and local(#`  X-XxX` ` governments, and information services which can be carried over the(#`  X~-XxX` ` Internet.s~" {O-#X\  P6G;ɒP#э Id. at 133 (emphasis added).s(#`  XR-x444. Congress also provided in section 254(c)(2) that "[t]he Joint Board may, from time to time, recommend to the Commission modifications in the definition of the";#*&&dd"  X-services that are supported by Federal universal service support mechanisms."[Z" {Oy-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(2). See also 47 U.S.C.  254(a)(2) (providing that "the Commission shall complete any proceeding to implement subsequent recommendations from any Joint Board on universal service within one year after receiving such recommendations").[ Congress anticipated that the definition of universal service would develop over time when it described  X-universal service as an "evolving" concept.j" yOm-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(1).j Congress specifically gave the Commission the authority to "alter the definition from time to time, and to provide a different definition  X-for schools, [and] libraries."tz" yO -#X\  P6G;ɒP#э Joint Explanatory Statement at 131.t Moreover, in its consideration of "additional" services under section 254(c)(3), Congress authorized the Commission to specify a distinct definition of  Xv-universal service that would apply only to public institutional telecommunications users.bv " {O1-#X\  P6G;ɒP#э Id. at 133.b The conferees stated that they expected "the Commission and the Joint Board to take into  XH-account the particular needs of . . . K12 schools and libraries."ZH" {O-#X\  P6G;ɒP#э Id.Z  X -x445.` ` In the NPRM, the Commission sought comment on services to be included  X -within the section 254(c)(1) definition of "core" telecommunications services. . " {O-#X\  P6G;ɒP#э NPRM at para. 77. See supra section IV for a discussion of core services. The NPRM proposed incorporating the "core" services included in the general definition of universal service under section 254(c)(1), as well as "any other services designated for support pursuant to section 254(c)(3)," in the category of services eligible for a discount for schools and  X -libraries.n " yO-#X\  P6G;ɒP#э NPRM at para. 77.n Further, the NPRM sought comment and Joint Board recommendation on how the definition of universal service for schools and libraries should reflect the section 254(c)(1) mandate to consider future "advances in telecommunications and information technologies and  Xb-services."hbP " {Oc-#X\  P6G;ɒP#э NPRM at para. 81.h In the Public Notice, the Common Carrier Bureau sought further comment on whether the services and functionalities eligible for discount should be specifically limited or  X4-identified, or whether the discount should apply to all available services.k4" yO"-#X\  P6G;ɒP#э Public Notice.k  X-x446.` ` The Commission asked commenters to identify what "additional" services carriers must make available to schools and libraries pursuant to section 254(c)(3) and what"r*&&ddE"  X-services must be provided at a discount pursuant to section 254(h)(1)(B).p" {Oy-#X\  P6G;ɒP#э  NPRM at paras. 78 and 80.p The NPRM also sought comment on what functionalities should be supported through universal service mechanisms for schools and libraries, as well as what facilities are required to provide those  X-functionalities.bZ" yO-#X\  P6G;ɒP#э NPRM at para. 80.b The NPRM noted that different kinds of services may require different capacity and different speed links. For example, schools and libraries requiring video links to  X-permit teleconferencing may require T1 links," yO( -#X\  P6G;ɒP#э A T1 line is equivalent to 24 voice channels, or 1.544 Mbps. while schools and libraries wishing to  Xv-provide high quality, fullmotion video may require a DS3 link.vz" yO -#X\  P6G;ɒP#э NPRM at para. 80 n.174. A DS3 link, also known as a T3 line, is equivalent to 672 voice channels, or 44.736 Mbps. The NPRM also sought comment on whether wireless technologies could provide a more efficient way of delivering  XH-any of the services designated for universal service support.nH" yO-#X\  P6G;ɒP#э NPRM at para. 81.n  X -x447.` ` In the NPRM, the Commission asked commenters to identify which services would qualify as "advanced telecommunications and information services" pursuant to section  X -254(h)(2).c b " yO-#X\  P6G;ɒP#э NPRM at para. 109.c The NPRM also sought comment on the features and functionalities necessary  X -to give classrooms, libraries, and health care providers access to those services.< " yOx-ԍ NPRM at para. 109.< The NPRM asked whether the "advanced telecommunications and information "services identified pursuant to section 254(h)(2) should be broader, narrower, or identical to the services  X-supported under sections 254(c)(3) and (h)(1).< " yO-ԍ NPRM at para. 109.< In addition, the NPRM asked how the Commission should assess whether specific services providing access to advanced telecommunications and information services are "technically feasible and economically  XK-reasonable."<K" yO!-ԍ NPRM at para. 110.<  X-x` ` 2. Comments  X-x448.` ` In General. Some commenters assert that universal service support should be provided only for the "core" telecommunications services provided under section 254(c)(1)"*&&dd&"  X-and that were proposed for rural, insular, and high cost areas." {Oy-#X\  P6G;ɒP#э See, e.g., Cincinnati Bell comments at 14; TCI comments at 1823; Ameritech reply comments at 18. TCI, for example, contends that requiring carriers to provide services beyond the "core" services would impose costs on the carriers, thereby limiting and delaying the ability of new entrants to enter the local  X-telephone market.gZ" yO-#X\  P6G;ɒP#э TCI comments at 1920.g Ameritech adds that additional federal mandates regarding which specific services and technologies should be deployed for schools and libraries would be inadvisable in light of the "bold initiatives [that] are already underway in various states to  Xv-bring telecommunications services and technology into various states."_Zv" yO -#X\  P6G;ɒP#э Ameritech reply comments at 19. Ameritech outlines the investments it has made in educational  {O -infrastructure and classroom solutions, as well as recent pilot projects and programs, in its fivestate area. See Ameritech reply comments, Att. A._  XH-x449.` ` Other commenters contend that universal service support should be provided for  X1-"core" services plus some complement of supplementary services.1 " yO-#X\  P6G;ɒP#э Florida Cable comments at 13; NCTA comments at 17; West Virginia Consumer Advocate comments at 1011. Some commenters, for example, identify specific sets of functionalities that they would like to see funded as either "additional" or "advanced" services. NSBA I, which filed comments in conjunction with 23 other schools and libraries groups, asserts that internal connections should be included in the  X -definition of services eligible for universal service support. d " {O-#X\  P6G;ɒP#э NSBA I comments at 7, 14. See infra section X.C. for a discussion of internal connections. West Virginia Consumer Advocate "recommends that carriers be required to provide at least one 56 kbps dedicated line  X -to each school in their geographic service territory at a discount." " yON-#X\  P6G;ɒP#э West Virginia Consumer Advocate comments at 1011. Florida PSC recommends that the Commission initially establish a dollar limit on expenditures that reflects the connection charge of a 56 kilobits per second (kbps) digital service and the monthly  Xb-service charge of ISDNBRI.&b " yO-#X\  P6G;ɒP#э Florida PSC reply comments at 23, 67. ISDN (basic rate), or ISDNBRI, is equivalent to two 64 kbps voice channels plus one 16 kbps signaling channel, or 144 kbps. ISDN (primary rate) is equivalent to 1.5 mbps.& Louisiana PSC advocates support for ISDN and T1  XK-service,pK" yO!-#X\  P6G;ɒP#э Louisiana PSC comments at 56. p Missouri PSC supports inclusion of interactive video,mKn" yOj#-#X\  P6G;ɒP#э Missouri PSC comments at 14.m and North of Boston  X4-Library Exchange suggests that T3 lines should be funded.4" yO%-#X\  P6G;ɒP#э North of Boston Library Exchange comments at 1. U S West states that"4*&&dd" additional services for schools and libraries should consist of a 56/64 kbps access line, and favors limiting services in order to minimize the size of the universal service fund and to  X-maximize the available discount for schools and libraries.$" {OK-#X\  P6G;ɒP#э U S West comments at 2022. See also Lincoln reply comments at 7 (stating that "only access to services, except for core universal services, should be subsidized for [schools and libraries]").$ Mass Library asserts that discounts should be applied to maintenance of lines providing telecommunications services to  X-schools and libraries.t"" yOw-#X\  P6G;ɒP#э Mass Library comments at 3. t  Xv-x450.` ` Numerous commenters assert that any telecommunications service available in the marketplace should be funded for schools and libraries through universal service support  XH-mechanisms.H" {O -#X\  P6G;ɒP#э See, e.g., ALA comments at 1; Alaska Library comments at 6; Ameritech comments at 15; Guam  yOu-comments at 14; NSBA I comments at 1317; NYNEX comments at 1821; Pennsylvania Library Ass'n reply comments at 6; Union City Board of Education reply comments at 6; Colorado Library further comments at 6; EDLINC further comments at 810. Under Bell Atlantic's revised universal service proposal, schools and libraries would have the right to use universal service funds for any available telecommunications service  {O-obtained from any carrier. See Bell Atlantic further comments at 3 and Att. B. NTIA's proposal, which incorporates a more narrowly defined package of free services, would permit schools and libraries to apply the value of that package to any  X -other telecommunications services.HX . " yO-ԍ Letter from Richard W. Riley, Secretary of Education, Daniel R. Glickman, Secretary of Agriculture, and Michael Kantor, Secretary of Commerce to Reed E. Hundt, Chairman, Federal Communications Commission, transmitting NTIA further comments at 9, 1315 (Oct. 10, 1996) (NTIA submission).H NTIA asserts that "[a]ll schools and libraries must have  X -flexibility in procuring needed telecommunications and information services."F N " yO-ԍ NTIA submission at 7, 1415.F These commenters argue that schools and libraries should be encouraged to purchase the services that best match their needs, and that limiting the services available for discounts would place artificial constraints on their choices. This limitation may lead to less useful purchases. Many commenters contend that the Commission should not specify services that must be  X-made available and funded through universal service support mechanisms." {O-#X\  P6G;ɒP#э See, e.g., Ameritech comments at 15; Citizens Utilities comments at 20; Idaho PUC comments at 10;  {O-Sprint comments at 23; Union City Board of Education reply comments at 6. Washington Library contends that to "describe either `core' or `advanced' services in terms of a service or  Xb-technology would be difficult at least, and quickly obsolete at best."b:" yOM#-#X\  P6G;ɒP#э Washington Library comments at 9 (suggesting that the best way to determine what services to support is to articulate desired results and aggregate an overall inventory of technologies needed). Alliance for Public Technology maintains that "no one technology or type of electronic service can address"K*&&dd"  X-adequately the complex and emerging needs of schools and libraries."" yOy-#X\  P6G;ɒP#э Alliance for Public Technology comments at 16. Union City Board of Education emphasizes that the services available at a discount to schools and libraries should "evolve over time, so that they keep pace with the developments in communications  X-and information technology."X" yO-#X\  P6G;ɒP#э Union City Board of Education reply comments at 6.  X-x451.` ` Several commenters argue that the Commission should not be involved with defining services eligible for support for schools and libraries. For example, PacTel supports deferring to the states to determine what services their schools and libraries need, provided  XH-certain guidelines are met.fH" yO -#X\  P6G;ɒP#э PacTel comments at 4.f PacTel notes that "the needs of educational institutions may vary from state to state and a definition of what advanced service is needed for education in  X -one state may not be appropriate in another."\ x" {OC-#X\  P6G;ɒP#э PacTel comments at 4. See also Promoting Educational Infrastructure and the Role of the Florida  {O -Public Service Commission at 3334 (May 1996) (including a study of 17 states indicating those states have employed approximately a dozen different plans to discount telecommunications services for schools). Benton supports allowing educational  X -professionals, rather than regulators, to determine the services and functionalities they need.xZ " {OP-#X\  P6G;ɒP#э Benton further comments at 3. See also West Virginia Consumer Advocate reply comments at 5 (stating that "schools and libraries themselves should decide which services they need most"); CFA further comments at 1 (stating that institutional users should determine what services they need).x  X -x452.` ` Several commenters note that wireless services, if they are available for schools  X -and libraries, should be eligible for federal universal service support. " {O-#X\  P6G;ɒP#э See, e.g., ALA comments at 12; Apple comments at 3; Merit comments at 2; Missouri Library comments at 3. New York Regents contends that "[i]t may not be as important to consider whether wireless technologies are more or less efficient for the delivery of service as it is to consider how these technologies will  Xb-complement the others currently in use."pb" yO+ -#X\  P6G;ɒP#э New York Regents comments at 8.p Apple recommends that a mix of wireless and  XK-wireline options be provided to maximize efficiency and minimize costs.eK" yO"-#X\  P6G;ɒP#э Apple comments at 3.e Metricom states that wireless, unlicensed, and other services providing alternatives to traditional wireline services, should be eligible for universal service support because "[a]ny subsidy program must present to these users a range of choices and incentives that replicates those in the competitive"8*&&ddF"  X-marketplace."ZZ" {Oy-#X\  P6G;ɒP#э Metricom comments at 68. See also ACE comments at 14 (stating that, in the interest of competition, "it is not appropriate for the Commission to make any special provision or discount to either encourage or discourage development of wireless technologies").Z Michigan Library Ass'n asserts that since wireless technologies, personal communications service, and satellite technology may provide services more efficiently, those  X-technologies should be eligible for universal service support.9Z" {Om-#X\  P6G;ɒP#э Michigan Library comments at 12. See also Washington Library comments at 12 (citing the state of Alaska as a wireless success story and the Fort Vancouver Regional Library in Washington State as a lessthansuccessful story).9 ALA notes that wireless technologies may be particularly useful in older schools and libraries where asbestos removal  X-may make the cost of inside wiring prohibitive.6Z " {Oa -#X\  P6G;ɒP#э ALA comments at 13. See also Missouri Library comments at 3 (noting that in addition to solving problems related to inside wiring, wireless connections may be an economical alternative for schools with multiple buildings).6 Iowa Communications Network, on the other hand, recommends that the Commission adopt rules that discourage the use of wireless technologies as a delivery platform because "wireless technology offers difficulties in both the ability to equip advanced services with multiple channels, and also, in the ability to acquire  XH-frequency licensing in some areas."H. " S'-#&a\  P6G; u&P#э # X\  P6G;ɒP#Iowa Communications Network comments at 2.  X -x453.` ` Numerous commenters address the question of what services and functionalities  X -should be included under the category of "advanced" services. " {O-ԍ See, e.g., MCI comments at 2223; Michigan Library Ass'n comments at 12; Missouri PSC comments at 14; Oakland School District comments at 78; Libraries for the Future reply comments at 13. Some commenters advocate  X -the inclusion of specific services or functionalities, including broadband services, (" {O-ԍ See, e.g., Ohio Consumers' Council comments at 15; Libraries for the Future reply comments at 3.  X -interactive services, " {O@-ԍ See, e.g., CWA comments at 1213; Iowa Communications Network comments at 2; Michigan Library Ass'n comments at 12; Missouri PSC comments at 14. voice messaging,S " {O-ԍ See New York Regents comments at 8.S video conferencing and teleconferencing  X -capabilities,T " {O"-ԍ See New York Regents comments at 10.T and highspeed data transmission. 8" {O#-ԍ See, e.g., CWA comments at 1213; Iowa Communications Network comments at 2; Ohio Consumers' Council comments at 15. United States Secretary of Education Richard Riley states that the Commission should adopt a broad definition of services that" *&&dd"  X-would include advanced services.eZ" {Oy-ԍ Richard Riley, Secretary of Education comments at 5. See also Libraries for the Future reply comments at 1 (stating that "[r]ather than begin with a limited definition of Universal Service, the FCC should begin with the broadest definition possible and restrict it only in cases where absolutely necessary").e Some parties contend that specific services should not be mandated if the market is adequately providing advanced services or until a needs  X-assessment is conducted." {Om-ԍ See, e.g., CCV comments at 5; Florida Cable comments at 13, 1617; NCTA comments at 23. Missouri PSC asserts that states should be able to include  X-additional services, as well as additional subsidies, if they believe that is necessary.I|" yO -ԍ Missouri PSC comments at 1415.I Information Renaissance, Georgia Tech Research Institute, and Morris Brown Research  X-Institute ask that funding also be provided for telecommunications consulting services. " {OJ -ԍ See Information Renaissance supplemental further comments at 3 (Oct. 17, 1996); ex parte presentation by Jeffrey Evans, Georgia Tech Research Institute, Roosevelt Thomas, Jr., Morris Brown Research Institute, and Christopher Evans, OutSource Integration, Inc., to Mark Nadel, Federal Communications Commission (Sept. 6,  yO-1996);  Letter from Timothy F. Coen, King and Spalding, to Georgia Tech Research Institute, Morris Brown  {Ol-Research Institute, and Christopher Evans (Sept. 17, 1996). For a further discussion of the parties' proposals, see  {O6-infra section X.E.  X_-x454.` ` Internet Access. Numerous commenters maintain that Internet access is a  XH-service that should be eligible for universal service support for schools and libraries."H " {O-#X\  P6G;ɒP#э See, e.g., ALA comments at 9; Lincoln Trail Libraries comments at 12; Merit comments at 2; Michigan Library comments at 12; Missouri PSC comments at 14; New Jersey Advocate comments at 21; New York DOE comments at 8; Oakland School District comments at 7; Oklahoma Libraries comments at 12; Pennsylvania  yO-Library Ass'n reply comments at 6. Oklahoma Libraries, for example, states that "the Internet is the emerging network of the future," and maintains that rural libraries would particularly benefit from flatrate pricing for  X -connection to an Internet provider.t t" yO(-#X\  P6G;ɒP#э Oklahoma Libraries comments at 12.t NTIA states that "a recent survey of educators regarding the scope of universal service found that respondents overwhelmingly view connectivity (98 percent) and Internet data services (94 percent) as their most important  X -service and educational need, respectively."@ " yOs -ԍ NTIA submission at 10.@ Florida PSC believes that the Commission should establish a nationwide minimum standard for "special" services that consists of Internet  X-access by means of a computer lab." yO#-#X\  P6G;ɒP#э Florida PSC reply comments at 23, 67.  New York DOE supports Internet access via local loop interconnection to an Internet service provider, so that schools and libraries would not"y$*&&dd"  X-have to incur long distance charges for gaining access.Z" {Oy-#X\  P6G;ɒP#э New York DOE comments at 8. See also Oakland School District comments at 7 (supporting dialup service); Syracuse University comments at 9 (supporting dialup Internet access points within the local area); U S West comments at 2022 (supporting toll free dialup access to an Internet Service Provider). Michigan Library Ass'n states that  X-"direct Internet access" should be eligible for universal service support." {O-#X\  P6G;ɒP#э Michigan Library comments at 12. See also Lincoln Trail Libraries comments at 1 (stating that "each library needs a direct connection to an Internet provider"). MCI supports  X-providing Internet access at or below cost to schools and libraries,D" {O -#X\  P6G;ɒP#э Connecting Schools and Libraries to the Internet: An MCI Proposal (June 27, 1996). and NTIA proposes  X-providing schools and libraries with free Internet service.B" yOB -ԍ NTIA submission at 910.B  X-x455.` ` Several commenters assert that Internet access should be included within the  Xv-category of "advanced" services.KZvf " {O-#X\  P6G;ɒP#э See, e.g., Michigan Library Ass'n comments at 12; Missouri PSC comments at 14; New York Regents comments at 8; Oakland School District comments at 78; Syracuse University comments at 910; U S West comments at 22; Washington SPI comments at 2.K Netscape argues that since "the 1996 Act does not repeal, and in fact codifies the Commission's longstanding Computer II distinction between basic telecommunications and `enhanced' information services, . . . Internet access is assuredly an  X1-`information' service, not a `telecommunications' service."s1 " {Oj-ԍ Netscape further comments at 3 (citing Netscape comments at 1417).s As such, Netscape contends, Internet access may be encouraged through the rules adopted pursuant to section 254(h)(2),  X -but not supported under section 254(h)(1).I " yO-ԍ Netscape further comments at 3.I PacTel subscribes to a similar interpretation.K " yO^-ԍ PacTel further comments at 1415.K  X -  X -x456.` ` Other commenters oppose the inclusion of Internet access among the services  X -eligible for universal service support. :" {O-#X\  P6G;ɒP#э See, e.g., CompuServe comments at 911; Interactive Service Ass'n comments at 6, 813; ITA/EMA reply comments at 511. ITA/EMA, for example, maintains that Internet access is an unregulated information service and is thus not eligible for universal service  X-support.p" yO#-#X\  P6G;ɒP#э ITA/EMA reply comments at 511.p They further contend that Internet access includes protocol conversion and information storage, both of which are unregulated enhanced services. In addition, ITA/EMA asserts that providing universal service support to Internet access would run counter to the"b$*&&dd" intent of the 1996 Act, and that the 1996 Act "does not authorize the Commission to define  X-universal service so as to include information services."p" yOb-#X\  P6G;ɒP#э ITA/EMA reply comments at 511.p Interactive Services Ass'n adds that "a decision by the FCC that . . . Internet access services are subject to the new universal service surcharge on the theory that they are telecommunications services would undermine the longstanding regulatory distinction made by the Commission between `basic service' and  X-`enhanced service.'"zX" yO-#X\  P6G;ɒP#э Interactive Service Ass'n comments at 12.z  X_-x457.` ` Netscape describes the Internet as an unregulated, nongovernmental and self XH-administered network for global information exchange.lH" yO -#X\  P6G;ɒP#э Netscape comments at 2, 11.l More specifically, Netscape characterizes the Internet as a complex global network consisting of thousands of independent computer networks run by private businesses, government agencies, and educational and research institutions. Netscape states that the Internet is a set of standards or protocols that enable various types of networks to communicate. The protocol, Transmission Control Protocol/Internet Protocol (TCP/IP) enables communications between private and public  X -networks running over any medium and over any kind of computer.l x" yO-#X\  P6G;ɒP#э Netscape comments at 2, 11.l  X-x` ` 3. Discussion  Xy-x   Xb-x458.` ` Telecommunications Services. We recommend that the Commission adopt a rule that provides schools and libraries with the maximum flexibility to purchase whatever package of telecommunications services they believe will meet their telecommunications service needs most effectively and efficiently. We conclude that maximum flexibility will satisfy the goals of section 254, given the varying needs and preferences of different schools and libraries. We also find that allowing schools and libraries to choose appropriate services will maximize the value generated by universal service support and minimize inefficient uses of services. Empowering schools and libraries to choose the services best suited for their needs is critical to achievement of the important universal services goal of pervasive technology deployment and use in all schools and libraries, regardless of wealth and location.  Xe-x459. ` ` Some commenters ask the Commission to limit discounts to only the "core"  XN-telecommunications services identified pursuant to section 254(c)(1).N" {O$-ԍ See, e.g., Cincinnati Bell comments at 14; TCI comments at 1823; Ameritech reply comments at 18. We reject that position based on a careful reading of the statute and its legislative history. We find that Congress clearly desired to permit schools and libraries to have access to and use of services" *&&dd" beyond those designated for support under section 254(c)(1). Section 254(c)(3) states that "in addition to the services included in the definition of universal service under paragraph [c] (1), the Commission may designate additional services for such support mechanisms for  X-schools, [and] libraries . . . for the purposes of subsection [254] (h)."w" {O4-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(3). w Congress explained this sentence in stating that it expected the Commission and Joint Board to take into account  X-the particular needs of K12 schools and libraries.Z" yO-#X\  P6G;ɒP#э Joint Explanatory Statement, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 13233 (1996). Thus, the Commission should not limit schools and libraries to services to be supported by the universal service mechanism under section 254(c)(1), i.e., to basic voice grade lines, when higher speed capabilities may be a more effective and efficient means of implementing telecommunications technology and applications within their respective activities.  X -x460. ` ` A number of commenters recommend that we select a specific limited package  X -of services that would be available at a discount. " {O-ԍ See, e.g., Missouri PSC comments at 14; NSBA I comments at 7, 14; U S West comments at 2022; West Virginia Consumer Advocate comments at 1011. Other commenters suggest different sets of services. For example, 17 states that were surveyed by the Florida PSC on this issue  X -selected more than a dozen different sets of services for discounts. D" {O-ԍ Florida PSC, Promoting Educational Infrastructure and the Role of the Florida Public Service  {O}-Commission at 3334 (1996). We recommend that the Commission permit different schools and libraries the flexibility to address their needs in the best way they see fit. We further recommend that the Commission adopt a rule that makes available discounts on all telecommunications services pursuant to sections 254(h)(1)(B) and 254(h)(2)(A). Section 254(h)(2)(A) provides a broader framework for facilitating deployment of services to schools and libraries because the competitively neutral  X4-rules contemplated under that section are applicable to all service providers.w4" {O-#X\  P6G;ɒP#э See 47 U.S.C.  254(h)(2)(A).w The discounts mandated under section 254(h)(1)(B), in contrast, are limited to the provision of services by  X-telecommunications carriers.w2 " {O-#X\  P6G;ɒP#э See 47 U.S.C.  254(h)(1)(B).w The discounting of telecommunications services under section 254(h)(2)(A) will enable schools and libraries to have access to the broadest array of services possible. This approach is also most consistent with the evolving competitive telecommunications market. x  X-x461. ` ` Permitting schools and libraries full flexibility among telecommunications services also eliminates the potential impediment that new technologies will not be available"| *&&ddP" to schools and libraries until the Commission has had the opportunity to conduct a proceeding to review evolving technological needs. Thus, schools and libraries will be able to use and teach students to use state of the art telecommunications technologies as they arrive on the commercial market. This flexibility should encourage schools and libraries to use both the most efficient services and the most efficient technologies, including wireless and other emerging new media. We decline to recommend the suggestion of the Iowa Communications Network that the Commission discourage the use of wireless because of any disadvantages  X_-that may be inherent in the current version of that technology.{_" yO-ԍ #X\  P6G;ɒP#Iowa Communications Network comments at 2.{ We recognize that all technologies have their advantages and disadvantages and conclude that it would be best to permit individual schools and libraries to evaluate those relative costs and benefits with respect to their individual needs and circumstances.  X -x462.` ` Internet Access. We recommend that the Commission adopt a rule providing that discounts for Internet access, as defined below, shall be available to schools and libraries pursuant to section 254(h)(2)(A). As explained by Netscape, Internet Service Providers (ISPs) and online service providers that also offer Internet access "rely to a large degree on existing telecommunications carriers for the underlying transport facilities that constitute the Internet's  Xy-backbone, as well as for local loop connections to individual Internet servers and users."hyX" yO-#X\  P6G;ɒP#э Netscape comments at 8.h Any attempt to disaggregate the network transmission component of Internet access from the information service component could serve to undermine the competitive forces that currently characterize the Internet access market at this time. By adopting a rule that allows Internet access costs to be eligible for discounts under section 254(h)(2)(A), we find that schools and libraries will be afforded the flexibility they may need to procure whatever Internet access arrangements they determine to be costeffective.  X-x463.` ` As stated above, we recommend that the Commission provide discounts for Internet access pursuant to section 254(h)(2). This discount would apply to basic conduit, i.e., noncontent, access from the school or library to the backbone Internet network. This access would include the communications link to the ISP, whether through dialup access or via a leased line, and the subscription fee paid to the ISP, if applicable. The discount would also apply to electronic mail. We find that such access would enable schools and libraries to retrieve all free information available on world wide web sites. Schools and libraries that choose to pay subscription or other fees to receive additional information services could access such information via this connection, but any charges for such content services would not be subject to the discount discussed herein. Schools and libraries, however, would be permitted to apply the discount to the entire "basic" charge by an ISP that bundled access to some minimal amount of content, but only under those circumstances in which the ISP basic subscription charge represented the most costeffective method for the school or library to"!*&&dd " secure noncontent conduit access to the Internet.  X-x464. ` ` Parties raise one other Internet access issue concerning the pricing of access to an ISP. In areas where local dialup access to the Internet is not available, carriers would likely offer customers either a private line, foreign exchange (FX) line, or possibly even flatrate tollfree service. Comments of the potential users reflect their desire that these or related  Xv-services be available at ordinary local calling rates.v" {O-#X\  P6G;ɒP#э See, e.g., New York DOE comments at 8; Oakland School District comments at 7; Syracuse University comments at 9. This suggestion would require universal service support mechanisms to fund 100 percent of the difference between the prediscount price for the appropriate service and the cost of an ordinary local calling link. As we explained above, we are not inclined to recommend, at this time, that the Commission single out the transmission component of Internet access from the information service component. We find that it is neither necessary nor appropriate to make findings regarding the regulatory treatment or classification of Internet access within this proceeding.  X -x465.` ` We also do not recommend that a discount mechanism for other information services be established at this time. By establishing a discount mechanism for telecommunications services and Internet access, we conclude that the intent of Congress will be met, and it is not necessary to support the full panoply of information services at this time. The Joint Statement of Managers stated that: x` ` For example, the Commission could determine that x` ` telecommunications and information services that constitute  X- x` ` universal service for classrooms and libraries shall include x` ` dedicated data links and the ability to obtain access to x` ` educational materials, research information, statistics,  X- x` ` information on government services, reports developed by x` ` Federal, State and local governments, and information services  X-x` ` which can be carried over the Internet.M"" yOf-ԍ Joint Explanatory Statement at 133.M The legislative history articulates the congressional intent to enable schools and libraries to: Xx` ` browse library collections, review the collections of museums, or find ` ` new information on the treatment of illness, to Americans everywhere ` ` via schools and libraries. This universal access will assure that no one  X-` ` is barred from benefiting from the power of the Information Age.m" {OU%- #X\  P6G;ɒP#Í Id. at 13233.m "D*&&dd"ԌBy providing for discounts on all telecommunications services, as well as discounted Internet access, we find that schools and libraries will have access to the wealth of information available on the Internet, and, therefore, will have access to advanced telecommunications and information services, in compliance with section 254(h)(2)(A). x  X-x C. IntraSchool and IntraLibrary Connections  X_-x` ` 1. Background  X1-x466.` ` Sections 254(b)(6) and 254(h)(2)(A) specifically refer to the provision of telecommunications and other services directly to classrooms. Section 254(b)(6) states that  X -"elementary and secondary school classrooms should have access to advanced  X -telecommunications services.") " Xg -#X\  P6G;ɒP# #c P7 P#Í# Xj\  PG;ynXP# #X\  P6G;ɒP#47 U.S.C.  254(b)(6) (emphasis added).#Xj\  P6G;ynXP#) Further, section 254(h)(2) provides that "[t]he Commission shall establish competitively neutral rules . . . to enhance, to the extent technically feasible  X -and economically reasonable, access to advanced telecommunications and information services  X -for all public and nonprofit elementary and secondary school classrooms. . . and libraries.") y" X-#X\  P6G;ɒP# #c P7 P#Í# Xj\  PG;ynXP# #X\  P6G;ɒP#47 U.S.C.  254(h)(2) (emphasis added).#Xj\  P6G;ynXP#) Congress explained that "[n]ew subsection (h) of Section 254 is intended to ensure that . . .  X-elementary and secondary school classrooms and libraries have affordable access to modern  Xj-telecommunications services."j*" yOE-#X\  P6G;ɒP#э Joint Explanatory Statement at 132 (emphasis added). Congress further stated that "[t]he ability of K12  XS-[kindergarten to 12th grade] classrooms, [and] libraries . . . to obtain access to advanced telecommunications services is critical to ensuring that these services are available on a  X'-universal basis."v'" {O-#X\  P6G;ɒP#э Id. at 13233 (emphasis added).v In the floor debate, Senators Snowe and Rockefeller noted that, while thirtyfive percent of schools have access to the Internet, only three percent of classrooms are  X-connected to the Internet.L" yO-#X\  P6G;ɒP#э 141 Cong. Rec. S7978, S7981 (daily ed. June 8, 1995). Senator Rockefeller noted that cost was a significant factor  X-when he stated that internal connections are an expensive facet of Internet access," yOo -#X\  P6G;ɒP#э 141 Cong. Rec. S7978, S7981 (daily ed. June 8, 1995). and he  X-specifically referred to getting schools "wired up."l " yO"-#X\  P6G;ɒP#э 141 Cong. Rec. S7978 (daily ed. June 8, 1995). #Xj\  P6G;ynXP#  X-x467.` ` The NPRM noted that only nine percent of all instructional rooms, including classrooms, labs, and library media centers, are currently connected to the Internet, and that" *&&ddn" "[s]chools with large proportions of students from poor families are half as likely to provide  X-Internet access as schools with small proportions of such students."F " {Ob-#X\  P6G;ɒP##X\  P6G;ɒP#э NPRM at para. 79 (citing National Ctr. for Educ. Statistics, U.S. Dep't of Ed., Advanced  {O,-Telecommunications in U.S. Public Elementary and Secondary Schools 1995 (Feb. 1996)).F The NPRM also stated that the most frequently cited barriers to the provision of such services are "funding and  X-inadequate telecommunications links." $" {O-#X\  P6G;ɒP#э NPRM at para. 79 (citing National Ctr. for Educ. Statistics, U.S. Dep't of Ed., Advanced  {OZ-Telecommunications in U.S. Public Elementary and Secondary Schools 1995 (Feb. 1996)). The NPRM sought comment on what functionalities and services providing access to advanced telecommunications services for elementary and secondary schools and classrooms and libraries should be supported through universal service  Xv-mechanisms.h v" yO -#X\  P6G;ɒP#э NPRM at para. 80.h The NPRM also asked what facilities would be required to support those  X_-functionalities.h _" yO -#X\  P6G;ɒP#э NPRM at para. 80.h The Public Notice asked the explicit question of whether section 254(h) contemplates that "inside wiring or other internal connections to classrooms may be eligible for universal service support of telecommunications services provided to schools and  X -libraries."m  " yOk-#X\  P6G;ɒP#э Public Notice at question 7.m In addition, the Public Notice sought comment on the estimated cost of inside  X -wiring and other internal connections.m 0 " yO-#X\  P6G;ɒP#э Public Notice at question 7.m  X -x` ` 2. Comments  X -  X -x468.` ` Numerous commenters assert that intraschool and intralibrary connections  X-should be eligible for federal universal service support. " {O-#X\  P6G;ɒP#э See, e.g., Mass Library comments at 23; NSBA I comments at 7; West Virginia Consumer Advocate reply comments at 57; ALA further comments at 34; Apple further comments at 23; Benton further comments  yO-at 34; EDLINC further comments at 1113; Great City Schools further comments at 3; Maine PUC further  yO[-comments at 35; NCLIS further comments at 3; NYNEX further comments at 67; Union City further comments at 2; U.S. Distance Learning Ass'n further comments at 4; Vanguard further comments at 56; NTIA submission at 10. Some parties find support for funding internal connections in both the 1996 Act and the legislative history. EDLINC, for example, asserts that support can be found in both section 254(c)(3) and section 254(h), contending that "the Commission has broad authority to determine what services constitute `special services' under [s]ection 254(c), and in defining those services, the Commission is to"4:*&&ddf"  X-consider the purposes of [s]ection 254(h)."o" yOy-#X\  P6G;ɒP#э EDLINC further comments at 10.o EDLINC further states that both the statutory and congressional references to "classrooms" support the legislative intent to include internal  X-connections within the definition of "special services" under section 254(c)(3).DX" {O-#X\  P6G;ɒP#э EDLINC further comments at 1011. See also NYNEX further comments at 67 (citing section 254(c)(3) and section 254(h)(2), NYNEX states that "the Commission should define universal service to include the inside wiring and other internal connections needed to ensure that telecommunications and information  yO7-services are delivered to the classroom"); Union City Board of Education further comments at 2 (stating that  {O-"[s]ection 254 specifically states that not just schools but classrooms should have access to advanced telecommunications services, and therefore inside wiring and internal networks should be considered as eligible for universal service support, because they are necessary if advanced services are to be accessible to individual school classrooms"). Benton contends that, considering the explicit mention of "classrooms" found in both the statutory language and the legislative history, "it is the plain intent of Congress to connect classrooms,  X-not just to reach the school house door."pd " yO-#X\  P6G;ɒP#э Benton further comments at 34.p Benton also asserts that if inside wiring or internal connections are not contemplated by section 254(h), that provision "will be little more  Xa-than an empty promise to the nation's public institutions."va " yO-#X\  P6G;ɒP#э Benton further comments at 3. v Great City Schools asserts that  XJ-"[u]niversal service and access are not realities if they stop at the street."J " yO-#X\  P6G;ɒP##X\  P6G;ɒP#э Great City Schools further comments at 3. In a letter to the Joint Board, a group of 26 Senators that includes the coauthors of section 254(h), states that "we believe that connecting the classrooms is necessary to truly enhance education so  X -connectivity should be defined to include internal connections, in ways that are technology  X -neutral." " yO-#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board (Sept. 26, 1996) (emphasis added).  NTIA also supports discounts for internal connections.g " yOE-#X\  P6G;ɒP#э NTIA submission at 10.g  X -x469.` ` Some commenters address the cost of intraschool and intralibrary  X -connections." 4" {O -#X\  P6G;ɒP#э See, e.g., Ameritech further comments at attachments A through C (schools); Bell Atlantic further comments at 3 (schools); EDLINC further comments at 13 (schools); Great City Schools further comments at 3 (schools); NYNEX further comments at 7 (schools); U.S. Libraries further comments at 3 (libraries); Washington UTC further comments at 8 (schools). NYNEX, for example, relies on estimates provided by McKinsey and Company when it states undiscounted figures of $5.025 billion in initial costs for schools, and $410 million per year for ongoing costs, based on deployment of the "partial classroom""}*&&dd"  X-model over five years.\" yOy-#X\  P6G;ɒP#э NYNEX further comments at 7. The McKinsey "partial classroom" model assumes one computer for  {OA-every five students in half of the classrooms and a T1 connection. See McKinsey and Company, Connecting K {O -12 Schools to the Information Superhighway at 21 (1995). NYNEX notes that those figures would have to be adjusted to  X-include private schools.LZ" yO-#X\  P6G;ɒP#э NYNEX further comments at 7. NYNEX Education Plan assumes a fiveyear deployment with a 75  {ON-percent discount for initial costs and a 50 percent discount for ongoing costs. See Ameritech further comments at Att. A through C.L EDLINC relies on the KickStart Report when it cites initial undiscounted costs for schools of up to $6.11 billion, and undiscounted annual operation and maintenance costs of $560 million, based on deployment of the McKinsey "full classroom"  X-model over ten years.&" {Oc -#X\  P6G;ɒP#э EDLINC further comments at 13. See also Great City Schools further comments at 3 (citing an "overall cost" for internal connections within schools of approximately $6 billion). The McKinsey "full classroom"  {O -model assumes one computer for every five students in all classrooms, with a T1 connection. See McKinsey  {O-and Company, Connecting K12 Schools to the Information Superhighway at 21 (1995). NCLIS, the only party to address the cost of internal connections for libraries, estimates that each public library spends between $12,625.00 and $168,220.00 on annual ongoing costs to provide public terminals for accessing advanced telecommunications and information services. NCLIS further estimates that the cost of inside wiring and other internal connections would amount to between 20 percent and 35 percent of those libraries'  X1-initial costs.m1 " yO-#X\  P6G;ɒP#э NCLIS further comments at 3.m  X -x470.` ` Numerous other commenters maintain that intraschool and intralibrary  X -connections should not be eligible for universal service support. " {O)-#X\  P6G;ɒP#э See, e.g., AT&T comments at 1920; AT&T reply comments at 2122; ALTS further comments at 5; AirTouch further comments at 911; Alaska Tel. further comments at 7; Ameritech further comments at 13,14; BellSouth further comments at 1115; Bell Atlantic further comments at 3; CFA further comments at 56; Century further comments at 11; Citizens Utilities further comments at 6; GCI further comments at 4; GTE further comments at 1113; Information Renaissance further comments at 5; MCI further comments at 45; NCTA further comments at 3; NECA further comments at 7; Netscape further comments at 47; New York DOE further comments at 6; Oakland School District further comments at 3; PacTel further comments at 15; RTC further comments at 11; SWBT further comments at 9; Sprint further comments at 4; TCI further comments at 1213; USTA further comments at 910; U S West further comments at 67; Vitelco further comments at 5; Washington UTC further comments at 89; Letter from United States Representative Jack Fields to Sharon Nelson, Chairperson, Washington Utilities and Transportation Commission (Oct. 17, 1996).  First, several commenters contend that inside wiring is not a telecommunications service as defined in the 1996 Act, and  X -therefore, cannot be eligible for universal service support.Z " {O]$-#X\  P6G;ɒP#э See, e.g., AT&T reply comments at 2122; Ameritech further comments at 1314; BellSouth further comments at 1115; GTE further comments at 1315; MCI further comments at 45; Sprint further comments at 4; USTA further comments at 910; U S West further comments at 67. The definition of "telecommunications"%*&&&" service" can be found at 47 U.S.C. 153(46). BellSouth, for example, asserts" X*&&dd " that since section 254(h) is entitled "Telecommunications Services for Certain Providers," the  X-only services covered by the subsection are telecommunications services.rX" yO-#X\  P6G;ɒP#э BellSouth further comments at 11.r Sprint maintains that even qualifying simply as a "service" under section 254(h)(1)(B) would not be sufficient to make inside wiring eligible for universal service support, since section 254(c)(3) defines  X-"universal service" as "an evolving level of telecommunications service."n" yO= -#X\  P6G;ɒP#э Sprint further comments at 4.n MCI points out  X-that internal connections refer to facilities and do not fit into a service classification.m x" yO -#X\  P6G;ɒP#э MCI further comments at 45.m United States Representative Jack Fields objects to providing universal service support for internal connections when he states: x` ` Another example of wellintentioned suggestions is that federal x` ` universal service must be used to wire the interiors of schools, x` ` hospitals, and libraries. The letter of the law is clear that the x` ` federal universal service fund can only support subsidies for  X -x` ` services, not plant and equipment.!X " yO-ԍ Letter from United States Representative Jack Fields to Sharon Nelson, Chairperson, Washington Utilities and Transportation Commission and all members of the FederalState Joint Board on Universal Service (Oct. 17, 1996).  X -x471.` ` Second, a number of parties assert that, because inside wiring is not a regulated  X-service, it is not eligible for universal service support."( " {Ok-#X\  P6G;ɒP#э See, e.g., Bell Atlantic further comments at 3; Century further comments at 11; PacTel further comments at 15; RTC further comments at 11; USTA further comments at 910. For example, PacTel states that including inside wiring in the definition of universal service would require all inside wire  Xd-vendors to be subject to universal service obligations,o#d " yO-#X\  P6G;ɒP#э PacTel further comments at 16.o while Bell Atlantic contends that noncarrier providers of inside wire would be ineligible to participate since only carriers are  X6-entitled to receive universal service funds under the 1996 Act.|$6" {O!-#X\  P6G;ɒP#э Bell Atlantic further comments at 3. See also SWBT further comments at 910 (asserting that "[s]ince the Act is clear that only telecommunications providers are eligible to receive universal service funding, the  {O#-multitude of providers who specialize in inside wiring and internal connections (e.g., electricians, LAN providers) would be at a competitive disadvantage because they would be ineligible to participate in a universal service fund under Section 254"); TCI further comments at 13 (stating that "given the Commission's longstanding policy of deregulated insidewiring, this market is comprised of literally thousands of small companies"%#*&&"&" whose business could be dramatically affected by the adoption of a subsidy program").| SWBT maintains that it"6X$*&&ddH" would not be practical, given regulatory, legal, and collections issues, to include inside wire  X-vendors as participants in the process.o%X" yO-#X\  P6G;ɒP#э SWBT further comments at 910.o CFA notes that including internal connections within the definition of universal service would be in direct conflict with the Commission position that wire inside the home or premises is "the property and responsibility of the  X-property owner."m&" yO= -#X\  P6G;ɒP#э CFA further comments at 56.m USTA states that the provision of internal connections is highly  X-competitive and nonregulated.o'x" yO -#X\  P6G;ɒP#э USTA further comments at 910.o Bell Atlantic asserts that, since state regulation of inside wiring has not been preempted, states should be free to decide whether to support inside  X_-wiring for schools and libraries as part of their universal service support mechanisms.u(_" yO-#X\  P6G;ɒP#э Bell Atlantic further comments at 3.u  X1-x472.` ` Third, some parties contend that if it had intended that inside wiring be included in the definition of universal service, Congress would have explicitly expressed that  X -intent.) " {OL-#X\  P6G;ɒP#э See, e.g., Citizens Utilities further comments at 6; Washington UTC further comments at 8. AirTouch asserts that, while the legislative history contains a "laundry list" of possible elements to be included in universal service, that list does not contain internal  X -connections.q* * " yO-#X\  P6G;ɒP#э AirTouch further comments at 10.q Ameritech notes that sections 706 and 708 are the only statutory provisions  X -in the 1996 Act that specifically address the issue of inside wiring.u+ " yO)-#X\  P6G;ɒP#э Ameritech further comments at 13,14.u Moreover, AirTouch asserts that the costs of inside wiring are incremental costs and, because its provision is open to competition, it may already be sold at close to incremental cost. AirTouch maintains, therefore, that providing discounts for the provision of inside wiring may place a heavy  Xb-financial burden on telecommunications users.t,bJ " yO]-#X\  P6G;ɒP#э AirTouch further comments at 1011.t  X4-x` ` 3. Discussion  X-  X-x473.` ` In General. We recommend that the Commission expressly acknowledge that schools and libraries may receive discounts on charges for internal connections, as well as for all commercially available telecommunications services and Internet access and other information services, as discussed above. We find that the applicable statutory provisions and",*&&dd" the legislative history evidence that Congress gave the Commission the discretion to provide support to allow schools and libraries to obtain these internal connections at a discount. We also find that Congress recognized that such connections are a critical element for achieving the congressional purpose of section 254(h), and thus contemplated that schools and libraries receive universal service support for internal connections.  Xv-x474.` ` Installation and Maintenance of Internal Connections is a Service. Some parties argue that the physical facilities that provide intraschool and intralibrary connections are "goods" or "facilities" rather than (c)(3) "services" and thus that they are not eligible for universal service support under section 254(h)(1)(B), which only provides support for  X -services.T-Z " {O -#X\  P6G;ɒP#э See, e.g., AT&T reply comments at 2122; GTE further comments at 1315; Sprint further comments at 4; USTA further comments at 910; U S West further comments at 67. The definition of "telecommunications service" can be found at 47 U.S.C. 153(46).T We find, however, that the installation and maintenance of such facilities are services. In fact, the cost of the actual facilities may be relatively small compared to the cost  X -of labor involved in providing internal connections.. " yO-#X\  P6G;ɒP#э Union City Board of Education further comments at 6 n.3. On the other hand, the cost of routers, hubs, and network file servers may be significant. The D.C. Circuit agrees, as it repeatedly refers to the installation and maintenance of inside wiring as services in its review  X -of the Commission's inside wiring detariffing decision./: B" {O-#X\  P6G;ɒP#э NARUC v. FCC, 880 F.2d 422, 430 (D.C. Cir. 1989) (stating that "charges for inside wiring services are  {O}-separated from charges for basic transmission service") (emphasis added); id. (stating that "the Commission may properly proscribe state tariffs that would result in the subsidization of the installation and maintenance of inside wiring by the general ratepayers because it would allow telephone companies to undercut alternative providers of  {O-inside wiring services.") (emphasis added); id. at 43031 (asserting that states maintain "that they should be able  {O-to require local telephone companies to serve as providers of last resort of installation and maintenance  {Ok-services.") (emphasis added). In contrast, the court refers to CPE as "equipment." Id. at 431. Similarly, the  {O5-Commission has repeatedly characterized the installation and maintenance of inside wiring as services. See, e.g.,  {O-Revision of Filing Requirements, Notice of Proposed Rulemaking, CC Docket No. 9623, FCC 9664, 1996 WL 80021, 1314, (released Feb. 27, 1996) (regarding LEC reports on "inside wiring services");  {O-Telecommunications Services Inside Wiring, Notice of Proposed Rulemaking, 11 FCC Rcd 2747, 2760 (1996)  {O[-(stating that "[t]his standardization ... promotes competition for inside wiring services and telephone customer premises equipment.") (emphasis added). x  X-x475.` ` Moreover, the attempted distinction between facility and service in describing the fundamental nature of internal connections is not practical. CFA contends that the wire inside the home or premises is "the property and responsibility of the property owner," and  XM-thus different from outside wiring.m0MD" yOB$-#X\  P6G;ɒP#э CFA further comments at 56.m It concludes that universal service funding cannot be"M0*&&dd "  X-used to aid customers seeking to purchase and install the inside wiring.m1" yOy-#X\  P6G;ɒP#э CFA further comments at 56.m This rationale, however, implies that when a carrier owns a facility, and sells others the opportunity to use it, then those who use the facility are purchasing a service, but when a school buys a facility directly, its use of the facility is not a service. While this reasoning is logical, it is somewhat strained. Under this rationale, the use of inside wiring would be a service if a school did not own the facilities itself, but rather sold the facilities to a nonschool party and then leased them back.  XH-x476.` ` Internal Connections Enhance Access to Advanced Telecommunications and  X1-Information Services. We recommend that the Commission adopt rules providing discounts for internal connections under the authority of section 254(h)(2)(A), which states that "[t]he  X -Commission shall establish competitively neutral rules . . . to enhance . . . access to advanced telecommunications and information services for all public and nonprofit elementary and  X -secondary school classrooms . . . and libraries."m2 X" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(A).m The provision of services by computer over the Internet appears to fall squarely within the phrase "advanced telecommunications and  X -information services." A primary way for "classrooms" to have access to such services is for computers in each classroom to be connected to a telecommunications network.  Xh-x477.` ` Furthermore, given that many schools have already secured internal connections, we conclude that the provision of such connections is both technically feasible and economically reasonable. Consistent with our recommendation to establish a competitively neutral program for discounting all telecommunications services and Internet access under section 254(h)(2)(A), we recommend that internal connections, which may include such items as routers, hubs, network file servers, and wireless LANs, but specifically excluding personal computers, be included within the section 254(h) discount program. x  X-x478. ` ` In addition to the statutory support discussed above, the legislative history also supports finding internal connections eligible for support. We note that, in its Joint  X-Explanatory Statement, Congress makes three explicit references to "classrooms."3" {O-#X\  P6G;ɒP#э See Joint Explanatory Statement, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 13233 (1996). We conclude that these references to providing access to "classrooms" rather than simply schools indicate congressional intent to assure that classrooms and libraries will benefit from the availability of discounted services.  X-x479.` ` In addition, while some commenters contend that if Congress had intended to"z3*&&dd[" include inside wiring in the definition of universal service, it would have stated so  X-explicitly,4" yOy-#X\  P6G;ɒP#э Citizens Utilities further comments at 6; Washington UTC further comments at 8. we note that Congress did not identify in section 254 any specific services or functionalities that should be supported. Thus, while the legislation does not specifically identify internal connections as eligible for universal service support, neither does it explicitly cover 56 kbps service, T1 service, wireless service, coaxial cable service, or any other comparable service. AirTouch argues that the legislative history includes a list of possible  Xv-elements to be included in universal service,u5vo" yO-#X\  P6G;ɒP#э AirTouch further comments at 911. u but that the list does not include internal connections. The excerpt from the legislative history to which AirTouch refers states:  X1-Xx` ` For example, the Commission could determine that telecommunications ` ` and information services that constitute universal service for schools  x` ` and libraries shall include dedicated data links and the ability to gain x` ` access to educational materials, research information, statistics, x` ` information on Government services, reports developed by Federal, x` ` State, and local governments, and information services which can be  X -x` ` carried over the Internet.6 " yOY-#X\  P6G;ɒP#э AirTouch further comments at 911 (emphasis added). We note that the list is not exhaustive because it is preceded by the phrase "for example." We further note that internal connections to the classroom facilitate access to the reference materials. Discounting of internal connections will facilitate schools' and libraries' ability to connect to these services.  X-x480.` ` As further evidence that Congress intended that internal connections may be eligible for universal service support, we note that during Senate consideration of this provision, Senators Snowe and Rockefeller emphasized the fact that thirtyfive percent of public schools have access to the Internet, but only three percent of classrooms are connected  X-to the Internet.7" yO-#X\  P6G;ɒP#э 141 Cong. Rec. S7978, S7981 (daily ed. June 8, 1995). Senator Rockefeller cited the lack of funds to buy computer equipment as one reason, and stated: XxX` ` But another reason, which becomes more serious as schools do scrape together the money for the onetime expense of buying equipment, is their inability to pay excessive rates to hook into those services. It is one thing to have the computer on the table  X -or the desk. It is another to have that hooked up to the wall and" 7*&&ddy"  X-then through that wall to the other wall.  That is expensive.8" yOy-#X\  P6G;ɒP#э 141 Cong. Rec. at S7981 (daily ed. June 8, 1995) (emphasis added). x`  X-  X-x481.` ` In addition, in the September 26, 1996 letter from 26 Senators, including the four sponsors of the SnoweRockefellerExonKerrey amendment, the Senators state their intent clearly and directly:  Xx-Xx` ` For schools, we believe that connecting the classrooms is necessary to  0 Xc-` ` truly enhance education so connectivity should be defined to include  0 XL-` ` internal connections in ways that are technology neutral.9LX" yOU -#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board at 1 (Sept. 26, 1996) (emphasis added).  On the other hand, we note the sentiments of United States House of Representatives Telecommunications and Finance Subcommittee Chairman Jack Fields, who objects to the provision of universal service support for internal connections because he believes that "[t]he letter of the law is clear that the federal universal service fund can only support subsidies for  X -services, not plant and equipment.":X " yO]-ԍ Letter from United States Representative Jack Fields to Sharon Nelson, Chairperson, Washington Utilities and Transportation Commission and all members of the FederalState Joint Board on Universal Service (Oct. 17, 1996).  X-x482.` ` Finding internal connections ineligible for support would create an anomaly. Congress clearly intended to encourage competition among technologies, including competition between wireline and wireless technologies. Moreover, the McKinsey Report found that wireless connections would be the more efficient alternative for connecting schools  X<-to telephone carrier offices for more than 25 percent of public schools.;<" {O-#X\  P6G;ɒP#э McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 58 (1995). No parties dispute that the wireless services that such schools purchase are services eligible for support. It would seem to follow that those wireless services would still represent services if school personnel also used them for communications between classrooms within a school rather than between schools and outside parties. There is nothing on the record or in the statute that would suggest any reason that such services are not eligible for universal service support. Yet if wireless intraschool connections are services eligible for a discount and Congress sought to ensure technological neutrality rather than favoring wireless services, it follows that schools purchasing wireline intraschool connections should also be permitted to apply discounts to those services.  X?-x483.` ` We note that AirTouch makes a policy argument opposing the provision of universal service support for internal connections. AirTouch asserts that, because internal"(;*&&dd" connections are likely available at incremental cost today, due to competitive forces, it would be impossible to provide significant discounts to schools and libraries without permitting them to pay less than the long run incremental cost of the service. AirTouch contends that permitting services to be available at such low rates would heavily burden providers of  X-support and distort other telecommunications markets.t<" yO-#X\  P6G;ɒP#э AirTouch further comments at 1011.t We find, however, that section 254 directs the Commission to employ such support mechanisms to achieve the important social benefits designated by Congress. Moreover, we would expect that the support mechanism adopted by the Commission will permit many disadvantaged schools and libraries to pay belowcost rates for telecommunications services.  X -x484.` ` Finally, we recommend that, just as with other eligible services, the Commission permit schools and libraries to secure internal connections under the discount structure discussed further below. To the extent that the Commission exercises authority under section 254(h)(2), we recommend, as we did with respect to Internet Service Providers, that the Commission establish "competitively neutral rules" which provide support to any provider of internal connections that the school or library selects. As we explained above, we  X-conclude that section 254(h)(2) requires competitively neutral rules,j=X" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2).j rather than limits on  Xy-support to providers that meet the statutory definition of "telecommunications carrier."E>y" {O-#XN\  PynXP# I. 1. 1. a.(1)(a) i) a) I. A. 1. a.(1)(a) i) a)#A\  PɒP#э See 47 U.S.C.  153(44).E  XK-x D. Discount Methodology  X-x` ` 1. Background  X-x485. ` ` Section 254(b)(5) establishes the principle that "there should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal  X-service."C?z" yO-ԍ 47 U.S.C.  254(b)(5).C Section 254(b)(1) states that "[q]uality services should be available at just,  X-reasonable, and affordable rates."j@ " yOe -#C\  P6QɒP#э 47 U.S.C.  254(b)(1).j Furthermore, section 254(e) directs that any universal  X-service support "should be explicit and sufficient to achieve the purposes of" section 254.@A" yO"-ԍ 47 U.S.C.  254(e).@ These obligations extend to the mechanism to support discounts on eligible services for schools and libraries. Moreover, section 254(h)(1)(B) states: "N* A*&&dd"ԌXxX` ` All telecommunications carriers serving a geographic area shall,(#`  X-x` ` upon a bona fide request for any of its services that are within the  0   X-XxX` ` definition of universal service under subsection (c)(3), provide such services to elementary schools, secondary schools and  X-libraries for educational purposes at rates less than the amounts(#`  X-XxX` ` charged for similar services to other parties. The discount shall be (#` XxX` ` an amount that the Commission, with respect to interstate services,(#` XxX` ` and the States, with respect to intrastate services, determine is(#`  VL-XxX` ` appropriate and necessary to ensure affordable access to and use(#`  X5-XxX` ` of such services by such entities.B5" yO -#X\  P6G;ɒP##X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B) (emphasis added).(#`  X -x486.` ` Section 254(d) provides that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to  X -preserve and advance universal service."gC X" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(d).g Section 254(h)(1)(B) requires "telecommunications carriers serving a geographic area" to provide services included within the definition of universal service to schools and libraries "at rates less than the amounts  X-charged for similar services to other parties."mD" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m  XQ-x487.` ` Congress emphasized affordability in the Joint Explanatory Statement when it stated that "[n]ew subsection (h) of section 254 is intended to ensure that . . . elementary and secondary schools classrooms, and libraries have affordable access to modern telecommunications services that will enable them to provide . . . educational services to all  X-parts of the Nation."Ex" yO-#X\  P6G;ɒP#э Joint Explanatory Statement, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 132 (1996). In addition, in the floor debates on the SnoweRockefellerExonKerrey amendment, Senator Snowe stated that, under section 254(h)(1)(B), "[b]y changing the basis for the discount from incremental cost to an amount necessary to ensure an affordable rate, the FederalState joint board in conjunction with the FCC and the States have some  X-flexibility to target discounts based on a community's ability to pay."F" yOR!-#X\  P6G;ɒP#э 141 Cong. Rec. S7984 (June 8, 1995) (emphasis added).  Xm-x488.` ` In the NPRM, the Commission proposed to interpret section 254(h)(1)(B) to entitle schools and libraries to receive discounts on all services falling either within the list of subsection (c)(1) "core" telecommunications services or the list of subsection (c)(3)"?F*&&dd"  X-"additional" or "special" services for schools and libraries.nG" yOy-#X\  P6G;ɒP#э NPRM at para. 82.n The NPRM also noted that the 1996 Act gives the Commission the authority to establish discounts on interstate services,  X-while the states are authorized to establish discounts on intrastate universal services.hHX" {O-#X\  P6G;ɒP#э  NPRM at para. 82.h  X-x489.` ` The NPRM sought comment on how to formulate discount methodologies that would ensure that each discount is "an amount that . . . is appropriate and necessary to ensure  Xv-affordable access to and use of" services deemed eligible for universal service support.Iv" {O -#X\  P6G;ɒP#э NPRM at para. 74 (quoting 47 U.S.C.  254(h)(1)(B)). Specifically, the NPRM sought comment and Joint Board recommendation on the factors to be used in formulating a discount methodology for universal service support for schools and libraries. The NPRM noted that "[t]he methodology could reflect whether the services used  X -are tariffed or whether the charges are for capital investments or recurring expenses."J |" yOG-#X\  P6G;ɒP#э NPRM at para. 83.#X\  P6G;ɒP#ѕ The NPRM also stated that "[t]he methodology could also be based on the incremental costs of  X -providing services rather than retail prices."nK " yO-#X\  P6G;ɒP#э NPRM at para. 83.n Moreover, the NPRM noted that "[s]ection 254(h)(1)(B) specifies that all discounts shall apply to `the amounts charged for similar  X -services to other parties.'"bL " yO -#X\  P6G;ɒP#э NPRM at para. 88.b The NPRM sought comment and Joint Board recommendation  X -on how those amounts might be determined.bM , " yO-#X\  P6G;ɒP#э NPRM at para. 88.b The Public Notice sought further comment on the discount methodology and asked whether the base service prices to which discounts would be applied should be: "(a) total service longrun incremental cost; (b) shortrun incremental costs; (c) best commerciallyavailable rate; (d) tariffed rate; (e) rate established through a competitivelybid contract in which schools and libraries participate; (f) lowest of  X4-some group of the above; or (g) some other benchmark."tN4 " yO-#C\  P6QɒP#э Public Notice at question 16.t In addition, the Public Notice sought comment on how the commerciallyavailable rate could best be ascertained, "in light of  X-the fact that such rates may be established pursuant to confidential contract arrangements."tOL " {O#-#C\  P6QɒP#э Public Notice at question 16.t  X-x490.` ` Further, the NPRM sought comment on how each discount methodology would conform with the mandate of section 254(b) to provide "specific, predictable and sufficient"O*&&dd"  X-Federal and State mechanisms to preserve and advance universal service."P" {Oy-#X\  P6G;ɒP#э NPRM at para. 83 (quoting 47 U.S.C.  254(b)(5)). The NPRM also sought comment and a Joint Board recommendation on how to harmonize state and federal discount methodologies to ensure that Congress's goal to provide access to advanced telecommunications services for elementary and secondary schools, classrooms, and libraries  X-throughout the Nation is realized.hQZ" yO-#X\  P6G;ɒP#э  NPRM at para. 83.h  Xv-x491.` ` The NPRM sought comment on additional issues related to the discount methodology. First, the NPRM asked how to define "geographic area" for purposes of section  XH-254(h)(1)(B).hRH" yO -#X\  P6G;ɒP#э NPRM at para. 80.h Second, the NPRM noted that "[u]nlike all other universal service support, which is to be restricted to `eligible telecommunications carriers" under the terms of section 214(e) of the Act . . . the offset or reimbursement provided under section 254(h)(1)(B), pertaining to schools and libraries, must be given to `all telecommunications carriers serving a  X -geographic area.'"cS z" yO-#X\  P6G;ɒP#э NPRM at para. 88. c The NPRM sought comment and Joint Board recommendation on how  X -to implement these provisions.bT " yO-#X\  P6G;ɒP#э NPRM at para. 88.b The NPRM also sought comment on the estimated costs  X -associated with each proposed discount methodology.hU " yO -#X\  P6G;ɒP#э NPRM at para. 83.h  X-x492.` ` The Public Notice sought further comment on several discounting issues, including whether discounts should be directed to the states in the form of block grants or direct billing credits, and if so, what, if any, measures should be implemented to ensure that  XK-the funds are used for their intended purposes.VK* " yO&-#C\  P6QɒP#э Public Notice at questions 12, 13, and 14. The Public Notice also sought comment on whether the cost estimates contained in the McKinsey Report and the KickStart Initiative provide an accurate funding estimate for schools and libraries, assuming that tariffed rates are  X-used as the basis.nW " yOq!-#X\  P6G;ɒP#э Public Notice at question 23.n Moreover, the Public Notice sought comment on whether other such  X-cost estimates are available,nXJ " yO#-#X\  P6G;ɒP#э Public Notice at question 24.n and on whether there are cost estimates that specifically"X*&&dd'"  X-address the funding estimates for private schools.tY" yOy-#X\  P6G;ɒP#э Public Notice at question 25.t  X-x493.` ` The Public Notice sought further comment on several specific issues regarding the discount methodology. The Public Notice sought comment, first, on what discount should  X-be applied, if any, for schools and libraries that are already receiving special rates,nZX" yO-#C\  P6QɒP#э Public Notice at question 17.n and, second, on whether schools and libraries located in rural, insular, high cost and economically  Xv-disadvantaged areas should receive an additional discount.n[v" yO -#C\  P6QɒP#э Public Notice at question 19.n Third, the Public Notice asked whether the Commission should use a slidingscale approach or a step approach to allocate  XH-any such additional discount.n\Hx" yOq-#X\  P6G;ɒP#э Public Notice at question 21.n Finally, the Public Notice asked whether the Commission should use an existing model to determine the degree to which a school is disadvantaged, such as Title I or the national school lunch program, and whether the Commission should make  X -modifications to any such existing model.t] " yO-#C\  P6QɒP#э Public Notice at question 20.t  X -x` ` 2. Comments  X -x494.` ` Setting a PreDiscount Price. Numerous commenters suggest methods for determining a prediscount price, which would serve as the base price to which a discount would be applied for schools and libraries. Ameritech advocates use of the rate charged to  Xb-other subscribers,j^b" yO-#X\  P6G;ɒP#э Ameritech comments at 17.j while BellSouth advocates a discount off the tariffed rate of a service.m_b( " yO;-#X\  P6G;ɒP#э BellSouth comments at 1920.m NSBA I proposes "a method that is based on the competitive market price or a surrogate for  X4-the competitive market price for each service (if no such price is readily ascertainable)."k`4 " yO-#X\  P6G;ɒP#э NSBA I comments at 1921. k U.S. Distance Learning Ass'n advocates "calculating a discount from the lowest, competitive rate secured by the beneficiary institutions, presumably at a statewide or even regional  X-level."aZH " {O#-#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 1415. But see EDLINC further comments at 28 (opposing a discount based on tariffed rates because it is likely "there will be no tariffs on which to base the discount" and because "the Commission does not conduct a quantitative analysis of tariffed rates"). U.S. Distance Learning Ass'n supports using the lowest competitive interstate and"ja*&&dd "  X-intrastate telephone rates as a baseline.b" yOy-#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 1415.  X-x495.` ` To ensure that schools and libraries pay for the network elements they use, MCI contends that "the price of service for schools and libraries must reflect at least the  X-capital costs of the plant used to provide the service."cZX" {O-#X\  P6G;ɒP#э MCI comments at 20. See also Syracuse University comments at 910 (asserting that "the Commission should adjust tariffs of qualified public institutions for all telecommunications services (whether intrastate or interstate) to reflect only the actual costs of providing service including a fair return on capital investments"). MCI contends that "the FCC should require that the actual economic cost of telecommunications services be the maximum rate charged by a telecommunications provider to any school or library before any discount is  X_-applied."d_z" {O -#X\  P6G;ɒP#э Connecting Students and Teachers to the Internet: An MCI Proposal (June 27, 1996). MCI further maintains that the "actual economic cost" should be based on  XH-TSLRIC.eH " {O-#X\  P6G;ɒP#э Connecting Students and Teachers to the Internet: An MCI Proposal (June 27, 1996). EDLINC asserts that a national benchmark should be established, which "should be calculated based on the least of three possible rates: the price paid by schools and libraries in areas in which there is competition; the lowest commerciallyavailable rate; and the  X -TSLRIC."fZ " {OR-#X\  P6G;ɒP#э EDLINC further comments at 27. See also Union City Board of Education reply comments at 12 (recommending that the price paid by schools and libraries should be the lower of "1. [t]he carrier's current rate or bid; 2. [t]he lowest price offered for such service to any other customer; or 3. [t]he TSLRIC").  X -x496.` ` Some commenters support basing the price of service for schools and libraries  X -on competitive bids for serving aggregated sets of schools and libraries.g " yO/-#X\  P6G;ɒP#э Florida Cable comments at 14, 17; NCTA comments at 18; NSBA I comments at 22. NCTA, for example, believes that a competitive bid process in which the low bid represents a discount from prevailing market rates and in which the lowest bidder would become the provider of services with no entitlement to a subsidy "has major benefits in ease and economy of administration, and is procompetitive, ensuring that the benefiting institutions have maximum  XK-choice."ehKP " yOL -#X\  P6G;ɒP#э NCTA comments at 18.e NCTA also proposes "use of a competitive bid process to ensure the lowest possible rate for schools and libraries in lieu of the suggested discount methodology,"  X-suggesting that no funded discount is necessary.ei" yO#-#X\  P6G;ɒP#э NCTA comments at 18.e NTIA also proposes using competitive bidding and a competitive rate when it is available. When competition does not exist, NTIA supports using the lowest commercial rate for similarly situated customers or, if that is not"pi*&&dd'"  X-available, a costplus price.jj" yOy-#X\  P6G;ɒP#э NTIA submission at 1213.j ACE, however, maintains that the 1996 Act does not permit the Commission to require that schools and libraries participate in a competitive bidding process, and that such a requirement "would constitute an unnecessary unfunded mandate with administrative costs to some schools and libraries being more than the anticipated annual cost  X-of the requested telecommunications services."ikX" yO-#X\  P6G;ɒP#э ACE reply comments at 6.i  Xv-x497.` ` Definition of "Geographic Area." Several commenters address the way in which "geographic area" should be defined for purposes of section 254(h)(1)(B). Washington Library, for example, suggests that, since the service areas of schools and libraries tend to overlap, "the summary of their areas might form the nucleus for determining the geographic  X -area for receiving universal service support."tl " yO-#X\  P6G;ɒP#э Washington Library comments at 67.t Alaska Library maintains that "geographic  X -area" should be defined as an entire state,7mZ x" {O,-#X\  P6G;ɒP#э Alaska Library comments at 6. See also ACE comments at 13 (asserting that "[i]n order to facilitate universal service fund administration . . . the applicable `geographic area' should be each State or combination thereof").7 while USTA asserts that "it should be interpreted  X -to mean the service area in which the qualified educational institution or library is located." n " {O7-#X\  P6G;ɒP#э USTA comments at 8 n.13. See also NCTA comments at 18 (asserting that "[t]he geographic area served by a particular company should be each company's selfdefined service area").   X -Oakland School District contends that "geographic area" should be defined as the LATA.xo " yOz-#X\  P6G;ɒP#э Oakland School District comments at 10.x NSBA I states that the Commission should not create geographic service areas in which  X -schools and libraries will be required to obtain service from a particular carrier.mp " yO-#X\  P6G;ɒP#э NSBA I reply comments at 16.m  Xy-x498.` ` Definition of "Telecommunications Carriers Serving a Geographic Area." Other commenters address the entities that should be included within the definition of "telecommunications carriers serving a geographic area." Continental Cablevision, for example, asserts that any carrier, including those that do not provide "core" telecommunications services, should be considered a telecommunications carrier for purposes  X-of providing advanced services to schools and libraries at a discount.q" {O#-#X\  P6G;ɒP#э CCV comments at 1314. See also Citizens Utilities comments at 20. Such a result will"q*&&dd("  X-enhance competition in the provision of services to schools and libraries.{rZ" {Oy-#X\  P6G;ɒP#э CCV comments at 1314. See also Citizens Utilities comments at 20 (stating that "[s]ection 254(h)(1)(B)'s extension of universal service offsetting credits or reimbursement to all telecommunications carriers, not just Section 214(e) eligibles, should spur competition to provide service"). { Iowa Tel. Ass'n maintains that "private network providers (such as electric company networks or corporate networks) and state sponsored private networks (such as Iowa Communications Network) that do not provide services directly to the public should not be eligible for these support  X-funds."os" yO? -#X\  P6G;ɒP#э Iowa Tel. Ass'n comments at 4.o U.S. Distance Learning Ass'n, on the other hand, states that the Iowa Communications Network and other specialized private or public carriers dedicated to providing telecommunications services to schools and libraries should be considered  X_-telecommunications carriers for the purposes of section 254(h)(1)(B).t_z" yO -#X\  P6G;ɒP#э U.S. Distance Learning Ass'n reply comments at 78.  XH-  X1-x499.` ` Discounted Rate. In general, commenters suggest several different methods for determining what the "discount" should be for schools and libraries. ALA, for example, recommends that the discount rate for schools and libraries should be the "lower of the  X -TSLRIC for the service or the lowest price offered commercially."u " {O-#X\  P6G;ɒP#э ALA reply comments at 39. See also Colorado Library reply comments at 3. Ĩ ALA supports a discount price based on TSLRIC because that method "would ensure that the provider  X -recovers its full cost, including the cost of capital."v " yO - #X\  P6G;ɒP# č ALA reply comments at 39 (asserting that "[t]he true economic costs of supply for any market sector  {O-have been found to be the provider's TSLRIC"). See also AFT comments at 4 (asserting that "[u]sing a method for determining rates based on the Total Service Long Run Incremental Cost can substantially increase the cost savings to carriers and the larger schools they serve" because in urban areas with dense populations, "[t]elecommunications hookups to a single school will serve larger numbers of students and classrooms than in smaller schools"). USTA, however, asserts that the use of TSLRIC should be rejected because "TSLRIC is not appropriate for pricing and is irrelevant  X-to determine universal service support amounts."dw" yOW-#X\  P6G;ɒP#э USTA comments at 7.d ACE maintains that the use of incremental cost in any form was considered and rejected by Congress when it substituted  Xb-"rates less than" and "discount" language in section 254(h)(1)(B).ixb" yO!-#X\  P6G;ɒP#э ACE reply comments at 5.i  X4-x500.` ` Other commenters suggest different methods for determining the discounted rate. For example, some schools and libraries groups, citing the need for predictability in the"6x*&&ddG"  X-budgeting process, support a flat rate that is neither distance nor timesensitive.y" {Oy-#X\  P6G;ɒP#э See, e.g., Mendocino School District comments at 4; Michigan Library Ass'n comments at 12 (stating that "[s]elected discount methodologies should be distance insensitive"); Oakland School District comments at 11 (asserting that "[s]chools should have flatrate access to the network at the same cost as residential customers").  {O-See also PacTel comments at 56 (stating that "[p]rices which vary by amount of usage and from monthtomonth introduce an element of unpredictability that schools told us they could not tolerate"). U.S. Distance Learning Ass'n suggests using the following discount rates as target: 45 percent discount on the lowest competitive interstate and intrastate telephone rates; 50 percent discount on installation of hardware necessary to access telecommunications services; and 50  X-percent discount for ongoing maintenance.z|" yO -#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 1415. NSBA I supports basing the discount price on the "95 percent affordability price point" (i.e., a price low enough to allow 95 percent of  Xv-schools to afford the rate) or, in the alternative, on TSLRIC.p{v " yO3-#X\  P6G;ɒP#э NSBA I reply comments at 2122.p Great City Schools supports  X_-a declining rate based on the school's or library's ability to pay,r|_" yO-#X\  P6G;ɒP#э Great City Schools comments at 2.r while NECA proposes using mechanisms similar to those used for the Lifeline Assistance program to support  X1-discounted services for schools and libraries.}1, " {O-#X\  P6G;ɒP#э NECA comments at 1517. See also Alliance for Distance Education comments at 1 (supporting equating each classroom and library to a lowincome consumer unit, thereby entitling it to "an amount equal to rate 10 percent below the lowest rates offered by a telecommunications service provider to its lifeline customers or 20 percent below the lowest contract rates offered to corporations or institutions for a particular service, whichever rate is lower"). Pennsylvania Library asserts that the  X -discounted rate for schools and libraries should represent the wholesale price of the service.~ " yO-#X\  P6G;ɒP#э Pennsylvania Library Ass'n reply comments at 6. Sailor recommends that pre1996 Act rates should be compared with post1996 Act rates, so  X -that it can be determined whether a genuine discount exists.j n" yO -#X\  P6G;ɒP#э Sailor comments at 1519.j Sprint, on the other hand, asserts that "at least in the schools and library context, it is premature to prescribe a discount methodology until the specified services, and most importantly the cost of implementing and  X -provisioning such services, are determined."g " yOV!-#X\  P6G;ɒP#э Sprint comments at 23.g  Xy-x501.` ` EDLINC proposes basing the size of the discount on "two factors that  Xb-determine affordability: the price of the service, and ability to pay."ob" yO%-#X\  P6G;ɒP#э EDLINC further comments at 29.o EDLINC maintains"b*&&dd" that the ability to pay is particularly important in lowincome and rural areas, and proposes ranking school districts based on a combination of the lower of the median value of owner X-occupied housing or median household income, plus population density.o" yOK-#X\  P6G;ɒP#э EDLINC further comments at 30.o Based on its ranking, each school district would receive a minimum discount of 30 percent, and a maximum discount of 70 percent. EDLINC chooses median value of owneroccupied housing  X-as the "best indicator of district wealth in noninner city areas,"pX" yO-#X\  P6G;ɒP#э EDLINC further comments at 30. p and median household  Xv-income as "a better indicator of the relative ability to pay of an inner city area."ov" yO -#X\  P6G;ɒP#э EDLINC further comments at 31.o EDLINC selects population density as a factor to apply to all districts "because of the lower potential sparsely populated areas have for recovering costs by spreading them out over the population as a whole," but acknowledges that the current density factor may have to be adjusted to accommodate extremely dense urban areas that may have substantial lowincome  X -populations.o x" yO,-#X\  P6G;ɒP#э EDLINC further comments at 31.o In terms of applying the discount percentage, EDLINC proposes having service providers submit competitive bids to schools and libraries. If the lowest bid is above the national benchmark proposed by EDLINC, or if there is only one bid, the discount will be calculated by applying the discount percentage to the national benchmark price. In the event of no bidders, the school or library can request service from the carrier of last resort, and the discount will also be calculated by applying the discount percentage to the national benchmark price. If the lowest competitive bid is below the national benchmark price, the discount will  Xb-be calculated by applying the discount to the bid price.rb" yO-#X\  P6G;ɒP#э EDLINC further comments at 3132.r  X4-x502.` ` Some commenters recommend providing selected telecommunications services at no cost to schools and libraries (i.e., give them a 100 percent discount). United States Secretary of Education Richard Riley, Vice President Al Gore, and United States Representative Edward Markey have proposed free "basic" service rates and highly discounted  X-rates for advanced services, which they refer to as "Erates."" {O! -#X\  P6G;ɒP#э See Letter from Vice President Al Gore to Secretary Richard Riley (June 26, 1996); Statement of Richard W. Riley, U.S. Secretary of Education, Press Conference on Free Access to the Internet (June 27, 1996);  {O!-Statement of United States Representative Edward J. Markey, Schools Need Free "ERate" to Educate for 21st  {O}"-Century (June 27, 1996). See also U.S. Distance Learning Ass'n comments at 1314 (stating that "the Commission should require telecommunications service providers to both install and deliver free of charge at least one voicegrade, curricularpurpose line to each such eligible institution").  Benton asserts that, to ensure affordable telecommunications services for schools and libraries, it may be necessary to"*&&dd"  X-provide free services.n" yOy-#X\  P6G;ɒP#э Benton reply comments at 9. n NYNEX, however, contends that the 1996 Act contemplates discounted, rather than free services, and that providing such free services may encourage  X-wasteful purchases.lX" yO-#X\  P6G;ɒP#э NYNEX reply comments at 17.l  X-x503.` ` NTIA proposes that services be split into two categories, with the discount for a specific service determined by the category into which the service falls. In the first category of services, NTIA recommends providing a basic package of services, which would include basic connectivity and Internet access at a maximum bandwidth of 1.5 Mbps, at the  XH-"Erate" (i.e., free to eligible schools and libraries)."H" yO -#X\  P6G;ɒP#э NTIA submission at 9. Basic connectivity would include "both installation and monthly rates for external access, and the inside connections and `networking' required to ensure that at least one personal computer (located in an area accessible to students) is online," and Internet access would include Email and the  {O9-resources of the World Wide Web. Id. at 10. The price for this basic package would be established through several possible means, which are intended to obtain a competitive price. The package could, for example, be competitively bid. If, on the other hand, there are no bidders because there are no competitors to the ILEC, a bid ceiling value could be established based on competitive prices in other locations, or could be based on economic  X -costs, including a reasonable profit margin, to simulate a competitive result.g " yOX-#X\  P6G;ɒP#э NTIA submission at 12.g NTIA expects that schools and libraries will include the nontelecommunications components of a technology plan, such as competing architectures or technologies, in their competitive bids, which will enable technological innovations to drive down the cost of the basic service  Xy-package.aZyb " {O-#X\  P6G;ɒP#э NTIA submission at 12. See also Teleport ex parte filing (Sept. 26, 1996) (proposing that telecommunications services that are included within a basic package would be competitively bid, and other components of the technology configuration could be included).a NTIA proposes that carriers would be reimbursed for the basic package from  Xb-universal service support mechanisms.jb " yO-#X\  P6G;ɒP#э NTIA submission at 1213.j  X4-x504.` ` In the second category of services, NTIA proposes that all other telecommunications services would be provided to eligible schools and libraries at rates no  X-greater than the best available commercial rate.j" yO#-#X\  P6G;ɒP#э NTIA submission at 1314.j Schools and libraries that chose not to subscribe to the basic package of services could apply the cost of the basic package to their total purchase of special or advanced services, and that amount would be recovered by its"*&&dd"  X-chosen carrier from universal service support mechanisms.g" yOy-#X\  P6G;ɒP#э NTIA submission at 14.g Low income and high cost schools and libraries would be eligible for a deeper discount, based on an "affordability  X-index."jX" yO-#X\  P6G;ɒP#э NTIA submission at 1314.j For these other telecommunications services, carriers would only be reimbursed  X-from universal service support mechanisms for the cost of the deeper discount.g" yOT-#X\  P6G;ɒP#э NTIA submission at 15.g  X-x505.` ` Cost Estimates. To establish what level of support is appropriate and necessary, the Commission must estimate a baseline cost for what schools and libraries are likely to spend as they secure access to the Internet, engage in distance learning applications, use video conferencing, and purchase whatever other telecommunications and information services they find useful for achieving their educational purposes. The most comprehensive estimate, on the record, of the costs of providing schools with the services proposed by  X -Congress in section 254(h) is provided by K12 Schools to the Information Superhighway,  ("McKinsey Report") prepared by McKinsey & Company, a management consulting firm, for  X -the National Information Infrastructure Advisory Council (NIIAC)." x" yO-#X\  P6G;ɒP#э The National Information Infrastructure Advisory Council (NIIAC) was created by executive order at the end of 1993 and formally established and appointed in early 1994. The 37 member advisory panel represents many of the key constituencies with a stake in the NII, including private industry, state and local governments, community, public interest, education, and labor groups, creators and distributors of content, privacy and security advocates, and leading experts in NIIrelated fields. The NIIAC is responsible for advising the Secretary of Commerce and the Administration on a national strategy for promoting the development of the NII and the  {O-Global Information Infrastructure (GII). See Russell Rothstein, Networking K12 Schools: Architecture Models  {Oz-and Evaluation of Costs and Benefits 25 n.9 (1996) (unpublished masters thesis, Massachusetts Institute of Technology). McKinsey cost information was also integrated into a report published by the U.S. Advisory  {O -Council on the National Information Infrastructure. See KickStart Initiative: Connecting Americas Communities  {O-to the Information Superhighway (1996)."  X -x506.` ` The McKinsey Report estimates the costs for four models of computerbased infrastructures: basic lab; lab plus; partial classroom; and full classroom. The basic lab model assumes that every school will install connections for 25 computers in a single room served by an Ethernet LAN in the lab and ten telephone lines to the public network. The lab plus model would include all components of the lab model plus one computer and modem per teacher. The partial classroom model would include one computer per every five students for half of the classrooms in each school, served by an Ethernet LAN across and within all  X-classrooms and a T1 connection to the public network." {O$-#X\  P6G;ɒP#э McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 2025 (1995). The full classroom model would include all of the components of the partial classroom model for every classroom."r*&&dd"Ԍ X-ԙx507.` ` The McKinsey Report estimates both initial and ongoing costs for six categories of costs: connection to the school, connection within the school, hardware, content,  X-professional development, and systems operation," {OK-#X\  P6G;ɒP#э McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 57 (1995). but only the first two categories are costs of providing noncontent conduits for transmitting data, and have been identified by parties as relevant to the establishment of universal service mechanism and competitively neutral rules  X-under section 254(h) of the 1996 Act.gZ" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h).g The estimated (initial/ongoing) costs for connections to the schools according to each of the four models are: lab ($815/$580 million), lab plus ($1,345/$595 million), partial classroom ($1,715/$1,030 million), and full classroom ($1,645/$920 million). The estimated costs for internal connections are: lab ($1,325/$200 million), lab plus ($1,325/$200 million), partial classroom ($5,025/$410 million), and full classroom ($6,285/$570 million). The estimated total costs for these models are: lab ($10.6/$3.9 billion), lab plus ($21.8/$7.4 billion), partial classroom ($28.9/$7.5 billion), and full classroom ($46.8/$13.9 billion). These figures assume a five year deployment period for the first three models and a ten year deployment for the full classroom model. As these data indicate, the combined total of the categories of the internal and external connections represents about 18 percent of the total initial costs of the models and 15 percent of the  X-ongoing costs." {O+-#X\  P6G;ɒP#э McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 28 (1995). Those costs are the identified base which we will consider in implementing section 254(h). Therefore, schools will have to depend on other sources to provide the additional 80plus percent of funding.  X4-x508.` ` The McKinsey Report makes a number of assumptions to reach its estimates. It assumes, for example, that 27 percent of connections to the school and 50 percent of internal connections would be provided via wireless radio, as the most costeffective technology. It also assumes that sevenpercent of schools already have internal connections in place. The services are priced at tariffed rates, although McKinsey assumes that the price of  X-many elements will decline over time.|" {O-#X\  P6G;ɒP#э McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 5459 (1995).  X-x509. ` ` The record also includes Russell Rothstein's May 1996 master's thesis entitled,  X|-Networking K12 Schools: Architecture Models and Evaluation of Costs and Benefits.|" yO;"-#X\  P6G;ɒP#э Russell Rothstein, Networking K12 Schools: Architecture Models and Evaluation of Costs and Benefits (1996) (unpublished masters thesis, Massachusetts Institute of Technology). In his thesis, Rothstein estimates a range of costs for five different models of school access: single PC dialup; local area network (LAN) with shared modem; LAN with router; LAN with local server and dedicated line; and ubiquitous LAN with highspeed connection. He"9f *&&dd" states that his results are consistent with the McKinsey models. Furthermore, Rothstein disaggregates the cost of access to the Internet and estimates that cost at between $150 and  X-$630 million per year." yOK-ԍ Russell Rothstein, Networking K12 Schools: Architecture Models and Evaluation of Costs and Benefits, at 50 (1996) (unpublished masters thesis, Massachusetts Institute of Technology).  X-x510.` ` The KickStart Initiative: Connecting America's Communities to the Information  X-Superhighway ("KickStart Initiative"),X " yO` -#X\  P6G;ɒP#э The United States Advisory Council on the National Information Infrastructure was created by executive order at the end of 1993 by President Clinton. The 36member advisory panel was formally established and appointed by the Secretary of Commerce in early 1994. This report was published in January 1996. produced by the United States Advisory Council on the National Information Infrastructure, incorporates data from the McKinsey Report on  Xc-schools, estimates the cost of providing service to the libraries in the nation.oc@" yOT-#X\  P6G;ɒP#э KickStart Initiative at 9498.o It estimates the cost of providing T1 connections to libraries serving populations of more than 25,000, while 60 percent of libraries serving populations of less than 25,000 would have access to ISDN lines (56 to 128 kbps service) and 40 percent would have access to ordinary voice  X -lines.l " yO-#X\  P6G;ɒP#э KickStart Initiative at 97.l It estimates the total initial cost to libraries at $1.6 billion and $1.3 in ongoing costs. It also estimates that the costs of connections to the library would represent 4 percent of the total initial and 9 percent of total ongoing costs and that internal connections would represent  X -17 percent of initial costs and 3 percent of ongoing costs.l ` " yO-#X\  P6G;ɒP#э KickStart Initiative at 96.l  X-x511. ` ` NCLIS submitted its June 1995 report entitled Internet Costs and Cost Models  X-for Public Libraries. " {O -ԍ NCLIS, Internet Costs and Cost Models for Public Libraries, Final Report (June 1995). The report describes five Internet connectivity models: (1) single workstation, textbased; (2) single workstation, multimedia; (3) multiple terminals, textbased; (4) multiple workstations, multimedia, with existing LAN and OPACs; and (5) multiple  X<-libraries, multiple workstations, multimedia.< " {Oo -ԍ NCLIS, Internet Costs and Cost Models for Public Libraries, Final Report 1522 (June 1995). NCLIS estimates the cost of model 4, which would include providing T1 connections and Internet access with an existing LAN and online public access catalog system, at $7,475 in initial costs and $27,220 in ongoing annual costs  X-(i.e., primarily Internet access) per library." {O$-ԍ NCLIS, Internet Costs and Cost Models for Public Libraries, Final Report 2627 (June 1995). "*&&dd"Ԍ X-x512.` ` Several commenters maintain that it is important to establish the size of the  X-universal service fund." {Ob-#X\  P6G;ɒP#э See, e.g., BellSouth further comments at 31; SWBT further comments at 18; USTA further comments at 18. In the same way that schools and libraries require predictability in  X-the budgeting process,"" {O-#X\  P6G;ɒP#э See PacTel comments at 56 (asserting that "[p]rices which vary by amount of usage and from monthtomonth introduce an element of unpredictability that schools told us they could not tolerate").  service providers must have a sense of what they need to contribute towards universal service support. It may be necessary, according to several commenters, to  X-make adjustments to the fund, consistent with the 1996 Act.|" {O -#X\  P6G;ɒP#э See, e.g., BellSouth further comments at 31; USTA further comments at 18.  Xv-x513.` ` Some commenters assert that the cost estimates provided in the McKinsey Report and the KickStart Initiative provide reasonable bases to estimate funding for schools  XH-and libraries.H" {O-#X\  P6G;ɒP#э See, e.g., BellSouth further comments at 3031; GTE further comments at 26; SWBT further comments at 18; USTA further comments at 1718. USTA, for example, states that the McKinsey Report and the KickStart Initiative represent the best available estimates of the funding necessary for schools and  X -libraries."p h " yO3-#X\  P6G;ɒP#э USTA further comments at 1718.p In terms of private schools, several commenters assert that McKinsey's per  X -school estimates can be extrapolated to include private schools.{Z " {O-#X\  P6G;ɒP#э See, e.g., BellSouth further comments at 31; MCI further comments at 11. See also TCI further comments at 2021 (stating that the McKinsey estimates are accurate, but recommending that "those estimates be altered for the use of TSLRIC costs determined by an appropriate proxy model").{ Other commenters  X -maintain that there are flaws in the McKinsey Report and the KickStart Initiative. " {O-#X\  P6G;ɒP#э See, e.g., ALA further comments at 1819; Information Renaissance further comments at 10; Oakland School District further comments at 10. Oakland School District asserts that the estimated costs and prices are likely to change once  X -competition takes hold. t" yO-#X\  P6G;ɒP#э Oakland School District further comments at 10. ALA contends that, while the KickStart Initiative may provide some useful guidance for funding, the cost estimates are based on misleading assumptions of  X-what small and rural libraries need, as well as the services those libraries need to provide.o" yOE"-#X\  P6G;ɒP#э ALA further comments at 1819.o ALA suggests, alternatively, the use of its simplified cost model which estimates "ongoing  Xb-connectivity costs only" (i.e., data connections for Internettype service only).ob" yO%-#X\  P6G;ɒP#э ALA further comments at 1922.o"b$*&&dd"Ԍ X-ԙx514.` ` Limitation on Funds. Some commenters support a limit on the amount of money available to schools and libraries under section 254. TCI, for example, recommends that the Commission limit the amount of the discount required for schools and libraries so that  X-the discount does not go beyond the requirements of the 1996 Act.o" yO4-#X\  P6G;ɒP#э TCI comments at 2021. o Florida PSC supports a  X-maximum dollar limit on expenditures for schools and libraries.vX" yO-#X\  P6G;ɒP#э Florida PSC reply comments at 67. v Teleport asserts that there should be an initial limit on funds for the first year and a cap on funds in the third year,  Xv-pending further review of the discount program.v" {O -#X\  P6G;ɒP#э Teleport ex parte filing (Sept. 26, 1996).  XH-x515.` ` Block Grant Approach. The block grant approach would provide a specified quantity of money to states, to be disbursed among the various schools and libraries for their purchases of telecommunications services. Ameritech, for example, asserts that the use of blockgrants could be a "reasonable approach" to fulfilling the statutory requirements  X -applicable to schools and libraries.r z" yO-#X\  P6G;ɒP#э Ameritech further comments at 17.r GTE states that the use of block grants "could satisfy the requirements of the 1996 Act, be administratively feasible, and enable the entire process to  X -be managed in an efficient and consistent manner."l " yOy-#X\  P6G;ɒP#э GTE further comments at 18.l Most commenters, however, oppose the block grant approach and state that the 1996 Act contemplates discounted rates for schools  X-and libraries.\" {O-#X\  P6G;ɒP#э See, e.g., ALA further comments at 12; EDLINC further comments at 2021; Illinois State Library further comments at 3; NECA further comments at 9; Senate Working Group further comments at 2; Time  {Om-Warner further comments at 23; Union City Board of Education further comments at 2, 9. Parties opposing the block grant approach state that such an approach would  Xy-create bureaucratic problems,y " {O-#X\  P6G;ɒP#э See, e.g., ALA further comments at 12; New York DOE further comments at 7; Puerto Rico Tel. Co. further comments at 67. would make it impossible to determine affordability,y" yOB-#X\  P6G;ɒP#э Senate Working Group further comments at 2. and  Xb-would distort the competitive services market.mb" yO!-#X\  P6G;ɒP#э AT&T further comments at 14.m The Senate Working Group, a bipartisan group of 16 Senators that includes the coauthors of section 254(h), states: XxX` ` We are seriously concerned about the issue of block grants. (#` x` ` Such grants would be incompatible with the statute's architecture"8*&&ddF"Ԍ X-XxX` ` of discounts based on affordability on flexible bona fide requests(#` XxX` ` submitted by schools and libraries. Block grants are not based on(#` XxX` ` individual needs and priorities of schools and libraries for education(#` XxX` ` technology. Affordability cannot be determined under a block grant(#` x` ` approach. It is imperative that the Commission and the Joint Board XxX` ` structure discounted rates for schools and libraries in such a way(#` XxX` ` that all schools and libraries will have access to telecommunications(#` XxX` ` services. We believe that a block grant approach cannot satisfy the(#`  XJ-XxX` ` objectives of [s]ection 254(h).|J" yO -#X\  P6G;ɒP#э Senate Working Group further comments at 2.|(#`  X -x516.` ` Funds to Schools Approach. Whereas the block grant proposals would allocate a set amount of money to be disbursed among various schools and libraries, NYNEX proposes a formula for computing the amount of money available for each school and library to be used as discounts toward the purchase of telecommunications services. NYNEX's Education Plan would compute funding based on a determination of the nationwide average cost of providing information technology access on a per student basis. This calculation would be established as a benchmark price that would be used as the basis for establishing a benchmark discount. Each school and library would develop a proposal for telecommunications services procurement that would be reviewed and/or approved by a state administrator for compliance  XM-with an advisory council's guidelines.MX" {OV-#X\  P6G;ɒP#э See infra section X.E. for discussion of an Education Council. Telecommunications service providers would obtain the funding associated with the discounts from universal service support mechanisms, with the  X-balance billed to the school or library." yO-#X\  P6G;ɒP#э NYNEX comments at 2123 and reply comments at 1418.  X-x517.` ` NYNEX clarifies that data should be disaggregated between urban and rural areas for both the benchmark prices and discounts, to account for the differences in costs between urban and rural areas in acquiring similar telecommunications capabilities. By varying the discounts between urban and rural areas, schools and libraries located in rural and urban areas could be assured of obtaining services at the same price. Under this proposal, schools and libraries would not be in competition with one another for the funds representing  Xg-the discounts.lgz" yO!-#X\  P6G;ɒP#э NYNEX reply comments at 16.l  X9-x518.` ` Direct Billing Credits Approach. Some commenters assert that providing direct billing credits from service providers to schools and libraries would be a simple and direct""  *&&dd"  X-method of providing support to schools and libraries.Z" {Oy-#X\  P6G;ɒP##X\  P6G;ɒP#э#X\  P6G;ɒP# See, e.g., Ameritech further comments at 18; Bell Atlantic further comments at 4; Information Renaissance further comments at 8; NCTA further comments at 5; NYNEX further comments at 1011; Netscape further comments at 14; New York DOE further comments at 8; PacTel further comments at 20. Most commenters supporting this  X-approach anticipate that direct billing credits will be used in conjunction with discounts." {O-#X\  P6G;ɒP#э#X\  P6G;ɒP# See, e.g., NCTA further comments at 5; NYNEX further comments at 1011. Other commenters assert that the 1996 Act specifies discounts as the appropriate mechanism for providing support to schools and libraries, and that discounts and credits are not one and  X-the same. |" {O -#X\  P6G;ɒP#э#X\  P6G;ɒP# See, e.g., ALA further comments at 12; Colorado State Library further comments at 9; EDLINC further comments at 2223; Great City Schools further comments at 34.   Xv-x519.` ` Schools and Libraries Located in High Cost Areas. Numerous commenters  X_-advocate providing additional support to schools and libraries located in high cost areas. _" X-#X\  P6G;ɒP##Xj\  P6G;ynXP#э#X\  P6G;ɒP# See, e.g., Union City Board of Education reply comments at 12; ALA further comments at 1617; AirTouch further comments at 1819; California Library Ass'n further comments at 5; Colorado State Library further comments at 10; Illinois State Library further comments at 45; Maryland DOE further comments at 1011; NECA further comments at 12; National Coalition for the Homeless further comments at 89; PacTel further  yO'-comments at 2526; U S West further comments at 11; NTIA submission at 1416.#Xj\  P6G;ynXP# Senate Working Group asserts that, in determining the level of federal universal support for schools and libraries, the Commission must consider what schools and libraries in high cost  X -areas can reasonably afford.~ " yOr-#X\  P6G;ɒP#э Senate Working Group further comments at 23.~ In a letter to the Joint Board, a group of 26 Senators stated that "discounts must . . . consider if the school or library is in a rural or high cost area and  X -ensure affordable access for all eligible schools and libraries." 7" yO-#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board (Sept. 26, 1996).  X -x520.` ` In suggesting that schools and libraries in high cost areas ought to receive a greater discount, several parties focus on the additional toll costs that rural schools and  X-libraries may incur relative to urban schools and libraries.;Z" {O -#X\  P6G;ɒP#э See, e.g., BellSouth further comments at 28; Bell Atlantic further comments at 6; Illinois State Library further comments at 45; NECA further comments at 12; PacTel further comments at 26; Washington SPI further comments at 2.; California Library Ass'n asserts that, in some rural areas, libraries may provide the sole public access point to electronic"y *&&dd"  X-information resources,Z" {Oy-#X\  P6G;ɒP#э California Library Ass'n further comments at 5. See also ALA further comments at 1617 (stating that "ALA urges strongly that deep discounts be provided for such areas, where often, libraries and schools are the key, perhaps even the only public access points to electronic information resources"). and that access to advanced telecommunications services in remote  X-areas is both expensive and difficult to obtain."" {O-#X\  P6G;ɒP#э California Library Ass'n further comments at 5. See also NECA further comments at 12 (explaining that additional discounts may be necessary for schools and libraries in rural, insular, and high cost areas because of long transport mileage and/or toll charges, as well as the difficulties in providing advanced services to such areas).  NCLIS notes that significant disparities exist in the types of service available to libraries based on the size of the population and the region in which libraries are located. For example, NCLIS research indicates that while approximately half of the libraries serving populations of 500,000 or more have T-1 connectivity to the Internet, very few libraries serving populations of less than 50,000 have  Xv-T-1 connectivity.mv" yO-#X\  P6G;ɒP#э NCLIS further comments at 6.m NCLIS advocates providing additional support to schools and libraries in  X_-high cost areas to correct such disparities.;Z_d " {Ot-#X\  P6G;ɒP#э NCLIS further comments at 6. See also Pennsylvania Library Ass'n reply comments at 6 (advocating additional support for schools and libraries in high cost areas to overcome obstacles such as distance and poor infrastructure). ;  X1-x521.` ` ALA advocates providing additional support for schools and libraries in high cost areas because "[p]roviding incentives for these institutions to get online and for the carriers to provide service will promote broad public access (the ultimate goal of all universal  X -service), as well as hasten the widespread deployment of highend services."o " yO#-#X\  P6G;ɒP#э ALA further comments at 1617.o ALA also notes that telecommunications costs for libraries in high cost areas represent a much higher  X -percentage of overall library budgets than for libraries in lower cost areas.d " yO-#X\  P6G;ɒP#э ALA comments at ii.d Great City Schools asserts that whether additional discounts are provided to schools and libraries in high cost areas should be a federal determination, rather than a decision left to state public utility  Xy-commissions.zy" yO -#X\  P6G;ɒP#э Great City Schools further comments at 4.z Century and TDS Telecom contend that discounts to schools located in high cost areas "must be `sufficient' to place them in a position to obtain services and access (e.g., Internet) reasonably comparable to what their urban counterparts are able to obtain and at"K 6*&&dd"  X-reasonably comparable rates."Z" {Oy-#X\  P6G;ɒP#э Century further comments at 14. See also MAP comments at 7 n.1 (in discussion of support for schools and libraries located in high cost areas, noting that "[s]ection 254(b)(3) requires that rates in rural, insular, and high cost areas be reasonably comparable to rates charged for similar services in urban areas").  MAP supports basing rates for schools and libraries on the ability to pay by first applying a sliding scale concept of affordability, based on income levels in a particular area. Discounts would then be applied on top of the slidingscale  X-rates.q" yOV-#X\  P6G;ɒP#э MAP further comments at 7.q ALA and the Illinois State Library assert that schools and libraries located in areas that are both high cost and economically disadvantaged should benefit from two sets of  X-additional discounts.z" yO -#X\  P6G;ɒP#э ALA further comments at 16 (stating that "[i]n the case in which a region is both highcost and lowincome, these additional discounts should be combined"); Illinois State Library further comments at 4 (asserting that "additional discounts should be given to both rural and economically disadvantaged areas with an additional discount provided to schools and libraries that are located in areas that are both rural and economically disadvantaged").  X_-x 522.` ` EDLINC acknowledges that the discount formula it proposes may not be sufficient for certain high cost school districts, so it proposes "that each state PUC have the authority to order lower discounts if a district is able to demonstrate that the standard discount  X -. . . does not yield an affordable price."o * " yO-#X\  P6G;ɒP#э EDLINC further comments at 38.o If a school's telecommunications expenditures exceed one percent of its total expenditures, EDLINC asserts that the school should be eligible for an additional discount, in an amount to be determined by the state PUC. Federal universal service mechanisms would fund twothirds of the additional discount, and state universal  X -service mechanisms would fund the remaining onethird.r " yO)-#X\  P6G;ɒP#э EDLINC further comments at 3839.r  X-x 523.` ` Several commenters oppose providing additional support to schools and  Xy-libraries located in high cost areas.PZyJ " {Ot-#X\  P6G;ɒP#э See, e.g., AT&T further comments at 16; Ameritech further comments at 21; Information Renaissance further comments at 910; MFS further comments at 3132; NCTA further comments at 6; TCI further comments at 18; Time Warner further comments at 2426.P Ameritech, for example, contends that the 1996 Act  Xb-does not provide for such an additional level of discount.rbl" yO"-#X\  P6G;ɒP#э Ameritech further comments at 21.r Information Renaissance sees no  XK-need for an additional discount.K" yO$-#X\  P6G;ɒP#э Information Renaissance further comments at 910. AT&T maintains that no additional discount should be provided, and states that if the best commercial rate in a rural area is considered excessive,"4 *&&dd" the affected schools and libraries could request the best commercial rate in an urban area  X-within the state.m" yOb-#X\  P6G;ɒP#э AT&T further comments at 16.m MFS believes that "generic highcost support" is sufficient for schools  X-and libraries located in high cost areas, and that an additional discount is not appropriate.oX" yO-#X\  P6G;ɒP#э MFS further comments at 3132.o Time Warner asserts that an additional discount is not necessary because schools and libraries in high cost areas will be eligible for general high cost universal support as well as the  X-discount that will be available to schools and libraries regardless of location.w" yO& -#X\  P6G;ɒP#э Time Warner further comments at 2425.w Washington UTC maintains that the 1996 Act does not mandate additional discounts for schools and libraries in high cost areas, and that "expansion of universal service funding on this basis is not consistent with the goal of limited, targeted support, or of allowing competition to  X1-work."w1x" yOZ-#X\  P6G;ɒP#э Washington UTC further comments at 13.w  X -x 524.` ` Time Warner asserts that an additional discount is not necessary because schools and libraries in high cost areas will receive the benefit of general high cost universal service support for these areas, as well as the discount that will be available to schools and  X -libraries regardless of location.w " yOw-#X\  P6G;ɒP#э Time Warner further comments at 2425.w Time Warner further observes that many states have begun regulatory initiatives that benefit schools and libraries, and suggests that the federal universal service support mechanism should complement, rather than duplicate, such state efforts and  Xy-should be structured in a competitively neutral manner.wy" yO-#X\  P6G;ɒP#э Time Warner further comments at 2425.w  XK-x 525.` ` Economically Disadvantaged Schools and Libraries. Numerous commenters  X4-support providing additional assistance to disadvantaged schools and libraries.84( " {O -#X\  P6G;ɒP#э See, e.g., AFT comments at 34; New Jersey Advocate comments at 22; U.S. Distance Learning Ass'n comments at 1516; ALA further comments at 1617; AirTouch further comments at 1819; CFA further comments at 1011; California Library Ass'n further comments at 5; Illinois State Library further comments at 45; National Coalition for the Homeless further comments at 811; U S West further comments at 11; Urban Libraries Council further comments at 712; NTIA submission at 1416.8 National Coalition for the Homeless states that recent statistics indicate that the gap between access to" *&&ddG"  X-telecommunications services afforded to rich and poor students continues to widen.uZ" yOy-#X\  P6G;ɒP#э National Coalition for the Homeless further comments at 8. National Coalition for the Homeless states, for example, that "[o]nly 31 percent of all schools with poor children have access to the Internet compared to 62  {O -percent of schools with affluent students." Id.u Public Advocates notes that NetDay `96, a California program aimed at wiring the state's 13,000  X-schools for access to the Internet, failed to reach poor schools in Los Angeles.Zz" yOm-#X\  P6G;ɒP#э Public Advocates comments at 1819 and Exhibit 5 (asserting that "[p]erhaps the most critical issue here is designing policies that ensure that schools, [and] libraries . . . in poor communities achieve levels of access equal to those in wealthy communities. Policies that perpetuate the status quo will merely deepen the disparities  {O -that are presently occurring"). See also Black Community Crusade for Children reply comments at 12 (stating that "[s]tudents who are poor clearly have less access than their betteroff peers to these increasingly fundamental tools, and when poor students do have access, it is more often for routine drill and practice than for the kind of advancedlevel programming offered to students in more affluent schools").Z AFT states that the infrastructure problems are greater in urban schools, and asserts that to deny access to urban students in resourcepoor schools "will negatively affect their educational opportunities, their employment prospects, and help reproduce economic disparities between those who have  Xv-technological proficiencies and those who do not."ev, " yOS-#X\  P6G;ɒP#э AFT comments at 34.e New Jersey Advocate maintains that schools and libraries in economically disadvantaged areas are likely to be most in need of  XH-access to the Internet and the information superhighway,tH " yO-#X\  P6G;ɒP#э New Jersey Advocate comments at 22.t and, therefore, most likely to need additional assistance. At a recent FederalState Joint Board meeting, United States Representative Major Owens emphasized the need to provide greater discounts to  X -economically disadvantaged schools and libraries. L " yO-#X\  P6G;ɒP#э Testimony of United States Representative Major Owens before the FederalState Joint Board on Universal Service (Oct. 17, 1996).  X -x 526.` ` The Senate Working Group, referring to both the principles of section 254(b) and the provisions of section 254(h)(1)(B), states that the Commission and the Joint Board must formulate a "discount mechanism" that takes into consideration what economically  X-disadvantaged schools and libraries can "reasonably afford."~" yO-#X\  P6G;ɒP#э Senate Working Group further comments at 23.~ The Senate Working Group urges that the discounts should be implemented in a manner that ensure all schools and  Xb-libraries have access to telecommunications and information services.|b4" yOG#-#X\  P6G;ɒP#э Senate Working Group further comments at 2.| Moreover, in a letter to the Joint Board, a group of 26 Senators asserts that "[a]ffordability must be defined so that the discounted rates are related to a school's or library's ability to pay," and discounts must"4*&&ddf"  X-be "real, significant and meaningful."" yOy-#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board (Sept. 26, 1996). The Senators also contend that we should "not create a division of `haves' and `have nots' in the Information Age when it comes to the  X-educational uses of schools and libraries."X" yO-#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board (Sept. 26, 1996).  X-x527.` ` U.S. Distance Learning Ass'n states that justification for providing additional assistance to disadvantaged schools and libraries can be found in the principles of section 254 of the 1996 Act, which state that any discount methodology established by the Commission  X_-must be specific, predictable, and sufficient,_" {O -#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 1516 (citing 47 U.S.C.  254(b)(5)). and that rates should be affordable._z" {O -#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 16 (citing 47 U.S.C.  254(b)(1)). New Jersey Advocate similarly focuses on the concept of affordability when it asserts that "there is an obvious correlation between the income of residents of an area, their ability to afford basic, as well as advanced, services that are included in the definition of universal service, and the  X -ability of schools and libraries serving these areas to afford those services."t " yO-#X\  P6G;ɒP#э New Jersey Advocate comments at 22.t AFT contends that, in order to provide equal access to telecommunications services at just, reasonable, and affordable rates, schools serving large populations of poor students will require discount rates  X -greater than other schools.c " yO -#X\  P6G;ɒP#э AFT comments at 3.c  X-x528.` ` Commenters suggest various ways that additional assistance could be administered for disadvantaged schools and libraries. Some commenters, for example,  Xb-contend that a slidingscale approach would be the most equitable way to proceed.$b, " {O?-#X\  P6G;ɒP#э See, e.g., CFA further comments at 11; EDLINC further comments at 4041; MAP further comments at 78; MCI further comments at 9; NECA further comments at 1415; Western Alliance further comments at 4;.  {O-See also U.S. Distance Learning Ass'n comments at 1317 (supporting either a sliding scale approach or a Lifelinetype program). NSBA I supports a system under which "[t]he amount of the subsidy would be proportional to the amount by which the average income in the district falls below the national average, so that an area with only 25 percent of the national average income would pay only 25 percent of the  X-discounted price."Z" {O#-#X\  P6G;ɒP#э NSBA I comments at 24. See also Great City Schools comments at 2 (stating that, "[i]n recognition of the direct relationship between the ability to pay even a discounted rate and the overriding principle of access, the Commission should consider establishing discount rates in declining amounts for schools in direct proportion"a%*&&%" to their ability to pay such rates"). Great City Schools also supports providing discounts in direct"X*&&dd "  X-proportion to the ability to pay.X" yO -#X\  P6G;ɒP#э Great City Schools comments at 2. Great City Schools supports basing any model on data provided by  {O-the Department of Education. Id. Other commenters support using a step approach to allocate an additional discount to disadvantaged schools and libraries, under which the discount would not need to be adjusted for every change in the percentage of children from  X-economically disadvantaged families." {O -#X\  P6G;ɒP#э See, e.g., NECA comments at 1516; U.S. Distance Learning Ass'n comments at 1317; TCI further comments at 19. Commenters suggest basing a stepapproach model  X-on either the threestep national school lunch programe " yOa -#X\  P6G;ɒP#э 42 U.S.C.  1758.e or the twostep Lifeline and Link X-Up programs currently available to needy residential customers.\" yO-#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 17. Several other commenters support a Lifeline approach.  {O-See, e.g., NSBA I comments at 2324; AFT comments at 6; U.S. Distance Learning Ass'n comments at 17. The  {Ol-Lifeline Assistance Plan and the LinkUp American Program are discussed in detail at section VIII supra.ļ PacTel, for example,  Xv-asserts that a step approach is easier to apply and administer than a sliding scale.rv " yO-#X\  P6G;ɒP#э PacTel further comments at 2627.r  XH-x529.` ` Consistent with its approach to providing a supplemental discount to high cost schools and libraries, EDLINC acknowledges that the discount formula it proposes may not be sufficient for certain economically disadvantaged school districts, so it proposes "that each state PUC have the authority to order lower discounts if a district is able to demonstrate that  X -the standard discount . . . does not yield an affordable price."o P " yO-#X\  P6G;ɒP#э EDLINC further comments at 38.o If a school's telecommunications expenditures exceed one percent of its total expenditures, EDLINC asserts that the school should be eligible for an additional discount, in an amount to be determined by the state PUC. Federal universal service mechanisms would fund twothirds of the additional  X-discount, and state universal service mechanisms would fund the remaining onethird.r" yO!-#X\  P6G;ɒP#э EDLINC further comments at 3839.r  Xb-x530.` ` Several commenters suggest ways to define disadvantaged schools and libraries. U.S. Distance Learning Ass'n defines disadvantaged schools and libraries as "those which are situated in communities which, according to U.S. census income data, are in the lowest 20  X-percentile in terms of income."}p" yO>%-#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 16.} New Jersey Advocate also supports consideration of"*&&ddG" income and the ability of the underlying populations to pay for advanced services in  X-determining whether a school is disadvantaged.t" yOb-#X\  P6G;ɒP#э New Jersey Advocate comments at 22.t Great City Schools advocates considering a  X-school's ability to pay, or in the alternative, the rate of poverty in the school district.tX" yO-#X\  P6G;ɒP#э Great City Schools comments at 12.t Some commenters support using eligibility requirements from the national school lunch program as a model for providing an additional universal service discount to disadvantaged  X-schools and libraries." {O& -#X\  P6G;ɒP#э See, e.g., MCI further comments at 10; New York DOE further comments at 10; NYNEX further comments at 16. Under the national school lunch program, a child is either eligible  Xv-for no assistance, a reduced price lunch, or a free lunch.AvB" yOi -ԍ 42 U.S.C.  1758(b).A A child whose family income is between 130 percent and 185 percent of applicable family size income levels contained in the nonfarm poverty guidelines prescribed by the Office of Management and Budget is eligible for a reduced price lunch. A child whose family income is 130 percent or less of applicable family size income levels contained in the nonfarm income poverty guidelines prescribed by  X -the Office of Management and Budget is eligible for a free lunch.A " yO-ԍ 42 U.S.C.  1758(b).A  X -x531.` ` AFT supports determining eligibility on a formula such as the one used to distribute federal educational funding under Title I of the Elementary and Secondary  X -Education Act of 1965 (Title I),$ b " yO-#X\  P6G;ɒP#э 20 U.S.C.  6301. The Improving America's Schools Act of 1994 (P.L. 103382) reauthorized the  {O-Elementary and Secondary Education Act of 1965. See United States Department of Education,  Policy  {OL-Guidelines for Title I, Part A Improving Basic Programs Operated by Local Educational Agencies at i (April 1996). which relies on Census Department poverty data, eligibility for AFDC, or participation in the national school lunch program, to determine  Xy-whether a school is disadvantaged.yyN " {Ox-#X\  P6G;ɒP#э AFT comments at 4. See also NSBA I comments at 23 (supporting use of Census Bureau data or some other appropriate state or federal formula). Title I is a federal program that provides financial assistance aimed  {O -at helping disadvantaged students meet academic content and student performance standards. See United States  {O -Department of Education, Policy Guidelines for Title I, Part A Improving Basic Programs Operated by Local  {O!-Educational Agencies at i (April 1996). y AFT argues that basing eligibility on such existing programs would not be administratively burdensome because school officials have used such  XK-poverty data for decades.K" {O%-#X\  P6G;ɒP#э AFT comments at 6. See also ALA further comments at 1718; USTA further comments at 16; U S West further comments at 11. PacTel supports basing eligibility requirements on poverty data"K`*&&dd"  X-provided by the Department of Education.o" yOy-#X\  P6G;ɒP#э PacTel further comments at 26.o TCI and the Urban Libraries Council assert that any model used should be based on the wealth of all inhabitants in a school district or within a library's service area, rather than based just on the wealth of the students enrolled in a  X-school district.X" yO-#X\  P6G;ɒP#э TCI further comments at 19; Urban Libraries Council further comments at 1214.  X-x532.` ` Some commenters oppose providing additional support to economically  Xv-disadvantaged schools and libraries.v" {O -#X\  P6G;ɒP#э See, e.g., AT&T further comments at 16; Ameritech further comments at 21; Information Renaissance further comments at 910; MFS further comments at 3132; Time Warner further comments at 2425. Ameritech, for example, asserts that the 1996 Act  X_-does not contemplate any such additional discount.-Z_B" {OR-#X\  P6G;ɒP#э Ameritech further comments at 21. See also Washington UTC further comments at 13 (asserting that "[t]he discount mechanism is limited to the circumstances set out in Section 254(h)(1) and should not be expanded").- MFS contends that "[i]t is inappropriate and beyond the scope of the Telecommunications Act to require telecommunications companies and telecommunications customers to bear the burden of  X -financing economically disadvantaged schools."o d " yO/-#X\  P6G;ɒP#э MFS further comments at 3132.o  X -x533.` ` Existing Special Rates. Some commenters support requiring the carriers to offer to schools and libraries already receiving special rates the lower of that special rate or  X -the discounted rate offered pursuant to section 254. " {Oc-#X\  P6G;ɒP#э See, e.g., GCI further comments at 7; NCTA further comments at 56; Oakland School District further comments at 17; TCI further comments at 18. Florida PSC, for example, asserts that the federal discount should be applied to the rate that would be charged in the absence of any  X-special rate, and the state should be free to further discount that rate.tN " yO-#X\  P6G;ɒP#э Florida PSC further comments at 13.t CFA maintains that carriers should not be able to collect universal service support for any services currently being  Xb-offered at a special rate.nb" yO -#X\  P6G;ɒP#э CFA further comments at 910.n Some commenters caution that schools and libraries should be precluded from receiving double support, once through existing special rates and again  X4-through any new discount programs.4n" yOS$-#X\  P6G;ɒP#э#X\  P6G;ɒP# AirTouch further comments at 18; ITC further comments at 8. RUS, on the other hand, asserts that discounts offered pursuant to section 254 should be applied on top of any low rates that schools and"*&&dd" libraries were previously able to secure. RUS adds that the goal should be to encourage service providers to offer services to schools and libraries, and service providers already offering special rates to schools and libraries should not be placed at a competitive  X-disadvantage.hZ" {O4-#X\  P6G;ɒP#э#X\  P6G;ɒP# See, e.g., Information Renaissance further comments at 9; NCTA further comments at 56; New York  yO-DOE further comments at 9; TCI further comments at 18; Union City Board of Education further comments at 4, 13.h  X-x534.` ` Interstate and Intrastate Discount Harmonization. A few commenters address  Xv-interstate and intrastate harmonization of discount mechanisms.v" {O -#X\  P6G;ɒP#э See, e.g., Apple comments at 6; Florida PSC comments at 23, 45, 8; Netscape comments at 21; . Netscape, for example, maintains that "the Commission should declare in this proceeding that all Internet communications and Internet access services are jurisdictionally interstate, and preempt state  X1-public service commission regulation of the Internet."i1|" yO^-#X\  P6G;ɒP#э Netscape comments at 21.i Netscape bases this argument on its interpretation that, under the jurisdictional classification rule for mixeduse local exchange carrier special access services, Internet access services are interstate, "even though the user's  X -`link' to the network is physically intrastate."mZ " {O-#X\  P6G;ɒP#э Netscape comments at 21 (citing 47 C.F.R.  36.154(a) and MTS and WATS Market Structure, 4 FCC Rcd. 5660 (1989) for the premise that "a facility with at least ten percent interstate usage is classified as interstate for separations, regulation and tariffing purposes").m BellSouth suggests that "the public interest would best be served if the federal universal service support mechanisms [were] also [ ] sufficient to cover statedesignated discounts for intrastate services where the state has not adopted `additional definitions and standards' within the meaning of [s]ection 254(f) or  X-appropriate funding mechanisms."j. " yOo-#X\  P6G;ɒP#э BellSouth comments at 22.j Some commenters assert that states should be able to  Xy-further discount any federally discounted services.y " {O-#X\  P6G;ɒP#э See, e.g., Florida PSC reply comments at 23, 45, 8; West Virginia Consumer Advocate reply comments at 57. New York DPS, on the other hand, asserts that state and federal discount methodologies need not be harmonized because the majority of services will likely be intrastate in nature and recovery of revenues will fall  X4-primarily to the states.l4" yO!-#X\  P6G;ɒP#э New York DPS comments at 8.l In addition, New York DPS maintains that the 1996 Act does not  X-require that state and federal discount methodologies be harmonized.l" yOv$-#X\  P6G;ɒP#э New York DPS comments at 8.l "8*&&ddF"Ԍ X-x` ` 3. Discussion  X-x` `  a. Prediscount Price  X-  X-x535.` ` As a preliminary matter, we note that the prediscount price is significant for two reasons. First, it is the total price that carriers would receive for the services they sell to schools and libraries. While schools and libraries would only pay the carrier a discounted rate, the carrier would receive the amount of the discount from universal service support mechanisms. Therefore, the prediscount price is the price of most significance to providers of services to schools and libraries. The prediscount price is also highly significant to schools and libraries because they must pay the undiscounted portion of the price. This gives schools and libraries a strong incentive to secure the lowest prediscount price, while service providers desire the highest possible prediscount price.  X -x536.` ` Competitive Environment. We expect that, in a competitive marketplace, schools and libraries would have both the opportunity and the incentive to secure the lowest price charged to similarly situated nonresidential customers for similar services. In a competitive marketplace, we also expect that carriers would face competitive pressures to provide such a price to schools and libraries. Thus we note that, while some carriers support  XK-use of the tariffed rate as the prediscount baseline,mK" yO-#X\  P6G;ɒP#э BellSouth comments at 1920.m we see no reason to deny schools and libraries the benefits of competitive pressures that might lead carriers to cut their prices. In fact, Congress sought to create an environment that stimulated competition to enable all customers to benefit from the lower costs and lower prices produced by the competitive pressures of the marketplace. Additionally, we would not want to deprive schools and libraries of access to contracts negotiated by state governments for all state institutions, nor would we want to deny schools access to rates under the federal FTS 2000 contract, if those rates were to become available to them. In addition, carriers that do not file tariffs do not have tariffed rates.  Xe-x537.` ` We conclude that it would be beneficial to encourage schools and libraries to aggregate their demand with others to create a consortium with sufficient demand to attract a competitor into the market which could influence the existing carrier to cut its prices. We also recognize the benefits that aggregation into consortia can create in terms of promoting more efficient shared use of facilities to which each school or library might need access, but which none alone would need for full capacity. We recognize that permitting schools and libraries to aggregate with other local customers, such as health care providers, community colleges, or commercial banks may raise administrative difficulties of enforcing the  X!-eligibilityj!X" yO%-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4).j and resale limitationsl!" yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(3).l that Congress imposed. Nevertheless, we conclude that"!X*&&dd " the benefits from such aggregation outweigh the administrative difficulties. We discuss the latter in greater detail in the context of eligibility and resale, below.  X-x538.` ` Ideally, schools and libraries would be able to take full advantage of the competitive marketplace and aggregation with others to secure costbased prediscount prices for the services they desire. We are hopeful that competition to serve schools and libraries will arise in a large fraction of the market. As NTIA states in one of its six principles, "the most efficient use of the universal service fund support system should be promoted through  XH-the use of marketbased techniques wherever possible."fHX" yOQ -#X\  P6G;ɒP#э NTIA submission at 7.f We are aware, however, that schools and libraries may not yet be aware of the impact of the 1996 Act on opening markets to competition. For example, many schools and libraries may not yet be aware of the McKinsey Report estimates stating that wireless service providers would offer the best prices  X -to 27 percent of all schools.  " {O-#X\  P6G;ɒP#э McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 58 (1995). Schools and libraries may also not yet be aware that cable  X -television wires currently pass more than 90 percent of homes nationwide.  z" {O-#X\  P6G;ɒP#э Paul Kagan Associates, Kagan Media Index (1995).  X -x539. ` ` Therefore, we find that fiscal responsibility compels us to recommend that schools and libraries be required to seek competitive bids for all services eligible for section 254(h) discounts. We recommend that schools and libraries be required to submit their requests for services to the fund administrator, who would then post a description of the services sought on a website for all providers of services to see and respond to as if they were requests for proposals (RFPs). Posting on the website would satisfy the competitive bid requirement. We reject ACE's argument that competitive bidding would represent an  X-impermissible unfunded mandate.i  " yO-#X\  P6G;ɒP#э ACE reply comments at 6.i Clearly, Congress sought to stimulate competition with the 1996 Act, and we find that it would be inappropriate to treat the costs of such competition as an impermissible unfunded mandate.  X-x540.` ` Lowest Price Charged to Similarly Situated NonResidential Customers for  X-Similar Services. Some commenters assert that the Commission should require carriers to  X|-provide service to a school or library at its "lowest commercial rate." |" {O#-#X\  P6G;ɒP#э See Union City reply comments at 12; EDLINC further comments at 27. We recommend modifying that concept to encompass the lowest price charged to similarly situated nonresidential customers for similar services (hereinafter "lowest corresponding price"). We"N. *&&dd" recommend that the lowest corresponding price apply in two contexts. In the context of competitive bidding, the lowest corresponding price would act as the ceiling on the prediscount price offered to schools and libraries. Service providers would be required to selfcertify to the administrator that the price offered to schools and libraries is no more than the lowest corresponding price, and no provider could seek to charge schools and libraries a price above that price. We would hope that providers would charge schools and libraries less than the lowest corresponding price, ideally the lowest price charged to any of their nonresidential customers.  X1-x541.` ` We recommend that the lowest corresponding price also apply in areas in which competition does not exist. In such areas, the lowest corresponding price would constitute the prediscount price carriers are required to offer to schools and libraries. As stated above, we recommend that carriers be required to selfcertify that the price offered to schools and libraries is actually the lowest corresponding price. We further recommend that schools, libraries, and carriers be permitted to seek recourse from the Commission, regarding interstate rates, and to state commissions, regarding intrastate rates, if they believe that the lowest corresponding price is unfairly high or low. Schools and libraries may request lower rates if they believe the rate offered by the carrier does not represent the lowest corresponding price. Carriers may request higher rates if they believe that the lowest corresponding price is noncompensatory.  X-x542.` ` To help ensure that schools and libraries are able to secure the lowest rates available in the market, Congress permitted them to receive discounts for services provided by  X-any telecommunications carrier serving a geographic area.w " {Oh-#X\  P6G;ɒP#э See 47 U.S.C.  254(h)(1)(B).w While Alaska Library urges that  X-we interpret "geographic area" to mean the entire state,nZ" yO-#X\  P6G;ɒP#э Alaska Library comments at 6.n this would require any firm providing telecommunications services to any school in a state to serve any other school in the state. This interpretation might discourage new firms from entering a state for fear that they could be forced to serve any area within that state. For example, electric utilities might be discouraged from offering telecommunications services to schools if there was a requirement that once they had negotiated an attractive rate for serving one school or library system in a state where they operated, any other school or library in the state could also demand telecommunications services at rates comparable to those the utility offered to its initial "test" community.  X-x543.` ` We are also concerned that using an expansive definition of geographic area might be unfair to a small telephone company serving a single community, including its schools, for such a definition would permit it to be compelled to serve other schools and libraries outside its market. While the proposal that we use LATA boundaries instead of state"!*&&dd " boundaries alleviates this problem to some degree, we still believe that even this interpretation would be harmful to the public interest for the reasons just discussed. For example, a cable company that offered special rates to a school in a community in which the company's costs were particularly low might be reluctant to compete to serve a nearby LATA if the company knew that it could be forced to provide service to a school or library in that LATA at the prices it charged in the first community. We recommend that the Commission interpret geographic area to mean the area in which the service provider is seeking to serve customers, e.g., the telephone or cable company's franchise areas and a wireless company's serving area.  X1-x544.` ` Using this definition of geographic areas, we recommend that the obligation to serve at lowest corresponding prices apply to all telecommunications carriers in that geographic area, including, for example, competitive LECs, private network operators, or  X -cable companies, to the extent that they offer telecommunications for a fee to the public.h " yOe -#X\  P6G;ɒP#э 47 U.S.C.  153(46).h Similarly, we agree with CCV that there is no reason to exclude carriers who do not provide core services, if they can offer eligible services to a school or library at the lowest rate. We believe that Congress desired that schools and libraries receive the services they need from the most efficient provider of those services.  Xb-x 545.` ` TSLRIC. We find that TSLRIC should not be used to set the prediscount price for services sought by schools and libraries. Our primary concern is based on the practicality of expecting schools and libraries to evaluate TSLRIC rates proposed by carriers.  X-In the Local Competition Order, the Commission recognized that even sophisticated equally resourceful carriers may not be able to agree on the appropriate Total Element LongRun  X-Incremental Cost (TELRIC) price for network elements without arbitration.X" {O-#X\  P6G;ɒP#э Local Competition Order at section VII.B. While such rates may eventually be established in many markets, these rates are different from TSLRIC rates, and in many markets, carriers may not negotiate TELRIC rates for many years, if ever. We doubt that schools and libraries would find it worthwhile to devote the resources necessary to secure the benefits of TSLRIC prices over the other prices offered by carriers in the same market. We also expect that calculating TSLRIC prices would be too time  Xg-consuming for all parties involved. In the Local Competition Order, the Commission provided proxies for TELRIC rates of network elements specifically because it anticipated that state commissions would be unable to develop such models or evaluate those submitted by  X$-incumbent local exchange carriers as quickly as customers would demand.$" {O"-#X\  P6G;ɒP#э Local Competition Order at section VII.C. On September 27, 1996, the 8th Circuit granted a temporary  {O#-stay of the Local Competition Order, pending oral argument. On October 15, 1996, the court "decided to stay the operation and effect of only the pricing provisions and the `pick and choose' rule contained in the FCC's First Report and Order pending . . . [its] final determination of the issues raised by the pending petitions for  {O%-review." Order Granting Stay Pending Judicial Review, 1996 WL 589204 (8th Cir.), __ F.3d __.  We find that it"$*&&dd\" is very important that schools and libraries have immediate access to the services available under section 254(h). We conclude that the use of TSLRIC should not be mandated for determining the prediscount price for services sought by schools and libraries. x  X-x!546.` ` In summary, we recommend that schools and libraries be required to seek competitive bids for all services eligible for section 254(h) discounts. We recommend that schools and libraries be required to submit their requests for services to the fund administrator, who would post the descriptions of services sought on a web site for potential providers to see. The posting of a school or library's description of services would satisfy the competitive bid requirement. We recommend that the lowest corresponding price, defined as the lowest price charged to similarly situated nonresidential customers for similar services, constitute the ceiling for the competitively bid prediscount price. In areas in which there is no competition, we recommend that the lowest corresponding price constitute the prediscount price. In both cases, the carrier would be required to selfcertify that the price offered to schools and libraries is equal to or lower than the lowest corresponding price. We further recommend that schools, libraries, and carriers be permitted to appeal to the Commission, regarding interstate rates, and to state commissions, regarding intrastate rates, if they believe that the lowest corresponding price is unfairly high or low.  XK- x` `  b. Discounts  X4-  X-x"547.` ` In General. The Act requires the Commission, with respect to interstate services and the states with respect to intrastate services, to establish a discount on designated services provided to schools and libraries. Pursuant to section 254(h)(1)(B), the discount must be an amount that is appropriate and necessary to ensure affordable access to and use of the  X-services pursuant to section 254(c)(3).F" yO:-ԍ 47 U.S.C.  254(h)(1)(B).F The discount must take into account the principle set forth in section 254(b)(5) that the federal universal service support mechanisms must be  X-specific, sufficient, and predictable.CX" yO-ԍ 47 U.S.C.  254(b)(5).C We recommend that the Commission adopt a percentage discount mechanism, adjusted for schools and libraries that are defined as economically disadvantaged and those schools and libraries located in high cost areas. In particular, we recommend that the Commission adopt a matrix that provides discounts from 20 percent to 90 percent, to apply to all telecommunications services, Internet access, and internal connections, with the range of discounts correlated to the indicators of economic disadvantage and high cost for schools and libraries.  X-x#548.` ` Discount Structure. Some commenters suggest that no discount is necessary for schools and libraries that are not identified as economically disadvantaged or located in high cost areas, if we recommend the adoption of a prediscount price based on TSLRIC. Since,"!*&&dd " however, we decline to make such a recommendation, we find that this proposal is moot. We also do not endorse the disbursement of discounts in the form of block grants to states. As noted by the Senate Working Group: Xx` ` Such grants would be incompatible with the statute's architecture  x` ` of discounts based on affordability on flexible bona fide requests x` ` submitted by schools and libraries. Block grants are not based on x` ` individual needs and priorities of schools and libraries for education x` ` technology. Affordability cannot be determined under a block grant  X1-x` ` approach.|1" yO -#X\  P6G;ɒP#э Senate Working Group further comments at 2.|  X -x$549.` ` We recommend that the Commission adopt a rule which provides support to  X -schools and libraries through a percentage discount mechanism/" X" yO-#X\  P6G;ɒP#э#X\  P6G;ɒP# Some commenters support discounts and oppose "billing credits" as contrary to a discount mechanism.  {O-See, e.g., ALA further comments at 12; Colorado State Library further comments at 9; EDLINC further comments at 2223; Great City Schools further comments at 34. Actually, we would expect to implement a discount mechanism through billing credits and we assume that these commenters simply misunderstood this./ because we find that such a mechanism would establish incentives for efficiency and accountability. First, requiring schools and libraries to pay a share of the cost should lead them to avoid unnecessary and wasteful expenditures because they would be unlikely to devote their preexisting budgeted funds to purchases that they could not use effectively. Second, a percentage discount encourages schools and libraries to seek the best prediscount price and to make informed knowledgeable choices among their options, thereby building in effective fiscal constraints on the discount fund. In fact, we understand that state or school or library boards generally require schools and libraries to seek competitive bids for all procurements above a specified minimum level, and we would expect a percentage discount mechanism to initiate the competitive bid process. x  X-x%550.` ` While NSBA I's proposal to discount services to a "95 percent affordability  X-price point"pB" yO-#X\  P6G;ɒP#э NSBA I reply comments at 2122.p appears sound, we conclude after careful analysis that it does not prove to be workable for two reasons. First, the price of higher bandwidth services , e.g., T3 (44 Mbps) or OC1 (52 Mbps), could be driven down to extremely low levels if they had to be priced to be affordable to 95 percent of schools and libraries, most of whom would have no use for the additional bandwidth such service would provide. Second, and of most concern, is that by definition five percent of the schools and libraries would not be able to afford basic services. Similarly, we find that the Pennsylvania Library Association's proposal for a discount set at"7*&&dd"  X-the wholesale price of a serviceY" yOy-ԍ Pennsylvania Library Ass'n reply comments at 6.Y is not germane in a market where the initial supplier of transport generally sells directly to customers at retail rates. We view this proposal as analogous to the proposal to set the prediscount price based on TSLRIC, and we decline to endorse it for reasons similar to why we did not recommend adoption of a TSLRIC prediscount standard.  Xv-x&551.` ` 100 Percent Discounts. While we have noted the advantages of the percentage discount mechanism, it also may have the drawback of failing to enable the participation of those schools and libraries that cannot allocate any of their own funds toward the purchase of eligible discounted services. This creates the potential that the universal service support program for schools and libraries could increase the resource disparity that exists among schools. The most impoverished schools need to have access to the services that are included within the discount mechanism, despite their lack of financial resources. To address this concern, we have recommended substantially deeper discounts for the schools and libraries that are most economically disadvantaged, as discussed below. We decline, however, to recommend a 100 percent discount for any category of schools or libraries. We believe that it is essential that the discount program be structured in a way that maximizes the opportunity for its costeffective operation. We believe that a minimal copayment by the most economically disadvantaged schools and libraries will assure realization of that goal. x  X4-x'552. ` ` Discount Level and Cap. The SnoweRockefellerExonKerrey provision for providing support to schools and libraries is a new provision. Unlike high cost assistance, longterm support, and DEM weighting, there is no historical record of how much it will likely cost to provide the support Congress directed us to afford to schools and libraries. The  X-McKinsey Report,X" {O-ԍ McKinsey and Company, Connecting K12 Schools to the Information Superhighway (1995). the KickStart Initiative," {Os-ԍ KickStart Initiative: Connecting America's Communities to the Information Superhighway (1996). and the other data sources we have  X-reviewedp^|" {O-ԍ See, e.g., Russell Rothstein, Networking K12 Schools: Architecture Models and Evaluation of Costs  {O-and Benefits (1996) (unpublished masters thesis, Massachusetts Institute of Technology); NCLIS, Internet Cost  {O-and Cost Models for Public Libraries, Final Report (June 1995). p provide some guidance, but they attempt to estimate costs in an area where technologies are developing rapidly and demand is inherently difficult to predict. Therefore, to fulfill our statutory obligation to create a specific, predictable, and sufficient universal service support mechanism, we recommend that the Commission establish an annual cap on the amount of funds available to schools and libraries.  X7-x(553. ` ` The McKinsey Report provides the most comprehensive estimate, on the record, of the cost of deploying and supporting the ongoing costs of a communications" *&&ddz"  X-network for public school on a nationwide basis." {Oy-ԍ See generally McKinsey and Company, Connecting K12 Schools to the Information Superhighway (1996). In the Public Notice, parties were asked  X-to comment on the accuracy of the funding estimate contained in the McKinsey Report.G"" yO-ԍ Public Notice at question 23.G Most commenting parties agree that the McKinsey Report at least constitutes an adequate starting point for estimating the costs associated with deploying and sustaining a pervasive  X-communications network for public schools.6\" {O -ԍ See, e.g., Bell Atlantic further comments at 7; New York DOE further comments at 10; U S West  {O -further comments at 12. See also MCI further comments at 10 (stating that the McKinsey Report appears to reflect tariffed rates accurately). 6 h  Xv-x)554. ` ` Extrapolating from the data provided by McKinsey,v" {O-ԍ McKinsey and Company, Connecting K12 Schools to the Information Superhighway (1995). Rothstein,vh " yO-ԍ Russell Rothstein, Networking K12 Schools: Architecture Models and Evaluation of Costs and Benefits (1996) (unpublished masters thesis, Massachusetts Institute of Technology). and  X_-NCLIS, _ " {O-ԍ NCLIS, Internet Cost and Cost Models for Public Libraries, Final Report (June 1995). we estimate that the total cost of the communications services eligible for discounts, as discussed above, would be approximately $3.1 to 3.4 billion annually during an initial four year deployment period, and approximately $2.4 to 2.7 billion annually during subsequent years. We reach these estimates based on the following assumptions and adjustments. First, we adjust the McKinsey base cost estimates for the full classroom model to account for discounts that McKinsey estimates: 10 percent to 30 percent volume discounts  X -and a 10 percent discount from using volunteers to pull cable. ! R " {O-ԍ McKinsey and Company, Connecting K12 Schools to the Information Superhighway at 35 (1995).  {O-McKinsey estimated that volume discounts would range from 10 percent to 60 percent. Id. at 59.  We also adjust McKinsey figures downward to reflect the increased percentage of schools that have already installed  X -internal connections since the McKinsey Report was prepared. "\ " {O-ԍ McKinsey assumed 7 percent of schools had internal connections. McKinsey and Company, Connecting  {O-K12 Schools to the Information Superhighway at 59 (1995). We estimate that 20 percent is a more accurate figure today.  We adjust our figures up to reflect the coverage of approximately 113,000 public and nonpublic schools, while  Xy-McKinsey's estimates were only based on 84,500 public schools.#Zy" {O#-ԍ Our estimate of total K12 schools comes from the United States Department of Education. See Letter from Emilio Gonzalez, United States Department of Education, to Mark Nadel, Federal Communications Commission (Nov. 4, 1996). We also add in the cost"y#*&&dd" of Internet access, assuming that 75% of schools and libraries will take advantage of at least basic access in the first year of this program, and that all schools and libraries will use at least  X-basic access in subsequent years.$"" yOK-ԍ We estimate the cost of basic access to the Internet based on Rothstein's $150 million annual figure and assume that by full deployment higher speed access will cost schools approximately $630 million annually before  {O-any discounts. See Russell Rothstein, Networking K12 Schools: Architecture Models and Evaluation of Costs and Benefits 50 (1996) (unpublished masters thesis, Massachusetts Institute of Technology). Furthermore, our estimates are based on deployment of onequarter of all eligible schools and libraries in each of the initial four years. Finally, we estimate the telecommunicationsrelated costs of schools that have not yet fully deployed internal connections or more advanced access based on an estimate that basic usage by schools  Xv-is approximately $485 million annually today.<%Zv" yO -ԍ Ameritech estimated that an average school in Ameritech territory spends approximately $4,773 annually  {O -for basic telecommunications services. See Letter from Celia Nogales, Ameritech to Mark Nadel, Federal Communications Commission (Nov. 4, 1996).<  XH-x*555. ` ` We recommend that the following matrix of percentage discounts be applied in the schools and libraries programs. The matrix represents an example of an appropriate distribution of schools across the six discount levels, according to the specified metric for determining the wealth of a school. If a different metric for determining the wealth of a school is ultimately chosen for the purposes of this program, we would expect that a similar distribution of schools across the discount range would be reflected. The principles in determining the final matrix should ensure that the greatest discounts go to the most disadvantaged schools and libraries, while an equitable progression of discounts should be applied to the other categories, keeping within the parameters of 20 percent to 90 percent discounts. x"K%*&&dd"Ԍ ^ ddx !(ddx` 88 ^  z g  DISCOUNT MATRIX  COST OF SERVICE (estimated percent in category)"zz " HOW DISADVANTAGED? based on percent of students in the national school lunch program (estimated percent in category)   low cost (67%)g midcost (26%)g highest cost (7%)"z q z" gw"  w < 1 (3%)ew"`20ew"20ew"l25"q q " w 119 (30.7%)w"`40w"45w"l50"q q e" w 2034 (19%)G w"`50G w"55G w"l60"q q " i w 3549 (15%) w"`60 w"65 w"l70"q q G "  w 5074 (16%)) w"`80) w"80) w"l80"q    " w"  K  75100 (16.3%) "`90 "90 "l90   )   X-x+556.` ` In addition, we recommend that the Commission set an annual cap on spending of $2.25 billion per year. In addition, any funds that are not disbursed in a given year may be carried forward and may be disbursed in subsequent years without regard to the cap. We further recommend that the Commission establish a trigger mechanism, so that if expenditures in any year reach $2 billion, rules of priority would come into effect. Under the rules of priority, only those schools and libraries that are most economically disadvantaged and had not yet received discounts from the universal service mechanism in the previous year would be granted guaranteed funds, until the cap was reached. Other economically disadvantaged schools and libraries would have second priority for support if additional funds were available at the end of the year. Finally, all other eligible schools and libraries would be granted funding contingent on availability after economically disadvantaged schools and libraries had requested funding. We also recommend that the Joint Board, as part of its review in the year 2001, revisit the effectiveness of the schools and libraries program.  XZ-x` `  c. Schools Located in High Cost Areas  X,-x,557.` ` Some parties argue that the Commission should not provide any additional support to schools and libraries in high cost areas because generic high cost support will be  X-sufficient to address this problem.&  {Ow"-#X\  P6G;ɒP#э See Time Warner further comments at 2425. We reject this argument because high cost assistance does not include services to multiconnection businesses. Thus, alternative mechanisms are necessary to ensure that schools and libraries in high cost areas have affordable access to and use of covered services.""Z&*&&dd"! "Ԍ X-ԙx-558.` ` While Ameritech contends that the 1996 Act does not provide for additional  X-levels of support for high cost areas,r'  yOb-#X\  P6G;ɒP#э Ameritech further comments at 21.r members of the Senate Working Group urge the  X-Commission to consider the statutory requirement that access be affordable.~(X  yO-#X\  P6G;ɒP#э Senate Working Group further comments at 23.~ As the Senate Working Group notes, affordability is clearly affected by the price of services, and which, in  X-turn, is based primarily on the cost of service in the area.~)  yO= -#X\  P6G;ɒP#э Senate Working Group further comments at 23.~ In fact, 26 Senators state that "[d]iscounts must also consider if the school or library is in a high cost area and ensure  Xv-affordable access for all eligible schools and libraries."*vx  yO -#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board (Sept. 26, 1996). ALA notes that higher costs force libraries in high cost areas to devote a larger percent of their budgets to telecommunications  XH-services.d+H  yO-#X\  P6G;ɒP#э ALA comments at ii.d  X -x.559.` ` While AT&T opposes additional discounts for schools and libraries in high cost areas, it proposes a mechanism for providing such support. AT&T offers a model similar to the one mandated for health care providers, whereby eligible purchasers in rural, high cost  X -areas would be permitted to purchase service at urban rates.m,   yO-#X\  P6G;ɒP#э AT&T further comments at 16.m While AT&T does not acknowledge the need to fund the difference between the urban and rural rates, that difference could represent a substantial discount. EDLINC proposes that the Commission provide additional support for schools and libraries in high cost areas based on a measure of population density. Furthermore, EDLINC proposes that state commissions be given authority to authorize additional discounts for "outliers" who demonstrate that their telecommunications expenditures exceed one percent of their budget and yet they are still unable to afford an adequate level of service. Twothirds of that support would come from the federal universal  X-service support fund while the state would contribute the remaining third.r-(  yO-#X\  P6G;ɒP#э EDLINC further comments at 3839.r  X-x/560.` ` We find the argument of the Senate Working Group to be compelling. We recommend that the statutory definition of "affordable" must take into account the cost of service in an area. Thus, we recommend that the Commission take into account the cost of providing services when setting discounts for schools and libraries. To achieve this, we recommend that the Commission consider a "step" approach that would calibrate the cost of service in some reasonable, practical, and minimally burdensome manner. For example, it"| -*&&ddn! " may be appropriate for the Commission to define high cost areas by considering the unseparated loop costs of the incumbent LEC. If unseparated loop costs exceed a nationwide threshold, then the area may be considered "high cost," and schools and libraries located in  X-that area would be given a greater discount.W.  {O4-ԍ See 47 C.F.R.  36.601 et seq.W Other methods for determining high cost may also be appropriate, and we encourage the Commission to seek additional information and parties' comments on this issue prior to adopting rules.  X_- x` `  d. Economically Disadvantaged Schools x  X1-x0561.` ` Both the statutory language and the legislative history of the 1996 Act lead us to recommend that the Commission promulgate a rule that provides a greater discount to economically disadvantaged schools and libraries for services within the definition of universal service. While section 254(h)(1)(B) does not explicitly mandate a greater discount for economically disadvantaged schools, it grants the Commission the discretion to determine whether such a discount is necessary to make access to and use of such services affordable for disadvantaged schools and libraries. We conclude that the numerous references to  X-affordability in the legislative history also support our recommendation./Z  {O-ԍ See, e.g., Joint Explanatory Statement, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 132 (1996); 141 Cong. Rec. S7984 (June 8, 1995). Moreover, as discussed above in the section on schools and libraries located in high cost areas, the Senate Working Group also emphasizes that such discounted rates must take into consideration the "different needs and different resources" of schools and libraries that qualify for universal  X4-service support.~04  yO-#X\  P6G;ɒP#э Senate Working Group further comments at 23.~ A group of 26 Senators similarly emphasizes that discounts must be "real, significant and meaningful," and that discounted rates must consider the school's or library's  X-ability to pay.1D  yO-#X\  P6G;ɒP#э Letter from 26 Senators to Members of the Joint Board (Sept. 26, 1996).  X-x1562.` ` In addition, we agree with commenters who assert that access to telecommunications and other covered services should not increase existing disparities  X-between economically disadvantaged students and their more affluent peers.2  yO/!-#X\  P6G;ɒP#э Public Advocates comments at 1819; AFT further comments at 34; National Coalition for the Homeless further comments at 8. NTIA notes, for example, that 62 percent of schools serving affluent children currently have access to the", 2*&&ddQ! "  X-Internet, compared with 31 percent of schools serving economically disadvantaged students.3&  {Oy-#X\  P6G;ɒP#э NTIA submission at 4 (citing U.S. Department of Education survey, entitled Advanced  {OC-Telecommunications in U.S. Public Elementary and Secondary Schools, 1995). See also National Coalition for  {O -the Homeless further comments at 8 (citing AAP Speaker Says Content Will Remain King for Publishers, Educational Marketer (Apr. 15, 1996)). Public Advocates states that California's NetDay `96 failed to reach economically disadvantaged schools, providing access to the Internet disproportionately to more affluent  X-schools.4  yO" -#X\  P6G;ɒP#э Public Advocates comments at 1819 and Exhibit 5. In addition, at a recent FederalState Joint Board meeting, United States Representative Major Owens highlighted the need to give greater discounts to economically  X-disadvantaged schools.5F  yO -#X\  P6G;ɒP#э Testimony of United States Representative Major Owens before the FederalState Joint Board on Universal Service (Oct. 17, 1996). To give full effect to the directive that the discounts "ensure  Xv-affordable access to and use of [telecommunications] services,"m6v  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m we recommend that economically disadvantaged schools and libraries be eligible for a greater discount.  X1-x2563.` ` We could recommend that the Commission grant a discount to all schools and libraries that would be large enough to make telecommunications and other covered services affordable to economically disadvantaged schools and libraries. We conclude, however, that such an approach would not be in the public interest because it would substantially increase the size of universal service support mechanisms beyond what is necessary to ensure affordable access to disadvantaged schools and libraries. We agree with commenters who assert that affordable access requires granting greater discounts for all covered services to  X-schools and libraries serving large populations of economically disadvantaged students.7.  {Oo-#X\  P6G;ɒP#э See, e.g., AFT comments at 3; New Jersey Advocate comments at 22.#X\  P6G;ɒP#ѿ  Xb-x3564.` ` To minimize any additional recordkeeping or data gathering obligations, we seek the least burdensome manner to determine the degree to which a school or library is economically disadvantaged. The Public Notice asked whether the Commission should use an  X-existing program for that purpose,n8  yO -#C\  P6QɒP#э Public Notice at question 20.n and commenters suggest using Title I,k9P  yO"-#C\  P6QɒP#э AFT further comments at 4.k poverty data  X-provided by the Department of Education,p:  yO$-#C\  P6QɒP#э PacTel further comments at 26. p Census Bureau data,q;p  yO-#C\  P6QɒP#э NSBA I further comments at 23.q or the national school" X;*&&dd ! "  X-lunch program.<X  {O -#C\  P6QɒP#э See, e.g., MCI further comments at 10; New York DOE further comments at 10. Ī The national school lunch program, for example, is a program that determines students' eligibility for free lunches or lunches at reduced prices based on family  X-income levels.~=Z  yOm-#C\  P6QɒP#э Children from families whose incomes are 130 percent or less of the poverty level qualify for a free lunch, while children from families whose incomes are between 130 percent and 185 percent of the poverty level  {O-qualify for a reduced price lunch. See 47 U.S.C.  1758(b).~ It is a single program with a welldefined set of eligibility criteria, is in place nationwide, and has data gathering requirements that are familiar to most schools. Title I also relies on family income levels and permits use of three different measures of economic  X-disadvantage, one of which is participation in the national school lunch program.e>   yOJ -#X\  P6G;ɒP#э 20 U.S.C.  6301.e We recognize that poverty data is also an accurate gauge of economic disadvantage, and that EDLINC's proposal for calculating the level of discount for schools and libraries takes  XH-affordability into consideration.y?H  {O-#C\  P6QɒP#э See EDLINC further comments at 38.y We conclude that using a single measure of economic disadvantage and a model already familiar to most schools and libraries would likely be the least administratively burdensome approach. We recognize that the national school lunch program fulfills both of these criteria, but we remain open to other approaches that may also prove to be both minimally burdensome for schools and libraries and accurate measures of economic disadvantage. We also recognize that nonpublic schools may not participate in the national school lunch program and, therefore, the data regarding student eligibility for the program may not be readily available to such schools. We recommend that the Commission seek additional information and parties' comments on what measures of economic disadvantage may be readily available for identification of economically disadvantaged nonpublic schools or, if not readily available, what information could be required that would be minimally burdensome.  X-x4565.` ` The national school lunch program reflects the level of economic disadvantage for children enrolled in school. While using a model that measures the wealth of an entire school district may better reflect perpupil expenditures in that district, we conclude that a model measuring the wealth of students enrolled in school will more accurately reflect the level of economic disadvantage in all of the schools and libraries eligible for universal service support under section 254, including both public and nonpublic schools. For example, a nonpublic school located in an economically disadvantaged school district that does not draw its students primarily from that district, may receive an unneeded windfall if it were to be given an additional discount based upon a model that reflects districtwide wealth. We find, therefore, that using the national school lunch program to determine eligibility for a greater"N!. ?*&&dd! " discount appears to fulfill more accurately the statutory requirement to ensure affordable access to and use of telecommunications and other covered services for schools and libraries.  X-x5566.` ` If it decides to use the national school lunch program as the model for determining eligibility for a greater discount, we recommend that the Commission require the entity responsible for ordering telecommunications services or other covered services for schools to certify to the administrator and to the service provider the percentage of its students eligible for the national school lunch program when ordering telecommunications and other covered services from its service providers. For schools ordering telecommunications and other covered services at the individual school level, which should include primarily nonpublic schools, the person ordering such services should certify to the administrator and to the service provider the percentage of students eligible in that school for the national school lunch program. Each school's level of discount will then be calculated by the administrator based on the percentage of students eligible for the national school lunch program.  X -x6567. ` ` For schools ordering telecommunications and other covered services at the school district level, we seek to target the level of discount based on each school's percentage of students eligible for the national school lunch program, if the national school lunch program is selected as the appropriate measure of economic disadvantage. At the same time, we seek to minimize the administrative burden on school districts. That is, we do not seek to impose unduly burdensome reporting and accounting requirements on school districts, but we also seek to ensure that the individual schools with the highest percentages of economically disadvantaged students may receive the steepest discounts. For example, if the level of discount were calculated for the entire school district, a school serving a large percentage of students eligible for the national school lunch program that was located in a school district comprised primarily of more affluent schools would not benefit from the level of discount to which it would be entitled if discounts were calculated on an individual school basis. Therefore, we recommend that the district office certify to the administrator and to the service provider the number of students in each of its schools who are eligible for the national school lunch program. We recommend that the district office may decide to compute the discounts on an individual school basis or it may decide to compute an average discount. We further recommend that the school district assure that each school receive the full benefit of the discount to which it is entitled.  X-x7568.` ` We recommend that schools or districts do not have to participate in the national school lunch program in order to demonstrate their level of economic disadvantage. Schools or districts that do not participate in the national school lunch program need only certify the percentage of their students who would be eligible for the program, if the school or district did participate. Since libraries do not participate in the national school lunch program, we recommend that they be eligible for greater discounts based on their location in a school district serving economically disadvantaged students. That is, the administrator would average the percentage of students eligible for the national school lunch program in all eligible"Q%"?*&&dd $! " schools, both public and nonpublic, within the school district in which a library was located. The library would then receive the level of discount representing the average discount offered to the school district in which it was located. We find that this is a reasonable method of calculation because libraries are likely to draw patrons from an entire school district and this method does not impose an unnecessary administrative burden on libraries. We recommend that the Commission seek additional information and parties' comments on what measures of economic disadvantage may be readily available for identification of economically disadvantaged libraries or, if not readily available, what information could be required that would be minimally burdensome. x  X -x8569.` ` We also recommend that the Commission adopt a step approach for calculating the level of greater discount available to economically disadvantaged schools and libraries. A step approach would provide multiple levels of discount based on the percentage of students eligible for the national school lunch program. We agree with PacTel, which asserts that a  X -step approach is easier to apply and administer than a slidingscale approach,r@  yO7-#X\  P6G;ɒP#э PacTel further comments at 2627.r which would require adjustment for every change in the percentage of children eligible for the national school lunch program.  Xb-x9570.` ` The national school lunch program, for example, is a threestep program based on family income: students are either eligible for a free lunch, eligible for a reduced price  X4-lunch, or not eligible for participation.rA4X  {O=-#C\  P6QɒP#э See 47 U.S.C.  1758(b).r We conclude, however, that the number of steps for determining greater discounts on telecommunications and other covered services should be principally based on the existing Department of Education categorization of schools eligible for the national school lunch program. The Department of Education places schools in five categories, based on percentage of students eligible for free or reduced price lunches: 019  X-percent, 2034 percent, 3549 percent, 5074 percent; and 75100 percent.B  {O\-#X\  P6G;ɒP#э See National Data Research Center (1995), Schools and Staffing Surveys,199394 (unpublished tabulations commissioned by the U.S. Department of Education for the National Assessment of Title I).  We also recommend that the Commission establish a separate category for the least economically disadvantaged schools, those with less than one percent of their students eligible for the national school lunch program. Those schools should have comparatively sufficient resources within their existing budgets so that they may secure affordable access to services at lower discounted rates. In our effort not to duplicate research already conducted and to tailor greater discounts based on level of economic disadvantage more accurately, we recommend using the Department of Education's fivestep breakdown to calculate the greater discounts on telecommunications and other covered services for economically disadvantaged schools. "#DB*&&dd<! "Ԍ X-x` `  e. Existing Special Rates  X-x:571.` ` StateMandated Rates. We must also address the question we raised in the Public Notice concerning the relationship between any discount the Commission adopts and existing special rates that schools or libraries may already have negotiated with carriers or  X-secured through state action.tC  yO-#X\  P6G;ɒP#э  Public Notice at question 17.t We turn first to special rates mandated by a state. To the extent that a state desires to supplement the discount financed through the federal universal service fund by permitting its schools and libraries to apply the discount to the special low rates, its actions would be consistent with sections 254(h) and 254(f). Furthermore, we believe that it would also be permissible for states to choose not to supplement the federal program and thus prohibit its schools and libraries from purchasing services at special statesupported rates if they intend to secure federalsupported discounts.  X -x;572.` ` Private contract rates. Some commenters have also raised the matter of how  X -discounts should apply to existing contracts between schools and libraries.OD X  {O-#X\  P6G;ɒP##X\  P6G;ɒP#э See, e.g., CFA further comments at 910; Florida PSC further comments at 13; GCI further comments at 7; NCTA further comments at 56; Oakland School District further comments at 17; TCI further comments at 18.O If the Commission permits schools and libraries to use the best negotiated contract rate for which they can bargain in the market as the prediscount price to which a discount would apply, it would seem reasonable that such discount would also apply to contracts negotiated prior to the adoption of rules under section 254(h). In both cases, schools and libraries with budgetary constraints have strong incentives to secure the lowest rates that they can as the prediscount price, and the proposed discount methodology would apply a discount on that prediscount rate. We recommend that the Commission not require any schools or libraries that had secured a low price on service to relinquish that rate simply to secure a slightly lower price produced by including a large amount of federal support. No discount would apply, however, to charges for any usage of telecommunications or information services prior to the effective date of rules promulgated pursuant to this proceeding.  X- x` ` f. Interstate and Intrastate Discounts  X|-  Xe-x<573.` ` Section 254(h)(1)(B) permits the Commission, with respect to interstate services, and the states, with respect to intrastate services, to determine the level of discount  X7-available to schools and libraries.oE7  yO"-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B). o We asked for comment, however, on how to harmonize that statement with the congressional intent to foster affordable access for schools and  X -libraries nationwide.bF B  yO%-#X\  P6G;ɒP#э NPRM at para. 83.b We recommend that the Commission recognize that it can provide for" $F*&&dd[! " federal universal service support to fund intrastate discounts. We also recommend that the Commission adopt rules that provide federal funding for discounts for schools and libraries on both interstate and intrastate services to the levels discussed above, and that establishment of intrastate discounts at least equal to the discounts on interstate services be a condition of federal universal service support for schools and libraries in that state. If a state wishes to provide an intrastate discount less than the federal discount, then it may seek a waiver of this requirement. x  XH-x E. Restrictions Imposed on Schools and Libraries x` ` 1. Background  X -  X -x=574.` ` Section 254 places four restrictions on schools and libraries receiving services funded under universal service support mechanisms. First, only certain entities are eligible for  X -"preferential rates or treatment" under section 254(h).lG  yO7-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4). l Schools must meet the statutory definitions of elementary and secondary schools found in the Elementary and Secondary  X-Education Act of 1965,HX  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4) and (h)(5)(A). The Elementary and Secondary Education Act of 1965 defines "elementary school" as "a nonprofit institutional day or residential school that provides elementary education, as determined under State law." 20 U.S.C.  8801(14). The Elementary and Secondary Education Act defines "secondary school" as "a nonprofit institutional day or residential school that provides secondary education, as determined under State law, except that such term does not include any education beyond grade 12." 20 U.S.C.  8801(25). must not operate as a forprofit business, and must not have an  Xy-endowment exceeding $50 million. jIy  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4).j Libraries must be "eligible for participation in State Xb-based plans for funds under title III of the Library Services and Construction Act,"J b`  yOs-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4). The Library Services and Construction Act defines libraries in the following manner: XxX` ` `Public library' means a library that serves free of charge all residents of a community, district, or region, and receives its financial support in whole or in part from public funds. Such term also includes a research library, which, for the purposes of this sentence, means a library which (#` XxX` ` (A) makes its services available to the public free of charge; (B) has extensive collections of books, manuscripts, and other materials suitable for scholarly research which are not available for the public through public libraries; (C) engages in the dissemination of humanistic knowledge through services to readers, fellowships, educational and cultural programs, publication of significant research, and other activities; and (D) is not an integral part of an institution of higher education. (#` "%I*&&,&"Ԍ 20 U.S.C.  351a(5).  and"b%XJ*&&dd,! "  X-must not operate as a forprofit business.jKX  yO -#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4).j Second, telecommunications services and network capacity provided to schools and libraries under section 254(h) "may not be sold, resold, or otherwise transferred by such user in consideration for money or any other thing of  X-value."jLZ  {OT-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(3). See also Joint Explanatory Statement at 133 (stating that "[n]ew subsection (h)(3) clarifies that telecommunications services and network capacity provided to . . . schools and libraries may not be resold or transferred for monetary gain"). j Third, section 254(h)(1)(B) requires that schools and libraries make a "bona fide  X-request" for services within the definition of universal service.mM   yO_ -#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m Fourth, any such services  X-requested by schools and libraries must be used for "educational purposes."mN  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m  X_-x>575.` ` The NPRM and the Public Notice sought comment on five restrictions imposed on schools and libraries: eligibility, resale, bona fide request, educational purposes, and annual carrier notification requirement. First, the NPRM sought comment on eligibility requirements. The NPRM stated that "[c]onsortia of educational institutions providing distance learning to elementary and secondary schools are considered as educational providers  X -eligible for universal service support."O *  {O-#X\  P6G;ɒP#э NPRM at para. 87 (citing Joint Explanatory Statement, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 134 (1996)). The NPRM proposed dictating that any certification requirement imposed by the Commission shall address the eligibility requirements enumerated  X -in section 254(h).bP  yO-#X\  P6G;ɒP#э NPRM at para. 87.b Second, the NPRM addressed resale restrictions when it sought comment on whether the resale prohibition in section 254(h) will affect the ability of schools and libraries receiving universal service support to share a network with parties not eligible  Xy-for such support.bQy  yO>-#X\  P6G;ɒP#э NPRM at para. 86.b The NPRM also sought comment on what mechanisms could ensure that the resale prohibition does not discourage partnerships between schools and libraries and their  XK-communities.bRK  yO"-#X\  P6G;ɒP#э NPRM at para. 86.b The Public Notice sought further comment on whether the resale prohibition should be construed to prohibit only the resale of services to the public for profit, or whether it should be construed to allow enduser costbased fees for services and whether such an interpretation would facilitate community networks and/or the aggregation of purchasing"&4R*&&ddF! "  X-power.nS  yOy-#C\  P6QɒP#э Public Notice at question 10.n If enduser costbased fees for services are permitted, the Public Notice asked whether discounts should be "available only for the traffic or network usage attributable to the  X-educational entities that qualify for the section 254 discounts."nTX  yO-#C\  P6QɒP#э Public Notice at question 11.n  X-x?576.` ` Third, the NPRM addressed the bona fide purchase requirement when it proposed that any person authorized under state or local law to order telecommunications services for schools or libraries be deemed capable of making a "bona fide request" for  X_-service for purposes of section 254(h).bU_  yO -#X\  P6G;ɒP#э NPRM at para. 85.b The Commission also sought comment and Joint Board recommendation on how to determine most accurately whether any such request is  X1-"bona fide."hV1x  yOZ-#X\  P6G;ɒP#э NPRM at para. 85.h The Public Notice sought further comment on the least administratively  X -burdensome approach to fulfilling the bona fide purchase requirement.nW   yO-#C\  P6QɒP#э Public Notice at question 15.n Fourth, the NPRM dealt with the "educational purposes requirement when it sought comment on what steps should be taken to ensure that services eligible for a schools and libraries discount will be used for "educational purposes," including a proposal requiring schools and libraries to submit written certification that the requested services will be used for educational purposes and will  X -not be resold.bX   yO-#X\  P6G;ɒP#э NPRM at para. 84.b Finally, the NPRM addressed carrier notification when it sought comment on a proposal requiring "each carrier to inform annually each school and library within its  Xy-geographic serving area of the available discounts."bYy(  yOR-#X\  P6G;ɒP#э NPRM at para. 84.b  XK-x` ` 2. Comments  X-x@577.` ` Eligibility. Numerous commenters address what constitutes eligibility under the  X-schools and libraries provisions of section 254.Z  {Oo!-#X\  P6G;ɒP#э See, e.g., Cheyenne River Sioux Tel. comments at 4; Missouri PSC comments at 15; U.S. Distance Learning Ass'n comments at 18; ALA reply comments at 17. Several commenters, for example, support allowing consortia of different types to qualify for universal support under section 254. The U.S. Distance Learning Ass'n explains that, "to meet certain educational goals, schools enter into resource sharing arrangements with other schools and with outside entities, including community colleges, which may, on their face, be considered ineligible for universal service"'Z*&&dd! "  X-support under the [1996] Act."[  yOy-#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 1819. U.S. Distance Learning Ass'n asks that such consortia be specifically recognized as eligible for universal service support, to the extent that they further  X-educational objectives for students who attend eligible schools.\X  yO-#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 19. Ą  X-xA578.` ` Libraries also participate in nonprofit consortia that share resources such as common databases, computer linkups to databases, electronic access to periodical databases,  Xv-and access to the Internet.]v  yO -#X\  P6G;ɒP#э North of Boston Library Exchange comments at 12. Numerous libraries and organizations representing libraries  X_-contend that such consortia should be eligible for universal service support.^_x  {O -#X\  P6G;ɒP#э See, e.g., North of Boston Library Exchange comments at 12; Washington Library comments at 17; ALA reply comments at 1416. ALA maintains that "eligible institutions participating in consortia with noneligible parties should qualify for appropriate discounts to the extent that they follow accounting procedures that  X -clearly separate telecommunications costs among the participants."j_   yO-#X\  P6G;ɒP#э ALA reply comments at 17.j Washington Library asserts that the eligible party's portion of telecommunications costs can easily be separated from the costs of other members of the consortia, and suggests that the Commission may want  X -to require separate, auditable records of the school's or library's portion of usage.s` b  yO-#X\  P6G;ɒP#э Washington Library comments at 15.s  X -xB579.` ` Some commenters support classifying several miscellaneous entities as parties eligible for universal service support under section 254(h). Missouri PSC and NSBA I, for example, support including community information networks within the definition of library  Xb-for purposes of universal service support eligibility.a"b  yO-#X\  P6G;ɒP#э Missouri PSC comments at 15; NSBA I reply comments at 16. Missouri PSC defines community information networks as nonprofit public benefit corporations established by governments and other public entities that develop and maintain computing services for the general public and serve many of the functions of a  {O]-library. See Missouri PSC comments at 15.  National Public Telecomputing Network asserts that community networks, such as "FreeNets," should be eligible for universal service support under section 254(h) in exchange for providing free or low cost"4(a*&&ddf! "  X-access for schools, libraries, and health care providers in a particular geographic area. b"  yOy-#X\  P6G;ɒP#э Nat'l Public Telecomputing Network reply comments at 10. "FreeNets" are defined as "multiuser, public access computer networks with much of the power and sophistication of commercial online services and Internet service providers. Yet each system is locally owned and operated by a nonprofit, communitybased  {O-organization whose governing body is made up of people active in local community affairs." Id. at 34.  APTS contends that consortia of educational television stations that provide services to elementary and secondary schools should be eligible for support. It argues that affording  X-wider access to educational programming is consistent with the 1996 Act.ec  yO -#X\  P6G;ɒP#э APTS comments at 11.e U.S. Distance Learning Ass'n contends that vocational and technical training at the secondary school level that is conducted in conjunction with community colleges should be considered as an  Xv-extension of an eligible public school for purposes of universal service eligibility.*dZvB  {Oi -#X\  P6G;ɒP#э U.S. Distance Learning Ass'n comments at 18. See also Community Colleges comments at 4 (maintaining that "comparable institutions," such as community colleges, should be eligible for universal service support).* Early Childhood states that if preschools affiliated with elementary schools are eligible for universal service support, "standalone" preschool and early childhood programs should be similarly  X1-eligible.oe1d  yOF-#X\  P6G;ɒP#э Early Childhood comments at 2.o Cheyenne River Sioux Telephone Company notes that schools and libraries established under tribal authority may not be eligible for support because only state elementary and secondary schools and libraries eligible for participation in statebased plans  X -are eligible institutions under section 254.~f  yO-#X\  P6G;ɒP#э Cheyenne River Sioux Tel. comments at 4 n.7. ~ Cheyenne River Sioux Telephone Company maintains that "[t]he Commission should begin . . . a separate proceeding to address tribal universal service issues and general federal Indian law issues as they relate to  X -telecommunications regulation on tribal lands."yg  yO-#X\  P6G;ɒP#э Cheyenne River Sioux Tel. comments at 4.y  Xy-xC580.` ` Resale. Numerous commenters support a strict interpretation of the resale  Xb-provision set forth in section 254 and state that resale of any kind should be prohibited.h"b  {O' -#X\  P6G;ɒP#э See, e.g., Ameritech further comments at 16; BellSouth further comments at 2021; Great City Schools further comments at 3; MCI further comments at 7; NCLIS further comments at 4; NECA further comments at 8; New York DOE further comments at 7; Puerto Rico Tel. Co. further comments at 6; SWBT further comments at 12; USTA further comments at 11. Puerto Rico Tel. Ass'n maintains that the statutory language is clear and that community networks and other aggregations of users are not among the entities deemed eligible for"4)h*&&ddf! "  X-discounted services under section 254.i  {Oy-#X\  P6G;ɒP#э Puerto Rico Tel. Co. further comments at 6. See also Great City Schools further comments at 3 (asserting that "[i]f Congress had wanted to include other entities, it would have done so directly"). Great City Schools asserts that permitting additional parties to benefit from the discounts intended for schools and libraries "would divert essential resources away from the deepest possible discounts for the narrow set of  X-expressly targeted entities in the legislation."zj"  yO-#X\  P6G;ɒP#э Great City Schools further comments at 3.z Ameritech states that enduser costbased fees would constitute the transfer of service and would, therefore, be in direct violation of  X-section 254(h)(3),k  {O -#X\  P6G;ɒP#э Ameritech further comments at 16. See also MCI further comments at 7; NCLIS further comments at 4. while USTA contends that permitting schools to resell discounted  Xv-services would result in ineligible parties benefiting from the universal service discount.lvD  {Ok -#X\  P6G;ɒP#э USTA further comments at 11. See also BellSouth further comments at 21. In addition, USTA asserts that, if resale is permitted, "[i]t is not technically feasible to accurately  XH-attribute network usage to multiple institutions using shared networks."OmZH  {O-#X\  P6G;ɒP#э USTA further comments at 11. See also BellSouth further comments at 21 (stating that "it would appear to be an insurmountable task to distinguish between eligible and noneligible uses of the same telecommunications service by multiple entities").O BellSouth maintains that a school or library wishing to resell telecommunications services "should be  X -required to do so as a reseller without the benefit of any universal service discounts."rn  yO-#X\  P6G;ɒP#э BellSouth further comments at 21.r NECA states that the Commission should promulgate rules that limit section 254 discounts to the entities expressly named in the 1996 Act because, in light of previous Commission decisions, a prohibition against resale may not be adequate to prevent abuse of services  X -discounted under section 254.o$  {O-#X\  P6G;ɒP#э NECA further comments at 8 (citing Resale and Shared Use of Common Carrier Services, 60 FCC 2d  {O-261, recon., 62 FCC 2d 588 (1977), aff'd sub nom. American Tel. & Tel. Co. v. FCC, 572 F.2d 17 (2d Cir. 1978) for the premise that "the term `resale' does not encompass the nonprofit sharing of facilities and services among unaffiliated users").   X-xD581.` ` Other commenters interpret section 254(h)(3) to prohibit only resale for profit  Xy-and to allow the recovery of enduser costbased fees for services.pyt  {O!-#X\  P6G;ɒP#э See, e.g., ALA further comments at 810; AT&T further comments at 13; Bell Atlantic further comments at 4; Benton further comments at 45; California Library Ass'n further comments at 2; Century further comments at 12; EDLINC further comments at 1718; ITC further comments at 56; Information Renaissance further comments at 7; NCTA further comments at 4; National Public Telecomputing Network further comments at 9; Oakland School District further comments at 67; PacTel further comments at 19; Senate Working Group further comments at 2; U S West further comments at 8; Washington UTC further comments at 1011.  Bell Atlantic, for"y*p*&&dd! " example, contends that schools and libraries should be permitted to recover administrative  X-costs by charging a reasonable fee to the public for use of telecommunications services.wq  yOb-#X\  P6G;ɒP#э Bell Atlantic further comments at 4. w Bell Atlantic also maintains that, while schools should not be allowed to charge students for use of telecommunications services, they should be permitted to charge a fee to the public for  X-use of the services outside of normal school hours.urX  yO-#X\  P6G;ɒP#э Bell Atlantic further comments at 4.u Information Renaissance believes that permitting user fees for such services as dialup access to a community network based at a  Xv-school, library, or community center should be permitted under section 254.sv  yO -#X\  P6G;ɒP#э Information Renaissance further comments at 7. Colorado State Library maintains that the prohibition on resale should not preclude such items as  XH-computer lab fees for students.<tZHx  {Oq-#X\  P6G;ɒP#э Colorado State Library reply comments at 3. See also NSBA I comments at 24 (asserting that "schools and libraries should not be prohibited from charging lab fees or user fees to defray expenses related to the use of a network").< AT&T argues that the statutory language "should be strictly construed to carry out Congress's intent and, most fundamentally, to limit the demand on and to keep the NUSF within reasonable limits, so that public support remains strong to  X -ensure its survival,"mu   yON-#X\  P6G;ɒP#э AT&T further comments at 13.m and supports permitting enduser cost recovery for schools and  X -libraries.sv *  yO-#X\  P6G;ɒP#э AT&T further comments at 13.s  X -xE582.` ` Several commenters contend that not allowing the recovery of enduser cost based fees by schools and libraries for use of their telecommunications services will invalidate  X -or impede efforts to aggregate demand for telecommunications services. w  {O-#X\  P6G;ɒP#э See, e.g., ALA further comments at 89; California Library Ass'n further comments at 23; Information Renaissance further comments at 7; Washington UTC further comments at 1011.  Senate Working Group asserts that, while the 1996 Act clearly prohibits the resale of telecommunications services for monetary gain, "this prohibition should not hinder or preclude the creative development of consortia among education institutions to provide distance learning and fairly  XK-share the actual costs."xK  {O!-#X\  P6G;ɒP#э Senate Working Group further comments at 2. See also U.S. Distance Learning Ass'n comments at 20. U S West maintains that aggregation of traffic "for the exclusive use of schools and libraries eligible for universal service funding, would not circumvent the provisions of the 1996 Act and would provide increased purchasing power to those  X-entities."py  yO]%-#X\  P6G;ɒP#э U S West further comments at 8.p U S West asserts, therefore, that the discount mechanisms developed under"+6y*&&ddF! " section 254 should provide enough flexibility to allow schools and libraries to purchase  X-aggregated telecommunications services from educational consortia.pz  yOb-#X\  P6G;ɒP#э U S West further comments at 8.p In addition, Maryland DOE argues that the rules should also allow eligible libraries to delegate communications management and procurement responsibilities to a central administrative agent, such as  X-Sailor.t{X  yO-#X\  P6G;ɒP#э Maryland DOE further comments at 1.t  Xv-xF583.` ` Several commenters support drawing a distinction between telecommunications mechanisms, on the one hand, and the telecommunications service itself, in applying the  XH-prohibition on resale.|H  {O -#X\  P6G;ɒP#э See, e.g., BellSouth further comments at 21; California Library Ass'n further comments at 2; EDLINC further comments at 18; Washington Library comments at 15. Washington Library suggests the following applications of such a distinction: XxX` ` For instance, a library may not resell its discounted access to (#` XxX` ` its city government, but it may levy a fee for Internet classes, (#` XxX` ` or [for] setting up and maintaining an Internet account(#` XxX` ` through the library, or for maintaining a web site for its unit (#` XxX` ` of local government. Such an application would appear to (#` XxX` ` satisfy the intent of the Telecommunications Act, but this (#` XxX` ` distinction would be more easily known and understood by (#`  Xb-XxX` ` all concerned if the FCC clarifies it.s}bB  {OU-#X\  P6G;ɒP#э Washington Library comments at 15. See also BellSouth further comments at 21 (stating that "[f]or instance, if a school or library obtained telecommunications services from a telecommunications provider and used them to gain access to nontelecommunications services such as the Internet or other enhanced service offerings, then the public institutional telecommunications user would be free to charge the public a fee for utilization of the Internet or other enhanced services (although not for the telecommunications service itself)"). s(#`  X4-xG584.` ` Several parties that support recovery of enduser costbased fees for services address how the discount should be applied when eligible and ineligible parties aggregate and  X-share a network.~  {O -#X\  P6G;ɒP#э See, e.g., California Library Ass'n further comments at 3; Maryland DOE further comments at 12; Oakland School District further comments at 7. Some commenters advocate providing the discount only to the traffic or  X-network usage attributable to eligible entities under section 254.N  {O#-#X\  P6G;ɒP#э See, e.g., California Library Ass'n further comments at 3; U S West further comments at 8; Washington UTC further comments at 11. California Library Ass'n states that such entities should be able to formulate recordkeeping and/or billing procedures to",*&&dd! "  X-ensure that only eligible entities benefit from the discount,  yOy-#X\  P6G;ɒP#э California Library Ass'n further comments at 3. and Maryland DOE asserts that the Commission should promulgate accounting rules for the separation of eligible and  X-ineligible network costs.vX  yO-#X\  P6G;ɒP#э Maryland DOE further comments at 12.v PacTel, on the other hand, contends that "there is no easy way to  X-police such a limitation."o  yOT-#X\  P6G;ɒP#э PacTel further comments at 20.o Other commenters maintain that the discount need not be applied  X-only to the eligible parties' portion of a shared network.x  {O -#X\  P6G;ɒP#э See, e.g., National Public Telecomputing Network further comments at 910; Oakland School District further comments at 7. Oakland School District points to the difficulty of separating costs and the negative effect that would have on the incentive to  Xv-aggregate.v  yO-#X\  P6G;ɒP#э Oakland School District further comments at 7.  XH-xH585.` ` Bona Fide Request for Educational Purposes. Numerous commenters support requiring schools and libraries to certify that services eligible for a discount are to be used for  X -"educational purposes." b  {O--#X\  P6G;ɒP#э See, e.g., ALA comments at 2021; NCTA comments at 1819; Washington Library comments at 1314. Apple, for example, contends that the Commission should adopt a simple selfcertification procedure, such as requiring a letter from an authorized school  X -official.  {O-#X\  P6G;ɒP#э Apple comments at 6. See also BellSouth comments at 1819; NCTA comments at 1819; GCI further comments at 6; UC further comments at 4. Ameritech supports an abbreviated bona fide request process in which schools and libraries submit their requests for telecommunications services in writing to all telecommunications carriers certified by the state public utility commission and certify that all  X -services would be used for educational purposes." N  {O-#X\  P6G;ɒP#э Ameritech comments at 16. See also BellSouth comments at 21 (asserting that the Commission should establish guidelines for stateadministered certification program); Michigan Library Ass'n comments at 13 (maintaining that a bona fide request must be signed by parties and verified by local, state, or federal government agency).  CEDR suggests that a voluntary  X-electronic data bank be established for schools to file requests for proposals.w8  yOy!-#X\  P6G;ɒP#э CEDR further comments (Oct. 17, 1996).w New Jersey Advocate, on the other hand, favors requiring a formal declaration from schools and libraries that includes assurances that discounted services will not be used for other than educational  XK-purposes.tK  yO%-#X\  P6G;ɒP#э New Jersey Advocate comments at 23.t New Jersey Advocate suggests that "[s]chools and libraries could be required to"K-X*&&dd! " implement certain security measures, such as passwords, codes, or limited access to the  X-facilities, to ensure that the services are used properly."t  yOb-#X\  P6G;ɒP#э New Jersey Advocate comments at 23.t In terms of defining "educational purposes," Oakland School District supports the principle of "total school service," in which all activities undertaken by school administrators, directors, managers, and all school and  X-school district personnel would be considered as "educational" in nature.xXX  yO-#X\  P6G;ɒP#э Oakland School District comments at 16 (stating that activities include Internet access, access to student records, access for food service personnel to determine eligibility for the national school lunch program, and telephone access to communicate with parents and to arrange for field trips).x Sailor maintains  X-that "every library activity is educational."gx  yO -#X\  P6G;ɒP#э Sailor comments at 12.g  X_-xI586.` ` In addition to requiring certification that services will be used for "educational purposes," numerous commenters support requiring schools and libraries to fulfill additional certification requirements in order to comply with the bona fide request requirement found in  X -section 254(h)(1)(B).   {O-#X\  P6G;ɒP#э See, e.g., AT&T further comments at 1415; GTE further comments at 2122; MCI further comments at 8. AT&T, for example, notes that requiring a more detailed certification process will hold schools and libraries accountable by ensuring that discounted  X -services are both "necessary and used for their intended purposes."m b  yO-#X\  P6G;ɒP#э AT&T further comments at 14.m AT&T supports requiring each school and library, as well as the appropriate statelevel governing authority, to certify the following: (1) the entity requesting discounted services is eligible under section 254(h); (2) the requested services are necessary and will be used for their intended purposes; and (3) the necessary support mechanisms, including such items as hardware, software,  Xy-wiring, and teacher training, will be deployed at the same time as the discounted services.y  {O-#X\  P6G;ɒP#э AT&T further comments at 1415. See also USTA comments at 8 (asserting that a bona fide request must include a plan to recover ongoing costs, as well as the cost of such items as hardware, software, and training); MCI further comments at 8 (stating that the Joint Board and the Commission should consider whether schools and libraries should be required to submit technology plans to a state agency prior to receiving a discount); NYNEX further comments at 1314 (advocating submission of technology plans to a state or local  yO -organization for annual certification).  į New York Regents recommends that the Joint Board establish a committee of educators and librarians that currently use technology to review requests for telecommunications services from schools and libraries. This committee would assess all such requests "with respect to  X-their purpose and value for supporting learning and information access."ql  yO:%-#X\  P6G;ɒP#э New York Regents comments at 10.q".*&&dd)! "Ԍ X-ԙxJ587.` ` Information Renaissance proposes developing an online resource to provide current information on the technology of school and community networking, as well as current examples of best practices in the application of the technology. Information Renaissance suggests that "[o]nline resources of this type could provide a selfcertification mechanism by which users would consult relevant sections of the online resource, verify their understanding of this material through a simple interactive form and then submit their  Xv-telecommunications requests to vendors in their region."v  yO-#X\  P6G;ɒP#э Information Renaissance supplemental further comments at 3 (Oct. 17, 1996). Georgia Tech Research Institute and Morris Brown Research Institute propose providing consulting services to schools and libraries to assist them in complying with the bona fide request requirement. Information  X1-Renaissance,1X  yO: -#X\  P6G;ɒP#э Information Renaissance further comments at 3. Georgia Tech Research Institute, and Morris Brown Research Institute$1  {O -#X\  P6G;ɒP#э Ex parte presentation by Jeffrey Evans, Georgia Tech Research Institute, Roosevelt Thomas, Jr., Morris Brown Research Institute, and Christopher Evans, OutSource Integration, Inc., to Mark Nadel, Federal  {O\-Communications Commission (Sept. 6, 1996). See also Letter from Timothy F. Coen, King and Spalding, to Georgia Tech Research Institute, Morris Brown Research Institute, and Christopher Evans (Sept. 17, 1996).  assert that they should be eligible for universal service support in exchange for providing such consulting services because they would yield more in savings to schools and universal service support mechanisms than they would cost.  X -xK588.` ` Some commenters, however, oppose a certification requirement.   {OC-#X\  P6G;ɒP#э See, e.g., Idaho PUC comments at 12; NSBA I comments at 5; Union City Board of Education reply comments at 1617. Idaho PUC, for example, warns against secondguessing schools and libraries regarding their requests for services and contends that imposing a certification requirement would impose an  Xy-unnecessary and burdensome paperwork requirement that would accomplish nothing. y.  {OX-#X\  P6G;ɒP#э Idaho PUC comments at 12. See also NSBA I comments at 5 (cautioning that the bona fide request requirement may impose substantial paperwork burdens on small government agencies).  Union City Board of Education asserts that the layer of review sought to be imposed by parties supporting detailed certification procedures "serve no useful purpose and would only create a significant delay in deployment of advanced telecommunications capabilities to  X-America's classrooms."  yOV!-#X\  P6G;ɒP#э Union City Board of Education reply comments at 1617. Union City Board of Education maintains that the level of accountability inherent in such detailed certification procedures already exists at the state and local government levels, and "school and library administrators responsible for making such decisions are already held accountable for the cost and effectiveness of their decisions by state"/*&&dd! "  X-and local elected officials and local taxpayers."  yOy-#X\  P6G;ɒP#э Union City Board of Education reply comments at 17.  X-xL589.` ` Numerous commenters address who should be responsible for making a bona  X-fide request.TZX  {O-#X\  P6G;ɒP#э See, e.g., ACE comments at 17; Alaska Library comments at 7; Mendocino School District comments at  yO-6; Oakland School District comments at 16; U.S. Distance Learning Ass'n comments at 19; Washington Library comments at 14.T ACE maintains that the individual generally responsible for ordering  X-telecommunications services should be permitted to make a bona fide request,lz  yO -#X\  P6G;ɒP#э ACE comments at 17. l while Oakland School District contends that schools and libraries should be permitted to designate  Xv-which specific individuals are legally authorized to make such requests.xv   yO1-#X\  P6G;ɒP#э Oakland School District comments at 16.x Washington Library maintains that, for a state library, either the state librarian or another state government official should make the bona fide request, while the official who is empowered under state  X1-law to request Title III funds should make the request for a local library.s1  yO|-#X\  P6G;ɒP#э Washington Library comments at 14.s x  X -xM590.` ` Several commenters suggest auditing the use of discounted services by schools  X -and libraries to ensure accountability with regards to the bona fide purchase requirement. *  {O-#]\  PCɒP#э See, e.g., Ameritech comments at 14; Michigan Library Ass'n comments at 13; CFA further comments at 8. Washington Library, for example, states that if the Commission is concerned about the unauthorized resale of telecommunications services in a consortium arrangement, it may require libraries to keep separate, auditable records of their portion of the network  X-arrangement.s  yO-#X\  P6G;ɒP#э Washington Library comments at 15.s Ameritech recommends that the Commission require all telecommunications providers to keep accounting entries to quantify and track funding for advanced services for  Xb-schools and libraries.jb  yO' -#X\  P6G;ɒP#э Ameritech comments at 14.j Michigan Library Ass'n asserts that "monitoring reports of overall  XK-cost, services and availability should be published."wK  yO"-#X\  P6G;ɒP#э Michigan Library Ass'n comments at 13.w CFA contends that schools and libraries should be required to comply with standard procurement procedures when ordering discounted services, and should be subject to random audits by the universal service fund"04*&&dd! "  X-administrator.k  yOy-#X\  P6G;ɒP#э CFA further comments at 8.k  X-xN591.` ` Several commenters recommend that some of the complex issues dealing with  X-support for schools and libraries be referred to an education advisory committee.X  yO-#X\  P6G;ɒP#э Florida Cable comments at 1318; NYNEX comments at 21; PacTel comments at 12; Teleport comments at 1819; Time Warner comments at 1617; NCTA reply comments at 2124. NYNEX, for example, recommends formation of an Education Telecommunications Council that would include representatives from a variety of interested parties, including public and private schools, the telecommunications industry, and state and federal government agencies involved  X_-in education issues._  yO -#X\  P6G;ɒP#э Testimony of Frank J. Gumper, NYNEX, before the FederalState Joint Board on Universal Service (Apr. 12, 1996).  X1-xO592.` ` Annual Carrier Notification Requirement. Several parties comment on the Commission's proposal to require telecommunications carriers to notify schools and libraries within their geographic area of available discounts on an annual basis. Libraries for the Future, for example, states that such notification is necessary because "universal service is not exactly a household term, so few librarians or administrators realize they will be entitled to  X -discounts."x   yOw-#X\  P6G;ɒP#э Libraries for the Future comments at 4.x Since the telecommunications carriers will be providing the service, Libraries for the Future maintains that they are the appropriate entities to notify schools and libraries of  X-the applicable discounts.x  yO-#X\  P6G;ɒP#э Libraries for the Future comments at 4.x Washington Library states that any such information conveyed  Xy-from carriers to schools and libraries must be "readily digestible."sy(  yOR-#X\  P6G;ɒP#э Washington Library comments at 14.s AT&T, however, maintains that telecommunications carriers should not bear the responsibility of notifying schools and libraries of applicable discounts, but supports leaving that responsibility to  X4-educational and library associations.e4  yO-#X\  P6G;ɒP#э AT&T comments at 20.e  X-x` ` 3. Discussion  X-xP593.` ` Eligibility. Some parties assert policy grounds for including community networks, educational television stations, community colleges, and preschools in the class of"1H *&&dd! "  X-entities eligible for support..Z  {Oy-#X\  P6G;ɒP#э See, e.g., APTS comments at 11; Community Colleges comments at 4; Early Childhood comments at 2; Missouri PSC comments at 15; NSBA I reply comments at 16; National Public Telecomputing Network reply comments at 10. . Section 254(h), however, explicitly defines the class of entities eligible for support. As we observed above, schools must meet the statutory definitions of elementary and secondary schools found in the Elementary and Secondary  X-Education Act of 1965,  {OV-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4) and (h)(5)(A). See supra section X.E. for the definitions of elementary and secondary school. must not operate as a forprofit business, and must not have an  X-endowment exceeding 50 million dollars.jD  yO -#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4).j Libraries must be "eligible for participation in  X-Statebased plans for funds under title III of the Library Services and Construction Act,"  {O-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4). See supra section X.E. for the definition of library.  Xv-and must not operate as forprofit businesses.jvf  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(4).j Furthermore, we conclude that those not directly eligible for support should not be permitted to gain eligibility by participating in consortia with those who are eligible, even if the former seek to further educational objectives for students who attend eligible schools.  X -xQ594.` ` This creates some tension over whether purchasing consortia of eligible and ineligible institutions should be permitted, even assuming that discounts were only applied to services purchased by eligible institutions. On the one hand, as we explained above, we want to encourage eligible institutions to aggregate their demands with others to enable them to enjoy efficiencies and negotiate better deals from service providers. As the Senate Working Group states, the 1996 Act "should not hinder or preclude the creative development of  Xy-consortia among education[al] institutions."y  {O -#X\  P6G;ɒP#э Senate Working Group further comments at 2. See also U.S. Distance Learning Ass'n comments at 20. Limiting such a consortium to include only other K12 schools and libraries could severely constrain their ability to achieve sufficient demand to attract potential competitors and thereby to negotiate lower rates or at least secure efficiencies, particularly in lower density regions. Permitting schools and libraries to aggregate with other educational institutions, including colleges, universities, educational broadcasters, community free nets, and municipalities, could enable the eligible entities to secure lower prediscount rates, thereby diminishing both their costs and the amount of support required to support a given percentage discount. On the other hand, we are somewhat concerned that permitting eligible and ineligible buyers to commingle their purchases would permit eligible schools and libraries to transfer the use of their discount to noneligible carriers in violation of the prohibition on resale. The difficulty, then, is how to allow eligible"2 *&&ddo! " institutions to aggregate their demand with ineligible entities without permitting the former to extend their discount privileges illegally.  X-xR595.` ` ALA suggests that this difficulty could be addressed if members of "mixed" consortia followed accounting procedures that clearly separated telecommunications costs  X-among participants.j  yO-#X\  P6G;ɒP#э ALA reply comments at 17.j Washington Library suggests that the Commission might want to  Xv-require auditable records.~XvX  yO -#X\  P6G;ɒP#э Washington Library comments at 15. If multiple parties have 56 kbps links to a single server that is connected to the Internet via a T1 connection, it is hard to dispute commenters who assert that accurate allocation of network usage of the T1 here is not technically feasible to ascertain. ~ In response, however, Oakland School District describes the  X_-administrative difficulty of separating costs and its supposed negative effect on aggregation._x  yO -#X\  P6G;ɒP#э Oakland School District further comments at 7. In addition, if multiple parties share a connection between a server and an ISP, it is difficult to disagree with commenters that assert that precise allocation of network usage of the shared  X -line is not technically feasible.   yO-#X\  P6G;ɒP#э BellSouth further comments at 21; USTA further comments at 11.  X -xS596.` ` On careful review, we conclude that, despite the difficulties of allocating costs and preventing abuses, the benefits from permitting schools and libraries to join in consortia with other customers in their community, as discussed above, outweigh the danger that such aggregations will lead to significant abuse of the prohibition against resale. We reach this conclusion based on three findings. First, we find that the only way to avoid any possible misallocations by eligible schools and libraries would be to severely limit all consortia, even among eligible schools and libraries, because it is possible that consortia including schools eligible for greater discounts could allocate more of the costs to those entities. We conclude that severely limiting consortia would not be in the public interest because it would serve to impede schools and libraries from becoming attractive customers or from benefiting from efficiencies. Second, illegal resale through misallocation abuse can be substantially prevented if the Commission requires providers to keep and retain careful records of how they have allocated the costs of shared facilities in order to charge eligible schools and libraries the appropriate amounts. These records should be maintained on some reasonable basis, either established by the Commission or set by the parties themselves, and should be available for public inspection. While we understand that technical precision may be impossible, we conclude that reasonable approximations of cost allocations should be sufficient to deter significant abuse. Finally, we would expect that the growing bandwidth requirements of schools and libraries would make it difficult for other consortia members to rely on using more than their paid share of the use of a facility without some technical constraint on the school or library's connection. This aspect would make fraud more detectable and likely" 3*&&dd! " would greatly deter fraud, given the small amounts of funds likely to be involved. Therefore, we recommend that state commissions undertake measures to enable consortia of eligible and ineligible entities to aggregate their purchases of telecommunications services and other services being supported through the discount mechanism, in accordance with the requirements set forth in section 254(h).  Xv-xT597.` ` Resale. Section 254(h)(3) bars entities that obtain discounts from reselling the discounted services. It states that: Xx` ` Telecommunications services and network capacity provided  x` ` [to schools or libraries at a discount] may not be sold, resold, x` ` or otherwise transferred by such user in consideration for money  X -x` ` or any other thing of value.  yOe -#X\  P6G;ɒP##X\  P6G;ɒP#э 47 U.S.C.  254(h)(3). Some parties propose that the Commission interpret this prohibition to apply only to resale for  X -profit. X  {O-#X\  P6G;ɒP#э See, e.g., ALA further comments at 810; AT&T further comments at 13; EDLINC further comments at 1718; PacTel further comments at 19; Washington UTC further comments at 1011. We recommend, however, that the Commission not interpret the section 254(h)(3) bar to apply only to resale for profit. To adopt this narrow interpretation of resale would enable the discounted services to be available via resale at discounted prices to entities not eligible for them. Therefore, we recommend that the Commission interpret section 254(h)(3) to restrict any resale whatsoever of services purchased pursuant to a section 254 discount.  X-xU598.` ` Section 254(c)(3) prohibition on resale, however, would not prohibit either computer lab fees for students or fees for Internet classes. As commenters recognize, because these are not services that schools or libraries purchased at a discount under the 1996 Act, they are not subject to the resale ban. Schools and libraries would not, however, be permitted to charge for the use of services they purchased at a discount pursuant to section 254.  X|-xV599.` ` Bona Fide Request for Educational Purposes. Section 254(h)(1)(B) limits discounts to services provided in response to bona fide requests made for services to be used  XN-for educational purposes.mN  yO!-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m While school groups strongly urge that any request for covered services made by an appropriate school or library official be presumed to be a bona fide  X -request for educational purposes,f B  yO%-#X\  P6G;ɒP#э NSBA I comments at 5.f we find that Congress intended to require greater accountability. We recommend that the Commission refer the task of evaluating in the first" 4*&&ddy! " instance whether a request is a bona fide request for educational purposes to an entity with expertise in this area. Those in the educational community are best able to prevent fraud and abuse by evaluating whether requests are bona fide and whether those requests are for educational purposes. Therefore, we recommend that schools and libraries be expected to comply with three bona fide request requirements. x  Xv-xW600.` ` First, AT&T asks that those requesting support for services certify that they will be able to deploy any necessary hardware, software, and wiring, and to undertake the  XH-necessary teacher training required to use the services effectively.pH  yO -#X\  P6G;ɒP#э AT&T further comments at 1415.p We find that this requirement would help schools avoid the waste that might arise from requests for services that the schools were unable to use for the educational purposes intended. We find that any bona fide request for educational services must be based on some internal school assessment that the institution can provide the necessary supporting technologies to permit the telecommunications and other covered services ordered to be used effectively. We appreciate that, in most instances, as long as schools and libraries are required to contribute some portion of the total cost of access (including noncovered expenses), their existing procurement process provides a check on wasteful purchases. x  Xb-xX601.` ` While requiring some contribution might be enough, we find that it would not be unduly burdensome to expect schools and libraries to certify that they have "done their homework" in terms of adopting a plan for securing access to all of the necessary supporting technologies needed to use the services purchased under section 254(h) effectively. We find that the burden would be particularly light given the likely development of clearinghouses of information for schools and libraries, such as the one proposed by Information  X-Renaissance.$X  yO-#X\  P6G;ɒP#э Information Renaissance supplemental further comments at 3. We also note that the Department of  {O-Education is participating in such an online site at "www.familyeducation.com". See also Amy Garmer and  {Os-Charles Firestone, Creating a Learning Society: Initiatives for Education and Technology 38 (1996) (addressing the clearinghouse web sites discussed by the Forum on Communications and Society).  Furthermore, we find that requiring such schools and libraries to have a plan for ensuring that they have the necessary hardware, software, wiring, and teacher training prior to ordering services eligible for a discount under section 254 would prevent waste and, therefore, would be in the public interest. We further note that nothing prevents the fund administrator from employing staff to check certifications and, where necessary, underlying plans, whether in an audit or otherwise.  X7-xY602.` ` Second, we also find merit in Ameritech's proposal that schools and libraries submit their requests for services in writing to all service providers certificated by the state  X -public utilities commission to serve the area in which the school or library is located,j D  yO%-#X\  P6G;ɒP#э Ameritech comments at 16.j" 5*&&dd=! " particularly in combination with the voluntary electronic data bank proposal of the Council for  X-Educational Development and Research.l  yOb-#X\  P6G;ɒP#э CEDR further comments at 2.l We conclude that Congress desired that schools and libraries take advantage of the potential for competitive bids, and that the proposals of Ameritech and the Council for Educational Development and Research seek to maximize the number of potential competitors aware of each institution's desire to purchase services. We recommend that schools and libraries be required to send a description of the services they desire to the fund administrator or other entity designated by the Commission. They can use the same description they use to meet the requirement that most generally face to solicit competitive bids for all major purchases above some dollar amount. The fund administrator or this other entity could then post a description of the services sought on a web site for all potential competing service providers to see and respond to as if they were requests for proposals (RFPs). This requirement is consistent with NTIA's principle of stimulating  X -competitive bidding.q X  yO-#X\  P6G;ɒP#э NTIA submission at 7, 1213, 14.q  X -xZ603.` ` Third, we recommend that, to ensure compliance with section 254, every school or library that requests services eligible for universal service support be required to submit to the service provider a written request for services. We recommend that the request should be signed by the person authorized to order telecommunications and other covered services for the school or library, certifying the following under oath: (1) the school or library is an eligible entity under section 254(h)(4); (2) the services requested will be used solely for educational purposes; (3) the services will not be sold, resold, or transferred in consideration for money or any other thing of value; and (4) if the services are being purchased as part of an aggregated purchase with other entities, the identities of all copurchasers and the portion of the services being purchased by the school or library.  X-x[604.` ` We also recommend that the Commission instruct the fund administrator to permit schools and libraries to selfcertify that they have met the three requirements discussed above. Under this approach, no school or library would be forced to wait for approval from a designated entity before arranging deployment, once it had filed its selfcertifications with the entity or the universal service administrator.  X7-x\605.` ` Auditing. As commenters suggest, we recommend that schools and libraries, as well as carriers, be required to maintain for their purchases of telecommunications and other covered services at discounted rates the kinds of procurement records that they already keep  X-for other purchases.  {O$-#X\  P6G;ɒP#э See, e.g., Ameritech comments at 14; Michigan Library Ass'n comments at 13; Washington Library comments at 15; CFA further comments at 8. We expect schools and libraries to be able to produce such records at"6B*&&dd! " the request of any auditor appointed by a state education department, the fund administrator, or any other state or federal agency with jurisdiction that might, for example, suspect fraud or other illegal conduct. We recommend that schools and libraries also be subject to random compliance audits to evaluate what services they are purchasing and how such services are being used. Such information would permit the Commission to determine whether universal service support policies require adjustment. The fund administrator should also develop appropriate reporting information for the schools and libraries to advise on their progress in obtaining access to telecommunications and other information services.  X1-x]606.` ` Annual Carrier Notification Requirement. We also address here what obligation carriers should have with respect to notifying schools and libraries about the availability of discounted services. While two library commenters ask us to require carriers to  X -inform libraries of this new offering,  {Oe -#X\  P6G;ɒP#э See Libraries for the Future comments at 4; Washington Library comments at 14. we are hesitant to recommend any regulatory requirements that appear unnecessary. We note that many national representatives of school and library groups are participating in this proceeding and we believe that no trade association or library or school trade publication will fail to inform its members or readers, respectively, of the opportunity to secure discounted telecommunications and other covered services under this program. Furthermore, assuming that we have set a reasonable prediscount price for carriers to receive, we would expect carriers to seek out schools and libraries as attractive customers, for that is how they earn profits. While we do not recommend that the Commission require notification, we do encourage service providers to notify annually each school and library association and state department of education in the states they serve of the availability of discounted services. x  X-x F. Funding Mechanisms for Schools and Libraries x  X- x` ` 1. Background  X-  X|-x^607.` ` Section 254(d) provides that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to  X7-preserve and advance universal service."g7Z  yOB -#X\  P6G;ɒP#э 47 U.S.C.  254(d).g Section 254(h)(1)(B) states that a telecommunications carrier providing services to schools and libraries shall: XxX` ` (i) have an amount equal to the amount of the discount treated(#` XxX` ` as an offset to its obligation to contribute to the mechanisms to(#` XxX` ` preserve and advance universal service, or(#` XxX` ` (ii) . . . receive reimbursement utilizing the support mechanisms(#` "!7*&&dd ! "Ԍ X-XxX` ` to preserve and advance universal service.m  yOy-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m(#` The Public Notice sought comment on whether separate funding mechanisms should be  X-  established for schools and libraries and for rural health care providers.tX  yO-#X\  P6G;ɒP#э Public Notice at question 22.t  X-x` ` 2. Comments  X_-x_608.` ` Separate Funding Mechanisms. Commenters approach the issue of separate funding mechanisms for schools, libraries, and health care providers in several ways. First, some commenters address whether schools, libraries, and rural health care providers should be included in a common funding mechanism with all other entities eligible for federal universal service support, or whether there should be separate funding mechanisms for each entity. Several commenters advocate separate funding mechanisms for each of the entities eligible for universal service support, including schools, libraries, health care providers, lowincome  X -subscribers, and rural, insular, and high cost areas.   {OW-#X\  P6G;ɒP#э See, e.g., Century further comments at 15; NYNEX further comments at 16; RTC further comments at 16; USTA further comments at 17; Vitelco further comments at 6. USTA, for example, maintains that separate funding should be adopted because the statutory requirements for the eligible entities are different. USTA notes, however, that "it is possible for funding support for each to be administered as part of the same fund so long as separate accounting practices are maintained  Xb-by the fund administrator."bB  yOU-#X\  P6G;ɒP#э USTA further comments at 17 (supporting separate funding mechanisms for schools and libraries, rural health care providers, and for "the provision of core universal services"). SWBT contends that separate funding mechanisms "will ensure  XK-proper accountability and a targeted focus."K  yO-#X\  P6G;ɒP#э SWBT further comments at 18 (supporting multiple funds). SWBT further recommends that the multiple  X4-funding mechanisms be combined to calculate a single customer surcharge.4*  {O-#X\  P6G;ɒP#э SWBT further comments at 18. See also NYNEX further comments at 16. NECA supports multiple "specificallytargeted funds," but also recommends a "common fund  X-collection mechanism for its universal service programs."p  yOs!-#X\  P6G;ɒP#э NECA further comments at 1314.p NCLIS maintains that schools  X-and libraries should even have separate funding mechanisms.mL  yO#-#X\  P6G;ɒP#э NCLIS further comments at 7.m Other commenters, however, support a single funding mechanism for all entities eligible for federal universal service"8*&&dd! "  X-support.  {Oy-#X\  P6G;ɒP#э See, e.g., Apple further comments at 4; Bell Atlantic further comments at 7; EDLINC further comments at 4041. EDLINC, for example, maintains that section 254 does not contemplate separate  X-funds.r"  yO-#X\  P6G;ɒP#э EDLINC further comments at 4041.r Bell Atlantic advocates a common funding mechanism, with separate sizing and  X-distribution.X  yO5-#X\  P6G;ɒP#э Bell Atlantic further comments at 7 (asserting that, "[s]ince all telecommunications providers must pay into the universal service fund, there can be a single collection mechanism for both the high cost fund and the education/library/health care fund. Each fund, however, would be sized and distributed individually").  X-x`609.` ` Alternatively, some commenters focus solely on whether schools and libraries should have one funding mechanism, and health care providers should have another funding  Xv-mechanism./Zv  {O-#X\  P6G;ɒP#э See, e.g., ALA further comments at 18; BellSouth further comments at 30; Information Renaissance further comments at 10; MCI further comments at 10; NCTA further comments at 6; Western Alliance further comments at 4./ MCI, for example, asserts that "if the Commission adopts an interstateonly universal service fund, then there must be separate funding mechanisms for schools and libraries and rural health care providers because all telecommunications service providers must  X1-contribute to the latter and only interstate carriers would contribute to the former."l1  yO-#X\  P6G;ɒP#э MCI further comments at 10.l BellSouth maintains that separate funding mechanisms are appropriate because of the different statutory criteria and methods for providing support to schools and libraries, on the one hand,  X -and rural health care providers on the other.PZ  {O!-#X\  P6G;ɒP#э BellSouth further comments at 30. See also ALA further comments at 18 (stating that "ALA simply notes that the language in Section 254(h)(1)(A) for rural health care providers differs somewhat from that in paragraph (B) for schools and libraries").P Oakland School District states that the differing needs of schools and libraries versus rural health care providers justify separate  X -funding mechanisms."   {O-#X\  P6G;ɒP#э Oakland School District further comments at 910. See also Information Renaissance further comments at 10 (asserting that "[t]he needs of schools and libraries and those of rural health care providers are sufficiently different that it is desirable to use one funding mechanism for schools and libraries and a separate funding mechanism for rural health care providers"). Other commenters assert that schools, libraries, and rural health care  X -providers should be combined in a single funding mechanism.   {O"-#X\  P6G;ɒP#э See, e.g., Ameritech further comments at 22; U S West further comments at 12. U S West, for example, supports a combined funding mechanism with separate allocation and administration of funds"9"*&&dd! "  X-for schools and libraries, and rural health care providers.y  yOy-#X\  P6G;ɒP#э U S West further comments at 12. y Ameritech states that "[i]t is not clear why it would be necessary or desirable to establish separate funding mechanisms, but it would be helpful to maintain separate accounting for these programs in order to give the Commission the opportunity to phaseout one or the other should that be reasonable to do in  X-the future."xX  yO-#X\  P6G;ɒP#э Ameritech further comments at 22.x  Xv-xa610.` ` Offset versus Reimbursement. Several commenters address carriers' options of applying the amount of the discount provided to schools and libraries as an offset to universal service contribution requirement or receiving direct reimbursement from universal service support mechanisms. NECA, for example, contends that "[f]rom an administrative standpoint . . . it would be preferable to provide direct reimbursements to all qualified carriers rather  X -than permit offsets in any case."j   yO-#X\  P6G;ɒP#э NECA comments at 16 n.34.j NECA argues, however, that if offsets are permitted, carriers should be required to report total revenue amounts, "with offsets stated as explicit  X -amounts to be credited against contribution requirements,"j x  yO-#X\  P6G;ɒP#э NECA comments at 16 n.34.j and should keep adequate  X -records that would be subject to audits by the Commission or the administrator.n   yOw-#X\  P6G;ɒP#э NECA reply comments at 1617.n NECA asserts that such an approach would serve the dual purposes of ensuring the accuracy of  X-carrier revenue data and diminishing verification problems.j  yO-#X\  P6G;ɒP#э NECA comments at 16 n.34.j Idaho PUC states that telecommunications carriers should only be able to seek offset or reimbursement "for actual  Xb-costs incurred but not recovered," but not for "estimated revenue loss."jb(  yO;-#X\  P6G;ɒP#э Idaho PUC comments at 13.j  X4-x` ` 3. Discussion  X-x  X-xb611.` ` Separate Funding Mechanisms. We recommend that the universal service administrator distribute support for schools and libraries from the same source of revenue used to support other universal service purposes under section 254. While we appreciate commenters' concerns that we ensure proper accountability for and targeting of the funds for  X-schools and libraries,w  {O%-#X\  P6G;ɒP#э See SWBT further comments at 18.w we agree with those commenters who observe that this is achievable":J *&&dd! "  X-if the fund administrator maintains separate accounting categories.w  {Oy-#X\  P6G;ɒP#э See USTA further comments at 17.w Other commenters propose the use of separate funds because Congress established different rules for distributing  X-funds,Z  {O-#X\  P6G;ɒP#э See ALA further comments at 18; BellSouth further comments at 30. but we see no reason why different distribution mechanisms should dissuade the Commission from collecting funds for different programs in the same most efficient manner.  X-xc612.` ` Other commenters urge us to recommend separate funds to enable the Commission to collect funds for schools and libraries on a different basis from other universal service programs. These commenters suggest that the Commission might target different categories of contributors, e.g., all interstate carriers versus all telecommunications service  X1-providers, for different programs.v1  {O -#X\  P6G;ɒP#э See MCI further comments at 10.v As we explain below, however, we recommend that funds be collected from all telecommunications carriers that provide interstate telecommunications services, and we find no advantage to collecting funds from a smaller subgroup for a different purpose. Thus, we conclude that the establishment of separate funds  X -would yield de minimis, if any, marginal improvement in accountability, while imposing unnecessary administrative costs.  X-xd613.` ` Offset versus Reimbursement. Section 254(h)(1)(B) requires that telecommunications carriers providing services to schools and libraries shall either apply the amount of the discount afforded to schools and libraries as an offset to its universal service contribution obligations or shall be reimbursed for that amount from universal service support  X6-mechanisms.m6~  yOe-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(B).m While we acknowledge NECA's argument that providing only direct  X-reimbursements may be administratively less complicated,j  yO-#X\  P6G;ɒP#э NECA comments at 16 n.34.j we conclude that section 254(h)(1)(B) requires that telecommunications carriers be permitted to choose either reimbursement or offset. Because nontelecommunications carriers are not obligated to contribute to universal service support mechanisms, they would not be entitled to an offset. Nontelecommunications carriers providing eligible services to schools and libraries, therefore, would be entitled only to reimbursement from universal service support mechanisms.  X~-x G. Sections 706 and 708 x` ` 1. Background  X9-  X"-xe614.` ` Section 706 of the 1996 Act directs the Commission and the states to"";*&&dd! " "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and  X-classrooms)."g  yOK-#X\  P6G;ɒP#э 1996 Act,  706(a).g Section 706 also states that the Commission and the states may use "price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulatory methods that remove barriers to infrastructure  X-investment" to encourage the deployment of advanced telecommunications services#X\  P6G;ɒP#.gXD yOu-#X\  P6G;ɒP#э 1996 Act,  706(a).g#Xj\  P6G;ynXP# Section 706 directs the Commission to initiate a Notice of Inquiry within 30 months after  X_-enactment of the 1996 Act, and to complete the inquiry within 180 days of its initiation.g_  yO -#X\  P6G;ɒP#э 1996 Act,  706(b).g  XH-#Xj\  P6G;ynXP#  X1-xf615.` ` Section 708 recognizes the National Education Technology Funding Corporation "as a nonprofit corporation operating under the laws of the District of Columbia, and . . . provide[s] authority for Federal departments and agencies to provide assistance to the  X -Corporation."j x  yO-#X\  P6G;ɒP#э 1996 Act,  708(a)(2).j The functions of the National Education Technology Funding Corporation include leveraging resources and stimulating investment in educational technology, designating  X -state educational agencies to receive loans or grants from the Corporation, providing loans and grants to state education technology agencies, and encouraging publicprivate ventures to  X-promote the development of advanced telecommunications services.m  yOI-#X\  P6G;ɒP#э 1996 Act,  708(a)(1)(C).m Section 708 also states that "the [National Education Technology Funding] Corporation shall be eligible to receive discretionary grants, contracts, gifts, contributions, or technical assistance from any  XK-Federal department or agency, to the extent otherwise permitted by law."jK  yO-#X\  P6G;ɒP#э 1996 Act,  708(c)(2).j The Public Notice sought comment on whether the provisions of sections 706 and 708 should be considered by the Joint Board and relied upon to provide advanced services to schools and  X-libraries.s(  yO-#X\  P6G;ɒP#э Public Notice at question 8.s  X-x` ` 2. Comments  X-  X-xg616.` ` Some commenters maintain that the Joint Board should consider section 706"< *&&dd! "  X-and 708 at this time.Z  {Oy-#]\  PCɒP#э See, e.g., NCTA comments at 23; Netscape comments at 2324; USTA comments at 12; ALA further comments at 45; BellSouth further comments at 1617; California Library Ass'n further comments at 2;  yO -NYNEX further comments at 78; Union City Board of Education further comments at 2, 7. Numerous commenters assert that, while sections 706 and 708 should not be considered substitutes for the requirements of section 254, they may be considered as  X-complements to section 254.PZ  {Om-#X\  P6G;ɒP#э#X\  P6G;ɒP# See, e.g., ACE reply comments at 7; ALA further comments at 45; BellSouth further comments at 1617; California Library Ass'n further comments at 2; MAP further comments at 56; RTC further comments at 11, 12.P AirTouch states that section 706 and 708 are within the scope of the Joint Board's mandate to evaluate, preserve, and enhance universal service  X-support.   yOa -#X\  P6G;ɒP#э#X\  P6G;ɒP# AirTouch further comments at 1214. NYNEX maintains that the Joint Board should pursue the goals of sections 706 and 708 by encouraging facilitiesbased competition and marketbased pricing. NYNEX also  Xv-states that section 708 recognizes the need for funding beyond universal service.v  yO-#X\  P6G;ɒP#э #X\  P6G;ɒP# NYNEX further comments at 78. U S West maintains that "[s]ections 706 and 708 should be solely relied upon to ensure that advanced  XH-services are provided to schools, [and] libraries."H,  yO%-#X\  P6G;ɒP#э#X\  P6G;ɒP# U S West further comments at 7. U S West further contends that the monitoring of the marketplace required by section 706 is all that is necessary for now. The Commission should wait until after there has been an opportunity to see how the market reacts to the competitive framework embodied in the 1996 Act to determine whether additional regulatory steps will be necessary to encourage the provision of advanced  X -services.  yOB-#X\  P6G;ɒP#э#X\  P6G;ɒP# U S West further comments at 7.  X -xh617.` ` Other parties contend that the Joint Board should not consider sections 706 and  X-708 in the context of this universal service rulemaking proceeding.ZL  {O-#]\  PCɒP#э See, e.g., Letter from Senator Carol MoseleyBraun and Senator Conrad Burns to Reed Hundt,  yOW-Chairman, Federal Communications Commission (Aug. 2, 1996); Ameritech further comments at 14, 15; Oakland School District further comments at 34; U.S. Distance Learning Ass'n further comments at 45. Senators Carol Moseley Braun and Conrad Burns, the principal cosponsors of sections 706 and 708, explained in a letter to Chairman Hundt that those sections were intended "to supplement, not replace or supplant, Section 254, with respect to [the use of] advanced services" by schools  X4-and libraries. 4n  {OS$-#X\  P6G;ɒP#э#]\  PCɒP# See Letter from Senator Carol MoseleyBraun and Senator Conrad Burns to Reed Hundt, Chairman, Federal Communications Commission (Aug. 2, 1996).  Ameritech asserts that only section 254(h)(2) addresses advanced services for"4=*&&ddf! " schools and libraries. Ameritech also contends that section 706 concerns only the encouragement of deploying advanced services and the capability of advanced services, while section 708 concerns only the leveraging of resources and the stimulation of private  X-investment in infrastructure.XZ  {O4-#X\  P6G;ɒP#э#X\  P6G;ɒP# Ameritech further comments at 14, 15. See also Oakland School District further comments at 34 (asserting that sections 706 and 708 have nothing to do with the provision of advanced services to schools and libraries).X CFA maintains that there is no need for the Joint Board to consider sections 706 and 708 until the new universal service policies are in place and  X-permitted to operate.  yO( -#X\  P6G;ɒP#э#X\  P6G;ɒP# CFA further comments at 67. ITC states that the Joint Board has neither the resources nor the  Xv-jurisdiction over collection and disbursement to support considering sections 706 and 708.vz  yO -#X\  P6G;ɒP#э#X\  P6G;ɒP# ITC further comments at 5. U.S. Distance Learning Ass'n contends that sections 706 and 708 should be viewed as broader  XH-mandates to reexamine the effectiveness of section 254 after implementation.#H   yO-#X\  P6G;ɒP#э#X\  P6G;ɒP# U.S. Distance Learning Ass'n further comments at 45 (noting also that the deadlines in sections 706 and 708 are longer term than the statutory deadlines for section 254).#  X -x` ` 3. Discussion  X -xi618.` ` Recognizing the growing importance of technological fluency for successful participation in society, section 254 expands the concept of universal service to include assistance for schools and libraries in making technology available to students and the general public. As discussed above, section 254 will provide the support needed as a catalyst for the deployment of technology to every school and library across the nation. While not replacements for the programs under section 254, we recognize that sections 706 and 708 include requirements that would complement the goal of widespread availability of advanced telecommunications services. We conclude, however, that Congress contemplated that section 706 would be subject to a separate rulemaking proceeding. In section 706, Congress directed the Commission to initiate a notice of inquiry within 30 months after the enactment of the 1996 Act, and it further directed the Commission to complete that rulemaking proceeding  X-within 180 days after its initiation.hb  yO -#X\  P6G;ɒP#э 1996 Act,  706(b). h These statutory deadlines differ from the deadlines imposed on the section 254 rulemaking proceeding. We decline, therefore, to consider section 706 in the context of this proceeding.  X-xj619.` ` Although we will not be making a recommendation regarding section 706, we note that section 706 reinforces the goals of section 254 by requiring the Commission and the states to encourage carriers to deploy advanced telecommunications capability to all"e> *&&dd! " Americans (including, in particular, elementary and secondary schools and classrooms) through the utilization of price cap regulation, regulatory forbearance, measures that promote competition in local telecommunications market, or other regulating methods that remove  X-barriers to infrastructure investment.  yO4-#X\  P6G;ɒP#Ѝ 1996 Act, #A\  PɒP# 706(a). The definition of advanced telecommunications capability under section 706 is consistent with the scope of services contemplated under section 254(h)(2) in its acknowledgment that the evolution of technology has expanded the  Xv-media by which advanced services are delivered.vX  yO -#X\  P6G;ɒP#Ѝ#A\  PɒP# 1996 Act,  706(c)(1). Whereas section 254 prescribes financial assistance for schools and libraries through the establishment of discounts on services, section 706 identifies mechanisms by which the power of competitive markets can be used to further the goal. The requirement under section 706 for periodic reports on the extent to which the goal of pervasive deployment of advanced telecommunications capabilities has been achieved further builds on the evaluation guidelines that we recommend. While we strongly support the goals of section 706, which include the Commission and the states creating incentives for the dissemination of technology to schools and libraries through appropriate streamlining of regulations, facilitation of competitive entry, and removal of barriers to infrastructure investment, we will not consider section 706 in the context of the section 254 rulemaking proceeding.  Xb-xk620.` ` We also note that the National Education Technology Funding Corporation, which is recognized under section 708, provides additional opportunities for schools and  X4-libraries to increase the deployment of technology within their institutions.4  yO-#X\  P6G;ɒP#э#A\  P ɒP# 1996 Act,  708(a)(1)(C). While we strongly support the mission of the Corporation, which includes the development of publicprivate ventures to accelerate the dissemination of technology, we do not rely upon section 708 to provide advanced services to schools and libraries within the context of the section 254 rulemaking proceeding. We agree with commenters who assert that section 708 should be  X-considered further after implementation of section 254.x  {O-#X\  P6G;ɒP#э See CFA further comments at 67; U.S. Distance Learning Ass'n further comments at 45. x  X-x H. Access to Advanced Telecommunications and Information Services  X|-  Xe-x` ` 1. Background  XN-  X7-xl621.` ` Section 254(h)(2)(A) directs the Commission to establish "competitively neutral rules" designed to enhance access to advanced telecommunications and information services to elementary and secondary school classrooms and libraries, "to the extent technically feasible" ? *&&ddy! "  X-and economically reasonable."m  yOy-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(A).m Congress also directs the Commission to establish "competitively neutral rules" defining the circumstances under which a carrier may be required to connect its network to public institutional telecommunications users, such as  X-elementary and secondary schools and libraries.mX  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(B).m Access to advanced telecommunications services is also included within the seven universal service principles outlined in section 254(b). Principle six, entitled, "Access to Advanced Telecommunications Services for Schools, Health Care, and Libraries," states that "[e]lementary and secondary schools and classrooms, . . . and libraries should have access to advanced telecommunications services as  XH-described in subsection [254] (h)."jH  yO -#X\  P6G;ɒP#э 47 U.S.C.  254(b)(6).j  X -xm622.` ` In the NPRM, the Commission asked commenters to identify which services would qualify as "advanced telecommunications and information services" pursuant to section 254(h)(2), as well as the features and functionalities necessary to give classrooms and libraries  X -access to those services.o x  {O-#X\  P6G;ɒP#э  NPRM at para. 109.o The NPRM sought comment on "any additional measures, other than discounts or financial support, that would promote deployment of advanced services to  X -school classrooms, [and] libraries."i   {Ob-#X\  P6G;ɒP#э  NPRM at para. 109.i For each such measure, the NPRM sought comment on whether it would be competitively neutral and whether it would comply with the resale  Xy-prohibition contained in section 254(h)(3).cy  yO-#X\  P6G;ɒP#э NPRM at para. 110.c The Commission also asked commenters to  Xb-estimate the potential costs associated with such measures.cb,  yO?-#X\  P6G;ɒP#э NPRM at para. 110.c  X4-xn623.` ` In addition, the NPRM also asked how the Commission should assess whether specific services providing access to advanced telecommunications and information services  X-are "technically feasible and economically reasonable."c  yOs!-#X\  P6G;ɒP#э NPRM at para. 110.c Moreover, the NPRM sought comment on how to define the circumstances under which a telecommunications carrier may  X-be required to connect its network to public institutional telecommunications users.cL  yO$-#X\  P6G;ɒP#э NPRM at para. 110.c "@*&&dd! "Ԍ X- x` ` 2. Comments  X-xo624.` ` Promoting Deployment. Several commenters discuss ways to promote  X-deployment of advanced services.  {O4-#X\  P6G;ɒP#э See, e.g., ALA comments at 2223; MFS comments at 21; Metricom comments at 8; NCTA comments at 23; NSBA I comments at 25; Syracuse University comments at 1011. NSBA I and ALA, for example, state that the Commission should encourage appropriate pricing policies, such as flat rate pricing, that  X-would accommodate the need of schools and libraries for predictable pricing."  {O` -#X\  P6G;ɒP#э ALA comments at 2224; NSBA I comments at 2425. See also CWA comments at 13 (asserting that reduced connection and user rates should be offered). NCLIS anticipates "discounted rates" and "affordable access" to advanced telecommunications and  X_-information services._|  {O -#X\  P6G;ɒP#э NCLIS reply comments at 4, 24. See also Libraries for the Future reply comments at 13 (stating that libraries require discounted access to advanced services). New York Regents maintains that market aggregation and a  XH-consistent funding mechanism will promote deployment of advanced services.qH  yO-#X\  P6G;ɒP#э New York Regents comments at 11.q Syracuse University asserts that direct subsidies should be provided to establish rate comparability  X -among rural, high cost, and urban areas for T1 data transmission lines.w f  yO1-#X\  P6G;ɒP#э Syracuse University comments at 1011.w Some parties  X -maintain that the fostering of competition will promote such deployment,   {O-#X\  P6G;ɒP#э See, e.g., MFS comments at 21; NCTA comments at 2223. while Rural Iowa Indep. Tel. Ass'n notes that the combination of competition, the establishment of universal service support mechanisms, and continuing technological advances will foster  X -deployment of advanced services.  {O-#X\  P6G;ɒP#э See Rural Iowa Independent Telephone Ass'n comments at 6.  X-xp625.` ` Other commenters take different approaches to the deployment of advanced services. CCV, for example, believes that "there are substantial incentives in place today that are driving companies such as Continental to accelerate the pace of providing access to a  XK-range of new, advanced services.cK  yO!-#X\  P6G;ɒP#э CCV comments at 6.c CCV cites a series of governmentbusiness partnerships into which it has entered and its construction of institutional networks that will promote  X-deployment of advanced services to schools and libraries.f  yOx$-#X\  P6G;ɒP#э CCV comments at 610.f USTA notes that "[w]hile  254(h)(2) requires that advanced services be provided in a manner that is technically and"A:*&&ddd! " economically reasonable, it does not require that advanced services that do not qualify as  X-special services be discounted."e  yOb-#X\  P6G;ɒP#э USTA comments at 12.e NCTA maintains that section 254(h)(2) does not envision  X-support for advanced services, but only contemplates enhancing access to such services.eX  yO-#X\  P6G;ɒP#э NCTA comments at 17.e  X-xq626.` ` Ensuring Competitive Neutrality. Several commenters address ways in which the Commission can ensure that it promulgates competitively neutral rules regarding advanced  Xv-services.v  {O -#X\  P6G;ɒP#э See, e.g., Metricom comments at 7; New York Regents comments at 1011; PacTel comments at 11; Sailor comments at 15; Time Warner comments at 18. Sailor, for example, asserts that rules for advanced services should allow schools and libraries to choose from among a variety of technologies and a variety of service  XH-providers.#HB  {O;-#X\  P6G;ɒP#э Sailor comments at 15. See also HITN comments at 8 (encouraging the Commission to include Instructional Fixed Service licensees as telecommunications providers eligible for universal service support). # Time Warner contends that ensuring competitive neutrality requires the Commission to "carefully examine the current market" to determine what services are already  X -being provided to schools and libraries.o   yOg-#X\  P6G;ɒP#э Time Warner comments at 1718.o PacTel states that "all telecommunications and information service providers must bear responsibility for providing and funding these  X -services."g  ,  yO-#X\  P6G;ɒP#э PacTel comments at 11.g New York Regents asserts that all companies providing core services to schools  X -and libraries should be required to provide interconnection to advanced services.q   yOD-#X\  P6G;ɒP#э New York Regents comments at 11.q  X -  X -xr627.` ` Technically Feasible and Economically Reasonable Requirement. Several commenters address the concept of technical feasibility and economic reasonableness. Ameritech, for example, notes that these two requirements are important limitations on the Commission's obligation to enhance access to advanced telecommunications and information services under section 254(h)(2), when it states that "[a]ccess to these advanced services may  X6-require more than the transmission capabilities provided by a telecommunications carrier."j 6L  yO3!-#X\  P6G;ɒP#э Ameritech comments at 20.j Ameritech also recommends that the Commission not adopt detailed rules regarding section 254(h)(2) at this time, but rather should adopt a rule that imposes the requirements of (h)(2) and provides for an informal dispute resolution process to handle any disputes which may"B *&&dd'! "  X-arise in the future.m   yOy-#X\  P6G;ɒP#э Ameritech comments at 2021.m PacTel maintains that any access mandated for an advanced service can only be considered technically feasible and economically reasonable "after the recipient has made a showing that it possesses and has the training to use related hardware and  X-software."g X  yO-#X\  P6G;ɒP#э PacTel comments at 11.g PacTel also supports ongoing review of access to advanced services and the development of working groups comprised of telecommunications providers and industry  X-members to examine related issues.j  yO& -#X\  P6G;ɒP#э PacTel comments at 1112.j USTA asserts that the technically feasible and economically reasonable requirement "does not require that advanced services which do not  X_-qualify as special services be discounted."e_x  yO -#X\  P6G;ɒP#э USTA comments at 12.e USTA also contends that rules to be promulgated under section 254(h)(2) should be considered in the context of the Commission's  X1-section 706 proceeding.1  {O-#X\  P6G;ɒP#э USTA comments at 12. See supra section X.G. for a further discussion of section 706.  X -xs628.` ` Requiring Carriers to Connect to Schools and Libraries. Only one party addresses the circumstances under which a carrier may be required to connect its network to schools or libraries. Metricom suggests that the Commission refer to section 214(e), which provides "a mechanism by which subscribers in all areas of the country are assured of interconnection with at least one carrier which must offer all of the services that the  X-Commission finds are necessary for schools, [and] libraries."h  yO-#X\  P6G;ɒP#э Metricom comments at 8.h Metricom concludes, therefore, that there is no need for the Commission to require carriers other than those deemed  Xb-eligible carriers under section 214(e) to provide interconnection to schools and libraries.hb*  yO=-#X\  P6G;ɒP#э Metricom comments at 8.h In its reply comments, Metricom acknowledges that no other party directly addressed this issue, but states that "the record contains ample support for the proposition that carriers should not be forced to offer advanced telecommunications or information services to educational . . .  X-institutions."  {Oq!-#X\  P6G;ɒP#э Metricom reply comments at 4 (citing New York DOE comments, TCI comments, and USTA comments).  X-x` ` 3. Discussion  X-  X-xt629.` ` As discussed above, we recommend that the Commission use section 254(h) to"C*&&dd! " provide universal service support to schools and libraries for telecommunications services, Internet access, and internal connections. We conclude that our recommendations for providing universal service support under section 254(h) will significantly increase the availability and deployment of telecommunications services for school classrooms and libraries, and we find that additional steps are not needed to meet Congress's goal of enhancing access to advanced telecommunications and information services. x  X_-x I. Implementation  X1-xu630. ` ` We recommend that the Commission adopt rules that will permit schools and libraries to begin using discounted services ordered pursuant to section 254(h) at the start of the 1997 1998 school year. We anticipate that they may begin complying with the selfcertification requirements as soon as the Commission's rules become effective. As explained in our discussion of the bona fide request requirement above, we recommend that all schools and libraries be required to comply with three selfcertification requirements: (1) certify to the administrator that they have adopted a plan for securing access to all of the necessary supporting technologies needed to use the services purchased under section 254(h) effectively; (2) send a description of the services they desire to the fund administrator, so that the description of services can be posted for all potential competing service providers; and (3) submit written requests to their chosen service providers for services eligible for section 254(h) discounts, including certification of their eligibility for support and agreement to abide by Commission rules.  X- XI. HEALTH CARE PROVIDERS  X-xA. Overview  X|-xv631.` ` Under section 254, public and nonprofit health care providers that serve persons residing in rural areas within a state may receive telecommunications services necessary for the provision of health care services at rates that are reasonably comparable to  X7-urban rates for similar services.m7  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(A).m They may also receive universal service support for  X -additional telecommunications services not included in the list of "core" services.j X  yO)!-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(3).j In addition, carriers that provide telecommunications services to rural health care providers at reduced rates may treat the amount of the reduction as part of their universal service  X-obligation.m  yOt%-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(A).m Further, the Commission is required to establish competitively neutral rules to"Dx*&&dd! " enhance, to the extent technically feasible and economically reasonable, the access of public and nonprofit health care providers to advanced telecommunications and information  X-servicesm  yOK-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(A).m and to define the circumstances when a carrier may be required to connect its  X-network to health care providers.mX  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(2)(B).m  X-xw632.` ` In this section, we recommend that the Commission seek additional information on the telecommunications needs of rural health care providers, and on the costs of these services, prior to the Commission adopting final rules. The record submitted to date does not give us the confidence to make a recommendation at this time regarding the exact scope of services to be supported. We also recommend that the Commission seek additional information on the costs that would be involved in reducing or eliminating distancebased charges to rural health care providers in excess of those paid by urban customers, recognizing that removing disparities between rural and urban telecommunications rates is a central purpose of section 254. Further, we recommend that the Commission seek additional information on the costs to support tollfree Internet access and necessary upgrades to the public switched network.  Xy-xx633. ` ` With respect to establishing reasonably comparable rates for those services ultimately designated, we recommend that the Commission require carriers to provide each service offered in a rural area at a rate no higher than the highest commercial tariffed or publicly available rate in the state's closest urban area. We also recommend compensating the providing carrier by allowing an offset to that carrier's universal service obligation. The offset should be the difference between the rate charged to the health care provider and the average of that carrier's rates in the rural county in which the health care provider is located. If the carrier is not providing the service to other customers in that area, we recommend that the offset be calculated from the average of other carriers' rates in the same area, or from a costbased rate approved by the state or the Commission. We also describe the certifications we recommend be included in each bona fide request for services, and explain our recommendation that aggregated purchase arrangements with noneligible entities should be allowed.  X7-x B. Services Eligible for Support  X -x` ` 1. Background  X-xy634.` ` As discussed in section IV.A. above, section 254(c)(1) of the 1996 Act gives the Commission and Joint Board responsibility for defining a group of core services eligible for federal universal service support. In addition to these core telecommunications services,"!E*&&dd ! " section 254(c)(3) provides the Commission with the authority to designate "special" or "additional" services as eligible for support for public and nonprofit health care providers for  X-the purposes of subsection 254(h).k  yOK-#X\  P6G;ɒP#э 47 U.S.C.  254(c)(3). k Subsection (h)(1)(A) provides a specific mechanism for supporting services to eligible health care providers serving persons who reside in rural areas  X-at rates reasonably comparable to rates in urban areas in that state.mX  yO-#X\  P6G;ɒP#э 47 U.S.C.  254(h)(1)(A).m  Xv-xz635.` ` In the Joint Explanatory Statement accompanying the 1996 Act, Congress explained that subsection (h) of section 254 is intended "to ensure that health care providers for rural areas have affordable access to modern telecommunications services that will enable  X1-them to provide medical . . . services to all parts of the Nation."1  yO -#X\  P6G;ɒP#э Jt. Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2nd Sess. 132 (1996). In addition, the Joint Explanatory Statement noted that the definition of services to be supported by universal service support mechanisms is an evolving one, and, "[t]he Commission is given specific authority to alter the definition from time to time, and to provide a different definition for . . .  X -health care facilities."s x  yO-#X\  P6G;ɒP#э Joint Explanatory Statement at 131.s Further, in its consideration of section 254(c)(3) "additional" services, Congress authorized the Commission to specify a separate definition of universal  X -service that would apply only to public institutional telecommunications users.CX   yO`-#X\  P6G;ɒP#э Joint Explanatory Statement at 133. The term "institutional telecommunications user" is defined as including "an elementary and secondary school [or] a library . . . as those terms are defined in this paragraph." 47 U.S.C.  254(h)(5)(c).C In formulating such a definition, Congress stated that "the conferees expect the Commission and the Joint Board to take into account the particular needs of hospitals, K12 schools and  Xb-libraries."Zb(  {O;-ԍ #X\  P6G;ɒP#Id.Z  X4-x{636.` ` In addition to core services,Q4  yO-#X\  P6G;ɒP#э The NPRM sought comment on a list of potential "core" telecommunications services that might be supported under the provisions of section 254(c)(1), including: (1) voice grade access to the public switched network, with the ability to place and receive calls; (2) touchtone; (3) singleparty service; (4) access to emergency services (911); and (5) access to operator services; NPRM at para. 16. For a full discussion of  {O"-section 254(c)(1) and core services, see section IV.B., supra.Q the NPRM proposed to "designate additional services" for support to "rural health service providers" to the extent "necessary for the"Fl*&&ddG! "  X-provision of [rural] health care services" pursuant to sections 254(c)(3) and 254(h)(1)(A).b   yOy-#X\  P6G;ɒP#э NPRM at para. 90.b The NPRM sought comment on what telecommunications services were "necessary for the  X-provision of [rural] health care services,"b!X  yO-#X\  P6G;ɒP#э NPRM at para. 90.b and whether incoming services should be eligible  X-for support as well as outgoing services.b"  yOT-#X\  P6G;ɒP#э NPRM at para. 94.b The Commission also sought comment on the nature of the "`instruction relating to such [health care] services telecom carriers provide their  X-subscribers."c#x  yO -#X\  P6G;ɒP#э NPRM at para. 93. c x  X_-x` ` 2. Comments  X1-x|637.` ` Limit Services Eligible for Support. Some commenters, including NCTA, TCI, and Florida Cable, suggest limiting universal service support for health care providers to  X -"core" services proposed under section 254(c)(1).$   {O-#X\  P6G;ɒP#э See, e.g., Florida Cable comments at 16; NCTA comments at 20; TCI comments at 24. Florida Cable argues that no services  X -beyond core services should be supported before a "needs assessment" is accomplished.n%   yO7-#X\  P6G;ɒP#э Florida Cable comments at 16.n These commenters argue that this option is most easily administered and would be the least expensive to support. TCI argues that the term "necessary" services should be defined narrowly "so that carriers are obligated to provide the least number of services" in order that  X-these requirements do not "result in the creation of entry barriers."d&*  yOk-#X\  P6G;ɒP#э TCI comments at 24.d Frontier maintains that more advanced services like ATM and ISDN could be added when a compelling need is  Xb-demonstrated.h'b  yO-#X\  P6G;ɒP#э Frontier comments at 5.h  X4-x}638.` ` Similarly, Ameritech argues that, under section 254(h)(1)(A), the services and functionalities eligible for support do not include all available services, but only those telecommunications services that are "necessary for the provision of health care services in a  X-state, including instruction relating to such services."r(J  yO#-#X\  P6G;ɒP#э Ameritech further comments at 12.r Several commenters assert that only certain limited services for health care providers should be supported under the provisions of "G(*&&dd&! "  X-section 254.|)Z  {Oy-#X\  P6G;ɒP#э See, e.g., Alaska Tel. further comments at 6 ("discounts should only apply to regulated services and functionalities"); NCTA further comments at 3; Nat'l Ass'n of Mfrs further comments at 12 (keep universal service supported services "as basic as possible"); Teleport further comments at 45.|  X-x~639.` ` Expand Coverage to Additional Services. Several other commenters are of the view that, in addition to core services, "special" or "additional" services should be provided to rural health care providers at rates comparable to urban rates. MCI, for example, notes that adequate telecommunications services for these institutional users are likely to require greater  Xv-bandwidth than that required by residential users.d*v  yO -#X\  P6G;ɒP#э MCI comments at 20.d Some commenters asserting similar  X_-views state their preferences in terms of modes of transmission such as ATM,+_z  {O -#X\  P6G;ɒP#э See, e.g., Frontier comments at 5; Mountaineer Doctor TV comments at 2; North Dakota PSC comments at 1. or basic rate  XH-or primary rate ISDN.,H  yO-#X\  P6G;ɒP#э Merit comments at 2; Mountaineer Doctor TV comments at 2; North Dakota PSC comments at 1; Nurse Practitioners comments at 3; PacTel comments at 9. Some use descriptions of digital transmission speed (e.g., up to and  X1-including 64 kbps,m-1,  yO-#X\  P6G;ɒP#э Alaska Health comments at 3.m 112 kbps,u.1  yO-#X\  P6G;ɒP#э American Telemedicine comments at 5.u 384 kbps/1L  yO.-#X\  P6G;ɒP#э Nebraska Hospitals comments at 1 ("At a very minimum, telemedicine requires 384 Kbps."). or 1.544 Mbps01  {O-#X\  P6G;ɒP#э Mountaineer Doctor TV comments at 2; Advisory Committee Report (see infra) at 4.). Still others use practical terminology to describe the services they wish to have supported (e.g., "[s]end and receive  X -diagnostic quality radiologic images").s1 n  yO"-#X\  P6G;ɒP#э Nurse Practitioners comments at 2.s The Advisory Committee on Telecommunications  X -and Health Care (Advisory Committee)c2   yO-#X\  P6G;ɒP#э The Advisory Committee on Telecommunications and Health Care was established on June 12, 1996 by the Federal Communications Commission to provide advice to the Commission and the Joint Board on telemedicine, particularly the rural telemedicine provisions of the Telecommunications Act of 1996. The Advisory Committee, which was made up of thirty eight individuals with expertise and experience in the fields of health care, telecommunications and telemedicine, issued its report (Advisory Committee Report) on October 15, 1996. c argues that services necessary to support rural telemedicine efforts should include health care provider consultation, health care provider to patient consultation, continuing medical education programs for rural physicians and other health care providers, access to the most current medical information through the Internet for" Hv2*&&dd! " rural health care providers, roundtheclock support from physicians and specialists at urban centers, and specialty services such as radiology, dermatology, selected cardiology, pathology,  X-obstetrics (fetal monitoring), pediatric, and psychiatric services.r3  yOK-#X\  P6G;ɒP#э Advisory Committee Report at 67.r The Advisory Committee contends that these services should be supported by the capacity to transmit high speed data  X-and high quality images to urban medical centers.T4X  yO-#X\  P6G;ɒP#э Id.T  Xv-x640.` ` U S West and Alaska Health state that transmission speeds for telecommunications access lines qualifying as "additional services" that are "necessary for the  XH-provision of health care" could be limited to 64 kbps.5H  yO -#X\  P6G;ɒP#э Alaska Health comments at 3; U S West comments at 22. Some commenters maintain that  X1-ISDN is the minimum service required to address current needs of rural health care.61x  yOZ-#X\  P6G;ɒP#э Maryland Nurses comments at 2; North Dakota Health comments at 1; PacTel comments at 9 ("ISDN can support voice, video and data applications necessary in the health care field"). Others argue that transmission speeds up to and including 1.544 Mbps capacity or those supported by a T1 line, are the minimum needed to support the telemedicine needs of rural  X -health care providers adequately today. 7    {Om-#X\  P6G;ɒP#э See, e.g., BellSouth comments at 23; Maryland Nurses comments at 2; Merit comments at 35 (urging the Joint Board and the Commission to include the widest possible range of services in the additional services to be made available to health care providers including dedicated T1 access for 1.544 Mbps service, ISDN primary rate service and LAN access); Mountaineer Doctor TV comments at 2; Navajo Nation comments at 3; New Jersey Advocate comments at 21; RUS comments at 1213 (noting that a "substantial majority" of applicants to their Telemedicine Grant Program request "Realtime full motion video access to multiple major urban medical centers"); BellSouth further comments at 10 ("services and functionalities which must be made available to rural health care providers at rates reasonably comparable to urban rates should be data, video and imaging at speeds of up to 1.544 Mbps for telemedicine purposes.").   X -x641.` ` Four commenters suggest extending universal service support for health care providers to cover services or facilities supporting higher transmission capacities than 1.544 Mbps. Harris suggests that DS3 service (up to 44.7 Mbps, the equivalent of a T3 line) be provided to rural areas from nearby cities or towns to serve health care providers, schools and  Xb-libraries in a state telecommunications network.g8b  yO!-#X\  P6G;ɒP#э Harris comments at 16.g Arizona Health suggests T3 connections between universities and remote areas to "actualize" distance medical teaching and learning  X4-opportunities.n942  yO%-#X\  P6G;ɒP#э Arizona Health comments at 2.n AHA urges the Commission to view the needs of rural health care to"4I9*&&ddH! "  X-encompass "the entire spectrum of modes of telecommunications."c:  yOy-#X\  P6G;ɒP#э AHA comments at 6.c Western Alliance would limit support to only "the more expensive services full motion video, data switching (frame relay or ATM) and higher bandwidth lease lines  X-such as DS3.z;X  yO-#X\  P6G;ɒP#э Western Alliance further comments at 23.z  X-x642.` ` Additional Services at Different Levels of Support. ORHP/HHS, seeking to balance "the need to develop an advanced telecommunications infrastructure with the need to  X_-avoid placing an undue financial burden on the universal service fund"h<_  yO -#X\  P6G;ɒP#э ORHP/HHS comments at 8.h suggests a twotiered system of support. Under this system, rural hospitals would receive support for T1 service providing transmission speeds up to and including 1.544 Mbps. Primary care providers, such as community and migrant health centers or rural health clinics, would be limited to support for basic rate ISDN or similar technology with transmission capacity of up to 64 to 128 kbps "with the ability to increase capacity to 384 kbps on an emergency  X -basis."j= x  yO-#X\  P6G;ɒP#э ORHP/HHS comments at 89.j ORHP/HHS also maintains that in its experience, public switched networks "currently do not support T1 bandwidth," and for that reason, rural health care providers that desire telecommunications services using this capacity will typically require dedicated T1  X-lines connecting their facility to other rural and urban health care facilities.B>  yOI-ԍ ORHP/HHS comments at 10.B  Xb-x643.` ` Other commenters want no additional services designated at this time. Citizens Utilities, for example, suggests that it is unwise to identify any specific additional services  X4-other than "core" services for universal service support.}?4  {O}-#X\  P6G;ɒP#э See Citizens Utilities comments at 18.} Citizens Utilities notes that the language in section 254(c)(3) giving the Commission authority to designate additional services for universal service support for health care providers is permissive ("may designate"), not  X-mandatory.s@*  yO -#X\  P6G;ɒP#э Citizens Utilities comments at 18.s Citizens Utilities would discourage attempts to "anticipate every type of service that every qualifying rural health care provider might conceivably require," because the list will invariably miss some needed services or "fail to anticipate services that are not yet deployed." Citizens Utilities suggests, instead, that parties be allowed to "negotiate"J @*&&dd! "  X-technical arrangements."/A  yOy-#X\  P6G;ɒP#э Citizens Utilities comments at 18 ("Limiting discounts to a specific technology and or bandwidth may  {OA-limit choices on types of services available"). See also Mountaineer Doctor TV comments at 2. / Likewise, Teleport argues that the Commission should postpone designating any additional services for support to a future "Phase II" proceeding that would  X-allow the states first to develop specific proposals.iB"  yO-#X\  P6G;ɒP#э Teleport comments at 19.i Sprint suggests that until the market determines, through subscribership, what services are desirable and necessary, regulators  X-should identify no specific services as requiring support.gC  yO -#X\  P6G;ɒP#э Sprint comments at 23.g  Xv-x644.` ` Support Services that are Technology Neutral. Another group of commenters approves of setting levels of support based on baseline parameters like bandwidth or transmission rate, but urge the Commission to avoid mandating particular services or modes of service delivery in ways that would limit customer choice, risk "locking in" obsolete technologies, or hamper the most efficient results by unwisely favoring some technologies  X -over others.D B  {O-#X\  P6G;ɒP#э See, e.g., American Telemedicine comments at 3; Council on Competitiveness comments at 4; Idaho PUC comments at 10; NCTA comments at 17; U S West comments at 22. For example, NCTA argues that "if and when additional services are designated for support, any proposed services should be competitively and technologically  X -neutral . . . and potentially obsolete technologies such as ISDN should not be mandated."E   yO"-ԍ NCTA comments at 20 (i.e., if broadband services with a certain bandwidth are required, providers should have the option to provide the service through various architectures. . .").  X -x645.` ` Other commenters urge the Commission not to specify particular services in a  X-way that might limit health care providers' technology choices now or in the future.F  {O5-ԍ See, e.g., American Telemedicine comments at 3; North Dakota PSC comments at 1. For example, AT&T argues that "the discount for qualified . . . health care providers should apply  Xb-to telecommunications services of the qualified institution's choice."EGb  yO-ԍ AT&T further comments at 9.E AT&T maintains that, because marketplace forces rather than the Commission should determine the evolution of telecommunications services, nonprofit health care providers should be able to select the  X-services that meet their needs."cHZ  {O"-ԍ AT&T further comments at 9. See also Benton further comments at 3 ("allow the greatest range of choice to the public institution."); ITC further comments at 4; MAP further comments at 3 ("apply to all commercially available services."); Maine PUC further comments at 6 ("apply to all available services.").c "K8H*&&ddF! "Ԍ X-x646.` ` Support Originating and Terminating Services. American Telemedicine asserts that because a telemedicine communication link may originate from either end of the  X-transmission, both originating and terminating calls must be eligible for support.I  {OK-ԍ American Telemedicine comments at 5. See also Mountaineer Doctor TV comments at 3; Nebraska Hospitals comments at 2; North Dakota Health comments at 2. On the other hand, Ameritech argues that only originating services should be eligible for universal service support because of the extreme difficulty in determining the urban/rural price differential with respect to terminating services and also the difficulty of policing the use of  Xv-terminating services.FJv"  yOI -ԍ Ameritech comments at 1819.F AHA maintains that because cellular services may charge for both incoming and outgoing calls, support should be provided for cellular services in both  XH-incoming and outgoing modes.<KH  yO -ԍ AHA comments at 6.<  X -x647.` ` Support Telecommunications Services Only. Frontier asserts that the use of the term "telecommunications services" in sections 254(c)(1) and (h)(1)(A) makes it clear that in the case of health care providers, "access to the Nation's telecommunications infrastructure" is  X -eligible for universal service support, while "the means to take advantage of that access (e.g.,  X -computers)" is not.CL B  yO-ԍ Frontier comments at 45.C BellSouth also argues that nontelecommunications services are excluded. It urges the Commission to clarify that non"telecommunications services" are not  X-eligible for universal service support mechanisms.3MZ  {O-ԍ BellSouth further comments at 10. See also Taconic Tel. Corp. reply comments at 6; Citizens Utilities further comments at 6 (1996 Act does not include customer premises equipment, inside wire or other internal connections.); PacTel further comments at 1415.3 x  Xd-x648.` ` "Instruction Relating to Such Services." Few commenters respond to the Commission's request for comment on the nature of the "instruction relating to such [health  X6-care] services";N6  yO-ԍ NPRM at para. 93.; in section 254(h)(1)(A). Arizona Health comments that telemedicine (supported by T3 cable to remote areas) would allow medical, pharmacy and nursing students to avoid much travel to meet both rural clinic assignments and class requirements, which would enable more students to rotate to rural assignments and allow teachers to better  X-supervise the students while on their assignments.WO  yO$-ԍ U of A, Health Sciences Center comments at 2.W  X-x649.` ` Periodic Review. Numerous commenters strongly suggest that, since the"LO*&&dd! " technologies and the patterns and penetration of their usage are changing so rapidly, the definition of services or functionalities eligible for universal service support should be subject  X-to ongoing or periodic Commission review.PZ  {OK-ԍ See, e.g., Council on Competitiveness comments at 4; (stating that "[p]olicymakers should periodically review and reconsider which additional service should be designated for universal service support for rural health care providers.").  ORHP/HHS suggests revisiting the universal  X-service definition on a periodic basis such as every three to five years.CQ  yOV-ԍ ORHP/HHS comments at 11. C American Telemedicine maintains that rapid changes in telemedicine suggest the wisdom of both  X-periodic review and redirection of established policy.NRz  yO -ԍ American Telemedicine comments at 4.N Missouri PSC comments that "[t]he FCC should periodically reevaluate this list [of services] to determine whether some other services have become more valuable, or whether some subsidized services have become  XH-obsolete."FSH   yO-ԍ Missouri PSC comments at 14.F The Advisory Committee argues that the "market basket," a representative package of telemedicine services developed and suggested by the Advisory Committee, should be reviewed and updated at least every two years. It also recommends a survey of well X -served areas to gather the information needed to revise accurately the "market basket."TX   yON-ԍ Advisory Committee Report at 6 (noting that the Advisory Committee developed a "market basket" of telemedicine services as a guide to estimate what level of telecommunications services would be necessary to support rural telemedicine efforts).  X -x` ` 3. Discussion  X -x650.` ` In attempting to determine what services should be designated as "necessary for the provision of health care services" and thus eligible for universal service support, we have carefully reviewed the record, considering the particular needs of hospitals and other health  Xb-care providers that serve rural areas.WUb  {O-ԍ See Joint Explanatory Statement at 132.W We have been mindful of Congress's intent that universal service support mechanisms be used to ensure that residents of rural America are not denied, because of the unavailability or higher cost of telecommunications services, access to health care services that are more readily available to their fellow citizens residing in urban  X-areas.=VL  {O#-ԍ See id.=  X-x651. ` ` In this regard, we have found the Advisory Committee Report particularly helpful. The Advisory Committee developed what it calls a "market basket" of telemedicine"MV*&&dd! " services available in urban areas to serve as a guide to what level of such services would be  X-necessary to support rural telemedicine.KW  yOb-ԍ Advisory Committee Report at 67.K The Advisory Committee's market basket of needed services included the capacity to support providertoprovider and providertopatient consultations, employing either voice or video transmission, between rural offices and urban centers. It included the capability to transmit data and medical images at speeds high enough to make transmission time reasonable and at transmission capacities broad enough to transmit accurately highresolution radiological images and make use of examination devices such as  X_-electronic stethoscopes.jX_X  {Oh -ԍ Id. See also American Telemedicine comments at 67.j Transmission of a single study of chest xrays containing four film images would take 3.5 hours to transmit over a 28.8 Kbps modem, 40 minutes over an ISDN  X1-line and only 4 minutes over a T1 line at 1.544 Mbps.AY1  yO -ԍ ORHP/HHS comments at 9.A Although the use of constantly improving compression technology would reduce these transmission times to some degree, we note that data compression of medical and radiological images under current technology results in some loss of image resolution and, as a result, some standardsetting bodies have  X -refused to approve the use of compression technology in teleradiology.DZ z  yO-ԍ ORHP/HHS comments at 910.D  X -x652. The Advisory Committee, and the majority of commenters who recommended a specific level of telecommunications bandwidth capacity to support rural health care providers, concluded that, to ensure access to the appropriate level of these services, health care professionals should be able to choose among any telecommunications  XK-services supporting a capacity of up to and including 1.544 Mbps or its equivalent.[ K   {O-ԍ #X\  P6G;ɒP#Advisory Committee Report at 4. #x6X@`7X@##X\  P6G;ɒP#See also BellSouth comments at 23; Maryland Nurses comments at 2; Merit comments at 35 (urging the Joint Board and the Commission to include the widest possible range of services in the additional services to be made available to health care providers including dedicated T1 access for 1.544 Mbps service, ISDN primary rate service and LAN access); Mountaineer Doctor TV comments at 2; Navajo Nation comments at 3; New Jersey Advocate comments at 21; RUS comments at 1213 (noting that a "substantial majority" of applicants to their Telemedicine Grant Program request "Realtime full motion video access to multiple major urban medical centers"); BellSouth further comments at 10 ("services and functionalities which must be made available to rural health care providers at rates reasonably comparable to urban rates should  yOH -be data, video and imaging at speeds of up to 1.544 Mbps for telemedicine purposes."). #x6X@`7X@#ѓ The Advisory Committee recognized that the need for various applications would differ among eligible health care providers. They also noted that, because rural health care providers would be required to commit substantial resources to the acquisition and maintenance of these services, health care providers would have a powerful incentive to choose the most costeffective telecommunications services that would meet their telemedicine needs. "N[*&&dd! "Ԍ X-x653. ` ` We note that, although one commenter asserts that lower bandwidth services  X-such as ISDN might be a less expensive alternative sufficient for telemedicine needs,?\  yOb-ԍ PacTel comments at 9.? most  X-other commenters suggesting ISDN couch their recommendation in terms of "at least"N]X  yO-ԍ American Telemedicine comments at 7.N or  X-"at a minimum"?^  yOT-ԍ PacTel comments at 9.? thus indicating that higher bandwidth would be desirable. We would, however, be hesitant to limit universal service support to a specific technology that may fall behind other emerging technologies or may not be the best telecommunications choice for  Xv-certain health care providers.H_vx  {O -ԍ See NCTA comments at 20.H In addition, further detailed information about the relative costs of supporting higher bandwidth technologies and services would be helpful in making a recommendation that is both sufficient for the needs of health care providers and minimally burdensome on customers and carriers.  X -x654. ` ` Overall, we find the conclusions of the expert Advisory Committee and the other commenters persuasive in these matters and we believe that health care providers should be able to choose the telecommunications services they require. To the extent that these health care providers will be receiving federal universal service support, we also believe, consistent with the statute, that the support should be tied to those services "necessary for the  X-provision of health care in a state."P`   {OK-ԍ See 47 U.S.C.  254(h)(1)(A).P We note that few commenters addressed this important issue and the record contains no real examination of the impact on rural health care of limiting support to a specific level of transmission capacity. In addition, it is clear that both the technology in this area and its deployment in the marketplace is developing and progressing at a rapid pace. We find that additional information is needed to assist the Commission in formulating a standard that would be both costefficient and sufficient to meet the needs of rural health care providers. For these reasons, we recommend that the Commission solicit information and expert assessments of the exact scope of services that should be included in the list of those additional services "necessary for the provision of  X-health care in a state."Aa  yO!-ԍ 47 U.S.C. 254(h)(1)(A).A We recommend that the Commission seek information on the telecommunications needs of rural health care providers and on the most cost effective ways to provide these services to rural America. Finally, we recommend that the Commission take this information and these assessments into account in deciding what services to include as services eligible for universal service support. "NO, a*&&dd! "Ԍ X-x655.` ` As several commenters noted, a question is presented whether support should  X-be offered to terminating services as well as originating services.b  {Ob-ԍ See supra section XI.B.2 (discussing comments of American Telemedicine, Ameritech and AHA). We recommend that the Commission include terminating as well as originating services for universal service support in cases where the eligible health care provider would pay for terminating as well as  X-originating services, such as in the case of cellular air time charges.GcZ  {O-ԍ  See, AHA comments at 6.G We agree with those parties who assert that terminating services that are not billed to the rural health care provider  Xv-would be too difficult to monitor and should not be supported.Qdv  {O -ԍ  See, Ameritech comments at 1819.Q  XH-x656.` ` Further, we recommend that the Commission initially designate only telecommunications services as eligible for support as expressly provided under the terms of sections 254(c)(1) and 254(h)(1)(A). We do not, at this time, recommend that the  X -Commission find that customer premises equipment would be eligible for support.e ~  {O2-ԍ See, e.g., BellSouth further comments at 10; Citizens Utilities further comments at 6.  X -x657.` ` After the Commission designates those services eligible for support for rural health care providers, we recommend that the Commission's list of supported telecommunications services be revisited in 2001, when the Commission is scheduled to reconvene a Joint Board on universal service. We agree with those commenters that argue that the rapid pace and vast scope of change in telecommunications technologies, infrastructures and businesses suggest the wisdom of periodically reviewing the list and definition of services designated for support in order to make needed modifications in the  X4-policy.f4  yO-ԍ American Telemedicine comments at 4; Council on Competitiveness comments at 45; Missouri PSC comments at 14; ORHP comments at 11. x` `  X-x C. Implementing Support Mechanisms for pp  J 0 (#(#X  X- Comparable Rates .  X-x` ` 1. Determining the urban rate. x  X-x` `  a. Background  Xe-x658.` ` The rate to be charged for telecommunications services to eligible health care providers who serve rural areas is described in section 254(h)(1)(A) as follows: "7Ph f*&&dd! "Ԍ  ` (A) HEALTH CARE PROVIDERS FOR RURAL AREAS. A telecommunications carrier shall . . . provide telecommunications services . . . to any public or nonprofit health care provider . . . at rates that are reasonably comparable to rates charged for  X-similar services in urban areas in that state.Fgh yO-ԍ 47 U.S.C.  254(h)(1)(A).F  Xv-  `  x659.` ` In the Joint Explanatory Statement, Congress stated that subsection 254(h) was "intended to insure that health care providers for rural areas . . . have affordable access to modern telecommunications services that will enable them to provide medical and educational  X1-services to all parts of the nation."h1X  yO: -ԍ Jt. Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 132 (1996). Congress emphasized affordability of telemedicine as a goal of this subsection, stating: "[i]t is intended that the rural health care provider receive an affordable rate for the services necessary for the purposes of telemedicine and instruction  X -relating to such services."{i   yO-#X\  P6G;ɒP#э Joint Explanatory Statement at 131 (1996).{  X -x660.` ` In the NPRM, the Commission stated that "in establishing an appropriate methodology for ensuring `reasonably comparable' rates, we wish to minimize, to the extent  X-consistent with section 254, the administrative burden on regulators and carriers."cjx  yO-#X\  P6G;ɒP#э NPRM at para. 100.c The Commission stated that it sought a methodology for establishing "reasonably comparable" rates that was based on publicly available data, neither underinclusive nor overinclusive, and  XK-easily administered.bkK  yO-#X\  P6G;ɒP#э NPRM at para. 95.b It asked commenters to discuss any proposed methodologies in these  X4-terms.bl4  yO}-#X\  P6G;ɒP#э NPRM at para. 98.b The Commission also stated that it interpreted the term "reasonably comparable" to require less than absolute precision in determining the appropriate rates for rural health care  X-providers.cm(  yO-#X\  P6G;ɒP#э NPRM at para. 100.c It asked for comments on how carriers should derive the rates applicable to rural health care providers to ensure the services to which they subscribed would be priced at reasonably comparable rates. In addition, the Commission asked whether average rates should  X-be computed or whether some other method would be more appropriate.cn  yO*$-#X\  P6G;ɒP#э NPRM at para. 101.c  X- x` `  b. Comments "QH n*&&dd! "Ԍ X-ԙx661.` ` Average Rate. Several commenters advocate using an average rate for telecommunications services to meet the statutory definition for a rate "reasonably  X-comparable" to rates charged for similar services in urban areas in that state.o  {OK-#X\  P6G;ɒP#э See, e.g., Sprint comments at 23; USTA comments at 11; Bell Atlantic further comments at 3. USTA  X-proposes using the statewide average rate for the particular service requested.epZ  yO-#X\  P6G;ɒP#э USTA comments at 11.e USTA argues that setting the rate at the statewide average would meet the requirement to offer rates that are reasonably comparable because it would be based upon the statewide average in both  Xv-rural and urban areas.qv  yO -#X\  P6G;ɒP#э USTA comments at 11; USTA reply comments at 7. Bell Atlantic asserts that the rate charged urban health care providers should not exceed a statewide average rate for telecommunications services used in  XH-the provision of health care service.urHz  yOs-#X\  P6G;ɒP#э Bell Atlantic further comments at 3.u North Dakota Health recommends the use of a mean  X1-state urban rate plus or minus 10 percent as a reasonably comparable rate for this purpose.ts1   yO-#X\  P6G;ɒP#э North Dakota Health comments at 2. t Sprint argues that the rate should be determined by taking averages of tariffed services on a  X -nationwide basis.?tX   yON-#X\  P6G;ɒP#э Sprint comments at 23 ("The discount should be the difference between the nationwide average tariffed rate for services provided in urban markets and the nationwide average tariffed rate for similar services provided in rural markets."). ?  X -x662.` ` Eliminate DistanceBased Charges. Several commenters argue that limiting or eliminating distancebased charges and charges based on transmission across LATA boundaries, which are often attached to telecommunications rates in rural areas, would help  X-make a rural rate "reasonably comparable" to an urban rate.u  {O-#X\  P6G;ɒP#э See, e.g., American Telemedicine comments at 9; Mountaineer Doctor TV comments at 3; Advisory Committee Report at 11. Mountaineer Doctor TV  Xy-suggests eliminating LATA boundaries for health care and educational usage because this will  Xb-allow one carrier to serve the circuit from end to end.vb  {O' -#X\  P6G;ɒP#э See, e.g., Mountaineer Doctor TV comments at 3. Mountaineer Doctor TV also recommends the use of a recurring flat fee for both ends of the circuit, and a discounted X4-mileage charge for health care and educational usage.vw4  yO#-#X\  P6G;ɒP#э Mountaineer Doctor TV comments at 3. v Mountaineer Doctor TV asserts that eliminating LATA boundaries would result in an immediate cost savings while improving"R6w*&&dd! "  X-access and distribution of health care related services in rural areas.vx  yOy-#X\  P6G;ɒP#э Mountaineer Doctor TV comments at 3. v Likewise, Montana Tel. Ass'n. argues that mileage charges for highspeed data or broadband services should be  X-prohibited.ryX  yO-#X\  P6G;ɒP#э Montana Tel. Ass'n comments at 7.r  X-x663.` ` TollFree Internet Access. Several commenters argue that tollfree dialup  X-Internet access should be supported for rural health care providers.z  {O& -#X\  P6G;ɒP#э See, e.g., Idaho PUC comments at 11; Maryland Nurses comments at 2; RUS comments at 13; Advisory Committee at 4. ORHP/HHS describes tollfree dialup Internet access as "an essential prerequisite to providing advanced telecommunications services to health care providers" that should be made available to all  XH-rural customers.h{HB  yO;-#X\  P6G;ɒP#э ORHP/HHS comments at 7.h U S West supports inclusion of tollfree Internet access for universal service support and suggests that carriers should be able to choose among a variety of means  X -to carry Internet toll traffic, including, for example, an 800 or FX service.i|   yO-#X\  P6G;ɒP#э U S West comments at 23.i The Governor of Guam states that core services for telemedicine should include highspeed digital and  X -Internet access.v} b  yO-#X\  P6G;ɒP#э Governor of Guam reply comments at 3.v RUS maintains that "rural use of Internet and other information services may never approach urban and suburban levels of use until availability of access on a nontoll  X -basis is provided."d~  yOa-#X\  P6G;ɒP#э RUS comments at 11.d  X-x664.` ` Relate Comparability to the Closest Urban Area. Ameritech argues that the rate for a rural health care provider should be based on the rate charged for a comparable service  Xb-in the closest urban area.jb  yO-#X\  P6G;ɒP#э Ameritech comments at 19.j NCTA also asserts that the methodology for determining reasonably comparable urban rates should not be based on any kind of average of urban rates,  X4-but rather on a comparison of rates in the nearest urban area, or perhaps two urban areas.e4  yO!-#X\  P6G;ɒP#э NCTA comments at 21.e  X-x665.` ` Competitive Bidding. Florida Cable asserts that a competitive bid process could achieve rates for rural health care providers that are reasonably comparable to rates"S*&&ddE! " charged by the same or other carriers serving health care providers in the nearby rural  X-area(s).n  yOy-#X\  P6G;ɒP#э Florida Cable comments at 17.n Florida Cable outlines a bidding process under which comparability to the urban rate would be one bid specification and every bid would be compared to publicly available tariff information about urban rates. The lowest bid, no higher than 10 percent over urban  X-rates, would receive the contract.ro  yO-#X\  P6G;ɒP#э Florida Cable comments at 17, 18.r Florida Cable proposes that, in the absence of a bidder, the states would most likely be best able to determine at what level services should be discounted and what eligible universal service provider(s) in a geographic area would meet an  X_-eligible facility's needs.n_  yO -#X\  P6G;ɒP#э Florida Cable comments at 18.n  X1-x666.` ` Other Suggestions. Alliance for Distance Education asserts that the rate for health care providers should equal the lower of the lowest Lifeline customer's rate or the lowest contract rate paid by corporations or institutions in the state for the telecommunications  X -service the health care provider requests.   yO,-#X\  P6G;ɒP#э Alliance for Distance Education comments at 1. NECA also argues that an approach similar to the rules governing the calculation of Lifeline assistance revenue could be followed with  X -respect to health care providers.e   yO-#X\  P6G;ɒP#э NECA comments at 15.e Wyoming PSC asserts that in defining reasonably  X -comparable rates, the state public service commissions should be consulted.l   yO-#X\  P6G;ɒP#э Wyoming PSC comments at 12.l Mountaineer Doctor TV questions the basic structure of the statute and its ability to address this problem. Noting that many of the rural areas' connectivity stems from urban centers, it asks whether urban pricing structures really differ that dramatically from such structures for their rural counterparts, or whether the price difference reflects shorter mileage charges and lack of  X4-crossed LATA boundaries.v4?  yO$-#X\  P6G;ɒP#э Mountaineer Doctor TV comments at 4. v  X-x` `  c. Discussion  X-x667.` ` We recommend that, for each telecommunications service delivered to a qualified health care provider as provided in section 254(h)(1)(A), the Commission should designate as the rate "reasonably comparable to rates charged for similar services in urban areas in that state" (the "urban rate"), the highest tariffed or publicly available rate actually being charged to commercial customers within the jurisdictional boundary of the nearest large city in the state (measured by airline miles from the health care provider's location to the"eT *&&ddO! "  X-closest city boundary point).vZ  yOy-#X\  P6G;ɒP#э We do not recommend an exact definition of the size of population a city must have to qualify as  {OA-"large" for purposes of calculating the urban rate. We leave that determination to the Commission. See infra section XI.D.1.c. for a discussion on defining urban areas.v  X-x668.` ` We agree with the parties who suggest that the urban/rural rate differential should be based on the rates charged for similar services in the urban area closest to the  X-health care provider's location.  yO? -#X\  P6G;ɒP#э Ameritech comments at 19; NCTA comments at 21. We believe that relating the provider's rate to a specific, publicly available rate actually being charged within the political boundary of a city has many  Xv-advantages over other plans proposed. This method is easy to understand and usevz  yO -#X\  P6G;ɒP#э It should be relatively easy to compare a city's political boundaries with a carrier's rate maps and thus ascertain precisely the applicable rate. and thus complies with the Commission's guideline that implementation of universal service support mechanisms should be fashioned to minimize administrative burdens on regulators and  X1-carriers.c1  yO-#X\  P6G;ɒP#э NPRM at para. 100.c For example, because it involves a onestep process, this method would be less  X -administratively burdensome than a competitive bidding system{ b  {O--#X\  P6G;ɒP#э See Florida Cable comments at 1718.{ or a process based on the  X -current Lifeline assistance program.o  {O-#X\  P6G;ɒP#э See NECA comments at 15.o We also believe it preferable to plans that would require obtaining information about private contract rates, which are proprietary and not  X -obtainable without elaborate confidentiality safeguards.  {O -#X\  P6G;ɒP#э See Alliance for Distance Education comments at 15.  X -x669.` ` Several commenting parties and the Advisory Committee request that access to an (ISP) be made available to rural health care providers tollfree or at toll rates comparable  Xy-to what most urban telecommunications customers are paying.y  {OB-#X\  P6G;ɒP#э  See Idaho PUC comments at 11; Maryland Nurses comments at 2; ORHP/HHS comments at 7; RUS comments at 13. We note that the Internet can supply access to many important sources of information for rural health care providers and might also be a more flexible and cost effective alternative to dedicated circuits as a conferencing tool. We also note, however, that the record is completely lacking of information on the extent and pace of development of Internet Service Provider coverage in rural areas in the country, and somewhat lacking in information on the cost of supporting the toll portion of Internet access for rural health care providers. Given the information currently"Ur*&&dd'! " on the record in this proceeding, we are not prepared to recommend supporting this service at this time. We do recommend, however, that the Commission seek information on the rate of expansion of local access coverage of ISPs in rural areas of the country and the costs likely to be incurred in providing tollfree access to ISPs for health care providers in rural areas. We also recommend that the Commission take this information and these assessments into account in deciding what services to include as services eligible for universal service support.  X_-x670.` ` Although none of the commenting parties provides detailed suggestions regarding how best to define the applicable urban area, we believe there are good reasons that support the definition we recommend. Using the political boundaries of cities makes this plan  X -specific and predictable.t  {O -#X\  P6G;ɒP#э  See 47 U.S.C.  254(b)(5).t Using the nearest large city to the health care provider as a reference point for urban rates is logical and efficient because that is the location from which telecommunications services to a given rural area are most likely to originate and be maintained, thus providing more accurate and more realistic comparable rates for specific  X -services than using rates, or average rates, from more distant urban areas. Z  {O-#X\  P6G;ɒP#э See infra section XI.C.2. concerning the calculation of the offset or reimbursement due to the carrier.  X-x671.` ` While acknowledging that other definitions are possible, we conclude that "comparable" in this context is most reasonably defined to mean "no higher than the highest" rate charged in the nearest city (excluding distancebased charges). We reject commenters' suggestions of using average rates, because an average rate, even if drawn from the city nearest to the health care provider, would entitle some rural customers to rates below those paid by some urban customers, creating fairness problems for those urban customers and arguably going farther with this mechanism than Congress intended. Using an average of  X-statewide urban rates,L  yO-ԍ North Dakota Health comments at 2.L an average statewide rate,N|  yO-ԍ Bell Atlantic further comments at 3.N or an average nationwide rate@   yO-ԍ Sprint comments at 23.@ would force the choice of a rate even farther removed from the nearest urban area from which service is likely to originate, and therefore potentially much higher or much lower than rates in nearby urban areas. Rates of these potentially varying magnitudes risk even greater fairness problems. Further, the use of an average nationwide rate would thwart the purpose of section 254(h)(1)(A) by requiring rates in some states that are not reasonably comparable to any rates in the urban areas of that state.  X7-x672.` ` Several commenters and the Advisory Committee request that we address the"7V*&&dd! "  X-issue of distancebased charges and charges for crossing LATA boundaries.  {Oy-ԍ See, e.g., American Telemedicine comments at 9; Mountaineer Doctor TV comments at 3; Advisory Committee Report at 11. We conclude that where such charges are in excess of those charges incurred by commercial customers in the nearest urban area, the statute suggests strongly that such charges should be made comparable. Indeed, it seems that the whole thrust of section 254(h)(1)(A) is that such disparities in telecommunications rates based on distance should be reduced or eliminated by universal service support. We decline, however, to recommend that the Commission eliminate or reduce such charges at this time because we find that the record lacks sufficient evidence about the costs of excluding distancebased charges in establishing the comparable rate. Instead, we encourage the Commission to solicit additional information on the probable costs that would be incurred in supporting distancebased and LATA crossing charges for rural health care providers where such charges are in excess of those paid by customers in the nearest urban areas of the state. We further recommend that the Commission take this information and these assessments into account in deciding whether to include these charges in the list of charges eligible for universal service support. x  X -x673.` ` No commenting parties addressed the issue of whether insular areas experience a disparity in telecommunications rates between health care providers in urbanized and nonurbanized areas in their territories. We also lack sufficient information about the size of cities and other demographic information pertaining to insular areas that might be used to establish the urban rate or rural rates in each of those areas. We recommend that the Commission solicit further information on these topics and make appropriate provision in the final Order for equalizing any disparities between urban and rural telecommunications rates to health care providers in insular areas.  X- x` `  2. Calculating the rural rate.  X-x` `  a. Background  X|-x674.` ` The method of determining the amount that a telecommunications carrier that has provided services to an eligible health care provider is entitled to treat as its universal service obligation is described in section 254(h)(1)(A) as follows: XxX` ` (A) HEALTH CARE PROVIDERS FOR RURAL AREAS. . . A telecommunications carrier providing service under this paragraph shall be entitled to have an amount equal to the difference, if any, between the rates for services provided to health care providers for rural areas in a State and the rates for  V!-similar services provided to other customers in comparable rural  X"-areas in that State treated as a service obligation as a part of its""W"*&&dd!! " obligation to participate in the mechanisms to preserve and  X-advance universal service.W  yOb-ԍ 47 U.S.C.  254(h)(1)(A) (emphasis added).W x`  X-x675.` ` The Commission stated in the NPRM that the amount of credit or reimbursement to carriers from health care support mechanisms should be based on the difference between the price actually charged to eligible health care providers and the rates for similar, if not identical, services provided to "other customers" in the rural areas of that  X_-state.<_X  yOh -ԍ NPRM at para. 101.< The Commission requested comments on how to determine the rate for rural nonhealth care providers and the rate for urban health care providers necessary to calculate the  X1-amount of credit.<1  yO -ԍ NPRM at para. 101.< The NPRM asked whether average rates should be computed or whether  X -some other method might be more appropriate.< x  yOC-ԍ NPRM at para. 101.< The Commission also stated that it may be difficult for a carrier to establish rates for similar services if identical services are not provided in the state. It stated, however, that similar services will likely be generally  X -available.<   yO-ԍ NPRM at para. 102.< The Commission sought comment on whether there is a need to define when  X -services are comparable and, if so, how this might be done.<   yO-ԍ NPRM at para. 102.<  X-x` `  b. Comments  Xb-x676.` ` Few commenters address the issue of how to determine the rates needed to  XK-calculate the credit.<K(  yO$-ԍ NPRM at para. 101.< Pacific Telecom asserts that the amount of the differential that qualifies for support treatment can readily be identified by comparing the rate at which the service is provided either with rates publicly filed or with rates that can be acquired by  X-Commission order.  yOo!-ԍ Pacific Telecom comments at 6 ("e.g., via TSLRIC study submitted by a competitive LEC"). Pacific Telecom further states that "[i]n either case, a specific support  X-amount can be established and added to the USF pool requirement for recovery."HH  yO#-ԍ Pacific Telecom comments at 6.H Pacific Telecom also argues that the Commission could rely on the existing USF pooling mechanism"X*&&dd&! "  X-immediately to begin support for rural educational and health care providers.H  yOy-ԍ Pacific Telecom comments at 7.H The Advisory Committee contends that the Commission should arrange for studies to be periodically conducted to compare urban rates versus rural costsplusprofit for those services in the minimum package (core services). It argues that these results should be used as the basis for reimbursing the designated providers in rural areas for reduced prices for core  X-services.JX  yO-ԍ Advisory Committee Report at 13.J  X_-x677.` ` GCI asserts that the Commission should require carriers to file information with the Commission that sets out both services and rates charged to calculate the difference, if any, between the urban rate at which the service is provided and rates for similar services  X -provided to customers in comparable rural areas in that state.B   yO-ԍ GCI reply comments at 15B  X -x678.` ` Comparable Services. Ameritech argues that there is no need for the Commission to prescribe guidelines for what constitutes "comparable" services between urban and rural areas. Instead the Commission should simply require the availability of comparable services at the rate charged in the urban area and resolve disputes informally if and when any  X-arise.Cx  yO-ԍ Ameritech comments at 19.C  Xb- x` ` c. Discussion  X4-x679.` ` Although a few commenting parties responded to the request in the NPRM seeking comment on how to determine the "rate for nonhealthcare providers . . . necessary  X-to calculate the amount of credit"<  yO-ԍ NPRM at para. 101.< (the "rural rate"), no commenter directly addressed the mechanics of how to calculate the credit. Therefore, we must fashion our own recommendation to the Commission for the design of this important piece of the support mechanism for health care providers for rural areas.  X-x680.` ` Mindful of the Commission's obligation to craft a mechanism that is "specific,  X|-predictable and sufficient,"C|  yO#-ԍ 47 U.S.C.  254(b)(5).C we recommend that the rural rate be determined to be the average of the rates actually being charged to customers, other than health care providers, for identical or technically similar services provided by the carrier providing the service, to"NY( *&&dd! " commercial customers in the rural county in which the health care provider is located. For all purposes associated with determining the rural rate, we recommend that the term "rural county" be defined as any "nonmetro" county as defined by the OMB MSA list, along with the nonurban areas of those metro counties identified in the Goldsmith Modification used by  X-the ORHP/HHS.  yO-ԍ For a discussion of OMB metro and nonmetro areas, MSAs and the Goldsmith Modification, see  {O-ORHP/HHS comments at 5 and section XI.D.1.b., infra. We also recommend that the rates averaged to calculate the rural rate not include any rates reduced by universal service programs and paid by schools, libraries or rural health care providers.  XH-x681.` ` We further recommend that, where the carrier is providing no identical or technically similar services in that rural county, the rural rate should be determined by taking the average of the tariffed and other publiclyavailable rates charged for the same or similar services in that rural county by other carriers. If no such services have been charged or are publicly available, or if the carrier deems the method described here, as it would be applied to the carrier, to be unfair for any reason, the carrier should be allowed, in the first instance, to submit for the state commission's approval, a costbased rate for the provision of the service in the most economically efficient, reasonably available manner. Where state commission review is not available, the carrier should be allowed to submit the proposed rate to the Commission for its approval. The proposed rate should be supported, justified, reviewed and approved, in the initial submission and periodically thereafter, according to procedures and requirements similar to those used for establishing tariffed rates for telecommunications services in that state.  X-x682. ` ` We conclude that, by defining "comparable rural areas" as the rural county in which the health care provider is located, the rates charged to nonhealth care customers in that area are likely to be a reasonable measure of "the rates charged for similar services provided to other customers in comparable rural areas in the state." In cases where there are no similar services being provided, either by the carrier or by others, and thus no comparable rates to average, or where the carrier concludes that rates derived from this formula are unfair, we find the availability of a costbased rate application procedure becomes an important backstop. We intend that this procedure will ensure greater fairness to the carrier and further ensure that the support mechanism is more likely to be "sufficient" as required by section  X7-254.M7"  {O !-ԍ  See 47 U.S.C.  254(b)(5).M We note, however, that the record is inadequate on this issue and, accordingly, we recommend that the Commission request additional information prior to adopting final rules, on the costs that would be incurred in supporting necessary upgrades to the public switched network. We also recommend that the Commission seek additional information as to what extent ongoing network modernization, as is currently going forward under private initiatives or according to statesponsored modernization plans, might make universal service support of" Z*&&dd! " this element unnecessary. We further recommend that the Commission take this information into account in deciding whether to include network upgrades in the list of services eligible for universal service support. x  X-x683. ` ` We acknowledge a related issue that arises when the public switched network serving a rural health care provider is not sufficiently technologically advanced to support the services needed by that provider. The 1996 Act appears to intend that the service be delivered to the health care provider without regard to any inability on the part of the local network to handle the service. In that regard, the Advisory Committee notes the deficiencies in many parts of rural America of the telecommunications "backbone infrastructure" and recommends that the Commission authorize the use of universal service funds to upgrade this  X -part of the network.I  yO| -ԍ Advisory Committee Report at 8.I We are reluctant to recommend such a course, however, without better information than is provided in the current record about the absolute and relative costs of providing such support. We have considered, for example, recommending that the carrier be permitted to include in its proposed rate the cost of upgrades to the public switched telephone network, amortized over the reasonable life of the upgraded facilities, where such upgrades could be shown to be necessary to deliver the service to the health care provider in the most costeffective manner. We have further considered recommending that the reviewing authority require the carrier, in setting the rate, to take into account the actual and reasonably anticipated usage of the upgraded facilities by other customers. Such an option might actually offer the potential of reducing the cost to the universal service fund of providing services to the health care provider. We are, however, without sufficient information in the record to reach this conclusion with confidence. Accordingly, we recommend that the Commission seek additional information on the probable costs and on the advantages and disadvantages of supporting upgrades to the public switched or backbone networks where such upgrades can be shown to be necessary to deliver services to eligible rural health care providers. x  X-x684.` ` We believe that the abovedescribed methods for calculating the rural rate compare favorably with the methods suggested by the sole party supplying comments on this question. Pacific Telecom suggests comparing the rate at which the service is provided with  XN-"rates publicly filed" or with rates obtained "by Commission order."HNX  yOW-ԍ Pacific Telecom comments at 6.H We approve of using rates publicly filed or obtained in the ordinary course of Commission proceedings to determine the rural as well as the urban rate. We reject, however, any suggestion that rates not publicly available should be required to be disclosed simply in order to implement a universal service mechanism because we find this method to be excessively burdensome to carriers and regulators. x  X!-x` ` 3. Selecting between combined or separate support mechanisms for (#(#X"![*&&dd ! "ԑ X-x` ` health care providers and for schools and libraries. x  X-x ` `  a. Background  X-x  X-x685.` ` In the Public Notice, the Common Carrier Bureau asked whether separate funding mechanisms should be established for schools and libraries and for rural health care  Xv-providers.Gv  yO-ԍ Public Notice at question 22.G  XH-x` `  b. Comments  X -x686.` ` Separate Funding Mechanisms. Several commenters maintained that the funding mechanism for support to rural health care providers should be separate from the  X -mechanism provided for schools and libraries X  yO-ԍ RTC comments at 1819 (a "separate or segregated fund" should be established for schools, libraries and health care providers so that "the very difficult job of determining proper funding levels can be established.").  {O-See also ALA further comments at 18; Alaska Tel. further comments at 7; ITC further comments at 10; Information Renaissance further comments at 10; Maryland DOE further comments at 4 (if block grants are used); NCTA further comments at 6; NECA further comments at 1314 (stating that the "[c]ommon fund collection mechanism should be used."); RTC further comments at 16; SWBT further comments at 18 (favoring separate mechanism, but stating that "costs should be reflected as a single surcharge on the customer bill."); U.S. Libraries further comments at 7; Vitelco further comments at 6; Western Alliance further comments at 4 (stating that "because schools and libraries are generally governmental entities, but rural health care is generally private sector.").  Others argued that separate funding  X -mechanisms are not necessary.x  yOx-ԍ AT&T further comments at 17; Apple further comments at 4 (stating that mechanisms might "detract from the ability of these entities to share facilities or cooperate in network design and operation. . . "); California Library further comments at 5; EDLINC further comments at 4041; GTE further comments at 25; MCI further comments at 10 (stating that "[i]f the FCC adopts an interstateonly USF, there must be separate funding mechanisms for schools and libraries and for rural health care providers because all telecom carriers must contribute to the latter and only interstate carriers would contribute to the former."); New York DOE further comments at 10; U.S. Distance Learning Ass'n further comments at 8. Some commenters argued for a common funding mechanism but specified the addition of some form of separate accounting or distribution  X -mechanism.x 2  yO -ԍ AirTouch further comments at 19 ("would be helpful to maintain separate accounting for these programs should they need to be phased out on an individual basis."); BellSouth further comments at 30; Bell Atlantic further comments at 7; PacTel further comments at 27 (stating that it is "[i]ndifferent to whether education fund is funded separately, but collected funds should be divided into discreet buckets to facilitate separate allocation, tracking and accounting."); USTA further comments at 17; U S West further comments at 12 (stating that there should be "separate allocation and administration functions for health care providers, since they have separate requirements under the 1996 Act."). " \r*&&dd ! "Ԍ X-ԙx` `  c. Discussion  X-x687.` ` We recommend that there be no separate funding mechanism for eligible health care providers and schools and libraries. We further recommend that separate accounting and allocation systems be maintained for the funds collected for the two groups. We agree with the parties arguing that separate funding mechanisms would be expensive and unnecessary but that separate accounting and allocation systems would be more efficient because the two groups have different requirements under the 1996 Act for calculating disbursements from the fund and the two systems could then more easily be monitored or amended on an individual  X1-basis.Z1  {O -ԍ  See, e.g., AirTouch further comments at 19; BellSouth further comments at 30; Bell Atlantic further comments at 7; PacTel further comments at 27; USTA further comments at 17; U S West further comments at 12.  X - xD. Eligibility x` ` 1. Defining rural and urban areas.  X -x` `  a. Background x  Xy-x688.` ` Section 254(h)(1)(A) provides that a telecommunications carrier shall provide  Xb-services to any health care provider "that serves persons who reside in rural areas in that  XM-State."WM  yO-ԍ 47 U.S.C.  254(h)(1)(A) (emphasis added).W The section further provides that the rates charged for the services provided must  X6-be "reasonably comparable to rates charged in urban areas in that State."W6z  yOa-ԍ 47 U.S.C.  254(h)(1)(A) (emphasis added).W In addition, the section provides that the carrier providing the service is entitled to a credit in an amount equal  X -to the difference between the rate charged and the rate in "comparable rural areas in that  X-State."W   yO-ԍ 47 U.S.C.  254(h)(1)(A) (emphasis added).W  X-x689.` ` In the NPRM, the Commission recognized that in order to implement section 254(h)(1)(A), it would be necessary to designate areas as either urban or rural in order to be able to determine the residency of health care patients served by providers and to establish reasonably comparable rates for telecommunications services that are necessary for the  Xk-provision of health care services in a state.;k  yO$-ԍ NPRM at para. 95.; The Commission stated that it sought a methodology to accomplish this task that would be based on publicly available data, neither"T]* *&&dd! "  X-underinclusive nor overinclusive, and easily administered,;  yOy-ԍ NPRM at para. 95.; and it asked commenters to  X-discuss any proposed methodologies in these terms.;X  yO-ԍ NPRM at para. 98.; The NPRM specifically described alternative methodologies developed by the ORHP/HHS and by the United States Department of Agriculture's Economic Research Service and asked for comment on these methods for  X-defining rural areas in a state.?  yO= -ԍ NPRM at paras. 9698.? The NPRM also asked commenters to address the costs and application of these proposals in regard to the requirements of the 1996 Act that universal  Xv-service support mechanisms be "specific, predictable and sufficient."cvx  {O -ԍ NPRM at para. 98 (citing 47 U.S.C.  254(b)(5)).c  XH-x` `  b. Comments  X - x690.` ` ORHP/HHS Method and the Goldsmith Modification. The most comprehensive and detailed comments on methods for determining the boundaries of rural areas are provided by ORHP/HHS. It asserts that no method for defining "rural" is perfect; each method has  X -deficiencies or problems.h   yO-ԍ#X\  P6G;ɒP# ORHP/HHS comments at 5.h For ease of administration, ORHP/HHS suggests using counties as the unit of analysis and specifically the Office of Management and Budget's (OMB) Metropolitan Statistical Area (MSA) metropolitan (metro) and nonmetropolitan (nonmetro)  X-counties.   yO-ԍ OMB defines Metropolitan Statistical Areas for use in federal statistical activities pursuant to 44 U.S.C.  3504(d)(3) and 31 U.S.C.  1104(d) and E.O. No. 10253 (June 11, 1951). Copies of the definitions used and the list of Metropolitan Areas is available to the public from the National Technical Information Service (NTIS) through the mail or over the Internet. Because of the methods that OMB uses to designate counties as metro, ORHP/HHS asserts that large, nominally metro counties, particularly in western states, can have huge rural areas, as for example when population is consolidated into one corner of the county. For that reason, ORHP/HHS suggests using the "Goldsmith Modification" of the  X4-OMB method."4  yOg -ԍ The Goldsmith Modification was developed by Harold F. Goldsmith, Ph.D., for the ORHP/HHS. The strategy for identifying the rural areas of large metropolitan counties is described in Goldsmith, H.F., Puskin,  {O!-D.S. and Stiles, K.J., Improving the Operational Definition of "Rural Areas" for Federal Programs, Office of Rural Health Policy, 1993. The Goldsmith Modification identifies denselypopulated census tracts or blocks within large metro counties (covering at least 1250 square miles) thus allowing easy"^l*&&ddG! "  X-separation of these tracts and blocks from the rural tracts in the county.C  yOy-ԍ ORHP/HHS comments at 56.C ORHP/HHS also suggests giving special consideration to "frontier" areas with extremely low density within  X-rural areas.CX  yO-ԍ ORHP/HHS comments at 56.C x  X-x691.` ` Several commenters specifically approve of using the ORHP/HHS methodology  X-for defining rural areas.f  yO& -ԍ MCI comments at 21; NCTA comments at 20; RUS comments at 13.f North Dakota Health suggests using a method that does not rely  Xv-on county boundaries alone for large counties with large disparities of density.vx  yO -ԍ North Dakota Health comments at 2 ("Caution against using county populations as a sole determinant as counties can vary significantly in size. . . "). Florida  X_-Cable states that the ORHP/HHS method "may be appropriate."o_  yO-ԍ Florida Cable comments at 14; MCI comments at 21; RUS comments at 13.o American Telemedicine endorses the OMB county classification system without reference to the "Goldsmith  X1-Modification" recommended by ORHP/HHS.N1`  yOB-ԍ American Telemedicine comments at 9.N  X -x692.` ` Other Methods. AHA<  yO-ԍ AHA comments at 5.< and High Plains Rural Health NetworkY  yO4-ԍ High Plains Rural Health Network comments at 2.Y assert that "frontier" areas with particularly low population density need special consideration. One commenter, Missouri PSC, expresses the fear that the ORHP/HHS and USDA methods might  X -be too restrictive.I   yO-ԍ Missouri PSC comments at 1819.I Missouri PSC asserts that other factors such as the driving distance from a hospital or medical center or number of doctors in the community should be considered  X-when establishing a definition of rural.F  yO-ԍ Missouri PSC comments at 18.F Nebraska Hospitals suggests that all hospitals in denselypopulated counties of Lancaster and Douglas should be considered urban, and the rest  Xb-of the counties in Nebraska as rural.Kb0  yOC#-ԍ Nebraska Hospitals comments at 2.K USTA favors the Census Bureau's definition of"b_*&&dd! "  X-"urban" if it were modified to exclude less denselypopulated areas.  yOy-ԍ USTA comments at 1011. USTA is also concerned that expanding the definition beyond this would "increase the difficulties in sizing the fund." USTA reply comments at 7.  X-x` `  c. Discussion  X-x693.` ` In order to implement section 254(h)(1)(A), we conclude that the Commission must define the boundary between urban and rural areas within each state. We find that it is necessary to designate rural areas in order to determine whether a health care provider is located in rural areas of a state. We also conclude that it is necessary to designate rural areas in order to determine "comparable rural areas" needed for calculating the credit or reimbursement to a carrier who provides services at reduced rates. For both of these purposes, we recommend the Commission use nonmetro counties (or county equivalents), as identified by the OMB MSA list of metro and nonmetro counties, together with nonmetro counties identified in the most currently available "Goldsmith Modification" of the MSA list  X -used by the ORHP/HHS.   {O-ԍ For a discussion of OMB metro and nonmetro areas, MSAs and the Goldsmith Modification, see  {Op-ORHP/HHS comments at 5 and section XI.D.1.b., supra. To the extent that the Commission can improve upon these definitions prior to its statutory deadline, by identifying other rural areas in metro counties not identified in the current version of the Goldsmith Modification, we encourage the Commission to do so.  Xb-x694.` ` For the task of determining the size and boundaries of the rural areas in a state, we believe it is appropriate to use a method that seeks to include as many of the truly rural areas as possible. We agree with ORHP/HHS that no currentlyused method of designating  X-rural areas is perfect.A|  yOJ-ԍ ORHP/HHS comments at 5.A We conclude, however, that the OMB MSA method is, by itself, underinclusive of many rural areas and therefore does not meet the standards set by the  X-Commission in the NPRM.;   yO-ԍ NPRM at para. 95.; The Goldsmith Modification, by identifying by census tract or block more denselypopulated areas in large, otherwise rural counties somewhat ameliorates  X-this problem.C  yO!-ԍ ORHP/HHS comments at 56.C This method meets the "ease of administration" criterion as well. Lists of MSA counties and Goldsmithidentified census blocks and tracts already exist, updated to 1995. Through the use of these lists, any health care provider can easily determine if it is located in a rural area and therefore whether it meets that test of eligibility for support. x  XN-x695.` ` The implementation of section 254(h)(1)(A) also requires a designation of"N`, *&&dd! " urban area boundaries in order to determine the exact area within which an "urban rate" for a telecommunications service is charged. For some purposes, defining the boundaries of the rural areas in a state, as we have recommended here, would also suffice for determining the corresponding urban areas. In this case, however, we believe that, to define the relevant urban area, it may be necessary to designate a different, somewhat more refined boundary than the countybased boundary described in the preceding paragraph. Because we are recommending that the highest tariffed or publicly available urban rate be used to set the  X_-urban rate charged to the health care provider,_  {O-ԍ See discussion of determining the urban rate at section XI.C.1.c., supra. we think it is important to use for this purpose an urban boundary smaller than a county boundary so as to minimize the possibility of inadvertently including distancebased or lowerdensitybased surcharges within the comparable urban rate. We also believe that using larger cities for this purpose will increase the likelihood that the rates in those cities will reflect to the greatest extent possible, reductions in rates based on largevolume, highdensity factors that affect telecommunications rates. Because we see nothing in the 1996 Act or its legislative history that would prohibit using different definitions of urban for different purposes in section 254, we recommend using, for purposes of determining the "urban rate in the closest urban area," the jurisdictional boundaries of larger cities. We further recommend that the Commission designate by regulation the exact city population size to define the term "large city," that it finds will best  Xb-balance the factors described in this paragraph.bZ  {Om-ԍ  See discussion of determining the urban rate at section XI.C.1.c., supra.  X4-x696.` ` We conclude that where all rural areas are entitled to a rate no higher than the highest rate in the closest city, there is no need to make additional provisions for frontier  X-areas, or areas with extralow population density, as some parties suggest.v  {O-ԍ See AHA comments at 5; High Plains Rural Health Network comments at 2.v Likewise, employing the methods recommended here for determining rural areas, we see no need to consider other factors such as number of doctors in the community or driving distance from  X-the hospital in formulating a definition of rural areas.I~  yO-ԍ Missouri PSC comments at 1819.I We find that the Census Bureau's  X-definition of "urban," which one commenting party suggests using,A  yOi -ԍ USTA comments at 1011.A would be less easily administered than the one suggested here because it is not based on political boundaries. Finally, we reject the suggestion that we use a definition consistent with the definition of "rural telephone company" in the Act because that definition does not provide a geographic boundary, it is meant to distinguish telecommunications companies from one another, not service and rate areas for rural health care providers and it is determined by the number of access lines and other factors that are not relevant to the issues of rural boundaries necessary" a*&&dd! " for implementing support mechanisms for health care providers.  X-x ` ` 2. Defining eligibility for health care providers x  X-x` `  a. Background x  Xv-x697.` ` Section 254(h)(1)(A) grants the right to receive federal universal service support to "any public or nonprofit health care provider that serves persons who reside in  XH-rural areas of that state. . . "FH  yO -ԍ 47 U.S.C.  254(h)(1)(A).F No provision in the section expressly limits or defines where a health care provider must be physically located in order to be eligible for universal service support under this section. The section further provides that the calculation of the amount of credit due to the carrier for providing services to the health care provider is to be based on  X -rates in "comparable rural areas."F X  yO-ԍ 47 U.S.C.  254(h)(1)(A).F  X -x698.` ` In the Joint Explanatory Statement, Congress referred to "health care providers for rural areas" in explaining that institutional users were intended to "have affordable access to modern telecommunications services that will enable them to provide medical and  Xy-educational services to all parts of the nation."y  yO-ԍ Jt. Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2nd Sess. 132 (1996). In another paragraph, the Joint Explanatory Statement referred to "the rural health care provider" in the course of explaining its intent that the rural health care provider receive an affordable rate for the services necessary for the  X4-purposes of telemedicine and instruction relating to such services.4x  yO]-ԍ Jt. Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2nd Sess. 133 (1996).  X-x699.` ` In the NPRM, the Commission noted that the statute gives eligibility to receive support under the universal service support mechanism to health care providers who serve  X-persons who reside in rural areas.<  yO-ԍ NPRM at para. 104.< x` `  X-x` `  b. Comments  X|-x700.` ` Ameritech and MCI assert that only health care providers located in rural areas should be eligible to receive the reasonably comparable urban rates provided in section  XN-254(h)(1)(A).\N  yO%-ԍ Ameritech comments at 19 n.30; MCI comments at 21.\ Ameritech's position seems to be based on ease of administration.JN(  yO-ԍ Ameritech comments at 19 n.30.J The"NbX*&&dd! "  X-reasoning behind MCI's position is not stated in MCI's comments.BX  yO -ԍ MCI comments at 21 n.16.B On the other hand,  X-AHA suggests that health care providers located in urban areas should also be eligible for  X-support.   yOk-ԍ AHA comments at 5 ("Beyond the definition of rural, the FCC should also consider that an advantage afforded by health care telecommunications networks is the dynamic and open collegial exchange of information between practitioners in and among rural settings, and between rural areas and their urban counterparts . . . The FCC should study and consider rates in nonrural areas as well.").  X-x701.` ` American Telemedicine, concerned about allocating limited resources, proposes that discounted telecommunications services be made available to both primary health care providers located in rural areas as defined in the OMB classification and secondary and tertiary care facilities located in other parts of the state that have telecommunications links for  XH-the provision of health care with rural health care institutions.OH  yO-ԍ American Telemedicine comments at 10.O  X -x` `  c. Discussion x  X -x702.` ` Section 254(h)(1)(A) defines eligibility for support to include any health care  X -provider that "serves persons who reside in rural areas in that state."F `  yO-ԍ 47 U.S.C.  254(h)(1)(A).F Because virtually all health care providers serve some rural residents, this definition could be read so expansively that it would theoretically offer support to nearly every health care provider in the country. An eligibility definition that includes providers located in urban areas, however, appears unworkable because implementation of the support mechanism is designed to reduce rural rates to a comparable level with urban rates.  X4-x703.` ` We recommend creating a mechanism that includes the largest reasonably practicable number of health care providers that primarily serve rural residents and that, due to their location, are prevented from obtaining telecommunications services at rates available to urban customers. We agree, therefore, with the commenters that urge that eligibility to obtain telecommunications services at rates reasonably comparable to rates in the state's urban  X-areas be limited to providers located in rural areas.  {Ob#-ԍ See Ameritech comments at 19 n.30; MCI comments at 21 n.16. American Telemedicine would limit support for primary care providers to those located in rural areas. American Telemedicine comments at 10. For purposes of defining a health care provider's eligibility for support under section 254(h)(1)(A), we define the term "rural counties" to mean any "nonmetro" county as defined by the OMB MSA list, along with the"cJ *&&ddQ! " nonurban areas of those metro counties identified in the Goldsmith Modification used by the  X-ORHP/HHS.  yOb-ԍ For a discussion of OMB metro and nonmetro areas, MSAs and the Goldsmith Modification, see  {O*-ORHP/HHS comments at 5 and section XI.D.1.c., supra.  X-x704.` ` We have recommended a definition of "rural areas" that is as expansive as reasonably possible in order to include the maximum number of separately identifiable rural  X-areas in which rates may be higher than for customers in nearby cities.Q"  {O` -ԍ  See section XI.C.1., supra.Q We also find that to the extent that this recommended mechanism excludes health care providers that are located in urban areas and otherwise technically eligible, those providers already have access to telecommunications services at urban rates and the statute contemplates no additional universal service support.  X -x  X - x` ` 3. Definition of health care provider. x` `  a. Background  X -  X -x705.` ` Section 254(h)(1)(A) states, in relevant part, that "[a] telecommunications carrier shall, upon receiving a bona fide request, provide telecommunications services which  Xy-are necessary for the provision of health care services in a State . . . , to any public or  Xd-nonprofit health care provider that serves persons who reside in rural areas in that  XO-State. . .".WO  yO-ԍ 47 U.S.C.  254(h)(1)(A) (emphasis added).W x  X!-x706.` ` Section 254(h)(4), entitled "Eligibility of Users," provides that "[n]o entity listed in this subsection shall be entitled to preferential rates or treatment as required by this  X-subsection, if such entity operates as a forprofit business. . ."CD  yO-ԍ 47 U.S.C.  254(h)(4).C  X-x707.` ` Section 254(h)(5), entitled "Definitions," states: xFor purposes of this subsection: . . . [t]he term 'health care provider' means x x` ` (i) postsecondary educational institutions offering health care instruction, x` ` teaching hospitals, and medical schools; x` ` (ii) community health centers or health centers providing health care to x` ` migrants; x` ` (iii) local health departments or agencies;" d*&&ddy! "Ԍx` ` (iv) community mental health centers; x` ` (v) notforprofit hospitals; x` ` (vi) rural health clinics; and x` ` (vii) consortia of health care providers consisting of one or more entities  X-x` ` described in clause (i) through (vi).F  yO-ԍ 47 U.S.C.  254(h)(5)(B).F  Xv-x ` `  b. Comments x  XH-x708.` ` General Comments. Although the NPRM did not specifically seek comment on the definition of the term "health care provider," some commenters claim that further clarification of the definition in section 254(h)(5)(B) is needed. For example, ORHP/HHS asks whether Congress intended these terms to have specific meanings under other federal laws such as the Public Health Service Act or whether Congress intended the Commission to give the term broader definition. ORHP/HHS also urges the Commission to seek further clarification from Congress on what its intentions were concerning the seven categories of public or nonprofit health care providers to which the 1996 Act refers. ORHP/HHS asserts that if the categories had been capitalized in the legislation or were to be in the regulations, they would refer to a specific set of providers that are designed to receive special consideration or funding under federal programs. ORHP/HHS argues that since these terms were not capitalized, the 1996 Act appears to imply a more generic, broader definition of  X4-these providers.C4X  yO=-ԍ ORHP/HHS comments at 67.C  X-x709.` ` Additions to Statutory Definition. Some commenters suggest additions to the definition of health care providers in the 1996 Act. American Telemedicine argues that the final FCC order implementing section 254 should allow individual health care practitioners serving rural residents through private practice to participate in the benefits offered under this  X-program.O  yOC-ԍ American Telemedicine comments at 10.O Community Colleges argues that the Commission should confirm that community colleges are eligible for universal service support as postsecondary educational institutions offering health care instruction, including emergency medical technician  Xe-training.Lex  yO!-ԍ Community Colleges comments at 10.L Arizona Health recommends that state offices of rural health be added to the list  XN-of rural health providers.GN  yO$-ԍ Arizona Health comments at 2.G Mountaineer Doctor TV asserts that the following organizations should be included in the notforprofit category: universities, notforprofit hospitals, state"7e*&&dd! "  X-notforprofit prisons, and county notforprofit prison systems.N  yOy-ԍ Mountaineer Doctor TV comments at 2.N The Advisory Committee suggests amending section 254(h)(5)(B) to include nonprofit nursing homes and other long X-term care facilities.JX  yO-ԍ Advisory Committee Report at 15.J It urges the inclusion of nonprofit home health care providers in rural areas, which it maintains is a rapidly growing segment of the health care industry, on the list of eligible health care providers. The Advisory Committee maintains that this group of health care providers can use telecommunications services for making electronic housecalls to the  Xv-elderly, chronically ill, and homebound mentally ill.Jv  yO -ԍ Advisory Committee Report at 15.J  X_-  XH-x710.` ` Eligibility Requirements. Other commenters emphasize eligibility requirements. Telec Consulting suggests that no universal service support should be given to health care  X -providers that operate on a forprofit basis.J x  yOC-ԍ Telec Consulting comments at 16.J The Advisory Committee argues that the distinction between nonprofit and forprofit should not determine who should be eligible for services at reduced rates in rural areas because of the advent of increasingly complex  X -relationships between profit and nonprofit health care providers.J   yO-ԍ Advisory Committee Report at 14.J For example, many nonprofit hospitals are acquiring forprofit health care ventures and institutions to remain  X -competitive.J   yO-ԍ Advisory Committee Report at 14.J The Advisory Committee argues that the focus should be on the improved delivery of health care to rural residents. It maintains that reducedrate telemedicine services that allow a forprofit health care professional to consult with a specialist at an academic health center should be viewed as a health care benefit to the patient, not an unfair subsidy to  XK-the forprofit health care professional.JK(  yO$-ԍ Advisory Committee Report at 14.J Therefore, the Advisory Committee argues, the Commission and Congress should consider the complex and competitive arrangements in the current health care delivery system when determining who is eligible to receive reducedrate  X-services.J  yOo!-ԍ Advisory Committee Report at 14.J Furthermore, the Advisory Committee argues that since most health care in rural areas is provided by forprofit professionals operating in a single office in remote areas with small profit margins, the Commission or Congress should consider extending the eligibility criteria to cover such individuals who can show that they cannot afford any but reducedrate"fH *&&dd! "  X-services.J  yOy-ԍ Advisory Committee Report at 14.J The Advisory Committee recognizes, however, that extending the eligibility  X-criteria may require an increase in the amount of universal service support.JX  yO-ԍ Advisory Committee Report at 14.J x  X-x ` `  c. Discussion  X-x711.` ` We recommend that the Commission attempt no further clarification of the definition of the term "health care provider." We find that section 254(h)(5)(B) adequately describes those entities intended by Congress to be eligible for universal service support. Therefore, we decline to recommend expanding or broadening those categories.  X -x712. ` ` We do not agree with ORHP/HHS's argument that since the categories listed were not capitalized, the scope of the definitional categories in section 254(h)(5)(B) cannot reasonably be defined for purposes of efficiently administering this program of universal  X -service support.D   yOn-ԍ ORHP/HHS comments at 6, 7.D We acknowledge Community Colleges' concern that community colleges be considered eligible for universal service support and we conclude that many such institutions may well fit in the definition of "postsecondary educational institutions offering  X-health care instruction."Sx  {O-ԍ See 47 U.S.C.  254(h)(5)(B)(i).S It would thus appear that an otherwise eligible subdivision of such an institution would be able to obtain supported services where 1) the entity offers health care instruction, 2) its officers can certify that the telecommunications services would be used exclusively for purposes reasonably related to the provision of such instruction, and 3) the  X4-health care provider is legally authorized to provide such instruction in that state.4   {O-ԍ See the certification required in a bona fide request as set forth in section XI.E.1.c., infra. We also  X-note Arizona Health's request to add state offices of rural healthG  yOj-ԍ Arizona Health comments at 2.G and Mountaineer Doctor  X-TV's request to add state and county notforprofit prisons to the list.T,  yO-ԍ Mountaineer Doctor TV comments at 2.T We conclude, however, that such additions cannot be included within the plain meaning of the language of the 1996 Act. Although we are bound by the language of the statute, we note that the commenters and the Advisory Committee have argued that the line drawn in the statute between eligible and noneligible providers may not reflect either changing economic  X-relationships in rural areas or changing patterns of health care provision.W  {O&-ԍ See Advisory Committee Report at 1315.W "gN *&&dd! "Ԍ X-ԙ x` ` 4. Selecting between offset or reimbursement for telecommunications (#(#X X-x` ` carriers.  X-x` `  a. Background  X-  X-x713.` ` Section 254(h)(1)(A) states that a telecommunications carrier that provides designated services to rural health care providers shall be entitled to have an amount equal to the difference, if any, between the rates for services provided to health care providers for rural areas in a state and the rates for similar services provided to other customers in comparable rural areas in that state treated as a service obligation as a part of its obligation to participate  X -in the mechanisms to preserve and advance universal service.F  yO -ԍ 47 U.S.C.  254(h)(1)(A).F This language differs from that of section 254(h)(1)(B), pertaining to schools and libraries, which explicitly permits telecommunications carriers providing designated services to schools and libraries to be reimbursed for services, either through an offset to their obligation to contribute to universal  X -service support, or through reimbursement drawn from support funds.F X  yO-ԍ 47 U.S.C.  254(h)(1)(B).F  X-x714.` ` In the NPRM, the Commission noted the different mechanisms of carrier support and sought comment on whether any statutory or policy rationale requires reimbursing carriers differently under subsection (h)(1)(A) than under subsection (h)(1)(B). The Commission asked whether subsection (h)(1)(A) permits reimbursement only through an offset to contributions, prohibiting direct compensation payments. The Commission also sought comment on the advantages of using the offset or reimbursement alternatives set forth in subsection (h)(1)(B) for compensating carriers serving health care providers as well as for  X-carriers serving schools and libraries.<  yO-ԍ NPRM at para. 106.< x  X-x` `  b. Comments x  X-x715.` ` Several commenters find no reason to treat telecommunications carriers serving health care providers any differently from those serving schools and libraries for  Xe-reimbursement purposes.~ex  yO!-ԍ American Telemedicine comments at 11; NCTA comments at 22; NECA comments at 16 n.34.~ NCTA asserts that direct reimbursement is prohibited under  XN-section 254(h)(1)(A).>N  yO$-ԍ NCTA comments at 22.> While NECA and American Telemedicine maintain that direct"Nh*&&dd! "  X-reimbursement is allowed under section 254(h)(1)(A),d  yOy-ԍ American Telemedicine comments at 11; NECA comments at 16.d Idaho PUC argues that direct reimbursement should not be allowed so as to reduce the incentive for fraud or "gaming the  X-system."CX  yO-ԍ Idaho PUC comments at 15.C Citizens Utilities asserts that if the carrier that provides the telecommunications service to a rural health care provider under section 254(h)(1)(A) is eligible pursuant to section 214(e), that carrier is entitled to claim reimbursement from the support fund, but if the carrier is not qualified under section 214(e), it is entitled only to take an offset against its  Xv-universal service contribution.Lv  yO -ԍ Citizens Utilities comments at 19.L Metricom argues a position similar to Citizens Utilities' position and asserts that, although the provisions regarding health care providers in section 254(h)(1)(A) do not explicitly override section 214(e), it believes such an override is implied  X1-because public institutional users are treated equally everywhere else in the 1996 Act.F1x  yOZ-ԍ Metricom comments at 6 n.14.F Nebraska Hospitals argues that compliance with rate guidelines should be a condition of  X -eligibility for interstate support pursuant to section 254(h).K   yO-ԍ Nebraska Hospitals comments at 2.K  X -x` `  c. Discussion  X -x716.` ` We recommend that the Commission allow telecommunications carriers providing services to health care providers at reasonably comparable rates under the provisions of section 254(h)(1)(A), to treat the amount eligible for support, calculated as recommended herein, as an offset toward the carrier's universal service support obligation. We recommend that the Commission disallow the option of direct reimbursement although we recognize that this alternative is within the Commission's authority. Because we agree with the commenters that assert that an offset mechanism is both less vulnerable to manipulation  X-and more easily administered and monitored,M  {OO-ԍ  See Idaho PUC comments at 15.M we recommend using an offset rather than a reimbursement mechanism. Consequently, we do not comment on Citizens Utilities' argument that carriers deemed eligible under section 214(e) should receive reimbursement but carriers  X-not eligible under section 214(e) should be entitled to an offset.L*  yO"-ԍ Citizens Utilities comments at 19.L We recognize a potential problem in the case where the total of a carrier's rate reductions exceed its universal service obligation in any one year. Accordingly, we recommend that carriers be allowed to carry offset balances forward to future years so that the full amounts eligible to be treated as a"|i *&&ddn! " credit may be applied to reduce their universal service obligation.  X-x E. Restrictions on Telecommunications Services   J 0 Provided to Rural Health Care Providers x` ` 1. Bona Fide Requests x x` `  a. Background  XH-  X1-x717.` ` Section 254(h)(1)(A) states, in relevant part, that "[a] telecommunications  X -carrier shall, upon receiving a bona fide request, provide telecommunications services which  X -are necessary for the provision of health care services in a State. . ." (emphasis added).F  yO~ -ԍ 47 U.S.C.  254(h)(1)(A).F  X -x718.` ` The NPRM asked that interested parties identify and discuss the safeguards needed to ensure that telecommunications carriers providing service pursuant to section 254(h)(1)(A) are, in fact, responding to the receipt of a "bona fide request" for "telecommunications services which are necessary for the provision of [rural] health care  X{-services in a State."g {X  {O-ԍ NPRM at para. 103 (citing 47 U.S.C.  254(h)(1)(A)).g The Commission also sought comment on whether it might require certification from rural health care providers requesting telecommunications services under section 254(h)(1)(A). Furthermore, in its Public Notice, the Common Carrier Bureau asked commenters to identify the least administratively burdensome requirement that could be used to ensure that requests for supported telecommunications services are bona fide requests  X-within the intent of section 254(h).I   yO-ԍ Public Notice, question No. 15.I  X-x719.` ` The Commission suggested that one possible approach would be to require each telecommunications carrier providing telecommunications services to rural health care providers under this provision to obtain written certification from the health care provider that  X-these services are necessary for the provision of health care services.< z  yO-ԍ NPRM at para. 103.< The Commission also sought comment on alternative or additional measures to ensure that universal service support provided to telecommunications carriers under section 254(h)(1)(A) is used for its intended  XP-purpose.< P   yO $-ԍ NPRM at para. 103.< x  X"-x` `  b. Comments ""j*&&dd! "Ԍx  X-x720.` ` No Safeguards Necessary. Idaho PUC argues that the bona fide request requirement seems unnecessary because providers are unlikely to provide unnecessary services to rural areas without large subsidies. Idaho PUC argues that competitive markets will force the carrier to sell its services, because the carrier will be unable to subsidize these services with revenues from other sources. For that reason, Idaho PUC concludes that ensuring bona  Xv-fide requests is not likely to be a major problem.C v  yO-ԍ Idaho PUC comments at 14.C Apple argues that, since some of the public institutional users receiving telecommunications services pursuant to section 254(h) do not have the resources to analyze a complex set of rules governing their rights to obtain telecommunication services on a discounted basis, there should be a strong presumption that schools, libraries and health care providers will act responsibly. Apple contends that any request made by an authorized official of the entity seeking service should be deemed bona  X -fide.F X  yO-ԍ Apple further comments at 4.F The Advisory Committee argues that prices of services, even at reduced rates, will serve to selfmonitor use of reducedrate services. For example, a two doctor rural clinic will  X -likely not be able to afford excess telecommunications capacity even at reduced rates.I   yOW-ԍ Advisory Committee Report at 7.I  X-x721.` ` Certification Requirements. Many commenters assert that there should be some type of certification from the health care provider or the carrier that reducedrate  Xb-telecommunications services are necessary for the provision of health care services. bx  {O-ԍ See, e.g., North Dakota Health comments at 23; North Dakota PSC comments at 4; AT&T further comments at 15; GCI further comments at 6; NCTA further comments at 5. Some commenters suggest specific methods of selfcertification. Alliance for Distance Education asserts, for example, that a health care provider should be able to selfcertify that it is providing rural health care and instruction by listing the rural areas it serves in its application  X-to a telecommunications service provider for health care rates.X   yO-ԍ Alliance for Distance Education comments at 1.X PacTel contends that entities redeeming credits should submit a sworn statement attesting that they are making a  X-bona fide request. H b  yO -ԍ PacTel further comments at 21.H Florida Cable comments that the goal of ensuring that carriers are responding to bona fide requests for services can be achieved through a plan containing the following components: 1) a determination of eligible facilities; 2) a needs assessment for the eligible facilities; 3) a technologyneutral applications plan; 4) a competitive bid process for needed services and applications; and 5) a safety net provision if no competitive bids are"|k *&&ddP! "  X-received for an eligible facility.G  yOy-ԍ Florida Cable comments at 14.G NCTA comments that selfcertification by rural health care providers would be the least burdensome approach and is unlikely to generate abuse of the system. NCTA states that the Commission should make some allowance for different needs across states and initially rely on a complaint system rather than impose burdensome  X-certification requirements before it is clear they are needed.> X  yO-ԍ NCTA comments at 22.> Some commenters argue that certification requirements should be imposed to ensure the intended use of rate reductions disbursed as block grants or direct billing credits. Ameritech asserts that it would not be unreasonable to require the health care provider's financial officer to sign a personal, sworn  XH-attestation that the funds have been used as intended by the 1996 Act.K H  yO -ԍ Ameritech further comments at 18.K AT&T suggests that the health care provider certify that the applicant is eligible for reducedrate service; that the service is necessary to support the application planned; and the associated hardware, wiring, onsite networking and training are to be deployed simultaneously with the discounted  X -service.  x  {O-ԍ AT&T further comments at 15. See also GTE further comments at 21; NCTA further comments at 5; Netscape further comments at 14; U.S. Distance Learning Ass'n further comments at 7. ITC suggests a certification statement from the institution, and random tests or  X -audits by the universal service administrator.D   yOX-ԍ ITC further comments at 7.D NYNEX suggests annual certification consisting of verification of the existence of a technology plan and a checklist of "other  X -information helpful in tracking universal service progress."J b  yO-ԍ NYNEX further comments at 1112.J  Xy-x722.` ` Federally Imposed Safeguards. Several commenters assert that the Commission should impose mechanisms to ensure that telecommunications users are making bona fide requests. Century asserts that the Commission should define "bona fide requests" for section  X4-254(h) purposes and should investigate specific complaint filings.I 4  yO-ԍ Century further comments at 13.I CFA maintains that requiring public institutional users receiving telecommunications services under section 254(h) to comply with standard procurement procedures combined with random audits by the  X-universal service administrator would strike a reasonable balance.D   yO"#-ԍ CFA further comments at 8.D North Dakota Health maintains that an ongoing log of the uses of the services should be maintained, and should be open to a reviewing agency on a periodic basis so that appropriate use of the services can be"l*&&dd! "  X-ensured.N  yOy-ԍ North Dakota Health comments at 23.N On the other hand, BellSouth states that any requirements used to ensure bona fide requests for supported telecommunications services should be imposed at the district or  X-state level.K X  yO-ԍ BellSouth further comments at 25.K  X-x723.` ` Audit Program. Some commenters suggest that the mechanism of universal service support for health care providers include a suitable program of random tests and site  Xv-audits as an enforcement scheme.D v  yO -ԍ ITC further comments at 7.D Some commenters assert that the need for an audit program could be avoided if block grants are not used. ALA states that the apparent need for an audit program is the reason why it opposes block grants or any such topdown distribution. ALA maintains that suitable accountability would exist in a reducedrate program without the  X -need for centralized oversight.  x  {OC-ԍ ALA further comments at 1213. See also Union City Board of Education further comments at 3, 12. Similarly, New York DOE states that an audit program would not be necessary if discounts are returned directly to the institution. New York DOE further claims that eligible institutions should be able to use savings from discounts at their  X -discretion.M   yO-ԍ New York DOE further comments at 8.M Bell Atlantic asserts that billing credit vouchers, which would ultimately be submitted by carriers for reimbursement, would ensure proper usage of funds and thus  X -presumably reduce or eliminate the need for an audit program.N   yO-ԍ Bell Atlantic further comments at 5.N NCTA also encourages the  X-use of billing credits to ensure the proper use of funds.4 *  yOk-ԍ NCTA at 5.4 x  Xb-x724.` ` Other Suggestions. Ameritech asserts that the best way to ensure that a request for supported service is bona fide is to have the requester put some of its own money at risk.  X4-USTA emphasizes that the chosen method of ensuring proper usage of funds should not be burdensome. For example, an electronic account system that restricted fund reimbursement to the offering of telecommunications services could alleviate many of the accountability  X-concerns.F   yOZ"-ԍ USTA further comments at 12.F  X- x` `  c. Discussion  X-x725.` ` We recommend that every health care provider that makes a request for"mJ *&&dd! " universal service support for telecommunications services be required to submit to the carrier a written request, signed by an authorized officer of the health care provider, certifying under oath the following information:  X-XxX` ` 1)X which definition of health care provider in section 254(h)(5)(B) under which the requester falls;x  Xv-XxX` ` 2) X that the requester is physically located in a rural area (OMB defined nonmetro county or Goldsmithdefined  XH-rural section of an OMB metro county); H  yO -ԍ For a discussion of OMB metro and nonmetro areas, Metropolitan Statistical Areas and the Goldsmith  {O -Modification, see ORHP/HHS comments at 5 and section XI.C.1.b., supra.  x  X1-x` ` 3)  that the services requested will be used solely for purposes  0reasonably related to the provision of health care services or instruction that the health care provider is legally authorized to provide under the law of the state in which they are provided; (#  X -XxX` ` 4) X that the services will not be sold, resold or transferred in  X -consideration of money or any other thing of value;C "  yO-ԍ 47 U.S.C.  254(h)(3).Cx  X -XxX` ` 5) X if the services are being purchased as part of an aggregated purchase with other entities or individuals, the full details of any such arrangement, including the identities of all copurchasers and the portion of the services being purchased by the health care provider. x  X-x 726. ` ` We conclude that the above certification covers the key portions of section 254(h) governing eligibility for and limitation of use of supported services for health care providers and is the minimum certification necessary for adequate monitoring of compliance with section 254(h)(1)(A). We agree with NYNEX's suggestion that the certification should  X-be renewed annually.J   yO$-ԍ NYNEX further comments at 1112.J  X-x727. ` ` In addition, we recommend that the Commission require the universal service fund administrator to establish and administer a monitoring and evaluation program to oversee the use of universal service supported services by health care providers, and the pricing of  XN-those services by carriers. NB  {OA#-ԍ Complaints against any common carrier subject to the 1996 Act may be filed with the Commission. See 47 U.S.C.  208. We conclude that a compliance program is necessary to ensure that services are being used for the provision of lawful health care, that requesters are complying with certification requirements, that requesters are otherwise eligible to receive" n*&&dd! " universal service support, that rates charged comply with the statute and regulations and that the prohibitions against resale or transfer for profit are strictly enforced. We disagree with ALA and New York DOE that suitable accountability would automatically exist in a reducedrate program, where customers are investing a substantial amount of their own resources,  X-without the need for any oversight.v   {O-ԍ See ALA further comments at 1213; New York DOE further comments at 8.v  Xv-x728. ` ` We agree, however, with Apple's argument that, considering the limited resources many public and nonprofit health care providers have to comply with complex regulations, there should be a strong presumption that health care providers will act  X1-responsibly.P 1Z  {O< -ԍ See Apple further comments at 4.P Also, in formulating our recommendation as to the method of ensuring that requests are bona fide, we are mindful of the importance of choosing a method that minimizes, to the extent consistent with section 254, the administrative burden on regulators  X -and carriers.F   {O-ԍ Cf., NPRM at para 100.F For these reasons, we have sought to recommend the least burdensome certification plan that will provide safeguards that are adequate to ensure that the supported  X -services will be used lawfully and for their intended purposes.F! ~  {O-ԍ  See NPRM at para. 103.F  X-x729.` ` For example, we do not recommend Florida Cable's fivecomponent  Xy-certification plan because we find it too expansive, expensive, and burdensome.Q" y  {O:-ԍ See Florida Cable comments at 14.Q We also reject NYNEX's suggestion that certification should include verification of the existence of a  XK-technology plan and a checklist of other information helpful in tracking universal service.J# K  yO-ԍ NYNEX further comments at 1112.J Although such a plan might be useful in a discount plan where disincentives to overpurchasing are needed, we find such a requirement unnecessarily burdensome where health care providers will be required to invest substantial resources in order to pay urban rates for these services. Likewise, we do not see the need to require health care providers to certify that hardware, wiring, onsite networking and training are to be deployed simultaneously with  X-the service, as suggested by AT&T.F$ 2  yO"-ԍ AT&T further comments at 15.F Finally, we do not accept Ameritech's suggestion that the financial officers of health care provider organizations be required to attest under oath that"o $*&&dd! "  X-funds have been used as intended by the 1996 Act,K%  yOy-ԍ Ameritech further comments at 18.K because we believe that the preexpenditure affidavit described above, which is to be submitted to the carrier along with the request for services, is sufficient under these circumstances.  X-x730. ` ` We also recommend that the Commission encourage carriers across the country to notify eligible health care providers in their service areas of the availability of lower rates resulting from universal service support so that the goals of universal service to rural health care providers will be more rapidly fulfilled. x  X1- x` ` 2. Restrictions on resale and aggregated purchases x  X -x` `  a. Background  X -x731.` ` Section 254(h)(3) provides that "[t]elecommunications services and network capacity provided to a public institutional telecommunications user under this subsection may not be sold, resold, or otherwise transferred by such user in consideration for money or any  X-other thing of value."& X  {O-ԍ 47 U.S.C.  254(h)(3). See also the definition of health care provider including "consortia of health  {Oc-care providers" discussed in section XI.D.3., supra. The Joint Explanatory Statement explained that this section "clarifies that telecommunications services and network capacity provided to health care providers . . .  Xb-may not be resold or transferred for monetary gain."' b  yO-ԍ Jt. Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2nd Sess. 133 (1996).  X4-x732.` ` In the NPRM, the Commission asked commenters to suggest additional measures, other than discounts and financial support that would promote deployment of  X-advanced services to health care providers.<( D  yO-ԍ NPRM at para. 109.< The NPRM further asked commenters to address whether measures proposed would comply with the requirements of section  X-254(h)(3).<)   yO]-ԍ NPRM at para. 110.< x  X-x` `  b. Comments  X-  X|-x733.` ` North Dakota Health argues that section 254(h)(3) threatens the ability of rural health care providers to make efficient use of their networks. It asserts that if private sector  XN-use of these facilities can improve efficiency and make them more costeffective, this should"Npd )*&&dd! "  X-be allowed.L*  yOy-ԍ North Dakota Health comments at 3.L USTA on the other hand, favoring strict enforcement of section 254(h)(3) argues that if restrictions are not enforced, telecommunications providers offering supported  X-services will be, in effect, subsidizing noneligible users._+ X  yO-ԍ USTA comments at 12; Advisory Committee Report at 12._ A similar position is advanced by the Rural Iowa Indep. Tel. Ass'n although it maintains that the restriction on resale will not discourage the development of "networking partnerships" between health care providers,  X-schools, libraries and other entities.U,   yO& -ԍ Rural Iowa Indep. Tel. Ass'n comments at 6.U  X_-x734.` ` The Advisory Committee argues that an eligible health care provider may charge the patient or insurance company for the cost of the telecommunications service, but  X1-that charge should not be considered a resale under section 254(h)(3).J- 1x  yOZ-ԍ Advisory Committee Report at 13.J The Report also encourages the use of nonprofit consortia to provide telemedicine services to eligible providers, through cooperative or other joint venture businesses. The Advisory Committee argues that users could purchase high capacity telecommunications services, which are often less expensive than multiple lower capacity services, by combining demand. Furthermore, the Report argues that advantage to rural areas would be even greater if consortia could include  X -schools and libraries receiving benefits under the 1996 Act.M.   yO`-ԍ Advisory Committee Report at 1213.M The Advisory Committee recommends that the Commission establish competitively neutral rules which ensure that federal, state, or local governmentowned or subsidized communications networks do not unfairly compete by selling network services or excess capacity as commercial services in  XK-unfair competition with the private sector.I/ K  yO-ԍ Advisory Committee Report at 9.I The Report also suggests that the infrastructure required for rural telemedicine be shared among schools, libraries and health care  X-providers.I0 (  yO-ԍ Advisory Committee Report at 8.I  X-x  X-x` `  c. Discussion  X-x735.` ` We advocate the strict enforcement of the prohibition in section 254(h)(3) against the resale of supported services, and we have urged that a sufficient audit program be established to monitor and evaluate the use of supported services in aggregated purchase"q 0*&&dd! "  X-arrangements.S1  {Oy-ԍ See section XI.E.1.c., supra.S We agree, however, with those commenters that maintain that this prohibition should not restrict or inhibit joint purchasing and networksharing arrangements  X-with both public and private entities and individuals.U2 Z  yO-ԍ Rural Iowa Indep. Tel. Ass'n comments at 6.U Several commenters observe that these arrangements can be used to substantially reduce costs and in some cases, their availability might make the difference between success and failure of a rural  X-telecommunications network.3   {O( -ԍ  See, ORHP/HHS comments at 1011. See also American Telemedicine comments at 3; Nebraska Hospitals comments at 2; Taconic Tel. Corp. reply comments at 5.  X_-x736.` ` Accordingly, we recommend that health care providers be encouraged to enter into aggregate purchasing and maintenance agreements for telecommunications services with other public and private entities and individuals, provided however, that the entities and individuals not eligible for universal service support pay full rates for their portion of the services. In addition, in these arrangements, we recommend that the Commission's order make clear that the qualified health care provider can be eligible for reduced rates, and the telecommunications carrier can be eligible for support, only on that portion of the services  X -purchased and used by the health care provider.J4 D  {O-ԍ  See Merit comments at 45.J We believe that these arrangements should be subject to full disclosure and close scrutiny under the audit program we recommend in section XI.E.1.c. above.  Xb-x F. Advanced Telecommunications and Information Services  X4-x` ` 1. Background  X-x737.` ` Section 254(h)(2) directs the Commission to establish "competitively neutral rules. . . to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public and nonprofit elementary  X-and secondary school classrooms, health care providers, and libraries."5   yOH -ԍ #X\  P6G;ɒP#47 U.S.C.  254(h)(2)(A).#Xj\  P6G;ynXP#є Section 254(h)(2) also directs the Commission to "define the circumstances under which a telecommunications carrier may be required to connect its network to such public institutional telecommunications  X|-users."m6 |f  yO$-ԍ #X\  P6G;ɒP# 47 U.S.C.  254(h)(2)(B).m The statute does not define "advanced telecommunications services." " Information services" is defined, however, as "the offering of a capability for generating, acquiring,"er 6*&&dd1! " storing, transforming, processing, retrieving, utilizing, or making available information via  X-telecommunications."7  yOb-ԍ #X\  P6G;ɒP# 47 U.S.C.  153(20).#Xj\  P6G;ynXP#я  X-x738.` ` The Joint Explanatory Statement provides the following explanation with respect to advanced telecommunications services: XxX` ` New subsection (h)(2) requires the Commission to establish rules to enhance the availability of advanced telecommunications and information services to public institutional telecommunications users. For example, the Commission could determine that telecommunications and information services that constitute universal service for classrooms and libraries shall include dedicated data links and the ability to obtain access to educational materials, research information, statistics, information on Government services, reports developed by Federal, State, and local governments, and information services which can be carried  X-over the Internet.8 X  yO-ԍ #X\  P6G;ɒP#Joint Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2nd Sess. 133 (1996).#Xj\  P6G;ynXP#x`  Xb-x739.` ` In the NPRM, the Commission acknowledged that section 254(h)(2), in contrast to section 254(h)(1)(A), requires identification of those advanced telecommunications services that carriers should make available to all health care providers to the extent  X-technically feasible and economically reasonable.9   {O-ԍ #X\  P6G;ɒP#NPRM at para. 109 (citing 47 U.S.C.  254(h)(2)(A)).#Xj\  P6G;ynXP#ѵ The Commission asked commenters to identify advanced telecommunications and information services and further identify the features and functionalities required to give health care providers access to those services. The Commission also asked commenters to suggest competitively neutral rules that would  X-enhance that access.: z  yO-ԍ #X\  P6G;ɒP#NPRM at para. 109.#Xj\  P6G;ynXP#ъ The Commission specifically asked whether advanced telecommunications and information services should be broader, narrower or identical to the services supported in section 254(h)(1)(A). In addition, the Commission requested suggestions as to additional measures, other than discounts and financial support, that would  Xe-promote the deployment of advanced services to health care providers.; e   yO #-ԍ #X\  P6G;ɒP#NPRM at para. 109.#Xj\  P6G;ynXP#ъ  X7-x740.` ` The Commission further asked commenters to address, for each measure proposed, whether it would be competitively neutral for carriers, telecommunications" s;*&&dd! " providers, and any other affected entities. The Commission sought comment on whether the proposed measure would comply with the 1996 Act's requirements that telecommunications  X-services and network capacity not be resold for value.<   {OK-ԍ #X\  P6G;ɒP#NPRM at #X\  P6G;ɒP#para. 110 (citing 47 U.S.C.  254(h)(3)).#Xj\  P6G;ynXP# The Commission also asked how it should assess whether services proposed are technically feasible and economically  X-reasonable.= Z  yO-ԍ #X\  P6G;ɒP#NPRM at para. 110.#Xj\  P6G;ynXP#ъ In addition, the Commission asked for estimates of potential costs for each measure pursuant to the principle that support mechanisms be specific, predictable and  Xv-sufficient.> v  {O -ԍ#X\  P6G;ɒP# NPRM at p#X\  P6G;ɒP#ara. 110 (citing 47 U.S.C.  254(B)(5)).#Xj\  P6G;ynXP# Finally, the Commission requested proposals to define the circumstances under which a telecommunications carrier may be required to connect its network to such public  XH-institutional telecommunications users.? H|  {Ou-ԍ #X\  P6G;ɒP#NPRM at #X\  P6G;ɒP#para. 110 (citing 47 U.S.C.  254(h)(2)(B)).#Xj\  P6G;ynXP#  X -x741.` ` In connection with the question of what entity is eligible for support, the Commission noted that Congress intended to benefit "all. . . health care providers," as defined in section 254(h)(5)(B), not just health care providers serving persons who live in rural  X -areas.@   yO-ԍ #X\  P6G;ɒP#NPRM at para. 111. #Xj\  P6G;ynXP#ы The Commission invited interested parties to comment and asked for the Joint  X -Board's recommendation regarding this interpretation.A   yO -ԍ #X\  P6G;ɒP#NPRM at para. 111.#Xj\  P6G;ynXP#ъ  X-x` ` 2. Comments  Xb-x742.` ` General Comments. Rural Iowa Indep. Tel. Ass'n is optimistic that the application of the mechanisms of support and encouragement of competition through the implementation of the 1996 Act will in itself help in enhancing access to advanced  X-services.|B .  yO-ԍ #X\  P6G;ɒP#Rural Iowa Indep. Tel. Ass'n comments at 6.| Taconic Tel. Corp. argues that the goal of advanced services to schools, libraries and health care providers can only be achieved through collaborative partnerships with  X-schools, the local community, coordinators, and state and federal legislators.C   yO^"-ԍ #X\  P6G;ɒP#Taconic Tel. Corp. reply comments at 6.#Xj\  P6G;ynXP#џ Other  X-commenters also propose allowing health care providers to join with government, school, community or even business users to form a network, share the cost and increase the usage of"tN C*&&dd! "  X-advanced telecommunications access lines. D   {Oy-ԍ #X\  P6G;ɒP#See, e.g., American Telemedicine comments at 3; Nebraska Hospitals comments at 2; Taconic Tel. Corp.  yOC-reply comments at 5.#Xj\  P6G;ynXP#  ORHP/HHS notes that without sharing of infrastructure by educational, medical, business and other community resources, "development  X-of advanced rural applications is more likely to fail."E "  yO-ԍ #X\  P6G;ɒP#ORHP/HHS comments at 1011.#Xj\  P6G;ynXP#ѓ Merit recommends allowing the sharing of transmission facilities with ineligible schools, libraries and health care providers  X-who would pay full nondiscounted rates.F   yO -ԍ #X\  P6G;ɒP#Merit comments at 45.#Xj\  P6G;ynXP#ю  Xv-x743.` ` Advanced Services. Several commenters express skepticism regarding the idea of defining or supporting advanced telecommunications and information services for health care providers and many assert that no attempt should be made to identify advanced services  X1-at this time.G 1B  {O$-ԍ #X\  P6G;ɒP#See, e.g., NCTA comments at 23.#Xj\  P6G;ynXP#ѝ NCTA argues, for example, that there is no need to require universal service support for advanced telecommunications services for health care providers and other public  X -institutional users since cable operators can, and already are delivering such services.H    yO-ԍ #X\  P6G;ɒP#NCTA comments at 23.#Xj\  P6G;ynXP#ь Similarly, CCV asserts that there are numerous incentives in place assuring a rapid deployment of advanced services to health care providers. CCV notes, in support of this argument, that it has already entered into a series of "government/business partnerships" in its areas of service which will facilitate a rapid deployment of these services to health care providers. Therefore, it argues, universal service support should not be required for these  Xy-advanced services.I yd  yO-ԍ #X\  P6G;ɒP#CCV comments at 5.#Xj\  P6G;ynXP#ъ Frontier adds that additional services, such as Asynchronous Transfer Mode (ATM) and ISDN technology should not qualify for support, absent a compelling demonstration of need, because the Commission's baseline set of services satisfies health care  X4-providers' need for access to advanced services.J 4  yO-ԍ #X\  P6G;ɒP#Frontier comments at 5.#Xj\  P6G;ynXP#я Sprint argues that additional and advanced telecommunications services requiring support should not be defined until subscribership indicates which services are desirable and necessary, and the rural health care marketplace has been assessed. Furthermore, Sprint argues that many of the advanced  X-services mentioned by the Commission are in their infancy and are still evolving.K   yO $-ԍ #X\  P6G;ɒP#Sprint comments at 23.#Xj\  P6G;ynXP#ю  X-x744.` ` Some commenters take the view that advanced services, though not identifiable"uK*&&dd! " now, will become known in the future and should be studied and reviewed in an ongoing  X-proceeding.vL  {Ob-ԍ #X\  P6G;ɒP#See, e.g., USTA comments at 12.v USTA states that such periodic review should be undertaken in conjunction  X-with the proceeding[s] required in section 706M Z  yO-ԍ #X\  P6G;ɒP##X\  P6G;ɒP#1996 Act,  706. of the 1996 Act as well as with the periodic  X-review of the universal service definitions.N   yOV-ԍ #X\  P6G;ɒP#USTA comments at 12.#Xj\  P6G;ynXP#ь Wisconsin PSC states that it may be best for the Commission to provide broad guidelines to identify the advanced service capabilities needed. Wisconsin PSC suggests further that the Commission provide matching funds or  Xv-direct grants for states to administer, as is now done in the Lifeline and LinkUp programs.O vz  yO -ԍ #X\  P6G;ɒP#Wisconsin PSC comments at 1718.#Xj\  P6G;ynXP#ј  XH-x745.` ` Information Services. Netscape argues that since "the 1996 Act does not  X1-repeal, and in fact codifies the Commission's longstanding Computer II distinction between basic telecommunications and `enhanced' information services, . . . Internet access is  X -assuredly an `information' service, not a `telecommunications` service."P    {O-ԍ #X\  P6G;ɒP#Netscape further comments at 3 (citing Netscape comments at 1417).#Xj\  P6G;ynXP# As such, Netscape contends, Internet access may be encouraged through the rules adopted pursuant to section  X -254(h)(2) but not supported under section 254(h)(1).Q   yO$-ԍ #X\  P6G;ɒP#Netscape further comments at 3.#Xj\  P6G;ynXP#ї PacTel subscribes to a similar  X -interpretation.R ,  yO-ԍ #X\  P6G;ɒP# PacTel further comments at 1415.#Xj\  P6G;ynXP#љ  X-x746.` ` Technically Feasible and Economically Reasonable. Ameritech expresses doubts that access to advanced services would be technically feasible since access will require substantial equipment and inside wiring in addition to transmission capacity. It further doubts that access to advanced services would be economically reasonable since the market price of  X6-the equipment and the transmission capacity would be considerable.S 6  yO-ԍ #X\  P6G;ɒP# Ameritech comments at 20.#Xj\  P6G;ynXP#ё BellSouth also opposes deployment of additional advanced services. BellSouth argues that deployment of additional advanced services should not be mandated because it would involve substantial new investments that may not be sound. BellSouth recommends, however, that transmission capabilities of 1.544 Mbps be provided to all rural health care providers as part of the universal service support for services "necessary for the provision of health care" under section 254(h)(1)(A). BellSouth argues further that basic connectivity can be provided through other services deemed eligible for universal service support pursuant to section"vL S*&&dd! "  X-254(h)(1)(A).T  yOy-ԍ #X\  P6G;ɒP# BellSouth comments at 23.#Xj\  P6G;ynXP#ё PacTel states that since mandated access to advanced services must be technically feasible and economically reasonable; such services should only be supported after the recipient has made a showing that it possesses and has the training to use related hardware  X-and software.U X  yO-ԍ #X\  P6G;ɒP#PacTel comments at 11.#Xj\  P6G;ynXP#ю USTA asserts that, while section 254(h)(2) requires that advanced services be provided in a manner which is technically and economically reasonable, it does not require that advanced services that do not qualify as special services be discounted or that the rates  Xv-for advanced services provided to rural health care providers be reasonably comparable.V v  yO -ԍ #X\  P6G;ɒP#USTA comments at 12.#Xj\  P6G;ynXP#ь  X_-With regard to provisions of section 254(h)(2)(B) that require the establishment of rules defining the circumstances under which a telecommunications carrier may be required to connect its network to such public institutional telecommunications users, Metricom asserts that if a carrier is not eligible under section 214(e), that carrier should not be forced to  X -connect its network to public institutional users.W  x  yO,-ԍ #X\  P6G;ɒP# Metricom comments at 8.#Xj\  P6G;ynXP#я x  X -x747.` ` Encourage Deployment. The Advisory Committee recommends that universal service funds be used to help telecommunications carriers build or upgrade the public  X -switched network or "backbone infrastructure" required for rural telemedicine.IX   yO`-ԍ Advisory Committee Report at 8.I That Report recommends that such a backbone infrastructure, upgraded with universal service funds, be shared by schools and libraries and private entities, with private entities being required to  Xb-repay the fund from profits generated from such services.IY b  yO-ԍ Advisory Committee Report at 8.I The Advisory Committee further recommends that the Commission establish policies that encourage interconnection standards and interoperability among networks with heterogeneous technologies. The Report suggests, as an example, that the Commission should establish rules that encourage the adoption of  X-Internet Protocol (IP) over ATM as a superior interoperability standard.LZ (  yO-ԍ Advisory Committee Report at 910.L The Report also notes that some states are using ATM to provide digital connectivity and argues that competitively neutral rules should encourage private sector involvement and competition  X-@@among private sector firms.I[   yO*$-ԍ Advisory Committee Report at 9.I  X-x748.` ` Both USTA and NCTA argue that the Commission should employ the"wH [*&&dd! "  X-incentives mentioned in section 706 of the 1996 Actd\  yOy-ԍ #X\  P6G;ɒP#1996 Act,  706.d to encourage deployment of advanced  X-telecommunications capability to health care providers.z] X  yO-ԍ NCTA comments at 23; USTA comments at 12.#Xj\  P6G;ynXP#z Alliance for Public Technology argues that the fundamental challenge in extending universal service is to include marketcompatible ways of overcoming the implicit "social engineering" of the marketplace in  X-developing new technologies.^   yO= -ԍ #X\  P6G;ɒP#Alliance for Public Technology comments at 19.#Xj\  P6G;ynXP#Ѧ Alliance for Public Technology asserts that the best way to meet this challenge is to provide financial incentives to the states to get them to open proceedings which would develop "strategies and marketoriented options." This would, in turn, encourage deployment of those advanced telecommunications services which, they argue,  XH-would meet the full spectrum of individual and communitybased needs._ Hx  yOq-ԍ #X\  P6G;ɒP#Alliance for Public Technology comments at 19.#Xj\  P6G;ynXP#Ѧ  X -x749.` ` Competitive Neutrality. Several commenters respond to the requirement that  X -the rules established must be competitively neutral.`    {O-ԍ #X\  P6G;ɒP#See, e.g., Metricom comments at 7.#Xj\  P6G;ynXP#Ѡ Council on Competitiveness states that it is important that the universal service program remain provider neutral and technology  X -neutral.a   yO -ԍ #X\  P6G;ɒP#Council on Competitiveness comments at 4.#Xj\  P6G;ynXP#ѡ PacTel asserts that ensuring competitive neutrality means that all telecommunications and information service providers must bear responsibility for providing  X -and funding these services.b *  yO-ԍ #X\  P6G;ɒP#PacTel comments at 11.#Xj\  P6G;ynXP#ю Metricom argues that the support program should unfairly favor neither competitors nor technologies because "wireless, unlicensed and other alternatives to traditional landline service may prove to be the best choice for these public institutional  Xb-users. . ."c b  yO-ԍ #X\  P6G;ɒP# Metricom comments at 78.#Xj\  P6G;ynXP#ё  X4-@@ x` ` 3. Discussion  X-x750.` ` The Commission's adoption of rules providing universal service support under section 254(h)(1) will significantly increase the availability and deployment of telecommunications services for rural health care providers. Furthermore, we conclude that the additional action the Commission will undertake, as discussed above, will be sufficient to ensure the enhancement of access to advanced telecommunications and information services for these and other health care providers. In this regard, we note that the class of users who"xJ c*&&dd! " may benefit from the implementation of section 254(h)(2)(A) includes all public and nonprofit health care providers, not solely rural health care providers or those who serve persons  X-residing in rural areas.Pd   {OK-ԍ See 47 U.S.C.  254(h)(2)(A).P  X-x G.` ` Implementation x  Xv-x751.` ` We propose that the Commission establish rules governing the implementation of the support mechanisms recommended above. We anticipate that the fund administrator will begin receiving and processing telecommunications service requests on or about June 1, 1997. Therefore, we recommend that the Commission advise eligible health care providers that they may begin submitting requests to carriers for supported services as soon as practicable after the Commission adopts final rules.  X -x752.` ` The rules should provide that the telecommunications carrier may begin to deploy the requested service as soon as practicable after it has received 1) a written request for an eligible telecommunications service, 2) a properly completed signed and sworn certification as provided in paragraph 92 of this section, 3) approval, if necessary, from the appropriate agency of the rate to be charged for the requested service, and 4) satisfactory payment or payment arrangements for the portion of the rate charged that is the responsibility of the health care provider.  X- XII. INTERSTATE SUBSCRIBER LINE CHARGES AND CARRIER COMMON LINE  X-CHARGES  X-x A. Overview  X-x753.` ` In this section, the Joint Board considers the existing mechanisms for the  X|-recovery of subscriber loop costs6e ~|Z  yO-ԍ "Subscriber loops" or "loops" are the connection between the telephone company's central office and the  {OO-customer's premises. In the Local Competition Order, the Commission defined the loop, for unbundling purposes, as "a transmission facility between a distribution frame, or its equivalent, in an ILEC central office,  {O-and the network interface device at the customer premises." Local Competition Order at para. 380. Currently, 25 percent of the total cost of the loop is allocated to the interstate jurisdiction, 47 C.F.R.  36.154(c), though  {Os!-interstate traffic actually represents only about 15 percent of loop usage. See FCC Monitoring Report, CC Docket No. 80286, Table 4.7 (rel. May 1996).6 the SLC and the residual CCL charges, which include LTS payments to determine whether they contain support mechanisms that are inconsistent with the directives in the 1996 Act. The Joint Board concludes that the existing LTS payment structure is inconsistent with the 1996 Act, because contributions to universal service should"7ye*&&dd{! "  X-be "equitable and nondiscriminatory."Ef  yOy-ԍ 47 U.S.C.  254 (b) (4).E We recommend that LTS be removed from the access charge regime and instead recovered from the new federal universal service support mechanism.  X-x754.` ` We recommend that there be no increase in the current $3.50 SLC cap for primary residential and singleline business lines. If the Commission utilizes both inter and intrastate revenues as the revenue base for assessing interstate telecommunications carriers' contributions to the new national universal service support mechanism, we recommend that there be a downward adjustment in the SLC cap for those lines, as well as CCL charges, to reflect the recovery of LTS and pay telephone costs from other sources. Further, we conclude that the current usagesensitive CCL charge structure is economically inefficient and urge the Commission to change the current CCL rate structure so that LECs are no longer required to recover the NTS cost of the loop from IXCs on a trafficsensitive basis.  X -x B. Background  X-x755.` ` Section 254(b)(4) establishes the universal service principle that "[a]ll providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service." Section 254(d) requires that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." Section 254(e) further requires that any universal service support "should be explicit," and the Joint Explanatory Statement indicates that the requirement that support be explicit serves the "conferees' intent that all universal service support should be clearly  X-identified."Mg X  yO-ԍ Joint Explanatory Statement at 131.M Section 254(b)(1) also establishes the principle that universal service should be available at affordable rates, and section 254(i) directs the Commission and the states to ensure that universal service is available at affordable rates.  Xe-x756.` ` Currently, LECs recover the portion of subscriber loop costs assigned to the interstate jurisdiction through a combination of the SLC and CCL charges. The SLC is capped at $3.50 per month for residential and singleline business customers and $6.00 per  X -month for multiline business customers.Mh   yO"-ԍ 47 C.F.R.  69.104, 69.203.M In the NPRM, the Commission noted that the imposition of usagesensitive CCL charges on one class of carriers (IXCs) to reduce flat rates for end users, with the goal of increasing subscribership, "appears to constitute a universal"zxh*&&dd<! "  X-service support flow."<i  yOy-ԍ NPRM at para. 113.< The NPRM noted that this apparent support flow appears inconsistent with the 1996 Act's directives that support be "explicit" and that it be collected on an equitable and nondiscriminatory basis from all carriers providing interstate  X-telecommunications services.Fj X  yO-ԍ 47 U.S.C.  254(d) (e).F The Commission observed that some parties have suggested in the past that loop costs be recovered solely from end users through an increase in the SLC,  X-and requested comment on this issue.@k   yO& -ԍ NPRM at paras. 11314.@ The Commission also requested comment on the  Xv-potential effect on subscribership of increasing the SLC.<l vx  yO -ԍ NPRM at para. 114.<  XH-x757.` ` The NPRM further observed that the CCL charges of ILECs not participating  X1-in the NECA pool recover LECs' LTS obligations.<m 1  yO-ԍ NPRM at para. 115.< As noted in the NPRM, LTS payments serve to equalize access charges among LECs by requiring larger LECs that no longer participate in the NECA access charge pool to contribute funds sufficient to reduce pooling  X -companies' access charges to the national average.<n   yO5-ԍ NPRM at para. 115.< The NPRM tentatively concluded that "LTS payments, which directly increase interstate access charges assessed by some LECs so as to reduce charges assessed by other LECs, are an identifiable support flow in the existing interstate access charge system" and "propose[d] to eliminate the recovery of LTS revenues  X-through ILECs' interstate CCL charges."<o (  yOi-ԍ NPRM at para. 115.< The NPRM requested public comment on these issues, and referred to the Joint Board the question of how interstateallocated subscriber loop  Xb-costs should be recovered.;p b  yO-ԍ NPRM paras. 114115. Formerly, CCL charges also recovered ILEC pay telephone costs. The Commission, in its recent pay telephone compensation decision, directed ILECs to remove this element of CCL  {O[-charges by April 15, 1997. See Implementation of the Pay Telephone Reclassification Provisions of the  {O% -Telecommunications Act of 1996, Report and Order, CC Docket No. 96128, FCC 96388 (rel. Sept. 20, 1996)  {O -(recon. pending) (Pay Telephone Order).;  X4-x758.` ` On July 3, 1996, the Commission's Common Carrier Bureau released a Public  X-Notice soliciting further comment on 72 specific questions.Bq n  {O<%-ԍ See Public Notice.B Two of those questions"{q*&&dde! " pertained to loop cost recovery. One asked, "If a portion of the CCL charge represents a subsidy to support universal service, what is the total amount of the subsidy?" It also requested supporting evidence to substantiate estimates of the amount of support, including information on the cost methodology used to estimate the magnitude of the support amount. The other question asked, "If a portion of the CCL charge represents contribution to the recovery of loop costs, please identify and discuss alternatives to the CCL charge for recovery of those costs from all interstate telecommunications service providers (e.g., bulk billing, flat rate/perline charge)."  X1-x759.` ` In its August decision implementing section 251 and related provisions of the  X -1996 Act,Lr   {O -ԍ See Local Competition Order.L the Commission concluded that purchasers of unbundled network elements  X -should not be required to pay access charges, including CCL charges.Us  Z  {O-ԍ Local Competition Order at para. 721.U The Commission determined that the "payment of rates based on TELRIC plus a reasonable allocation of common costs, pursuant to section 251(d)(1), represents full compensation to the ILEC for use  X -of the network elements that telecommunications carriers purchase."t    {O[-ԍ Local Competition Order at para. 721. "TELRIC" is an acronym for "total element long run incremental  {O%-cost." See id. at para. 674. Nevertheless, the Commission recognized that some portion of the CCL charge represents universal service support that should not be terminated before the Commission has begun to implement new  Xy-support mechanisms.Uu yH  {Or-ԍ Local Competition Order at para. 719.U To preserve existing support flows until the completion of the universal service and access charge reform proceedings, the Commission adopted an interim mechanism that requires purchasers of the unbundled local switching element to continue to pay CCL charges (plus a charge equal to 75 percent of the TIC) for all interstate minutes  X-traversing the ILEC's local switches.Uv   {O-ԍ  Local Competition Order at para. 720.U The Commission applied the transitional mechanism to "the unbundled local switching element, rather than to any other network elements, because such an approach is most closely analogous to the manner in which the [CCL charge] and  X-TIC are recovered in the interstate access regime."Uw l  {O -ԍ Local Competition Order at para. 721.U This transitional mechanism will expire upon completion of the universal service and access charge proceedings, but no later than  X-June 30, 1997.Ix \  yOY$-ԍ For BOCs, the transitional mechanism will also expire on the date the BOC is authorized to provide in {O!%-region interLATA services if this occurs before completion of the two proceedings or June 30, 1997. Local  {O%-Competition Order at para. 720.I"|"x*&&dd! "Ԍ X-ԙ xC. Comments  X-x760.` ` CCL Charges Are Not a Support Mechanism. Many commenters, including most states and state consumer advocates as well as some small LECs, Teleport, and NECA, argue that the CCL charge does not represent a support flow because it is a mechanism for  X-LECs to recover IXCs' share of the joint and common loop costs.y   {O-ԍ See, e.g., AARP comments at 1415; Bell Atlantic comments at 1011; OPCDC comments at 17; Florida PSC comments at 2123; Harris comments at 13; Maine PUC comments at 17; NASUCA comments at 46; RTC comments at 1718; Rural Iowa Indep. Tel. Ass'n comments at 6; Teleport comments at 1011; Texas OPUC comments at 67; Washington UTC comments at 1819; DC PSC reply comments at 910; United Utilities reply comments at 34; NECA further comments at 37. These commenters contend that IXCs should bear some or all of the burden for interstate loop costs because IXCs would otherwise have use of the loop, an input to their service, at no charge. Several commenters contend that, because the loop is a joint and common cost, section 254(k)  X1-requires that IXCs bear a reasonable share of loop costs.z 1z  {O\-ԍ See, e.g., Indiana PUC comments at 9; NARUC comments at 16; Texas OPC comments at 34; AARP reply comments at 16; NASUCA reply comments at 1314; Oklahoma CC reply comments at 21. Other commenters, while still arguing that CCL charges are not a support mechanism, suggest that LECs may be over X -recovering loop costs because CCL charges are computed based on embedded costs.{    {O-ԍ See, e.g., Maine PUC comments at 2122; New York DPS comments at 4; Washington UTC comments at 1819. These commenters believe that re-computation of loop costs based on forwardlooking cost principles justifies lowering at least the SLC, and perhaps CCL charges as well. Other commenters suggest that the current $3.50 residential SLC cap should be lowered to reflect  X -declines in the real cost of providing loops.|  .  yO-ԍ According to AARP, loop costs have decreased by 7 percent per year for the past decade. AARP  {ON-comments at 17. See also Maine PUC comments at 2122; Texas OPUC comments at 1314. Some commenters note the use of digital loop carrier technology in the feeder portion of the loop and suggest that has resulted in less of the  Xy-loop being a nontrafficsensitive, dedicated facility.} y  {O-ԍ See, e.g., Testimony of Mark Cooper, Director of Research, CFA, Federal State Joint Board Meeting, Sept. 13, 1996.  XK-x761.` ` Most states take the position that CCL charges do not constitute a support flow  X4-and favor elimination of the SLC and recovery of interstate loop costs entirely from IXCs.~ 4  {O"-ԍ See, e.g., Idaho PSC comments at 1617; Maine PUC comments at 17; NARUC comments at 17. Many of these commenters argue that this change will allow the marketplace to determine"}t~*&&dd)! "  X-how such costs will be recovered from end users.   {Oy-ԍ See, e.g., Idaho PSC comments at 17; Maine PUC comments at 18; Pennsylvania PUC reply comments at 21. Many of these parties also favor converting the CCL charge to a flatrate, perline, revenuebased, or other type of charge to  X-IXCs, "  {O-ԍ See, e.g., Maine PUC comments at 1617 (advocating a flat charge to PIC with proportional division of charges for customers who make casual use of nonPIC carriers); NARUC comments at 17 (same); DC PSC  {O7-reply comments at 89 (flat charge divided proportionally among carrier on basis of relative use). See also Ohio Consumers' Council comments at 20; Ameritech further comments at 46; Century and TDS further comments at 33; NYNEX further comments at 4748 (arguing that a perline charge might encourage customers to unpresubscribe and use dialaround codes for long distance calls, and advocating a revenuebased charge). agreeing that "it is not economically efficient to recover nontraffic sensitive costs  X-on a traffic sensitive basis"   {O -ԍ Maine PUC comments at 1617. See also NARUC comments at 17; Alabama PUC reply comments at 13; DC PSC reply comments at 89. (as CCL charges are currently recovered). NYNEX argues that "loop costs represent approximately 80 percent of total [incremental] universal service costs," and observes that "the current end user charge cap of $3.50 was initially felt to  Xv-represent 50 percent of average interstate assigned loop costs." v  {O-ԍ See ex parte letter from Frank J. Gumper, NYNEX, to William F. Caton, Secretary (Oct. 21, 1996) at 2. NYNEX therefore proposes that 40 percent (i.e., 80 percent of 50 percent) of interstateallocated loop costs be recovered from end users, with the remaining 60 percent to be recovered from IXCs on the  X1-basis of presubscribed lines.3 1  {Ol-ԍ Id.3 NARUC and some states suggest that loop costs for customers who refuse to select a PIC should be allocated among the IXCs that those specific  X -customers actually use.    {O-ԍ See, e.g., Idaho PUC comments at 17; Maine PUC comments at 17; NARUC comments at 17. Other commenters favor flatrate charges to all carriers using the  X -loop.f   yOK-ԍ Pennsylvania PUC comments at 24; CFA further comments at 27.f The Texas OPUC suggests that, as local markets become more competitive, "the Commission will have to abandon subscriber line charges altogether and allow costs for the provision of the loop to be recovered by service providers in the rates they charge each other  X -and their customers."D >  yO -ԍ Texas OPUC comments at 10.D  Xy-x762.` ` Support Flows Not Covered by the Act. At least one commenter argues that, although CCL charges and LTS payments may constitute support flows, they are not support flows intended to serve the universal service goals of the 1996 Act and therefore do not need"K~*&&dd! "  X-to be made explicit to comply with the 1996 Act.   {Oy-ԍ See NYNEX comments at 38. NYNEX nevertheless argues that the current access charge regime,  {OC-developed in a monopoly environment, will be unsustainable in a competitive marketplace. Id. Some small LECs and a few states  X-disagree with the elimination of the LTS component of CCL charges. $  {O-ԍ See, e.g., Harris comments at 1819; Missouri PSC comments at 2021; Pennsylvania PUC comments at 24; Rock Port Tel. Co. comments at 2; Western Alliance comments at 8; Fred Williamson comments at 1718. No party appears, however, to have attempted to refute the NPRM's tentative conclusion that LTS represents an  X-impermissible implicit support mechanism.F ~  {O -ԍ See NPRM at para. 115.F  X-x763.` ` CCL Charges as Impermissible Support Mechanisms. On the other hand, a substantial number of commenters argue that CCL charges contain support flows inconsistent  X_-with the 1996 Act. Z_  {O -ԍ See, e.g., AT&T comments at 34, 16; Ad Hoc Telecom. Users comments at 22; BellSouth comments at 8; California PUC comments at 20; GSA comments at 4; SNET comments at 6; Time Warner comments at 1920; NTIA reply comments at 21 n.54. Many advocate eliminating CCL charges altogether and recovering  XH-interstate loop costs entirely through the SLC. ZH2  {O+-ԍ See, e.g., AT&T comments at 16; Ad Hoc Telecom. Users comments at 22; BellSouth comments at 4; CPT comments at 12; GTE comments at 15; NTIA comments 21 n.54; Time Warner comments at 20; USTA comments at 18.  Others advocate increasing the SLC by some fixed amount, such as the amount necessary to compensate for inflation since the SLC  X -cap was imposed.  T  {O-ԍ See, e.g., Ad Hoc Telecom. Users comments at 2224; Churchill County comments at 4. Some contend that economic theory supports the recovery of nontraffic sensitive facility costs, like loop costs, from the cost causer which they contend is the end  X -user.h   yO-ԍ Ad Hoc Telecom. Users comments at 22; BellSouth comments at 8.h Sprint argues that, since the loop must be unbundled pursuant to section 251, it is no  X -longer a shared facility; therefore, IXCs should no longer share in the recovery of its cost.F v  yO-ԍ Sprint reply comments at 20.F  X-x764.` ` Many of these commenters argue that shifting loop costs previously recovered through CCL charges to end users through the SLC will not have an adverse impact on  Xb-universal service.$ Zb  {O$-ԍ See, e.g., BellSouth comments at 1718; Time Warner comments at 20. AirTouch argues that shifting loop cost recovery to end users will increase demand for telecommunications services by lowering toll rates. AirTouch further comments at 2829.$ These commenters cite statistics showing that telephone penetration rates"b(*&&dd! " have increased since the introduction of the SLC in 1985 as evidence that there has not been  X-an adverse effect on universal service.   {Ob-ԍ See, e.g., AT&T comments at 1617 n.21; BellSouth comments at 1718; Time Warner comments at 20; USA reply comments at 12. This view contrasts with other commenters who assert that increasing the SLC could have a negative impact on subscribership in contravention  X-of the 1996 Act's universal service goals. "  {O-ԍ See, e.g., Maine comments at 2021; NARUC comments at 16; New York DPS comments at 4; AARP reply comments at 1415. Some of these commenters also argue that enduser loop cost recovery would violate section 254(k), which requires that services included in the definition of universal service bear no more than their fair share of joint and common  Xv-costs. v|  yO -ԍ These commenters argue that basic telephone service will include the services defined as universal service. At the same time, they argue that loop costs are joint and common costs shared between local service and competitive services such as interexchange service. They therefore contend that enduser recovery of loop costs would force recovery of those costs through rates for basic service, and thus force services included in the definition of universal service to bear the entire burden of a joint and common cost shared with competitive  {O-services, in violation of section 254(k). See, e.g., AARP comments at 1516; DC OPC reply comments at 2. AARP contends that allowing IXCs to pay nothing for the use of the loop would violate the prohibition in section 254(k) against noncompetitive services subsidizing  XH-competitive services.> H  yO-ԍ AARP comments at 16.>  X -x765.` ` Some commenters argue that IXCs should be required to pass on savings  X -associated with any CCL charge reductions to their subscribers on a dollarfordollar basis.   {O:-ԍ See, e.g., Bell Atlantic comments at 1113; Citizens Utilities comments at 9; NARUC comments at 15; Siskiyou reply comments at 2. At the same time, some commenters observe that the computation of loop costs that LECs  X -should be allowed to recover should be based on forwardlooking, not embedded, costs.n   {Of-ԍ See, e.g., MCI comments at 14; AT&T further comments at 4546.n They assert that recalculating loop cost recovery based on a forwardlooking methodology may allow full recovery of such costs from end users with little or no increase in current SLC levels. USTA notes that, on a wire center basis, 48 percent of access lines would pay a SLC  Xy-equal to or less than the current $3.50 residential cap. yr  {O!-ԍ USTA ex parte letter dated August 1, 1996, from Porter E. Childers to William F. Caton. GSA recommends recovering loop  Xb-costs through SLCs rather than CCL charges, but would set the SLC at urban loop cost levels, and recover the difference in nonurban areas from a new universal service fund to which all  X6-interstate telecommunications carriers would contribute on an nondiscriminatory basis.> 6  yO%-ԍ GSA comments at 56.> "6*&&ddf! " GTE, in contrast, would eliminate CCL charges and de-average the amount of the SLC on a  X-geographic basis.   yOb-ԍ GTE comments at 1415. USTA would modify the existing SLC caps based on a local affordability  {O*-benchmark. USTA comments at 15. See also SWBT comments at 46. A few commenters would recover all interstate loop costs not recovered  X-from SLC revenues through a new universal service fund.m "  {O-ԍ See, e.g., Ohio PUC comments at 1718; PacTel comments at 13.m  X-x766.` ` Other Comments. A few commenters assert that the collection of LTS could  X-be restructured to be consistent with the 1996 Act's nondiscrimination requirements.   yO -Ѝ#X\  P6G;ɒP# Missouri PSC comments at 21; Pennsylvania PUC comments at 24; Winnebago Tel. comments at 1.#Xj\  P6G;ynXP# Missouri PSC argues that retaining the LTS mechanism in some form will increase  X_-interexchange competition in rural and high cost areas. ~_D  {OT-ԍ See Missouri PSC comments at 2021. Missouri PSC observes that the LTS system has historically  {O-served to reduce pressure on IXCs to de-average rates. Id. The 1996 Act requires IXCs to charge geographically averaged rates, however, and the Commission recently adopted rules implementing this provision.  {O-47 U.S.C.  254(g); See also Policy and Rules Concerning the Interstate, Interexchange Marketplace, Report and Order, CC Docket No. 9661, FCC 96331 (rel. August 7, 1996). Missouri PSC argues that, under a mandate to deaverage rates and absent access charges equalized by LTS, IXCs might choose not to serve high cost areas. Missouri PSC comments at 21. Several argue that any elimination  XH-of LTS should occur over time or through some other type of transition mechanism. H  yO-ԍ Citizens comments at 79; Florida PSC comments at 22; Montana Indep. Telecom. comments at 7; West Virginia Consumer Advocate comments at 1213. A small number of commenters claim that too great a proportion of subscriber loop costs are  X -allocated to the interstate jurisdiction, and advocate reform of the separations mechanism.i    {O-ԍ See, e.g., ALTS comments at 78; Frontier comments at 10.i At least one commenter would delay any consideration of revisions to the SLC and CCL  X -charge until more information is submitted to the record.K t  yO-ԍ Indiana URC reply comments at 25.K Finally, a few commenters contend that proposals to change CCL charges and LTS payments are outside the scope of the  X -universal service proceeding.x   yOs -ԍ Rural Iowa Indep. Tel. Ass'n comments at 6; Fred Williamson comments at 1718.x  X- xD. Discussion   Xb-x` ` 1. LTS Payments  X4-x767.` ` We recommend that the Commission adopt the tentative conclusion reached in"4*&&dd! " the NPRM that LTS payments constitute a universal service support mechanism. As the Commission noted in the NPRM, LTS payments serve to equalize LECs' access charges by raising some carriers' charges and lowering others. While some commenters have noted the beneficial purposes currently served by LTS, no commenter argued that LTS was not a support flow. We conclude that this support mechanism is inconsistent with the 1996 Act's requirement that support be collected from all providers of interstate telecommunications  Xv-services on a nondiscriminatory basis.@ v  yO-ԍ 47 U.S.C.  254(d).@ Currently, only LECs that do not participate in the NECA pool make LTS payments, which they in turn recover from their IXC customers  XH-through CCL charges, and only LECs participating in the NECA pool receive LTS support.V HX  {OQ -ԍ See 47 C.F.R.  69.105(b)(3) (4).V  X1-We reject some commenters' argument that the 1996 Act only requires new universal service support mechanisms to comply with section 254, and does not require the reformation of existing support mechanisms, such as LTS, that were not originally adopted in furtherance of  X -section 254.H   {O-ԍ See supra section XII.C.H We believe Congress intended not only that any new universal service support mechanisms recommended in this proceeding comply with section 254, but also that we should recommend reform of existing support mechanisms, if necessary. We are required to "recommend changes to any of [the Commission's] regulations in order to implement  X-sections 214(e) and this section [254]."C |  yO-ԍ 47 U.S.C.  254(a)(1).C Section 254(d) specifically states that universal service support mechanisms should be supported by contributions by all providers of interstate telecommunications services. The Conference Report provides further support, stating that "[t]he conferees intend that, in making its recommendation, the Joint Board will thoroughly  X6-review the existing system of Federal universal service support."M 6   yO-ԍ Joint Explanatory Statement at 131.M  X-x768.` ` We therefore recommend that the LTS system no longer be supported via the  X-access charge regime. As described more fully in section VII, supra, we recommend that  X-rural LECs continue to receive payments comparable to LTS "  {O) -ԍ As discussed supra in section VII, such payments would be computed on a perline basis for each ILEC currently receiving LTS, based on a the LTS payments that carrier has received over a historical period prior to the release of this Recommended Decision. In the interest of competitive neutrality, such payments would also be portable, on a perline basis, to competitors that win the ILEC's subscribers. from the new universal service support mechanism. To this extent, we recommend that the Commission adopt the position of those commenters favoring the reformation of the LTS mechanism to make it" *&&dd! "  X-consistent with the 1996 Act.   {Oy-ԍ See, e.g., Missouri PSC comments at 2021; Pennsylvania PUC comments at 24; Winnebago Tel. comments at 1. We make this recommendation because we find that LTS payments currently serve the important public interest function of reducing the amount of loop cost that high cost LECs must seek to recover from IXCs through interstate access charges, and thereby facilitating interexchange service in high cost areas.  X-x` ` 2. Other Modifications to Interstate Loop Cost Recovery Mechanisms  X_-x` `  a. SLC Caps  X1-x769. ` ` In this Recommended Decision, we have stated our view that current rates are  X -generally affordable,D  "  {O -ԍ See supra section V.D and that primary residential and singleline business lines are central  X -to the provision of universal service.E    {Oh-ԍ See supra section IV.E We further observe that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal service concerns such as affordability. Consistent with these premises, the Joint Board concludes that the current $3.50 SLC cap for primary residential and singleline business lines should not be increased.  Xy-x770. ` ` At the same time, the Joint Board recognizes that the SLC represents a critical element of a complex, interdependent mechanism for the recovery of loop costs allocated to the interstate jurisdiction. The Commission has the responsibility for maintaining the economic sustainability of interstate costrecovery mechanisms. That mechanism necessarily depends upon a number of issues not presented to this Joint Board. One important factor is the permissible level of total common line recovery, which is not a part of this proceeding. For example, it is not yet clear the extent to which unbundled loops may provide a marketbased pricing discipline on common line charges. The prices for these loops are currently being determined through negotiations among carriers and in arbitrations before state commissions. While the Commission adopted standards to govern pricing of those unbundled  X-loops in the Local Competition Order, those pricing rules are currently stayed pending  X~-appeal. ~F  {Ou!-ԍ See Iowa Utilities Board v. FCC, 1996 WL 557116 (8th Cir., rel. Oct. 15, 1996). We also note that the rules adopted in the Local Competition Order required deaveraging of unbundled loop prices into at least three zones, which could also have some impact on common line recovery methods. To the extent that local exchange competition develops, whether using unbundled loops or a competitive carrier's own loop facilities, mandatory common line rate structures for ILECs may become unnecessary. In this regard,"$*&&dd! " we note that competitive carriers do not have mandatory common line rate structures.  X-x771.` ` Any consideration of common line recovery must also take account of the impact of high cost support, and of the magnitude of such support on the recovery of total loop costs in high cost areas. There is also the question of how the revenue derived from such support is treated in the separations process. The Commission must also address the extent to which embedded loop costs should be recovered in its upcoming access charge reform proceeding. Ultimately, the establishment of the SLC cap depends upon the Commission's resolution of each of these issues.  X -x772. ` ` In this Recommended Decision, we have reached no conclusion with respect to the proper revenue base for determining contributions by providers of interstate telecommunications services to the new national high cost and lowincome universal service support mechanism. We observe that if the Commission ultimately establishes a rule assessing carriers' contributions based upon both inter and intrastate revenues, we recommend that the Commission, as part of the transition to the new universal service contribution methodology, implement a downward adjustment in the SLC cap in order to help mitigate any potential effects on enduser charges related to local service.  XK-x773. ` ` We note that the Commission could implement such a transition without increasing aggregate revenues currently collected through CCL charges. We observe that the provisions of the 1996 Act will likely result in a reduction in the total costs that ILECs will recover through common line recovery methods currently, the SLC and CCL charges. In implementing the Act, the Commission recently directed ILECs to eliminate from their CCL charges an amount equal to the interstate allocation of pay telephone costs currently recovered  X-through those charges,a   {O:-ԍ See Pay Telephone Order at para. 181.a and we here are recommending that the Commission provide LTS X-surrogate payments out of a new universal service support mechanism.J Z  {O-ԍ See supra section XII.D.1.J In the event that the Commission implements a rule assessing carriers' universal service contributions based on all telecommunications revenues regardless of jurisdictional classification, we recommend that the benefits from these CCL reductions be apportioned equally between primary residential and singlelinebusiness subscribers to local exchange service, on the one hand, through a reduction in the SLC cap for those lines, and interstate toll users, on the other hand, through lower CCL charges.  X-x` `  b. Recovery of Residual Interstate Loop Costs  X -x774.` ` Currently, ILECs are required to recover through trafficsensitive CCL charges" *&&dd! "  X-those interstateallocated NTS loop costs not recovered through SLCs and LTS payments.J  {Oy-ԍ See 47 C.F.R.  69.105.J In the NPRM, the Commission referred to the Joint Board questions related to the recovery of these loop costs, and suggested that the current mechanism may constitute a universal service  X-support flow.< Z  yO-ԍ NPRM at para. 113.< Commenters disagree on whether the current, usagesensitive CCL charge  X-represents a true universal service support flow.   {O? -ԍ Compare, e.g., Bell Atlantic comments at 1113 with, e.g., MCI comments at 6. The Joint Board reaches no conclusion on this question. x  X_-x775. ` ` Like many commenters,Y _|  {O -ԍ See, e.g., TCI further comments at 3536.Y however, the Joint Board recognizes that the usagesensitive CCL charge constitutes an inefficient mechanism for recovering NTS loop costs.  X1-The cost of the loop is largely a fixed cost, i.e., it does not vary with usage. 1  yO-ԍ We acknowledge, as some commenters have noted, that, as new loop technologies such as digital loop carrier and hybrid fibercoaxial cable loops supplant traditional twistedcopper loops, it may become less accurate to characterize the loop as a dedicated, NTS facility. We find that the best manner in which to deal with this changing technology is, as we recommend today, to give carriers the flexibility to recover these costs in a manner that is consistent with the way they are incurred. To provide proper economic signals, it would be preferable for prices related to the loop, such as the CCL charge, to be set in a manner that is consistent with the manner in which the loop's cost is incurred. Because the cost of a loop generally does not vary with the minutes of use transmitted over the loop, the current CCL charge that mandates recovery of loop costs through perminuteofuse charges represents an inefficient costrecovery mechanism.  X-x776.` ` Accordingly, we believe it would be desirable for the Commission in the very near future to consider revising the current CCL charge structure so that LECs are no longer required to recover the NTS cost of the loop from IXCs on a trafficsensitive basis. One promising alternative that would send the proper market signals to potential users and carriers would involve permitting ILECs to recover CCL costs from IXCs through a flat, perline charge. It appears that the most administratively simple mechanism to recover such a flatrate CCL charge would be to assess it against each customer's PIC. This approach could promote efficiency if IXCs, in turn, can recover this charge as they see fit, including passing the flat charge directly to the end user (whether or not the end user generates any usagebased  X-charges).   yO0$-ԍ We acknowledge that the 1996 Act's IXC rate averaging requirement may affect IXCs' ability to pass  {O$-flat charges to their subscribers. See 47 U.S.C.  254(g). We recognize, however, that imposing such a charge only on the PIC may simply encourage end users not to select a PIC. To resolve this problem, if the Commission"*&&dd! " allows carriers to assess a flatrate CCL charge on customers' PICs, the Joint Board suggests that the Commission allow ILECs to collect the flatrate charge that would otherwise be assessed against the PIC from any customer who elects not to choose a PIC.  X- XIII. ADMINISTRATION OF SUPPORT MECHANISMS  X_-xA. Overview  X1-x777.` ` Section 254(d) instructs the Commission to require "every telecommunications carrier that provides interstate telecommunications services" to contribute, on an equitable and nondiscriminatory basis, to the preservation and advancement of universal service. The 1996 Act permits the Commission to require other providers of interstate telecommunications to contribute to support mechanisms, if the Commission finds that it would serve the public interest. The 1996 Act also permits the Commission to exempt carriers from contribution if  X -their contribution to universal service would be de minimis. To satisfy these statutory requirements, the Commission must determine which carriers shall contribute to support mechanisms, which carriers should be exempt from contribution, the basis for assessing contributions, and whom should administer the new support mechanism.  X6-x 778.` ` The Joint Board recommends that all carriers that provide interstate telecommunications services make contributions to the support mechanism based on their gross interstate and intrastate telecommunications revenues net payments to other telecommunications carriers. We recommend exempting from contribution those carriers for which the cost of collection exceeds the amount of the contribution. We also recommend that the Commission appoint a universal service advisory board to appoint, through competitive  X-bidding, and oversee a neutral, thirdparty administrator of the support mechanism.  X~-xB. Mandatory Contributors to Support Mechanisms  XP-x` ` 1. Background x  X"-x 779.` ` Section 254(b) provides that "[a]ll providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and  X-advancement of universal service"   yOm!-ԍ #X\  P6G;ɒP#47 U.S.C. 254(b)(4).#Xj\  P6G;ynXP#ё through "specific, predictable and sufficient Federal and  X-State mechanisms." X  X#-ԍ #X\  P6G;ɒP# 47 U.S.C. #Xj\  P6G;ynXP##X\  P6G;ɒP#Ѡ254(b)(5).#Xj\  P6G;ynXP# To accomplish these goals, the 1996 Act mandates that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and"! *&&dd ! " sufficient mechanisms established by the Commission to preserve and advance universal  X-service."  yOb-ԍ #X\  P6G;ɒP#47 U.S.C. 254(d).#Xj\  P6G;ynXP#ю The statute defines the term "telecommunications carrier" as "any provider of  X-telecommunications services,"i X  yP-ԍ#c PE37 P# # X\  P6G;ɒP#The 1996 Act specifically exempts aggregators of telecommunications services (as defined in section  yO-226) from the definition of "telecommunications carrier." 47 U.S.C.  153(44).#c PE37 P#i and the term "telecommunications service" as "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be  X-effectively available directly to the public, regardless of the facilities used."   yO -ԍ #X\  P6G;ɒP#47 U.S.C.  153(46).#Xj\  P6G;ynXP#я In addition, the 1996 Act defines "telecommunications" as "the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or  X_-content of the information as sent and received."i _A  yOQ-ԍ #X\  P6G;ɒP#47 U.S.C.  153(43). i Congress added that "the term telecommunications service is defined as those services and facilities offered on a common carrier basis, recognizing the distinction between common carrier offerings that are provided  X -to the public . . . , and private services."    yO-ԍ#X\  P6G;ɒP# Jt. Statement of Managers, S. Conf. Rept. No. 104-230, 104th Cong., 2nd Sess. 115 (1996). In the NPRM, the Commission sought comments as to which service providers would fall within the scope of the term "telecommunications  X -carrier" and would be required to contribute to federal support mechanisms.c a  yO-ԍ#X\  P6G;ɒP# NPRM at para. 119.c  X -x` ` 2. Comments  X-x 780.` ` Mandatory Contributors. All commenters agree that "all providers of interstate telecommunications services" should be required to contribute to universal service support  Xb-mechanisms, zb  {O-  Ѝ#X\  P6G;ɒP# See, e.g., Alliance for Public Technology comments at 13; Ardmore Tel. comments at 5; Associated Communications comments at 4; Colorado PUC comments at 6; Frontier comments at 10; Louisiana PSC comments at 67; MCI comments at 1516; New York CPB comments at 10; New York DPS comments at 10; Oklahoma CC comments at 67; Oregon PUC comments at 78; PacTel comments at 2021; Pacific Telecom comments at 3; Pennsylvania RDC comments at 45; Teleport comments at 12; Telec Consulting comments at 17; Ameritech reply comments at 9; California PUC reply comments at 7; Dell Tel. reply comments at 7; WinStar reply comments at 6. and while some state that the definition should be construed broadly,~ $b3  {OF#-ԍ#X\  P6G;ɒP# See, e.g., AlabamaMississippi Tel. Ass'n. comments at 56; Alliance for Distance Education comments  {O$-at 2; Keystone comments at 4; LDDS comments at 14. See also CSE Foundation comments at 1617 (if carrier ultimately allows subscribers to access switched local exchange networks across the states); West Virginia Consumer Advocates comments at 13 (all providers of switched services); Fred Williamson comments at 8 (all"%*&&%" who use and benefit from the public switched telephone network).~ most"bX*&&dd! " do not specifically describe which types of entities should be included within that definition. Several commenters, however, attempt in varying degrees to provide some suggestions or guidance on how to identify all contributors. Some commenters suggest that the group of contributors to the universal service fund should mirror the group that contributes to the TRS  X-fund. X  {O-ԍ#X\  P6G;ɒP# See Keystone comments at 4; Illinois CC comments at 9; USTA comments at 24. Every carrier providing interstate telecommunications services must contribute to the  X-TRS fund,|   {O( -ԍ#X\  P6G;ɒP# See 47 C.F.R.  64.604(c)(iii)(A).| and, for TRS purposes, the Commission has stated that interstate telecommunications services include, but are not limited to, "cellular telephone and paging, mobile radio, operator services, PCS, access (including subscriber line charges), alternative access and special access, packet switched, WATS, 800, 900, MTS, private line, telex,  X1-telegraph, video, satellite, international, intraLATA, and resale services."| 1|  {O^-ԍ#X\  P6G;ɒP# See 47 C.F.R.  64.604(c)(iii)(A).| Reed, Smith argues that the TRS fund is not the proper model for defining contributors to support mechanisms, because the funding mechanism for the TRS fund is based on the Americans  X -with Disabilities Act, not the 1996 Act.q   yO-ԍ#X\  P6G;ɒP# Reed, Smith reply comments at 4.q Several other commenters provide illustrative lists of the types of carriers that should be required to contribute to universal service. Those lists include one or more of the following: ILECs; CLECs; IXCs; competitive access providers (CAPs); resellers; CMRS providers including cellular, PCS, paging, SMR and BETRS; satellite providers; payphone service providers; enhanced service providers (ESPs); voice over the internet (VON) providers; operator service providers; cable television companies; providers of inside wiring; providers of customer premise equipment; utility companies and  XK-other providers of telecommunications services. * K  {O-ԍ#X\  P6G;ɒP# See, e.g., ALTS comments at 17 (ILECs, CLECs, IXCs, cellular, PCS, payphone service providers); Ameritech comments at 23 (all wireline service providers; LECs, IXCs, CAPs, cable companies to the extent they provide telecommunications services, resellers, wireless providers, cellular, PCS, satellite, BETRS, SMRs, paging, ESPs if they are found to provide telecommunications services); CSE Foundation comments at 1617 (LECs, IXCs, Resellers, CAPs, cellular, PCS, cable television providers); Cincinnati Bell comments at 14 (LECs, new local service providers, IXCs, CAPs, cellular, PCS, resellers and other future providers); CompTel comments at 15 (LECs, IXCs, CAPs, CMRS, cellular, paging and PCS); Harris comments at 34 (LECs, IXCs, wireless, cable television companies, public payphone service providers, providers of inside wiring, providers of customer premise equipment and operator service providers); Keystone comments at 4 (LECs, IXCs, RHCs; electric or gas; cellular, paging, PCS, resellers, 900 services, satellite and video companies); SWBT comments at 20 (ILECs, other LECs, resellers, wireless carriers, IXCs, CAPs, alternate operator service providers); GCI reply comments at 16 (LECs, CAPs, cellular, payphone service providers, ESPs); LDDS reply comments at 1314 (LECs, IXCs, CAPs, CMRS; including paging; some ESPs, such as entities that provide VON services). "4*&&dd*! "Ԍ X-x 781.` ` Exempted Carriers. Several commenters proffer arguments that specific types  X-of carriers should not be required to contribute to support mechanisms.   {Ob-ԍ#X\  P6G;ɒP# See, e.g., PCIA comments at 7; Rural Electric Coop. comments at 2; TRA comments at 68; UTC comments at 45; Vanguard comments at 45; Ad Hoc Telecom. Users reply comments at 6. Some commenters assert that contributions should only be required from facilitiesbased providers, because resellers of such services already make contributions to universal service through their  X-payments to facilitiesbased carriers.V Z"  {Ow-ԍ#X\  P6G;ɒP# See TRA comments at 68; Ad Hoc Telecom. Users reply comments at 6. See also Merit comments at 5 (arguing that carriers that build valueadded networks using leased facilities already contribute through their payments to facilitiesbased carriers).V Rural Electric Coop. states that companies that lease excess capacity to other telecommunications carriers should not be required to contribute to support mechanisms, because they do not provide telecommunications services "directly" to  X_-the public for a fee. _D  {OT-ԍ#X\  P6G;ɒP# Rural Electric Coop. comments at 2. See also Motorola reply comments at 56. See also UTC comments at 58. These parties argue that, as "wholesalers," such entities do not provide services directly to the public, which they interpret as meaning to subscribers/end users. Rural Electric Coop. adds that, since rural electric cooperatives providing telecommunications services to rural and high cost areas further universal service goals, they  X -should not be required to contribute.t    yOR-ԍ#X\  P6G;ɒP# Rural Electric Coop. comments at 2.t UTC states that entities that do not offer services on a forprofit commercial basis, such as utility and pipeline companies, do not offer services  X -"for a fee" and thus do not offer "telecommunications services."e .  yO-ԍ#X\  P6G;ɒP# UTC comments at 45.e A few commenters argue that CMRS providers should not contribute to support mechanisms, because they already contribute to universal service through interconnection payments to LECs and, due to the  X-limited nature of their service, may be ineligible to receive universal service support.   {O-ԍ#X\  P6G;ɒP# See PCIA comments at 7; Vanguard comments at 45; Reed, Smith reply comments at 13. Additionally, PCIA states that the paging industry should be exempt as a result of its very low  Xb-profit margins. bP  {Oc-ԍ#X\  P6G;ɒP# PCIA comments at 7. See also MobileMedia comments at 911; Commnet Cellular reply comments at 45. Comsat, a satellite telecommunications company, argues that it should not be required to contribute, because the terms of its license bar it from offering interstate  X4-service.g 4  yO#-ԍ#X\  P6G;ɒP# Comsat comments at 11.g The Governor of Guam clarifies that Comsat provides limited service between"4:*&&ddf! "  X-Guam, other Pacific insular areas, Hawaii and the U.S. mainland through Intelsat facilities.$  {Py-ԍ#X\  P6G;ɒP# #c PE37 P# # X\  P6G;ɒP#Governor of Guam reply comments at 6. See also Guam Tel. Authority reply comments at 3.#X\  P6G;ɒP#$  X-x 782.` ` Enhanced Service Providers. Many ESPs argue that they are not providers of interstate telecommunications services and therefore should not be required to contribute to  X-support mechanisms. [  {O-ԍ#X\  P6G;ɒP# See CompuServe comments at 711; Florida PSC comments at 24; Interactive Service Ass'n comments at 69; Texas PUC comments at 1920; NAB reply comments at 12. They assert that online informational and Internet services do not meet the definition of "telecommunications," because: users do not choose the destination of the information or the travel path when information is dynamically routed through the Internet; users do not choose the content of the information that is sent when they engage in functions such as browsing a Web page; and ESPs change the content and form of the information through the use of protocols, headers or similar aspects of the subscriber's  X -transmitted information.Z    {O-ԍ#X\  P6G;ɒP# Id.Z ESPs also argue that the 1996 Act, by distinguishing information services from telecommunications services in section 254(h)(2), confirms their assertion that  X -ESPs do not provide "telecommunications services." " G  {O-ԍ#X\  P6G;ɒP# See CompuServe comments at 1216; ITA/EMA comments at 510; Interactive Service Ass'n comments at 1011. Section 254(h)(2)(a) states that the Commission shall establish rules "to enhance ... access to advanced  yOv-telecommunications and information services for all public and nonprofit elementary and secondary school classrooms, health care providers, and libraries." 47 U.S.C.  254(h)(2)(a). They state that this distinction is based on the Commission's basic and enhanced service classifications. ESPs note that the Commission has traditionally defined online and Internet services as enhanced services and has not regulated ESPs as common carriers, thus ESPs should not be included as  X-telecommunications carriers for contribution purposes. 1  {Or-ԍ#X\  P6G;ɒP# See CompuServe comments at 1216; ITA/EMA comments at 510. They conclude by stating that, even if the Commission finds that ESPs provide "telecommunications services" for universal service support mechanisms, public policy would dictate against ESPs contributing, because ESPs already contribute to support mechanisms through their payments to other carriers, contributions would hinder the growth of online and Internet services and would raise the price of such services, identifying, tracking and monitoring ESPs would be administratively  X-difficult, and such action would encourage other states or countries to regulate ESPs.   {Oz!-ԍ#X\  P6G;ɒP# See CompuServe comments at 1620; Information Industry Ass'n comments at 6; Interactive Service Ass'n comments at 1113. CompuServe also states that the Commission must distinguish between ESPs and VON  X-software companies.p   yO%-ԍ#X\  P6G;ɒP# CompuServe reply comments at 8.p It states that many companies, unrelated to ESPs, produce software"*&&dd! " that enable users to transmit voice over the Internet. In addition, Compuserve contends that ESPs make the same content and protocol changes to VON traffic as they make to Email,  X-thus rendering VON calls as something other than "telecommunications."   {OK-ԍ#X\  P6G;ɒP# CompuServe reply comments at 810. See also ITA/EMA reply comments at 16.  X-x783.` ` CMRS. Several CMRS commenters argue that they should be exempt from  X-state support programs, pursuant to section 332(c)(3).j Z  yO-ԍ#X\  P6G;ɒP# 47 U.S.C.  332(c)(3).j That provision preempts state and local governments from regulating rates and entry for CMRS, yet allows states to regulate  X_-other terms and conditions.j _  yO -ԍ#X\  P6G;ɒP# 47 U.S.C.  332(c)(3).j Some commenters interpret this provision as prohibiting states from requiring state support contributions from CMRS providers unless their services are a substitute for landline service. They note that no state government has demonstrated that any commercial mobile radio service is a substitute for landline service in a substantial portion of  X -a state.  z  {O.-ԍ#X\  P6G;ɒP# See AirTouch comments at 34; CTIA comments at 58; MobileMedia comments at 312; Reed, Smith comments at 37; PCIA reply comments at 79. Reed, Smith also mentions that section 253(e), which governs the removal of barriers to entry, provides that nothing in section 253(e) shall affect the application of section  X -332(c)(3).k   yOZ-ԍ#X\  P6G;ɒP# Reed, Smith comments at 7.k Reed, Smith argues that this provision indicates that Congress did not intend  X -section 254(f) to affect section 332(c)(3).Z d  {O-ԍ#X\  P6G;ɒP# Id.Z Several other CMRS providers also argue that CMRS providers do not provide intrastate telecommunications services, because wireless  X-services are inherently interstate services.   {O7-ԍ#X\  P6G;ɒP# See MobileMedia comments at 8; PCIA comments at 1012; Reed, Smith comments at 7. Several state PUCs urge the Commission not to disrupt state universal service programs by exempting CMRS carriers from contributing to  Xb-state universal service programs. b  {O-ԍ#X\  P6G;ɒP# See, e.g., California PUC reply comments at 78; Pennsylvania PUC reply comments at 710. Pennsylvania PUC contends that such an exemption  XK-conflicts with both the Omnibus Budget Reconciliation Act of 1993 and the 1996 Act.z K  yO!-ԍ#X\  P6G;ɒP# Pennsylvania PUC reply comments at 78. z California PUC notes that CMRS providers currently contribute to California's existing  X-universal service programs.v   yOx$-ԍ#X\  P6G;ɒP# California PUC reply comments at 78.v ":*&&dd! "Ԍ X-x ` ` 3. Discussion  X-x784.` ` We recommend to the Commission that the statutory requirement that "all  X-carriers that provide interstate telecommunications services"g   yO4-ԍ#X\  P6G;ɒP# 47 U.S.C.  254(d).g must contribute to support   mechanisms be construed broadly. A broad base of funding will ensure that competing firms make "equitable and nondiscriminatory contributions" and will reduce the burden on any particular class of carrier. In order to interpret the term "telecommunications carrier" as broadly as possible, we recommend providing a nonexclusive, illustrative list of "interstate telecommunications" (discussed below). We recommend requiring any entity that provides any interstate telecommunications for a fee to the public, or to such classes of eligible users as to be effectively available to a substantial portion of the public, to contribute to the fund.  X -x785.` ` Thus, for the purposes of identifying which entities must contribute to universal service support mechanisms, the Joint Board recommends that the Commission adopt a definition of "interstate telecommunications" that is similar to the one used for determining TRS support. We recommend that "interstate telecommunications" include, but are not limited to, the interstate portion of the following: Xxcellular telephone and paging, mobile radio, operator services, PCS, access (including SLCs), alternative access and special access, packet switched, WATS, tollfree, 900, MTS, private line, telex, telegraph, video, satellite, international/foreign, intraLATA, and resale services(# Generally, telecommunications are "interstate" when the communication or transmission originates in one state, territory, possession or the District of Columbia and terminates in  X-another state, territory, possession or the District of Columbia.h X  yO-ԍ#X\  P6G;ɒP# 47 U.S.C.  153(22).h In addition, under the Commission's rules, if over ten percent of the traffic over a private or WATS line is interstate, then the revenues and costs generated by the entire line are allocated to the  X|-interstate jurisdiction.t |  {O-ԍ#X\  P6G;ɒP# See 47 C.F.R.  36.154(a).t We agree with CNMI that interstate telecommunications services include telecommunications services between territories and possessions, and if Comsat provides telecommunications services between the Northern Mariana Islands and any state,  X7-territory or possession, Comsat does provide interstate telecommunications services. $7z  {Ob#-ԍ#X\  P6G;ɒP# We note that Comsat filed with the Commission an Application for Review, or in the Alternative, a  {O,$-Waiver, Telecommunications Relay Services (TRS) and the Americans with Disabilities Act of 1990, CC Docket No. 90-571, on March 17, 1995, regarding the Commission's contribution requirements for the interstate TRS Fund. Comsat's Application for Review is still pending."7f *&&dd! "Ԍ X-ԙx786.` ` We recommend adoption of the TRS approach,l \  {Oy-ԍ#C\  P6QɒP# Contributions to the TRS fund are based on gross interstate telecommunications revenues. See 47  {OC-C.F.R.  64.604(c)(4)(iii)(A). As discussed infra, we do not recommend that the Commission base contributions to the support mechanism in this manner.l because carriers and the Commission are already familiar with this approach. In addition, the TRS approach is administratively easier than adopting a list of specific types of carriers that must contribute to support mechanisms. The TRS approach will automatically require entities that provide telecommunications services through new media to contribute to support mechanisms. By contrast, listing specific types of carriers requires the Commission continually to amend its list to take into account technological changes. We find unpersuasive Reed, Smith's argument that, because it was designed in response to the Americans with Disabilities Act, TRS is an inappropriate model to identify those entities that must contribute to universal service support mechanisms. Whatever its genesis, the TRS funding mechanism, like the universal service support mechanism, requires that those entities that are interstate telecommunications service providers be identified. The Commission has developed a method of defining entities that are interstate telecommunications service providers for TRS that appears to be easy to explain and easy to apply.  X -x787.` ` We find no reason to exempt from contribution CMRS, satellite operators, resellers, paging companies, utility companies or carriers that serve rural or high cost areas that provide interstate telecommunications services, because the 1996 Act requires "every telecommunications carrier that provides interstate telecommunications services" to contribute  XK-to support mechanisms.g K  yO-ԍ#X\  P6G;ɒP# 47 U.S.C.  254(d).g Thus, to the extent that these entities are considered "telecommunications carriers" providing "interstate telecommunications services," they must contribute to universal service support mechanisms.  X-x788.` ` The Joint Board agrees with Rural Electric Coop.'s comments that services offered "directly to the public" means services offered to the public or to end users. This  X-decision is consistent with prior Commission interpretation of the phrase.u \|  {O-ԍ#X\  P6G;ɒP# See Implementation of Sections 3(n) and 332 of the Communications Act, Second Report and Order, FCC 9431, 9 FCC Rcd 1411 (1994) at 1439, para. 65 (defining to the public as offered to the public without  {O-restriction on who may receive it) (CMRS 2nd R&O).u We recommend that "wholesale" carriers, carriers that provide services to other carriers, should be required to contribute, because such carriers' activities are included in the phrase "to such classes of  X|-eligible users as to be effectively available to a substantial portion of the public."r |  {O#-ԍ#X\  P6G;ɒP# See 47 U.S.C.  153(46).r The Commission has interpreted this phrase to mean "systems not dedicated exclusively to internal"e2 *&&dd! "  X-use," or systems that provide service to users other than significantly restricted classes.  {Oy-ԍ#X\  P6G;ɒP# See CMRS 2nd R&O at 1441, para. 68. We recommend adopting the same definition for universal service purposes. Thus, for example, to the extent PMRS MSS providers lease capacity to other carriers, they would be considered carriers that provide interstate telecommunications services.  X-x789.` ` Furthermore, we disagree with UTC's position that the phrase "for a fee" means for profit. We do not find any reason to define "for a fee" as "for profit" and recommend that the Commission interpret the phrase "for a fee" as meaning services rendered in exchange for something of value or a monetary payment. The Joint Board concludes that the requirement that "every telecommunications carrier" contribute towards the support of universal service, requires all interstate telecommunications carriers, including wholesalers and nonprofit  X -organizations, to contribute to support mechanisms.  Z  {O-ԍ#X\  P6G;ɒP# See 47 U.S.C.  254(b)(4), 254(d). Thus, we recommend that the Commission require any entity that provides any of the listed interstate telecommunications services on a wholesale, resale or retail basis to contribute to support mechanisms to the extent that it provides interstate telecommunications services.  X-x790.` ` The 1996 Act defines an "information service" as "the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications . . . but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the  X4-management of a telecommunications service."h 4  yO-ԍ#X\  P6G;ɒP# 47 U.S.C.  153(20).h The Commission's rules define "enhanced services" as "services offered over common carrier transmission facilities used in interstate communications which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber  X-interaction with stored information." \|  {O-ԍ #X\  P6G;ɒP#47 C.F.R.  64.702. See also North American Telecommunications Association, Petition for Declaratory Ruling under Section 64.702 of the Commission's Rules Regarding the Integration of Centrex, Enhanced Services  {O-and Customer Premises Equipment, Report and Order, 101 FCC 2d 349 (1985), recon. 3 FCC Rcd 4385 (1988). The definition of enhanced services is substantially  X-similar to the definition of information services, \  yO!-ԍ#X\  P6G;ɒP# The NonAccounting Safeguards NPRM sought comment on the relationship between enhanced services  {O"-and information services. See Implementation of the NonAccounting Safeguards of sections 271 and 272 of the  {O#-Communications Act of 1934, NPRM, FCC 96308, at para. 42 (rel. July 18, 1996). and information services are not" *&&ddR! "  X-"telecommunications services." ^  {Oy-ԍ#C\  P6QɒP# In the Local Competition Order, the Commission stated that information service providers are not  {OC-telecommunications carriers. Local Competition Order at para. 995. Thus, information services, by definition,  {O -are different than telecommunications services. See 47 U.S.C.  153(20), 153(43). Thus we recommend that information service providers and enhanced service providers not be required to contribute to support mechanisms. We note, however, that if information or enhanced service providers provide any of the listed interstate telecommunications to the public for a fee, they would be required to contribute to support mechanisms based on the revenues derived from telecommunications services. We also recommend that the Commission reevaluate which services qualify as information services in the near future to take into account changes in technology and the regulatory environment.  X1-x791.` ` With respect to the issue of whether CMRS providers should contribute to state  X -universal service support mechanisms, we find that section 332(c)(3)3    yO-ԍ#X\  P6G;ɒP# Section 332(c)(3) states that "[n]othing in this subparagraph shall exempt providers of commercial mobile services (where such services are a substitute for land line telephone exchange service for a substantial portion of the communications within such State) from requirements imposed by a State commission on all providers of telecommunications services necessary to ensure the universal availability of telecommunications service at affordable rates." 47 U.S.C.  332(c)(3).3 does not preclude states from requiring CMRS providers to contribute to state support mechanisms. In addition, section 254(f) requires that all contributions to state support mechanisms be equitable and nondiscriminatory. x  X -x C. Other Providers of Interstate Telecommunications  Xy-x` ` 1. Background  XK-x792.` ` The Commission may require "[a]ny other provider of interstate  X4-telecommunications" to contribute to universal service, "if the public interest so requires."g 4  yO-ԍ#X\  P6G;ɒP# 47 U.S.C.  254(d).g A provider of interstate telecommunications would provide "the transmission, between or among points specified by the user, of information of the user's choosing, without change in  X-the form or content of the information as sent and received."h .  yO -ԍ#X\  P6G;ɒP# 47 U.S.C.  153(43).h Unlike providers of interstate telecommunications services, however, providers of interstate telecommunications would not  X-offer telecommunications "for a fee directly to the public."h   yO0$-ԍ#X\  P6G;ɒP# 47 U.S.C.  153(46).h Congress noted this distinction when it stated that an entity can offer telecommunications on a privateservice basis without"N *&&ddp! "  X-incurring obligations as a common carrier.  yOy-ԍ#X\  P6G;ɒP# Jt. Statement of Managers, S. Conf. Rept. No. 104-230, 104th Cong., 2nd Sess. 115 (1996). In the NPRM, the Commission asked if the public interest requires us to extend support obligations to "[a]ny other provider[s] of interstate telecommunications," and, if so, which categories of providers, other than  X-telecommunications carriers, should be so obligated.c X  yO-ԍ#X\  P6G;ɒP# NPRM at para. 119.c x  X-x ` ` 2. Comments  Xv-  X_-x793.` ` A few commenters, including small incumbent LECs, state that the phrase "any other provider of interstate telecommunications" refers to private network operators and that the Commission should exercise its discretion to require these entities to contribute to support  X -mechanisms.    {O-ԍ#X\  P6G;ɒP# See, e.g., Ardmore Tel. at 5; Bledsoe Tel. comments at 5; Blountsville Tel. comments at 5; Harris comments at 8; Ragland Tel. Co. comments at 5. ACTA adds that private network operators should contribute if they access  X -the public switched network.h  B  yO-ԍ#X\  P6G;ɒP# ACTA comments at 1213.h ITA/EMA argues that private network operators should not be required to contribute because they derive little or no direct benefit from universal service  X -and generally serve only the internal needs of the operator.k   yOX-ԍ#X\  P6G;ɒP# ITA/EMA comments at 1819.k ITA/EMA also states that even if a private network operator leased some of its network to another entity, it should not be  X -required to contribute, because the generated revenues would be minimal.  b  {O-ԍ#X\  P6G;ɒP# ITA/EMA comments at 1819. See also UTC comments at 45 (charging fees on a notforprofit basis does not equal "to the public for a fee"). If private network operators are required to contribute, ITA/EMA argues that the requirement should be limited to "other providers" who own their own transmission facilities. UTC argues even if private network operators are required to contribute, private network operators who provide  XK-essential public services should be exempted from contribution.c K  yO-ԍ#X\  P6G;ɒP# UTC comments at 9.c  X-x ` ` 3. Discussion  X-x794.` ` We recommend that the Commission not require "other providers of telecommunications" to contribute to support mechanisms at this time. We agree with commenters that the phrase "other providers" refers to entities that provide telecommunications that meet the entity's internal needs or that are provided freeofcharge. We believe that such providers should not be required to contribute to support mechanisms,"L *&&dd! " because such providers do not substantially benefit from the PSTN. Obviously, to the extent "other providers," such as private network operators, offer interstate telecommunications services, they will be required to contribute to support mechanisms, as discussed above.  X<x D. The De Minimis Exemption  Xw-x ` ` 1. Background  XI-x795.` ` The Commission may exempt a carrier or class of carriers from contributing to universal service mechanisms "if the carrier's telecommunications activities are limited to such an extent that the level of such carrier's contribution to the preservation and advancement of  X -universal service would be de minimis."g   yO} -ԍ#X\  P6G;ɒP# 47 U.S.C.  254(d).g Congress explained that "this authority would only be used in cases where the administrative cost of collecting contributions from a carrier or carriers would exceed the contribution that carrier would otherwise have to make under the  X -formula for contributions selected by the Commission." X  yO-ԍ#X\  P6G;ɒP# Jt. Statement of Managers, S. Conf. Rept. No. 104-230, 104th Cong., 2nd Sess. 131 (1996). In the NPRM, the Commission sought comment on whether we should establish rules of general applicability for exempting very small telecommunications providers, and if so, what the basis should be for determining that the administrative cost of collecting support would exceed a carrier's potential  Xe-contribution.c e  yO-ԍ#X\  P6G;ɒP# NPRM at para. 120.c Within those parameters, the Commission also specifically sought comment on measures to avoid significant economic harm to small business entities, as defined by  X7-section 601(3) of the Regulatory Flexibility Act. 7x  yO`-ԍ #X\  P6G;ɒP#5 U.S.C.  601(3). #Xj\  P6G;ynXP#я In the Public Notice, the Commission asked what levels of administrative costs should be expected per carrier under the various methods that have been proposed for funding (e.g., gross revenues, revenues net of payments  X-to other carriers, retail revenues, etc.).d   yO-ԍ#X\  P6G;ɒP# Public Notice at 9.d  X-x ` ` 2. Comments  X-x796. ` ` De Minimis Cost of Collection. Several commenters discuss the meaning and  X-application of the de minimis language in section 254(d).   {O#-ԍ#X\  P6G;ɒP# See, e.g., ALTS comments at 1718; Ameritech comments at 23; Illinois CC comments at 10; Teleport further comments at 11. Some state that only carriers for which the administrative cost of collecting the contribution is more than the amount of the"l *&&dd@! "  X-contribution itself should be eligible for the de minimis exemption.  {Oy-ԍ#X\  P6G;ɒP# See ALTS comments at 1718; Ameritech comments at 23; Illinois CC comments at 10. Teleport asserts that administrative costs should include both the administrator's and the contributing carriers'  X-compliance costs.q Z  yO-ԍ#X\  P6G;ɒP# Teleport further comments at 11.q Although no commenter submitted estimates for administrator and contributor costs, NECA estimates that the administrative cost of billing and collecting contributions, excluding costs incurred by the contributor and any verification costs, would be  X-approximately $20.00 per carrier per year.m   yO* -ԍ#X\  P6G;ɒP# NECA further comments at 43.m In addition, several commenters state that no carrier should be exempt, because contributor and administrator costs should be minimal if  Xa-contributions are based on revenues. az  {O -ԍ#X\  P6G;ɒP# See MCI further comments at 33; NCTA further comments at 26; NYNEX further comments at 4849; PacTel further comments at 6061; Sprint further comments at 20; U S West further comments at 3132. These commenters claim that revenue information should be easy to compile because most companies already produce similar revenues figures  X3-for tax purposes. 3  {O-ԍ#X\  P6G;ɒP# See  NCTA further comments at 26; PacTel further comments at 6061; U S West further comments at 3132. A few commenters suggest that administrative costs cannot be determined until after an administrator is chosen or begins to administer the support  X -mechanism.  .  {O-ԍ#X\  P6G;ɒP# See Ameritech further comments at 48; GTE further comments at 6162; Time Warner further comments at 5758.  X -x797.` ` De Minimis Based on Carrier Revenues. A few commenters suggest that the  X -de minimis exemption should be based on an industry's contribution to total telecommunications revenues. For example, Metricom asserts that since unlicensed Part 15 wireless providers account for less than one half of one percent of total telecommunications  X-industry revenues, their contributions would be de minimis compared to the fund as a  Xj-whole.j j  yO-ԍ#X\  P6G;ɒP# Metricom comments at 16.j Thus, they state unlicensed Part 15 providers should be exempt from contribution. Similarly, MobileMedia argues that paging companies should be exempt because their  X<-contribution to the TRS fund in 1994 was less than 0.6 percent of the total fund.o <  yO"-ԍ#X\  P6G;ɒP# MobileMedia comments at 1011.o UTC  X%-suggests that de minimis should be defined in terms of the size of the service offering rather  X-than the size of the provider, i.e., exempting companies for which telecommunications"*&&ddF! "  X-services make up only a small percentage of their total business.  {Oy-ԍ#X\  P6G;ɒP# UTC comments at 1011. See also Rural Electric Coop. comments at 2. Ameritech adds that  X-exempted carriers should be ineligible to receive support funds. Z  {O-ԍ#X\  P6G;ɒP# Ameritech comments at 23. See also Western Alliance further comments at 17. Other commenters,  X-however, argue that an exemption for de minimis carriers would create a negative incentive to underestimate a carrier's size, which could lead to abuse and further burden paying  X-carriers.   {OC -ԍ#X\  P6G;ɒP# See Cincinnati Bell comments at 14; Fred Williamson comments at 1920; AT&T further comments at 49.  Xx-x798.` ` Different Treatment for Small Carriers. Other commenters suggest that "small"  Xa-carriers should either be exempt from contribution aF  {OX-ԍ#X\  P6G;ɒP# See Florida PSC comments at 24; Teleport comments at 1214. or should be allowed to make  XJ-discounted contributions. J  {O-ԍ#C\  P6QɒP# See, e.g., NECA comments at 18; PCIA comments at 8; Vitelco further comments at 16. A few commenters state that "small" carriers should be allowed  X3-to make small flat minimal payments in lieu of their regular contributions. 3j  {ON-ԍ#X\  P6G;ɒP# See Idaho PUC comments at 17; NECA comments at 18; NCTA further comments at 26; PacTel further comments at 60; RTC further comments at 35; Vitelco further comments at 16; . PCIA suggests a graduated contribution scheme in which small carriers would contribute a smaller percentage  X -of their revenues than large carriers.d   yOz-ԍ#C\  P6QɒP# PCIA comments at 8.d PCIA argues that this revenuesensitive contribution system would be less discriminatory to small carriers for whom support contributions are  X -more disruptive.j T  yO-č#X\  P6G;ɒP# PCIA comments at 8.j Commenters suggested a variety of bases for exempting or discounting the contributions of small carriers, including the following: interstate net transmission  X -revenues less than one percent of total interstate net transmission revenues;    {O>-ԍ#C\  P6QɒP# See Teleport comments at 1214. But see NYNEX reply comments at 14 (arguing that this would unfairly exempt competitive LECs from contribution). interstate  X-telecommunications revenues of less than or equal to $10 million;z >  {O!-ԍ#X\  P6G;ɒP# See United Utilities comments at 5.z less than one percent of market share, with market share being determined by revenues net payments to other  Xd-carriers;n d  {O$-ԍ#X\  P6G;ɒP# See MFS comments at 23.n and less than .05 percent of presubscribed lines nationwide. db  {O-ԍ#X\  P6G;ɒP# See Bell Atlantic comments at 14; USSBA comments at 1011."dZ *&&dd! "Ԍ X-ԙx ` ` 3. Discussion x  X-x799.` ` Although section 254(d) gives the Commission the authority to exempt from  X-contribution carriers whose contributions would be de minimis, it does not provide specific  X-guidance on what would constitute a de minimis contribution. To this end, we find the Joint  X-Explanatory Statement instructive. The Joint Explanatory Statement states that the de minimis exemption applies only to those carriers for which the cost of collection exceeds the amount  Xe-of contribution. eZ  {Op -ԍ#X\  P6G;ɒP# See Jt. Statement of Managers, S. Conf. Rept. No. 104230, 104th Cong., 2nd Sess. 131 (1996). Thus, we recommend that the Commission interpret the de minimis exemption in this manner. We find that the legislative history of section 254(d) indicates Congress's intent that this exemption be narrowly construed. We thus disagree with Teleport, which advocates basing the exemption on administrator and contributor costs, and recommend that the cost of collection encompass only the administrator's costs to bill and collect  X -individual carrier contributions. We also reject suggestions that the de minimis exemption be based on factors other than the cost of collection. We find that Metricom, MobileMedia and UTC's suggestions are not as consistent with congressional intent as our recommendation, as evidenced by the Joint Explanatory Statement.  X-x800.` ` Although we agree that a de minimis exemption, as defined above, is appropriate, commenters did not submit enough data regarding the cost of collection for us to recommend a specific threshold amount. NECA, based on its experience with the TRS system, estimates that, if contributions are based on revenues, the cost to bill and collect  X)-individual carriers will be approximately $20.00 per carrier per year.n )  yO-ԍ#X\  P6G;ɒP# NECA further comments at 43. n This figure, however, may not be an accurate estimate of the cost of collection for universal service support mechanisms for two reasons. First, the TRS system bases contributions on gross interstate telecommunications revenues and, as discussed below, we recommend that support mechanism contributions be based on gross interstate and intrastate telecommunications revenues net payments to other carriers. Second, NECA's figure does not include administrator startup costs. Thus, we recommend that, once it determines the administrator's cost of collection, the Commission exempt carriers for which the contribution would be less than the cost of collection. We suggest that such carriers be exempt from contribution and reporting requirements. We also recommend that the Commission reevaluate administrative costs periodically once the contribution mechanisms are implemented. We reject requiring flat  X,-minimum payments for carriers qualifying for the de minimis exemption, because it would be impractical to require a payment that would result in a net loss to the support mechanism.  X-x 801.` ` We also disagree with commenters who suggest that "small" carriers should be"|*&&dd! "  X-treated differently from "large" carriers. Congress expressed its intent to limit the de minimis exemption as discussed above, and there is no statutory requirement that the Commission must establish preferential programs for small carriers. Although we note that several commenters feel a graduated contribution system would be more equitable to "small" carriers, we find that  X-a uniform contribution percentage, subject to the de minimis exemption, is fair and equitable to all carriers, because all carriers will be subject to the same requirements. Graduated contribution schemes would require the Commission to devise rigid small carrier definitions and would unnecessarily complicate the contribution system. In addition, small carrier preferences might encourage all carriers to underestimate their size in order to qualify for contribution discounts.  X -x E. Basis for Assessing Contributions  X -x ` ` 1. Background  X -x!802.` ` "Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and  Xf-advance universal service." f  X-ԍ #X\  P6G;ɒP#47 U.S.C. 254(d).#Xj\  P6G;ynXP# #X\  P6G;ɒP#See also 47 U.S.C.  254(b)(4). In the NPRM, the Commission suggested three different methods by which to assess contributions: basing contributions on gross revenues; basing contributions on gross revenues net payments to other carriers; and basing contributions on perline or perminute charges. The Commission invited comment on the relative merits of these methods and the extent to which they do or do not satisfy the requirements of the 1996 Act. The Commission also sought comment on any other alternative methodologies for calculating a carrier's or service provider's contribution to universal service support. The Commission instructed commenters to address which method would be the most easily administered and competitively neutral in its effect upon contributing carriers and service providers. In addition, the Commission sought comment on how these methods could be adapted if the Commission were to require noncarrier providers of telecommunications  Xi-services to make contributions to universal service support mechanisms.h iy  yO-ԍ#X\  P6G;ɒP# NPRM at paras. 122126.h  X;-x ` ` 2. Comments  X -x"803.` ` Gross Net Payments to Other Carriers. Commenters advocate a variety of contribution methodologies, and the majority recommend some kind of revenuesbased" *&&dd! "  X-mechanism. "  {Oy-ԍ#C\  P6QɒP# See, e.g., Florida PSC comments at 25; MCI comments at 1516; NECA comments at 1718; New Jersey Advocate comments at 24; SWBT comments at 1820; USTA comments at 2425; West Virginia Consumer Advocate comments at 14; Wisconsin PSC comments at 19; LDDS reply comments at 12; Puerto Rico Tel. Co. reply comments at 79. PCIA warns that assessing a contribution equal to a fixed percentage of revenues may cause a greater disruption to the business plans of small, low profit margin  X-carriers than to large carriers.p   {O5-ԍ#X\  P6G;ɒP# See PCIA comments at 89.p Several commenters argue that contributions should be based on gross telecommunications revenues net payments to other carriers, because such a methodology avoids assessing two contributions on the same service, the socalled "double  X-payment" problem, and would be easy to administer. "D  {O -ԍ#C\  P6QɒP# See, e.g., ALTS comments at 18; Ameritech comments at 2324; CWA comments at 11; GCI comments at 15; Illinois CC comments at 9; MCI comments at 1516; Maine PUC comments at 20; NCTA comments at 24; New York CPB comments at 10; New York DPS comments at 10; Oregon PUC comments at 8; Time  yO-Warner comments at 2223; CPI reply comments at 1213; Puerto Rico Tel. Co. reply comments at 79.#XP\  P6QynXP# Time Warner adds that the net revenues model would base contributions only on valueadded services, i.e., new services that  X_-the contributing carrier itself provided or added to telecommunications systems. _.  {O>-ԍ#C\  P6QɒP# Time Warner comments at 2223. See also Ad Hoc Telecom. Users comments at 21. Other commenters also state that the net revenues model is competitively neutral in that it does not advantage vertically integrated companies relative to specialized companies or those that  X -purchase wholesale services.   {O-ԍ#C\  P6QɒP# See Maine PUC comments at 22; Sprint comments at 17. Illinois CC also notes that the use of interstate revenues net of payments to other carriers would be consistent with the Commission's mechanism for  X -collecting regulatory fees.k R  yO-ԍ#X\  P6G;ɒP# Illinois CC comments at 9.k U S West counters that, although the net revenues model eliminates the double payment problem, it is not competitively neutral, because it allows most carriers to make contributions based only on retail revenues, while LECs would base  X -contributions on their total revenues.l   yO:-ԍ#C\  P6QɒP# U S West comments at 1819.l It argues that the net revenues model would not be easy to administer, because LECs should be allowed to subtract imputed access charges, a  Xy-figure difficult to calculate.l yr  yO!-ԍ#C\  P6QɒP# U S West comments at 1819.l CPI replies that carriers should not deduct the value of imputed access charges, unless they add the value of imputed access to wholesale revenues,  XK-because they cannot deduct a cost that never existed.m K  yO$-ԍ#X\  P6G;ɒP# CPI reply comments at 1314.m GTE states that the net revenues model is not competitively neutral, because some carriers, including incumbent LECs, are not"4*&&dd! "  X-free to adjust their rates in the same way as their competitors.j  yOy-ԍ#X\  P6G;ɒP# GTE reply comments at 12.j New Jersey Advocate states that contributions should be based on the value of services, as measured by price and demand,  X-not net prices.t X  yO-ԍ#X\  P6G;ɒP# New Jersey Advocate comments at 25.t  X-x#804. ` ` Gross Revenues. A few commenters suggest that basing contributions on gross telecommunications revenues would be the most equitable and easily administered mechanism because the industry is already familiar with the TRS fund which is based on interstate gross  X_-revenues.  _  {O -ԍ#C\  P6QɒP# See, e.g., AlabamaMississippi Tel. Ass'n comments at 6; Staurulakis comments at 17; TCA comments at 7; West Virginia Consumer Advocate comments at 14; Wisconsin PSC comments at 19.  GVNW argues that gross revenues would be an inappropriate model, because current jurisdictional separations and access charge rules would assign a significant portion of the universal service support contributions to the interstate billing and collection category, a  X -category for which there would be no additional recovery.e  B  yO -ԍ#X\  P6G;ɒP# GVNW comments at 15.e NCTA adds that gross revenues  X -would disadvantage companies with substantially different net and gross revenues.e    yO-ԍ#X\  P6G;ɒP# NCTA comments at 24.e NCTA claims that it would particularly disadvantage new LECs that would initially pay large fees to other telecommunications carriers. LDDS opposes gross revenues on the grounds that such an  X -approach would double count certain revenues. b  {O-ԍ#X\  P6G;ɒP# LDDS reply comments at 17. See also ALTS comments at 18; Ameritech comments at 24. For example, a reseller and a facilitiesbased provider offering services to the reseller would both contribute based on the same underlying service. SWBT argues that both gross and net revenues are inferior contribution methodologies that, because they base contributions on wholesale access, will result in higher  Xb-access charges and will encourage carriers to avoid access.e b  yO-ԍ#C\  P6QɒP# SWBT comments at 19.e  X4-x$805.` ` Retail Revenues. Several carriers advocate assessing contributions based on  X-retail telecommunications revenues.! Z  {OR!-ԍ#C\  P6QɒP# See, e.g., BellSouth comments at 1516; Harris comments at 8; SWBT comments at 1820; USTA  yO"-comments at 2425; U S West comments at 1620; GTE reply comments at 11; #XP\  P6QynXP##X\  P6G;ɒP#LDDS reply comments at 1618; Taconic Tel. reply comments at 6. They define retail revenues as those revenues derived  X-from the sale of final products or services to enduser consumers."   {O]%-ԍ#X\  P6G;ɒP# See SWBT comments at 18; USTA comments at 24. Retail revenues would"8"*&&ddF! " exclude transactions involving services or sales provided as inputs for the provision of other  X-telecommunications services.o#  {Ob-ԍ#C\  P6QɒP# See SWBT comments at 18.o Such inputs would include access services sold to other carriers for the provision of toll services, services provided to other carriers for the provision  X-of resale and equipment sales to other telecommunications service providers.r$ Z  {O-ԍ#C\  P6QɒP# See USTA comments at 2425.r Thus, an IXC would exclude any access charges paid to a LEC. LECs would include, for example, interstate toll revenues, revenues associated with special access provided directly to end users,  Xv-Feature Group A services% v  yO -ԍ#X\  P6G;ɒP# Feature Group A is similar to a local exchange service, but is used for interstate access. In such circumstances, the end user dials a sevendigit number to reach the LEC's "dial tone office" serving an IXC, where the LEC switches the call to the IXC's POP via a dedicated lineside connection. Feature Group A represents approximately one percent of incumbent LEC transport revenues. provided directly to end users and subscriber line charges  X_-assessed on nonuniversal service lines.w& _  {O-ԍ#C\  P6QɒP# See BellSouth comments at 1516.w Proponents of the retail revenues model claim that using retail revenues would avoid assessing double contributions on the revenues derived from  X1-the same services and would not encourage carriers to avoid wholesale services.' 1f  {OH-ԍ#C\  P6QɒP# See, e.g., SWBT comments at 18; USTA comments at 2425; BellSouth reply comments at 1314; GTE reply comments at 1112; LDDS reply comments at 1718; U S WEST reply comments at 2122. They also state that contributions based on retail revenues would be explicit and easy to administer if  X -such contributions appeared as a surcharge on enduser's bills.( Z  {Ot-ԍ#&J\  P6Q u&P## C\  P6QɒP# See, e.g., AT&T comments at 89; SWBT comments at 1920; U S West comments at 1620; GTE reply comments at 11; LDDS reply comments at 18; Lincoln reply comments at 7; NYNEX reply comments at 1119; Siskiyou reply comments at 23; Sprint reply comments at 36. Harris notes that if private carriers are required to contribute to support mechanisms, their contributions would have to be  X -assessed in some other manner.f)   yOh-ԍ#C\  P6QɒP# Harris comments at 8.f Illinois CC opposes basing contributions on retail revenues because this approach would relieve wholesalers from contributing to support mechanisms,  X -which Illinois CC claims violates the 1996 Act's directive that all carriers must contribute.* r  {O-ԍ#C\  P6QɒP# Illinois CC comments at 10. See also TLD reply comments at 1011. Similarly, Texas OPUC opposes funding support mechanisms through a customer surcharge because it would violate the 1996 Act's directive that telecommunications carriers, not  Xb-consumers, must contribute to the fund.+ b  {O$-ԍ#X\  P6G;ɒP# Texas OPUC reply comments at 11. See also CPI reply comments at 1415; GSA reply comments at 12; TLD reply comments at 1011. Finally, NCTA states that retail revenues would unfairly relieve incumbent LECs from contributing because most of their interstate revenues"K^+*&&dd! "  X-are derived from access charges.k,  yOy-ԍ#X\  P6G;ɒP# NCTA reply comments at 25.k  X-x%806.` ` PerLine or PerMinute. Frontier suggests basing contributions on net interstate  X-minutes of use.i- X  yO-ԍ#X\  P6G;ɒP# Frontier comments at 10.i Several commenters oppose contributions based on perminute or perline charges, because they would require equivalency ratios for those carriers not using perline or  X-perminute billing methods..   {O& -ԍ#X\  P6G;ɒP# See ALTS comments at 18; NCTA comments at 24; PCIA comments at 89; SWBT comments at 19; U S West comments at 19; GTE reply comments at 13. They state that such methodologies could favor certain types of providers over others and could distort carrier incentives. New Jersey BPU states that perline or perminute charges would penalize highvolume, lowprice providers, and instead  XH-favors a hybrid approach using both revenues and the number of customers/lines served./ HB  {O;-ԍ#X\  P6G;ɒP# New Jersey BPU comments at 5. See also TLD reply comments at 35. A few commenters suggest that contributions be assessed through an increase in the SLC or  X -other flat nontraffic sensitive charges on end users.0    {O- xЍ#X\  P6G;ɒP# See, e.g., LCI comments at 45; LDDS comments at 18; PCIA comments at 13; Reed, Smith comments at 910; AirTouch reply comments at 17. They argue that this approach would be explicit and easy to administer. Pennsylvania PUC counters that raising the SLC, like an enduser surcharge, would violate the 1996 Act's mandate that carriers must support universal  X -service.w1 .  yO-ԍ#X\  P6G;ɒP# Pennsylvania PUC reply comments at 21.w CWA suggests that carriers should receive credits towards their universal service contributions for any services that they provide to high cost areas, schools or libraries at  X -reduced rates.2   {O-ԍ#X\  P6G;ɒP# CWA comments at 11. See also Public Advocates reply comments at 11 (suggesting that carriers partially contribute through inkind donation of technical assistance). Montana Indep. Telecom. states that the Commission should consider  X-whether a carrier is a carrier of last resort when calculating contributions.w3   yOY-ԍ#X\  P6G;ɒP# Montana Indep. Telecom. comments at 3.w  Xb-x ` ` 3. Discussion  X4-x&807.` ` We agree with Time Warner and recommend that contributions be based on a carrier's gross telecommunications revenues net of payments to other carriers. We favor this methodology for several reasons. First, basing contributions on gross revenues net of payments to other carriers eliminates the "double payment" problem discussed by commenters. Second, as Time Warner notes, basing contributions on gross revenues net of payments to"3*&&dd! " other carriers more closely approximates a valueadded contribution, because it bases contributions only on services that the carrier adds to the PSTN. Third, this approach would be administratively easy to implement, because, as the Illinois CC notes, the Commission already collects common carrier regulatory fees on this basis. Most common carriers are familiar with the regulatory fees process and have accounting systems already in place to calculate gross revenues and payments to other carriers. Industry and Commission familiarity with calculating contributions using this approach will make collecting contributions easier and will likely reduce the time necessary to implement the new support mechanisms. U S West argues that this methodology would be difficult to administer because LECs should be allowed to subtract imputed access charges. CPI argues that LECs should not be permitted to subtract imputed access from gross revenues because they do not add the value of imputed access to their gross telecommunications revenues. We agree with CPI that basing contributions on gross telecommunications revenues net of payments to other carriers is relatively easy to administer.  X -x'808.` ` The Joint Board, acknowledging GTE's comments that some ILECs may not be free to adjust rates to account for the amount of their contributions to universal service support, recommends clarifying that, under the Commission's section 251 rules, ILECs are prohibited from incorporating universal service support into rates for unbundled network elements. We note, however, that carriers are permitted under section 254 to pass through to users of unbundled elements an equitable and nondiscriminatory portion of their universal service obligation.  X-x(809.` ` Additionally, we find that basing contributions on gross revenues net of payments to other carriers is competitively neutral. U S West claims that basing contributions on gross revenues net of payments to other carriers disadvantages ILECs, because they generally make no payments to other carriers. Therefore, ILECs will base their contributions on gross telecommunications revenues, while other carriers will base contributions on gross revenues net of payments to other carriers. For nonILEC carriers that subtract payments to other carriers, U S West claims that the netted figure equals revenues derived from noncarrier end users or retail revenues. U S West argues that, in order to be competitively neutral, ILECs should also be allowed to make contributions based on their retail revenues. We disagree with U S West. NonLEC carriers will not make contributions based on their retail revenues. NonLEC carriers will make contributions based on the value of the services that they add to the PSTN, measured in terms of gross telecommunications revenues net of payments to other carriers. LECs will also make contributions based on the value of the services that they add to the PSTN. If the value of ILECadded services generally equates to their gross revenues, this is not inequitable or discriminatory, because all contributing carriers will base their contributions in the same manner. ILECs should not be afforded special or different treatment when calculating their contributions. Thus, we find that basing contributions on gross revenues net of payments to other carriers is competitively neutral and easy to administer. "Q%3*&&dd $! "Ԍx  X-x)810.` ` We disagree with commenters, such as Wisconsin PSC and TCA, that state that basing contributions on gross telecommunications revenues is the most equitable contribution mechanism. While this method of collecting contributions may be easy to administer because carriers already base TRS contributions on gross telecommunications revenues, we agree with  X-LDDSk4   yO-ԍ#X\  P6G;ɒP# LDDS reply comments at 17.k that basing contributions on gross revenues may create a "double payment" problem,  Xv-in that certain services may be counted twice for contribution purposes.85 vX  yO -ԍ#C\  P6QɒP# For example, under the gross revenues model, a reseller would include revenues derived from the provision of services to customer A. The facilitiesbased carrier that sells transmission capacity to the reseller would also include the revenues derived from reseller for the reseller's purchase of transmission capacity to serve customer A. Thus, the revenues derived from customer A's call would be counted twice, once against the reseller and once against the facilitiesbased carrier.8  XH-x*811.` ` We also disagree with commenters that support basing contributions on retail revenues. Although basing contributions on retail revenues eliminates the "double payment" problem, we agree with the Illinois CC that it would relieve wholesale carriers from directly contributing to support mechanisms. At the same time, the Commission would have difficulty tracking and verifying carrier retail revenues because it has not previously compiled data on that basis.  X -x+812.` ` We disagree with commenters that advocate collecting contributions on nonrevenues based measures, such as on a perminute or perline basis. We reaffirm the Commission's statement in the NPRM that such mechanisms would require the Commission to adopt and administer difficult "equivalency ratios" for calculating the contributions of carriers that do not offer services on a perline or perminute basis. In addition, these approaches may favor certain services or providers over others. Furthermore, we reject commenters' suggestions that support mechanisms be funded through the SLC or a retail enduser surcharge. We find that these mechanisms would violate the statutory requirement that carriers, not consumers, finance support mechanisms. We also find that the New Jersey Advocate's suggestion that contributions be based on service prices and demand would be administratively difficult to implement.  X-x,813.` ` Finally, we agree with commenters that suggest that carriers should receive credits against their contributions for services provided to rural, insular or high cost areas, schools and libraries or health care providers at below cost. We recommend that the Commission clarify that contributions to support mechanisms may be made in cash or through  X7-the provision of "inkind" services at "comparable"w6 7  {O$-ԍ#C\  P6QɒP# See 47 U.S.C.  254(h)(1)(A).w or "discounted"y7 7  {O-ԍ#C\  P6QɒP# See 47 U.S.C.  254(h)(1)(B).y rates."7Z7*&&dd{! "Ԍ X-ԙx F. Revenues Base for Assessing Contributions  X-x ` ` 1. Background  X-x-814.` ` Every telecommunications carrier that provides interstate telecommunications services must make "equitable and nondiscriminatory" contributions to universal service  Xv-support mechanisms.g8 vZ  yO -ԍ#X\  P6G;ɒP# 47 U.S.C.  254(d).g In the NPRM, the Commission asked whether the Joint Board should recommend basing federal universal service contributions from interstate carriers (and, possibly, from other interstate service providers) on both their interstate and intrastate revenues or on their interstate revenues only. If commenters proposed that contributions should be based on interstate revenues only, the Commission asked for proposals on how to determine the interstate revenues for the many and varied telecommunications carriers and telecommunications service providers that are not subject to our jurisdictional separations rules and, in some cases, may not have a clear basis for delineating interstate and intrastate  X -services.h9   yOY-ԍ#X\  P6G;ɒP# NPRM at paras. 125126.h In particular, the Commission asked for comment on the practicality of the  X -approach used for the TRS fund.:  z  yO-ԍ #X\  P6G;ɒP#NPRM at para. 125. Each common carrier providing interstate telecommunications services must contribute to the TRS fund. 47 C.F.R.  64.604(c)(iii)(A). The TRS worksheet instructs carriers to calculate, wherever possible, the percentage of total revenues that are interstate by using information from their books of accounts and other internal data reporting systems. Carriers that cannot calculate a percentage from their books  yO-or from internal data may elect to rely on special studies to determine interstate percentages.#Xj\  P6G;ynXP#џ x  Xy-x ` ` 2. Comments  Xb-  XK-x.815.` ` Interstate Only. Several commenters indicate that, assuming revenuesbased  X4-contributions, only interstate telecommunications revenues should be included for assessment  X-purposes. ; "*  {O-  Ѝ#X\  P6G;ɒP# See, e.g., 360 comments at 9; Associated Communications comments at 45; BellSouth comments at 1516; California PUC comments at 21; Harris comments at 8; MCI comments at 1516; New York CPB comments at 10; New York DPS comments at 10; SWBT comments at 19; TCA comments at 7; USTA comments at 2425; Wisconsin PSC comments at 19; Taconic Tel. Corp. reply comments at 6. Some commenters state that section 254(d) contemplates contributions from only interstate telecommunications providers and that there is no indication that Congress intended to change the current jurisdictional responsibilities between federal and state governments over";*&&dd! "  X-inter and intrastate revenues.<   {Oy-ԍ#X\  P6G;ɒP# See California PUC comments at 21; NARUC comments at 18; New York DPS comments at 9; NYNEX reply comments at 12; Pennsylvania PUC reply comments at 22. Pennsylvania PUC and New York DPS argue that basing federal contributions on intrastate revenues would be unlawful, because they claim the 1996  X-Act does not give the Commission the authority to do so.= "  {O-ԍ#X\  P6G;ɒP# New York DPS reply comments at 23; Pennsylvania PUC reply comments at 22. See also California PUC comments at 21. New York DPS alleges that section 254(d), when read in conjunction with sections 2(b), 254(f) and 601(c), is limited to  X-interstate revenues.t> |  yO -ԍ#X\  P6G;ɒP# New York DPS reply comments at 23.t Section 2(b) states that "... nothing in this Act shall be construed to apply or to give the Commission jurisdiction with respect to (1) charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service." Section 601(c) states that the 1996 Act "shall not be construed to modify, impair, or supersede Federal, State or local law unless expressly so provided." NYNEX adds that including intrastate revenues in federal support programs would adversely affect state support programs by assessing contributions on intrastate revenues twice, once for federal support and  X -once for state support.o?    yO-ԍ#X\  P6G;ɒP# NYNEX reply comments at 1213.o NYNEX also mentions that including only interstate revenues for federal universal service purposes would not be burdensome, because all interstate carriers  X -already separate their revenues for TRS purposes.l@   yO"-ԍ#X\  P6G;ɒP# NYNEX reply comments at 13.l  X -x/816.` ` Inter and Intrastate. Other commenters, however, state that contributions should be based on both inter and intrastate telecommunications revenues. Proponents of including intrastate revenues claim that basing contributions on both revenue bases would eliminate the need for complex separations schemes that are not employed by some of the  XK-contributing carriers. A K,  {O(-ԍ#X\  P6G;ɒP# See, e.g., AT&T comments at 89; NCTA comments at 24; New Jersey Advocate comments at 25; West Virginia Consumer Advocate comments at 14; GTE reply comments at 11; LDDS reply comments at 1618. NCTA notes that companies not subject to the Commission's Part 36  X4-separations rules might be able to manipulate results if intrastate revenues were excluded.B 4  {Ok -ԍ#X\  P6G;ɒP# NCTA comments at 2324. See also GTE reply comments at 11. Sprint states that because intrastate services will be supported by universal service, intrastate  X-funds should be included in the basis for calculating contributions.C   yO#-ԍ#X\  P6G;ɒP# Sprint comments at 1617 and Sprint reply comments at 56. Sprint argues that failure to do this would favor ILECs. CSE Foundation asserts that if contributions were based only on interstate revenues, the demand for interstate services would decrease, and"C*&&dd! "  X-carriers would not invest in interstate services or would try to avoid those services.D   {Oy-ԍ#X\  P6G;ɒP# CSE Foundation comments at 1718. See also AirTouch reply comments at 18; GTE reply comments at  yOC-#X\  P6G;ɒP#11#X\  P6G;ɒP#.  LDDS asserts that section 254(b)(4) grants the Commission broad powers to impose contributions on all providers of telecommunications services, not just interstate providers, so intrastate  X-telecommunications revenues can be included for contribution assessment purposes.kE "  yO-ԍ#X\  P6G;ɒP# LDDS reply comments at 18.k  X-x` ` 3. Discussion  X_-x0817. ` ` The Joint Board recommends that universal service support mechanisms for schools and libraries and rural health care providers be funded by assessing both the intrastate and interstate revenues of providers of interstate telecommunications services. The Joint Board makes no recommendation concerning the appropriate funding base for the modified high cost and low income assistance programs, but does request that the Commission seek additional information and parties comment, particularly the states, regarding the assessment method for these programs. The recommendations on the universal service mechanism for high cost assistance are tentative at this time and will be supplemented with a report of the state Joint Board Members following combined federal/state staff workshops on the proxy models. The recommendations on the schools and libraries discount mechanism, in contrast, are more certain, especially with respect to the identification of costs. The existing high cost assistance program is currently funded from interstate revenues, and intrastate revenues support universal service both implicitly, through rate structure, and explicitly, through some states' universal service fund mechanisms. The Joint Board believes that the decision as to whether intrastate revenues should be used to support the high cost and low income assistance programs should be coordinated with the establishment of the scope and magnitude of the proxybased fund, as well as with state universal service support mechanisms.  X-x1818. ` ` When the Commission established the existing high cost assistance fund in 1984, the Commission recognized that universal service was a mutual goal shared with the states. The federal program was constructed to build upon the programs already being undertaken by the states: XxX` ` We also agree with the Joint Boards plan to direct assistance to high cost areas. This approach will promote universal service by enabling telephone companies and state regulators to establish local exchange service rates in high cost areas that do not greatly exceed nationwide average levels. The federal Universal Service Fund will ensure that telephone rates are within the means of the average subscriber in all areas of the country, thus providing a" E*&&dd! " foundation on which the states can build to develop programs  X-tailored to their individual needs.DF   yOb-ԍ#X\  P6G;ɒP# In the Matter of Amendment of Part 67 of the Commissions Rules and Establishment of a Joint Board,  yO*-CC Docket No. 80286, Decision and Order, 96 F.C.C. 781, 795 (February 15, 1984).#Xj\  P6G;ynXP#Dx`  X-x2819. ` ` The 1996 Act reflects the continued partnership among the states and the FCC in preserving and advancing universal service. Together, sections 254(d) and 254(f) contemplate continued complementary state and federal programs for advancing universal service. The Joint Board finds that state universal service programs should continue to play an important role in ensuring universal service to all consumers. Section 254(f) states that: x Xx[a] State may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service. Every telecommunications carrier that provides intrastate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, in a manner determined by the State to the preservation and advancement of universal service in that State. A State may adopt regulations to provide for additional definitions and standards to preserve and advance universal service within that State only to the extent that such regulations adopt additional specific, predictable, and sufficient mechanisms to support such definitions or standards that do not rely on or burden Federal universal service support  Xb-mechanisms.gG b   yO3-ԍ#X\  P6G;ɒP# 47 U.S.C.  254(f).g(# Section 254(f) was intended to preserve state authority over universal service matters within certain parameters. Indeed, the Joint Explanatory Statement states that "[s]tate authority with  X-respect to universal service is specifically preserved under new section 254(f)."tH   yOg-ԍ#A\  PɒP# Joint Explanatory Statement at 132.t  X-x3820. ` ` While section 254(d) prescribes that every telecommunications carrier that provides interstate communications services shall contribute to the Commissions universal service support mechanisms on an equitable and nondiscriminatory basis to the specific, predictable and sufficient mechanism established by the Commission, the statute does not expressly identify the assessment base for the calculation of the contribution. We recognize that the universal service mechanism established in this proceeding to address the needs of rural, insular and high cost areas will be combined with the existing high cost assistance, DEM weighting, Linkup, Lifeline and Long Term Support funding mechanisms.  X -x4821. ` ` The appropriate revenue base for collecting support for the high cost and low income programs must be considered in tandem with the distribution of these funds. The"@H*&&dd<! " current federal high cost and low income programs are supplemented by existing state  X-programs. As we have discussed supra, the development and composition of a universal service support mechanism based on a proxy model has been deferred for decision at this time, pending the convening of staff workshop sessions. We have also deferred decision on the appropriate revenue benchmark to compute the level of federal universal service support. Similarly, the modifications to the Lifeline program have been tentatively identified and set forth in this Recommended Decision for further comment. We find that it would be premature at this time to conclude how the high cost assistance fund and low income assistance programs should be funded, i.e., confined to interstate revenues or a combination of interstate and intrastate revenues.  X -x5822. ` ` The Joint Board recommends that the Commission seek further information and parties comments on the issue of whether both intrastate and interstate revenues of carriers that provide interstate telecommunications should be assessed to fund the Commissions high cost and low income support mechanisms. The role of complementary state and federal universal service mechanisms requires further reflection. An additional consideration is whether the states have the ability to assess the interstate revenues of providers of intrastate telecommunications services to fund state universal service programs and whether that  Xd-assessment capability would affect the funding base for federal universal service programs.I d  yO-ԍ#X\  P6G;ɒP# See, e.g., Vermont Stats., Title 30, Chapter 87, Section 7521(a); Goldberg v. Sweet, 109 S.Ct. 582 (1989). In addition, we recommend that the Commission seek additional information and parties' comment on whether the intrastate nature of the services supported by the high cost and low income assistance programs should have a bearing on the revenue base for assessing funds. We also recommend that commenting parties address the ability to separately identify intrastate and interstate revenues in the evolving telecommunications market where services typically associated with particular jurisdictions are likely to be packaged together. Finally, we ask that parties comment on whether carriers will have an incentive to shift revenues between jurisdictions to avoid universal service contributions.  X~-x6823. ` ` The state members of the Joint Board will include a discussion of the appropriate funding mechanism for the new high cost fund and low income programs as part  XP-of the report(s) on each of those programs discussed supra. These reports by the state members will be filed prior to the Commissions decision in this proceeding on the high cost and low income funds. x  X-x G. Administrator of Universal Support Mechanisms  X -x ` ` 1. Background  X"-x7824.` ` In the NPRM, the Commission sought comment on the best approach to"" I*&&dd!! " administer universal service support mechanisms fairly, consistently, and efficiently. The Commission suggested that support mechanisms could be administered by a nongovernmental entity and stated that any administrator would be required to operate in an efficient, fair and competitivelyneutral manner. Furthermore, the Commission noted that the administrator would be required to process information and databases on a large scale, to calculate the proper amount of each carrier's contribution and to apply eligibility criteria consistently, in order to ensure that only carriers eligible for support are properly compensated by the support mechanisms. The Commission asked commenters to discuss these criteria and any others the Commission might use to assess qualifications of any candidates, how long an administrator should be appointed, and any other matters related to the selection and appointment of an administrator. The Commission also invited parties to suggest the most efficient and least  X -costly methods to accomplish the administrative tasks associated with administration.hJ   yO| -ԍ#X\  P6G;ɒP# NPRM at paras. 128129.h  X -x8825.` ` The Commission also sought comment on whether universal service support could be collected and distributed by state PUCs. Under this approach, individual state commissions or groups of state commissions would be responsible for administering the collection and distribution of funds, operating under plans approved by the Commission. The state PUCs might delegate the administration of funds to a governing board composed of representatives from the state commissions, the contributing carriers, and support recipients. This board could also function as a central clearinghouse to the extent collection and distribution issues extended beyond the boundaries of individual states. The Commission requested comment on this alternative approach and on what provisions should be incorporated in any plan that the Commission approves for administration under this option. The Commission also invited proposals for other means of administering support  X-mechanisms.cK X  yO-ԍ#X\  P6G;ɒP# NPRM at para. 130.c Pursuant to the 1996 Act's principle that support for universal service should  X-be "predictable,"L   yOZ-ԍ #X\  P6G;ɒP#47 U.S.C.  254(b)(5).#Xj\  P6G;ynXP#ї the Commission also sought comment estimating the cost of administration using either of the two approaches that we proposed. Commenters proposing an alternative method were asked to identify the costs of administration associated with their  X|-suggested method.cM |x  yO -ԍ#X\  P6G;ɒP# NPRM at para. 131.c  XN-x ` ` 2. Comments  X -x9826.` ` Third Party. A majority of commenters suggest that universal service support" M*&&dd! "  X-should be administered by a nongovernmental, neutral third party.N "  {Oy-ԍ#C\  P6QɒP# See, e.g., ALTS comments at 19; AT&T comments at 22; AirTouch comments at 11; Ameritech comments at 24; Cincinnati Bell comments at 15; Frontier comments at 10; Illinois CC comments at 1011; LDDS comments at 1920; Maine PUC comments at 2021; Missouri PSC comments at 2122; NCTA comments at 25; Sprint comments at 2324; CPI reply comments at 16; MFS reply comments at 9. Proponents state that a lack of affiliation with any telecommunications carriers and no direct interest in support mechanisms is essential for the administrator to function as a neutral arbitrator among all of the various service providers that must contribute to support mechanisms. Such an administrator must have large scale database capabilities and the ability to collect and  X-distribute funds.O   {O -ԍ#C\  P6QɒP# See Illinois CC comments at 1011; NCTA comments at 25. Several of these commenters state that the third party administrator should be selected through competitive bidding in order to lower the costs of  X_-administration.+P Z_D  {OT-ԍ#C\  P6QɒP# See, e.g., ACTA comments at 13; ALTS comments at 19; Ameritech comments at 24; Frontier comments at 10; Idaho PUC comments at 1718; Maine PUC comments at 2223; Teleport comments at 18; CPI reply comments at 16.+ Idaho PUC agrees that the administrator should be chosen through  XH-competitive bidding, but adds that NECA should be allowed to bid.Q Hf  {O_-ԍ#C\  P6QɒP# Idaho PUC comments at 1718. See also Maine PUC comments at 21; California PUC reply comments at 9.  X -x:827.` ` NECA. Several LECs and a few others state that NECA should be appointed  X -the administrator of the universal service fund.R "  {Ot-ԍ#C\  P6QɒP# See, e.g., Associated Communications comments at 5; Farmers Tel. comments at 5; Frederick & Warinner comments at 4; MonCre comments at 5; NECA comments at 23; New Hope Tel. comments at 5; OTIAWITA comments at 16; Rock Port Tel. comments at 1; SWBT comments at 20; TCA comments at 7; Cathey, Hutton reply comments at 89; Vitelco reply comments at 1112. These commenters support NECA as the fund administrator because of NECA's proven experience in administering the current high cost assistance mechanism and the TRS system and its familiarity with the  X -telecommunications industry.S "   {O-ԍ#C\  P6QɒP# See, e.g., Associated Communications comments at 5; Farmers Tel. comments at 5; Frederick & Warinner comments at 4; MonCre comments at 5; NECA comments at 23; New Hope Tel. comments at 5; OTIAWITA comments at 16; Rock Port Tel. comments at 1; TCA comments at 7; Cathey, Hutton reply comments at 89; Vitelco reply comments at 1112. As an alternative to being appointed the permanent administrator, NECA suggests that it be appointed the interim administrator, because it would be able to implement the new support mechanisms quickly. NECA notes that it was appointed the twoyear interim administrator of the TRS fund, before being reappointed for an"yS*&&dd! "  X-additional fouryear term.T   yOy-ԍ#X\  P6G;ɒP# Letter from Katherine Falk, NECA, to Diane Law, Attorney, FCC, September 25, 1996 (NECA  {OA-September 25 Ex Parte). Opponents of appointing NECA as administrator question whether an organization composed of small LECs can administer a program involving all  X-telecommunications carriers in a neutral manner.U "  {O-ԍ#X\  P6G;ɒP# See LDDS reply comments at 1920; MCI reply comments at 1617; MFS reply comments at 8; WinStar reply comments at 6; Letter from Mary L. Brown, MCI, to Reed Hundt, Chairman, FCC, October 25, 1996. NECA notes that its Board of Directors does contain nonLEC representatives and that it administers the TRS fund to which all  X-telecommunications carriers, not just LECs, contribute.eV |  yO -ԍ#X\  P6G;ɒP# NECA comments at 23.e As administrator of the TRS fund, NECA receives guidance from an advisory committee drawn from the telecommunications industry, members of the hearingimpaired community and consumer advocates regarding the TRS fund, and NECA suggests that a similar committee could be created for the new  XH-universal service fund.eW H   yO-ԍ#C\  P6QɒP# NECA comments at 23.e NECA adds that the Commission has the authority to modify its  X1-Part 69 rules governing NECA's governance if it believes changes are necessary.X \1  {O~-ԍ#X\  P6G;ɒP# NECA September 25 Ex Parte. See also Letter from Bruce W. Baldwin, NECA to Reed Hundt,  {OH-Chairman, FCC, October 18, 1996 (NECA October 18 Ex Parte) (suggesting that the Commission amend section 69.602 of the Commission's rules to add six more directors, representing nonLEC carriers, to NECA's board). Sprint states that if NECA is chosen as the fund's administrator, its Board of Directors must be  X -broadened to include more nonLECs.Y   {Ot-ԍ#C\  P6QɒP# Sprint comments at 2324. See also Telec Consulting comments at 1819 (arguing NECA should broaden its membership); TCA reply comments at 4. Idaho PUC suggests that an advisory board be  X -created to advise the administrator regardless of which entity is chosen.pZ   yO-ԍ#X\  P6G;ɒP# Idaho PUC reply comments at 12.p  X -x;828.` ` State PUCs. A few commenters recommend that the fund should be administered by state commissions, because they are more familiar with local market  X-conditions and industry.[   {O-ԍ#C\  P6QɒP# See, e.g., Colorado PUC comments at 7; Time Warner comments at 2325; New York DPS reply comments at 3. Others, however, question whether state commissions would have the resources to administer federal and state support programs and whether their  Xb-administration would be uniform across states.\ b  {O$-ԍ#C\  P6QɒP# See ALTS comments at 19; Associated Communications comments at 5; Teleport comments at 17; MFS reply comments at 89. Pennsylvania PUC suggests that states be given the choice of administering the program themselves or of appointing a thirdparty"K^\*&&dd! "  X-administrator, such as NECA.]  {Oy-ԍ#X\  P6G;ɒP# Pennsylvania PUC reply comments at 2223. See also Oregon PUC comments at 8. Netscape suggests that the Commission should establish macrolevel policies and allow industry forums to handle the detailed administration of those  X-goals.i^ Z  yO-ԍ#C\  P6QɒP# Netscape comments at 12.i  X-x ` ` 3. Discussion  Xv-x<829.` ` Based on the record in this proceeding, we recommend that the Commission appoint a universal service advisory board to designate a neutral, thirdparty administrator. Administration by a central administrator, as opposed to individual state PUCs, would be more efficient and would ensure uniform decisions and rules.  X -x=830.` ` Although we do not recommend direct administration by state PUCs, we recommend creating a universal service advisory board, pursuant to the Federal Advisory  X -Committees Act,v_   yOp-ԍ#X\  P6G;ɒP# 5 U.S.C., App.  4(a) and 3(2)(C).v including state and Commission representatives, to select, oversee, and provide guidance to the chosen administrator. To expedite the formation of the advisory board and its selection of a permanent administrator, we encourage the Commission to limit the number of advisory board members as much as possible. To ensure that administrative costs are kept to a minimum, we recommend that the universal service advisory board select an administrator through a competitive bidding process. The chosen administrator, including its Board of Directors, must: (1) be neutral and impartial; (2) not advocate specific positions to the Commission in nonadministrationrelated proceedings; (3) not be aligned or associated with any particular industry segment; and (3) not have a direct financial interest in the support mechanisms established by the Commission. As several commenters note, any candidate must also have the ability to process large amounts of data and to bill large numbers of carriers. We recommend that the advisory board fund the administrator's costs through the support mechanism.  X-x>831.` ` The Joint Board strongly advises the Commission to create a universal service advisory board as quickly as possible because it will be responsible for selecting an administrator. The board, in turn, should quickly select an administrator because implementation of the new universal service support mechanisms is of utmost importance to the nation. The Joint Board recommends that the universal service advisory board appoint a neutral, thirdparty administrator through competitive bidding no later than six months after the board is created. We also recommend that the Commission and the advisory board require the administrator to implement the new support mechanisms no later than six months after its appointment."z_*&&dd! "Ԍ X-ԙx?832.` ` NECA has successfully administered the existing high cost assistance fund and the TRS fund. We, however, disagree with those who propose that NECA automatically be appointed the permanent administrator. We conclude that many commenters question NECA's ability to appear as a neutral arbitrator among contributing carriers. We believe that NECA's current membership of incumbent local exchange carriers, its Board of Directors composed primarily of representatives of incumbent local exchange carriers, and its advocacy positions in several Commission proceedings may appear to nonLEC carriers as evidence of NECA's bias towards ILECs. Although we have no evidence of impropriety regarding NECA's management of the existing high cost assistance fund, the appearance of impartiality for the new administrator is essential, given the importance and magnitude of the universal service support programs that will ensure telecommunications access in all regions of the Nation. We, therefore, recommend against appointing NECA as the permanent administrator at this time. We recommend, however, that the Commission take such action as necessary that would allow NECA to render itself a neutral, thirdparty and would eliminate NECA's  X -current appearance of bias toward incumbent LECs.z`  {O7-ԍ#X\  P6G;ɒP# See NECA October 18 Ex Parte.z If changes to its membership and governance render NECA a neutral, thirdparty, NECA should be eligible to compete in the advisory board's selection process. In addition, we reject Netscape's suggestion that industry forums should develop and administer universal service support mechanisms. Although cooperation with industry is essential to the successful implementation of universal service goals, conflicts of interest may arise through industry selfregulation. Furthermore, it may be difficult for industry members to reach a consensus on controversial issues.  X-x@833.` ` We note that a transition period for low income consumers and rural, insular and high cost areas is necessary because we are changing eligibility requirements and how support is calculated, consistent with sections 254(c)(e). These issues, however, do not apply to schools, libraries and health care providers because they do not participate in preexisting programs. Consequently, consistent with section 254, we believe that support for schools, libraries and health care providers can be deployed sooner than support programs for low income consumers and rural, insular and high cost areas, because these programs are not presently defined. Thus, in the interest of providing telecommunications services to schools, libraries and health care providers as quickly as possible, we recommend that NECA be appointed the temporary administrator of support mechanisms for schools, libraries and health care providers. Prior to appointment as the temporary administrator, we recommend, however, that the Commission permit NECA to add significant, meaningful representation for nonincumbent LEC carrier interests to the NECA Board of Directors. NECA could begin collecting carrier contributions and processing requests for services soon after adoption of the Commission's rules and would continue to do so until the permanent administrator is ready to begin operations. We recommend that, in addition to operating the new support mechanisms for schools, libraries and health care providers, NECA would continue to administer the existing high cost and low income support mechanisms until the permanent administrator is"#Z`*&&dde"! " prepared to implement the new high cost and low income support mechanisms.  X- XIV. CONCLUSION  X-xA834.` ` The 1996 Act instructs the Joint Board and the Commission to adopt a new set of universal service support mechanisms that are explicit and sufficient to preserve and advance universal service. We believe that the recommendations, discussed above, will achieve Congress's goals and will ensure quality telecommunications services at affordable rates to all consumers, in all regions of the Nation.  X - XV. RECOMMENDING CLAUSES  X -xB835.` ` For the reasons discussed in this Recommended Decision, this FederalState Joint Board, pursuant to section 254(a)(1) and section 410(c) of the Communications Act of 1934, as amended, 47 U.S.C.  254(a)(1), 410(c), recommends that the Federal Communications Commission adopt the proposals, as described above, implementing new section 254 of the Telecommunications Act of 1934, as amended, 47 U.S.C.  254.  Xb-x[ C836.` ` The Joint Board further recommends that parties submitting any comments or additional information in this docket be required to serve each member of the FederalState  X4-Joint Board and the Joint Board staff.a 4] yO-ԍ#X\  P6G;ɒP# These submissions should be served in accordance with the service list attached as App. G. x` `  hhFEDERAL COMMUNICATIONS COMMISSION x` `  hhWilliam F. Caton x` `  hhActing Secretary[ x"eXa*&&dd! "  X-  @A-@ ò)APPENDIX A  X- PARTIES FILING INITIAL COMMENTS ă  X-Commenter` `  hh@hppAbbreviation  X-360o Communications Co.hh@hpp360  Xv-AARP, CFA, Consumer Unionhh@hppAARP  X_-Access to Communications for Education CoalitionppACE  XH-Ad Hoc Telecommunications Users CommitteehppAd Hoc  X1-AMSC Subsidiary Corp.hh@hppAMSC  X -AT&T Corp.` `  hh@hppAT&T  X -Airtouch Communications, Inc. hh@hppAirTouch  X -Alabama Public Service Commission@hppAlabama  X - \ AlabamaMississippi Telephone Assoc.@hppAlabamaMississippi Tel. Ass'n" )  X -Alaska Area Native Health Services@hppAlaska Health  X -Alaska Library Associationhh@hppAlaska Library  X-Alaska Public Utilities Commissionhh@hppAlaska PUC  Xy-Alaska Telephone Associationhh@hppAlaska Tel.  Xb- Alliance for Distance Education in CaliforniahppAlliance for Distance Education  XK-Alliance for Public Technologyhh@hppAlliance for Public Technology  X4-Allied Associated Partners, LP/GELD Information SystemsAAP/GELD  X-America's Carriers Telecommunications AssociationppACTA  X-American Association of Community CollegeshppCommunity Colleges  X-American College of Nurse Practitioners@hppNurse Practitioners  X-American Federation of Teachershh@hppAFT  X-American Foundation for the Blindhh@hpp  X- American Hospital Association hh@hppAHA  X-American Library Associationhh@hppALA  X|-American Telemedicine Association@hppAmerican Telemedicine Ameritech  XN-Apple Computer, Inc.hh@hppApple  X7-Arctic Slope Tele Association (VCR TAPE)hppArctic  X -Ardmore Telephone Companyhh@hppArdmore Tel.  X -Arizona Health Sciences Centerhh@hppArizona Health  X-Associated Communications & Research Services, Inc.ppAssociated Communications  X-Association for Local Telecommunications ServicesppALTS  X -Association of America's Public Television StationsppAPTS  X!-Association of the Bar of the City of New YorkhppBar of New York Bell Atlantic  X#-BellSouth/National Economic Research AssociateshppBellSouth  Xh$-Benjamin N. Cardozo School of Law/Yeshiva UniversityppCardozo  XQ%-Benton Foundation hh@hppBenton"Q%a*&&dd'$! "Ԍ X-Bledsoe Telephone Co.hh@hppBledsoe Tel.  X-Blountsville Telephone Companyhh@hppBlountsville Tel.  X-Bonnie Price` `  hh@hppPrice  X- Brite Voice Systems, Inc.hh@hppBrite  X-#Xx{2 PQ|XP##XP\  P6QynXP#California Department of Consumer Affairshpp  X- California State Libraryhh@hppCalifornia Library  Xv-Cellular Telecommunications Industry Association ppCTIA  X_- Center for Civil Networking Inc.hh@hppCenter for Civil Networking  XH-Century Telephone & TDS TelecommunicationshppCentury  X1-Cheyenne River Sioux Telephone Authority & Golden WestCheyenne River Sioux Tel.  X -X` hp  (#%'0*,.8135@8: