November 23, 1998

Re:	Federal State Joint Board on Universal Service (CC 96-45)

The Joint Board's recommendation today moves the universal service reform process a significant step closer to fulfillment of statutory requirements, with emerging majority positions on many difficult issues. The Joint Board is recommending a framework to "preserve and advance" universal service support for "consumers in rural, insular, and high-cost areas." This framework will provide "specific, predictable, and sufficient" support for rates that are "affordable" and "reasonably comparable to rates charged for similar services in urban areas," as required by the Act, without overburdening consumers all across the nation.

The Joint Board recommends that the Commission replace its prior 75-25 approach to universal service funding. Instead, it endorses the Commission's commitment to the Congress to hold the states harmless. Under this approach, no study area in any State would receive less support from the new high cost mechanism for non-rural carriers than it currently receives from explicit federal support mechanisms. In addition, the Joint Board further recognizes an additional need for the federal mechanism to supply any universal service support that States need but cannot reasonably be expected to fund from intrastate sources. It recommends that federal universal service support continue to be distributed to carriers, not to States. I support these recommendations without reservation.

The Joint Board majority reaffirms using a forward-looking economic cost approach for universal service, states that it anticipates the FCC's cost proxy model to provide reasonable cost estimates, and encourages the Commission to continue to work with the States through the selection of inputs to develop an accurate model. I support this recommendation as well. No economic model is perfect. But no one has proposed a better alternative for estimating forward-looking costs. A model is the only tool that has been identified to permit objective assessment of special needs that may require increased federal support to particular study areas. But we will not use this tool unless it is has achieved a level of accuracy, predictability, and openness that earns it broad acceptance.

The Joint Board is also recommending a two-step methodology for determining and allocating federal high cost universal service need, which will be finalized as the FCC completes its work on the models. Federal support will be provided when a telephone company service area in a State has forward-looking costs significantly above the national average, and the

State cannot reasonably fund that need from intrastate sources. Key details remain to be formulated, but this general framework strikes me as logical and fair.

The Joint Board members generally agree that local competition is not yet developing quickly, and they detect no clear evidence that sources of implicit support have been undermined. This reduces the urgency and the magnitude of replacing implicit support with explicit support. But the FCC -- and the States -- cannot neglect our responsibilities. Both jurisdictions, in their respective spheres, must be prepared to provide whatever explicit support is needed as competition diminishes the availability of implicit support.

As provided by the law, universal service funds should be assessed and collected from carriers, not through mandatory new line-item charges on consumers. To the extent carriers choose to recover these costs through individualized assessments on consumers, they have a corresponding obligation to ensure that changes resulting from the Telecommunications Act are explained accurately to consumers, and not to use the restructuring of rates as a smokescreen for unjustified rate increases. I look forward to completing the Commission's "truth in billing" proceeding, where these issues are already under review.

Today's recommended decision is also important for what it does not do. It does not mean any reduction in the universal service support currently provided to non-rural carriers. It does not preordain any significant increase in explicit universal service funding nor create any colorable excuse for carriers to increase charges to consumers. It does not preordain any changes whatsoever in the universal service support currently provided to rural carriers.

Issues involving rural carriers are "off the table." Nothing that is done with respect to the large non-rural carriers will necessarily require corresponding changes in the regime for rural carriers. They will continue to operate under the status quo for the foreseeable future, pending recommendations from the Rural Task Force to the Joint Board.

The Joint Board process over the past several months has been a healthy and constructive dialogue between and among federal and State regulators with different perspectives on high cost universal service. Regulators who have to grapple with the problems of having high-cost service areas often have differing views from those who have a proportionately higher number of low-cost consumers.

Although there probably will always be differing opinions about how best to proceed, all sides have been listening to one another, and we have seen some very important breakthroughs. This is exactly how the process should work.

Most high-cost States now acknowledge the legitimacy of certain points previously stressed by the low-cost States. In particular, they generally agree that keeping telephone service affordable is a shared federal and State responsibility, that much of the problem has been managed and can continue to be managed by the State public utility commissions; and that the

federal responsibility should be based on the assumption that States will continue to shoulder their own responsibilities.

Conversely, many low-cost States now acknowledge the legitimacy of certain points previously stressed by the high-cost States. For instance, they generally recognize that some States may have such high costs in certain areas, and such a disproportionately small number of lower-cost lines, that they may require somewhat greater assistance than has historically been provided by the interstate jurisdiction.

Balancing the interests of the high-cost and low-cost States will continue to be a challenge, but I believe the framework recommended today represents a major milestone in the implementation of Section 254. I look forward to continuing the dialogue with the Joint Board members as partners in this proceeding, as the Commission continues with the next vital steps.