November 23, 1998

We believe this Recommended Decision is an important step in a long process to bring traditional universal service goals in line with an increasingly competitive local marketplace. The framework outlined in this document will aid the transition to a more competitive arena, if it is properly implemented.

We are mindful of Congress' strong commitment to ensuring that rural, insular, and high cost customers are protected. Thus, we support the Commission's commitment to Congress to hold states harmless. Specifically, in this first step we have ensured that no company, thus customer, will receive less universal service support than it receives today. Although we have tentatively endorsed a forward-looking methodology, we have ensured that nonrural companies still have the safeguard provided by the existing method.

It is not without reservation, however, that we support this recommendation. While we are committed to ensuring that all citizens, both rural and urban, have fair, reasonable telephone rates, we are concerned that consumers from larger urban states not be overburdened with an unreasonably large high cost fund for nonrural carriers. Basic economic principles tell us that competition will develop primarily in the urban areas of urban states first.⁽¹⁾ These consumers will expect to see the benefits of competition through lower prices. Competitive benefits should not be completely eroded through high cost fund surcharges or other rate increases to customers.

While we believe that we can establish a system that will ensure fair and reasonable rates everywhere, we do not believe that regulations can establish, through a regulatory methodology, competition anywhere. Competition is now emerging in urban areas at a much faster pace than in rural areas. But even in the urban areas, growth has been modest.⁽²⁾ We are very concerned that an improperly sized fund will overcompensate some areas, creating competition in rural areas not for customers, but for subsidies. Such a distortion of the market will serve as a barrier to true competition in both urban and rural areas.

We are pleased that the Recommended Decision anticipates a high cost fund at or near today's levels. Our endorsement of this recommendation is contingent on a commitment that the Commission will establish a high cost fund that is sufficient to provide for the needs of rural, insular, and high cost areas, but will not unnecessarily burden urban consumers from urban states.

Consistent with that commitment, we are troubled by the results to date of the Commission's platform model efforts. There are numerous issues to be resolved before a forward-looking model can be reasonably implemented, even for nonrural companies. Proprietary data, input values, and exorbitant results are but a few of the problems that must be overcome before July of next year. Although we are hopeful that these issues can be resolved, we must make it clear that unless the model produces consistent and rational results we will recommend that the existing system be maintained.

The Commission is investigating universal service and access charge reform concurrently; we expect a decision on both proceedings in time to implement them by July 1, 1999. We generally support the Commission's desire to remove implicit universal service support from interstate rates. We believe that, although universal service is predominantly funded through intrastate mechanisms, there is probably implicit universal service support in interstate access charges. It does not appear that, given today's marketplace, it is either simple or necessary to specifically identify the support at this time.

We see merit in industry plans that would remove "implicit universal service support" from interstate access charges. The difficulty, however, lies in quantifying those portions of interstate access charges that constitute universal service support. We believe it is possible to construct a system that will lower long distance rates for consumers without negating all of the benefits of the reductions through excessive surcharges. The Commission and Joint Board should continue to evaluate methods that benefit all classes of customers. To do so, the Commission should concentrate its efforts to ensure that all rate reductions are passed through to customers in an equitable manner so that all classes of customers benefit. Surcharges, if modest enough, could allow both low volume and high volume customers to benefit from the change in rate structure. Additionally, to ensure that customers continue to receive the benefits of access reform, any plan, whether through restructuring access rates or moving implicit universal service support into the universal service fund, should include an aggressive mechanism that would reduce rates or support over time, reflecting the continually declining costs of the telecommunications industry.

The Joint Board must continue our work with the Commission, even after the model platform becomes workable. Our support of this recommendation is contingent on an agreement that the Joint Board will have additional opportunities for input into the implementation of the forward-looking cost model, as well as any access charge reform issues that are directly related to universal service. We look forward to working with the Commission and its staff over the next six months and beyond.

2. In the last year, competitive local carriers have increased their overall share of total access lines from 0.5% to 1.8%. Their percentage of total business lines grew from 1.4% to 4.3%; residential lines rose to 0.7%, compared to 0.2% in 1997 (1998 Status of Competition report to Florida Legislature).