3. FONES4ALL's Proposal

FONES4ALL endorses adoption of the pilot project proposed in its April 16, 2002, Amended Petition, with a number of modifications, which are indicated below. According to FONES4ALL, in the case of a reseller, receipt of the difference between the ILEC's rate and the ULTS rate adds nothing to its revenue stream beyond the basic wholesale discount, which does not come close to meeting the costs that FONES4ALL actually incurs in providing ULTS service to its subscribers.

The cost recovery schedule proposed by FONES4ALL is as follows:

· CLECs serving between 1 and 5,000 total subscribers shall be reimbursed for lost revenues by the ULTS Fund at a rate of at least $50 per ULTS subscriber, less the end-user contribution received by the carrier directly from the ULTS subscriber;⁶

· When the number of total subscribers served by the CLEC reaches between 5,001, and up to 10,000, the CLEC shall be reimbursed by the ULTS Fund for lost revenues at a rate of at least $40 per subscriber for all subscribers, less any charges received by the carrier directly from the ULTS subscriber;

· When the number of total subscribers served by the CLEC reaches between 10,001, and up to 20,000, the CLEC shall be reimbursed by the ULTS Fund for lost revenues at a rate of at least $30 per subscriber for all subscribers, less any charges received by the carrier directly from the ULTS subscriber;

· When the number of total subscribers served by the CLEC goes above 20,000, the CLEC shall be reimbursed by the ULTS Fund for lost revenues at a rate equal to two times the tariffed rates and charges of the ILEC serving the area in which the customer resides, less any charges received by the carrier directly from the ULTS subscriber.⁷

FONES4ALL believes that the Commission program providing recovery of the incremental cost of serving ULTS subscribers does not afford carriers with the ability to recover the full cost of furnishing such service. FONES4ALL asserts that measuring the incremental cost of providing ULTS service is extremely difficult, especially for a small carrier that does not have spare personnel and other resources to undertake time-and-motion studies and other procedures required to accurately determine which of its costs are incremental to the ordinary costs of provisioning service to residential subscribers. Moreover, a new carrier, such as FONES4ALL, does not have any "ordinary" costs of service that can serve as a baseline. Consequently, it is almost impossible for such a carrier to determine its incremental costs.

FONES4ALL proposes a 3-year pilot project to incent CLECs to seek out new ULTS customers. The FONES4ALL proposal, with the most recent changes, includes the following provisions:

· A cap of 5% of total amount of the ULTS Fund per fiscal year that may be used to reimburse CLECs under FONES4ALL's pilot project⁸;

· Protections to prevent companies from forming multiple CLECs in order to game the pilot project;

· A rule that CLECs participating in the pilot project demonstrate a growth rate of at least 20% in ULTS subscribership every six months.

· A requirement that if a carrier does not grow at the prescribed rate, that carrier will automatically be governed by the ULTS reimbursement rules applicable to non-participating carriers.

· A rule that no carrier may remain at the same pilot project reimbursement level for more than one year, until a carrier reaches the 20,000 total customer level;

· A rule that a CLEC participating in the pilot project may claim no more than its tariffed rate for basic local service, as filed with the Commission as of April 1, 2001 (the date that lost revenue rules of D.00-10-028 went into effect) for its existing ULTS customer base; only new ULTS customers enrolled by the carrier after the date of the adoption of the pilot project will be subject to the pilot project's reimbursement rates.

· A rule that provides that participating CLECs will not be eligible to collect the pilot project reimbursement rates for "ULTS migrations," that is, subscribers who have been ULTS subscribers in the preceding 60 days at the same premises. Instead, existing ULTS subscribers who migrate to another carrier would be reimbursed at the ILEC rate, plus the average

CLEC monthly cost of operational expenses for the preceding 12 months.

FONES4ALL's proposal includes two incentive proposals for carriers not eligible to participate in the pilot project:

1. Reimbursement by the ULTS Fund for "marketing" expenses, with the total amount of the ULTS Fund available for such marketing reimbursement being capped at $2 million per fiscal year; or

2. The Commission's proposed "Finder's Fee" pilot project, the cost of which would be capped at $2 million per fiscal year to the ULTS Fund.

3.1 Parties' Positions

FONES4ALL, Z-Tel, I-Trax, Mpower and Latino Initiatives for the Next Century, et al. filed in support of FONES4ALL's pilot project. FONES4ALL defends its proposal indicating that its proposal provides the necessary safeguards to protect the ULTS Fund from being depleted and provides safeguards that will prevent any carrier from gaming the ULTS program. FONES4ALL asserts that its proposal removes all subjectivity from the Commission's review of operating expenses claimed by eligible carriers by obviating the need for the Commission to review operational expense claims for participating CLECs.

FONES4ALL claims that adoption of the pilot project will further state public policy, as delineated in Section 709 of the Public Utilities Code, to provide universal service to all Californians through broader consumer choice, as well as achieving the Legislature's goals of promoting broader competition and telecommunications choice for ULTS-eligible consumers. FONES4ALL urges that the results of the new pilot programs be compared to the results achieved by the ULTS-MB. According to FONES4ALL, while the ULTS-MB has spent millions of dollars since it came into existence, conducting studies of the ULTS-eligible population, developing marketing programs and operating a call center, it is unclear how many ULTS customers have actually been added through its efforts. FONES4ALL asserts that the number of ULTS-eligible households that do not currently have telephone service has remained relatively constant since 1996. According to FONES4ALL, while the outreach functions performed by the ULTS-MB have done a good job of retaining ULTS-eligible customers, the program has a poor track record of enrolling new ULTS-eligible households.

FONES4ALL asserts that its pilot project will lead to concrete and ascertainable results, namely, more new ULTS customers, in contrast to the activities of the ULTS-MB. FONES4ALL believes that adoption of the protections it proposes as part of its pilot project will ensure that the ULTS outreach goals of the Commission are met, while preventing the pilot program from in any way compromising the integrity of the ULTS Fund, or necessitating any increase in ULTS surcharges being imposed on California ratepayers.

FONES4ALL asserts that implementation of the pilot project will allow participating CLECs to recover their much higher initial operational and customer acquisition costs, while at the same time forcing them to become more efficient as they gain more customers. FONES4ALL responds to the criticism that the reimbursement amount it proposes is "excessive" saying that the pilot project eliminates any reimbursement of participating carriers for administrative expenses and instead combines reimbursement for lost revenues and administrative expense into one lump sum, thereby mooting the concerns expressed in the ACR regarding the lack of guidelines to govern TD's review of the reasonableness of those expenses.

Both Latino Initiatives for the Next Century et al. and Z-Tel support adoption of FONES4ALL's pilot project, saying that it will go a long way toward promoting the availability of competitive choice and enhance service quality for low-income subscribers who are eligible to participate in the ULTS program, but who have not been made aware of it, and may not ever be made aware of it without the implementation of the pilot program. They indicate that the pilot program will provide incentives to telephone companies to seek out and serve ULTS customers and point out that the FONES4ALL proposal includes a package of protections that address the concerns raised by several of the initial commenters and that will ensure that participants are not able to take advantage of the ULTS Fund.

Mpower asserts that FONES4ALL should be applauded for its ingenuity in coming up with an abuse-proof program that will, if successful, increase ULTS subscribership in the state to a substantial portion of the more than approximately 300,000 households in California that qualify for ULTS but are not currently availing themselves of it. According to Mpower, many commenters simply seem to be willing to accept current ULTS penetration as sufficient and do not seem to be concerned with bridging the ULTS gap.

I-Trax⁹ believes that the pilot project will provide many low income families with the basic telecommunications capabilities they require. Expanded ULTS subscribership will allow I-Trax to improve the quality of health care available to low income people who are eligible to participate in the ULTS program, but who are presently without telephone service. I-Trax points to the need for telephone connectivity for physicians to report the results of diagnostic tests to patients, to allow patients to access basic healthcare information, and to access emergency care through the 911 system.

A number of parties--the Coalition, Verizon, ORA, Roseville, Small LECs, LIF/Greelining, and the ULTS Administrative Committee (ULTS-AC)-stated their opposition to FONES4ALL's proposal. According to Verizon, FONES4ALL has not established that it is unduly burdensome for the typical CLEC to measure the incremental cost of providing ULTS service. If the Commission were to determine, based on an adequate factual record, that a reasonable number of CLECs have such difficulties, Verizon would not necessarily object to the establishment of presumptively reasonable rates. However, if the Commission were to establish such rates, it should set them so that the fund size does not increase without providing customers with a commensurate benefit. Verizon asserts that although California's ULTS program is a worthy program that benefits millions of low-income individuals who would otherwise not be able to afford basic telephone service, it comes at a price tag that cannot be ignored. In 2002-2003 the program is estimated to cost ratepayers more than $284 million. Verizon concludes that the Commission and the utilities share a fiduciary responsibility to ensure that the ULTS program does not become an arbitrage opportunity for CLECs at the ratepayers' expense.

According to Roseville and the Small LECs, the ACR paints an inaccurate picture of the Commission's successful efforts to ensure every Californian has access to basic service. According to a study released by the Federal Communications Commission (FCC) on April 23, 2002, the penetration rate for basic service among low income households in California increased to 91.3% in March 2001 (FCC Report, Table 4). Furthermore, from March 1997 to March 2001, the penetration rate among low income households increased approximately 3.6%¹⁰ from 87.7% to 91.3% (FCC Report, Table 3).

Roseville and the Small LECs conclude that the Commission has made, and continues to make, substantial progress toward fulfilling its penetration goal for low income households. Therefore, it is not necessary to undertake the substantial reforms to the ULTS program contemplated by the FONES4ALL petition.

In addition, Roseville and the Small LECs indicate that FONES4ALL's proposed pilot program would not further the public interest, since it would be duplicative of the marketing and outreach efforts of the ULTS-MB. They urge the Commission to focus its ULTS marketing efforts on the ULTS-MB. Since neither the ULTS-MB nor the contractor Richard Heath & Associates (RHA) stands to profit by encouraging ULTS customers to switch from one carrier to another, they are likely to focus their efforts more squarely on the ultimate goal of the ULTS program-to ensure that every Californian who wants basic phone service has it.

According to Roseville and the Small LECs, the outreach efforts under FONES4ALL's pilot program are not likely to be as effective as the efforts consistently provided by the ULTS-MB. Unlike the ULTS-MB, FONES4ALL's primary incentive is to increase its own customer base, and thereby its profits. As a resale provider, FONES4ALL can increase its customer base most easily by taking ULTS customers from ILECs. It is not under the same directive of the ULTS-MB to seek out only those without basic telephone service.

Roseville and the Small LECs assert that FONES4ALL's proposed compensation scheme is arbitrary and self-serving. The scale of monthly "per subscriber" payments which the FONES4ALL pilot program would put in place, bears no relation to the actual cost of serving those subscribers, and appears to be wholly arbitrary. A CLEC is encouraged to maintain a smaller subscriber base to take advantage of higher "per ULTS customer" subsidies. Similarly the attractiveness of these large subsidies could generate an artificial demand for ULTS subscribers, causing a number of CLECs to enter the pilot program. This would further drain the ULTS fund for a benefit that is duplicative at best. Such churn of existing ULTS subscribers does not further the Commission's goal of increasing the penetration rate of basic service among those households who do not currently have such service. Also, carriers could have an incentive to improperly enroll ULTS subscribers to receive the subsidies.

The Coalition recommends that the Commission maintain the ULTS program as it currently exists and address any shortcomings with minor revisions to the existing rules. The Coalition asserts that the marketing responsibilities should remain in the hands of the ULTS-MB to ensure the dissemination of competitively-neutral information. The Coalition finds that FONES4ALL's proposal would only serve to deplete the ULTS fund to the detriment of ratepayers.

LIF/Greenlining complains that the criticisms that FONES4ALL makes of the ULTS-MB should be leveled straight at the Commission itself. The Commission has failed to process a contract for ULTS outreach that it entered into with Richard Heath & Associates in about June 2001. Although the full Commission approved the contract in December 2001, the contract still sits in bureaucratic limbo in the Commission's Telecommunications Division (TD). The $5 plus million dollars that was earmarked for ULTS outreach remains unspent.

LIF/Greenlining believes the Commission would be unable to monitor FONES4ALL and other CLECs to ensure that the ULTS Fund is not being misspent, gamed or abused.

According to LIF/Greenlining, FONES4ALL does not explain how the Commission will ensure that ULTS marketing funds, even capped, will not be spent in a self-serving manner, which is precisely why ULTS marketing was taken in-house by the Commission rather than permitting carriers to market themselves. Also, while proposing to cap marketing expenses to a purportedly modest $2 million and overall charges against the fund to 5% of the fund, FONES4ALL does not explain why such charges will not ultimately erode the fund. If other carriers are ultimately permitted to charge the ULTS fund with rates that double or quadruple charges carriers currently receive from the ULTS fund, the fund will be jeopardized both in terms of its ability to reach individual unserved customers and in terms of political risk. LIF/Greenlining believes there exists the enormous potential for gamesmanship and depletion of the ULTS fund for the three-year pilot project, for service that has, and can be, provided for a fraction of the cost.

ORA echoes the concerns of other parties that FONES4ALL's proposed pilot project runs the risk of placing undue financial burden on the ULTS Fund without commensurate benefits. Assuming that FONES4ALL provides service to 20,000 ULTS customers, ORA calculates that the cost to the ULTS Fund for just these 20,000 customers would be $4,636,800 more expensive than Pacific Bell and $3,060,000 more expensive than Verizon. And ORA points out that other CLECs would also participate in the program. ORA finds that the money could better be spent on outreach and marketing through the existing ULTS program. Further, ORA asserts that FONES4ALL's proposed pilot project violates the Commission's goal of competitive neutrality.

3.2 Discussion

First, we examine the penetration rate for telephone service in California. According to the FCC,¹¹ the annual average percentage of households with telephone service was 97.0% in July 2001, up from 91.7% in November 1983. We are pleased that the overall penetration rate has improved. However, we have yet to reach the goal of a 95% subscriber rate for each residential customer group,¹² which is the goal established by the ULTS-AC.

While FONES4ALL states that the penetration rate has not improved in recent years, the FCC data presented by Roseville and the Small LECs and that cited above clearly indicate that the telephone penetration rate in California has been improving. One factor which could have an impact on the penetration rate is the Commission rule that precludes telephone companies from leveraging basic service in order to collect charges for non-basic service. This should serve to reduce telephone service terminations.

The question before us is how best to achieve that 95% goal for all residential customer groups. How can we most effectively market the existence of ULTS service to those unreached consumers? To answer this question, we will examine the FONES4ALL proposal and our ULTS marketing program.

3.2.1 ULTS Marketing Program

First, the reimbursement mechanism that is the heart of FONES4ALL's pilot project includes reimbursement to CLECs for marketing ULTS service. FONES4ALL makes it clear in its Supplemental Filing that it is engaged in marketing and outreach efforts:

...FONES4ALL field representatives who understand the ULTS program conduct door-to-door canvassing in neighborhoods to explain how the program works. In addition, FONES4ALL conducts multi-cultural notification placement, forges alliances with community based organizations, and has a presence at a number of community events such as cultural festivals and fairs to make potential subscribers aware of ULTS.¹³

We need to determine whether we should change our current rules which preclude using the ULTS Fund to subsidize individual carriers marketing of ULTS service. In making that determination, we will review our original rationale for industry-wide marketing of ULTS, as described by ULTS-AC in its filing. The Commission's industry-wide marketing program for low-income households is necessitated by decisions made by Congress and the California Legislature to foster the evolution of advanced telecommunications services by permitting and facilitating the creation of an open, diverse and competitive telecommunications market. In 1994 the California Legislature adopted legislation which directed the Commission to open all telecommunications markets to competition by January 1, 1997,¹⁴ and it also directed the Commission to ensure that the goals of universal service continue as competition develops.¹⁵

Aware that the goal of universal service might be difficult to achieve in a competitive environment, the Legislature also charged the Commission as well as the carriers it regulates to employ "every means...to ensure that every person qualified to receive lifeline telephone service is informed of and is afforded the opportunity to subscribe to that service." This requirement was affirmed by the California Legislature in Pub. Util. Code § 871.5(d). In § 871.5(d), the Legislature required the Commission to implement a universal service telephone program "in a way that is equitable, nondiscriminatory, and without competitive consequences for the telecommunications industry in California."

On the national front, the federal Telecommunications Act of 1996 (Act) made the goal of an open and competitive local marketplace a nationwide policy. Recognizing that universal service programs could be anti-competitive, however, Congress said that states could impose "requirements necessary to preserve and advance universal service" but only on a "competitively neutral basis."¹⁶

The Commission affirmed this dual Federal/state mandate in D.96-10-066, dated October 25, 1996, as follows:

[T]he ULTS program should not subsidize the marketing efforts of each carrier who offers basic service to low income customers. ...It makes no sense to have multiple marketing campaigns conducted by each carrier who is trying to sign up the same customers, especially when the marketing expense of each carrier is subsidized by the ULTS program. ... In addition, multiple marketing efforts tend to indirectly subsidize the carrier's overall marketing strategy. ... Such advertising also promotes the name of a particular carrier at the expense of ratepayers. It also indirectly subsidizes the marketing of other services, such as lucrative toll and enhanced services.... Having individual carriers continue to market the ULTS program may lead to abuses of a subsidized marketing system.

We believe that in a competitive environment, a single entity should be responsible for the marketing of ULTS services. The advantage of this approach is that no particular carrier is directly benefited by ULTS marketing activities. Instead, potential customers are free to choose which carrier they want to call. A single entity also limits the size of the ULTS marketing expenses. Instead of ratepayers having to subsidize multiple ad campaigns, there could be a single budget for marketing expenses. A third advantage is that the entity can specifically target the ULTS marketing to customer groups which have lower subscribership rates.¹⁷

In compliance with the Congressional and legislature mandates, the Commission approved a Commission-directed marketing program for lifeline telephone service and created the ULTS-MB as the advisory body responsible for ULTS marketing. In D.96-10-066, as cited above, the Commission gave its reasons why individual carriers should not be reimbursed for ULTS marketing activities.

For the Commission to approve the reimbursement plan in FONES4ALL's pilot project, we would have to determine that individual CLECs, such as FONES4ALL, should be allowed to engage in marketing activities. However, we first need to determine whether FONES4ALL's proposal violates § 253(b) of the Act or Pub. Util. Code § 871.5(d).

One aspect of the pilot program is that only CLECs are allowed to participate; it is not available to ILECs. In addition, FONES4ALL's marketing focuses on getting more customers for the company, and therefore, increasing the company's revenue. The Commission concluded in D.96-10-066 above that the best way to market ULTS in a competitive environment is through a single entity, so that no one carrier is advantaged by marketing activities. All of the reasons discussed above for creating a single ULTS marketing entity, and in not allowing carriers to be compensated for their marketing efforts, still exist today. And the legal mandate of competitive neutrality has not changed since that 1996 decision. We find that FONES4ALL's proposal violates the requirements of § 253(b) of the Act and Pub. Util. Code § 871.5(d) that the ULTS program be administered in a competitively neutral manner.

A Commission-selected contractor charged with conducting ULTS marketing would focus only on its mandated task of educating California's underserved populations about ULTS to further the Commission's goal of increasing basic service subscribership among low income households. An outside contractor would operate in a competitively neutral manner and would have no incentive to steer prospective ULTS participants toward a particular carrier, to the detriment of another. An outside contractor will not profit by encouraging ULTS customers to switch from one carrier to another. By design, it is more likely to focus its efforts more squarely on the ultimate goal of the ULTS program -to ensure that every Californian who wants basic phone service has it.

We find that ULTS marketing, in order to be competitively neutral, should be conducted by organization(s) that have no vested interest in a customer's choice of carrier. A contractor selected by the Commission and managed by TD, meets that criterion, while CLECs do not.

In addition to the legal issues relating to ULTS marketing, we should also explore the policy implications of the FONES4ALL proposal. Parties assert that FONES4ALL's proposal would lead to abuses, at the expense of ratepayers. One potential abuse would be that the ULTS program would be paying for churn, as customers are encouraged to change carriers so that the new carrier can claim they have a "new" customer. Also, the monetary incentive presented in FONES4ALL's proposal could encourage carriers to sign up ineligible customers for the ULTS program.

FONES4ALL indicates that the safeguards it proposes as part of the pilot project address all the concerns raised by other parties relating to gaming, fraud and abuse. FONES4ALL's proposed safeguards include a cap on the total amount of ULTS funding available under the pilot program. FONES4ALL states that the pilot project will preclude abuse, gaming and fraud by ensuring that: (1) only the enrollment of new ULTS customers will entitle participating carriers to the pilot project's reimbursement mechanism; (2) participating carriers will not be allowed to collect a given reimbursement rate for more than one year, and therefore must grow; and (3) carriers will be precluded from establishing multiple "shell" companies to take advantage of the pilot project's terms.¹⁸ However, if we examine those safeguards, we find that they do not address the major problem areas.

First, FONES4ALL indicates that a cap of 5% of the amount of the ULTS funds available would eliminate any possibility that ratepayers who support the ULTS Fund through surcharges on their monthly phone bills will be put at risk as a result of the FONES4ALL project. In the budget for 2002-2003, 5% would amount to 13 million dollars, which is not an insignificant amount. Since our ULTS surcharge is set to recover only the amount needed to administer the program, we cannot say with certainty that adding 5% of our total budget would not necessitate an increase in the surcharge amount.

FONES4ALL points out that to be eligible for reimbursement under its proposal, "the carrier being reimbursed will have been required to demonstrate affirmatively to the Commission that a new ULTS customer is actually receiving telephone service."¹⁹ FONES4ALL does not say exactly how the carrier would make that demonstration, nor does FONES4ALL respond adequately to parties' assertion that the Commission would need to develop a costly, personnel-intensive way to monitor the data carriers provide, in an effort to ensure that carriers are not abusing the rules of the pilot project. And any Commission monitoring program developed could prove to be more costly than the benefits received, since the Commission would need additional staff to perform the monitoring function.

The pilot program includes a rule that only new ULTS customers, those who have not received ULTS service within the past 60 days at the same premise, would be eligible for the pilot project. Without an extensive monitoring system, and potentially invasive contacts with ULTS customers, it would be difficult for the Commission staff to ascertain whether carriers are including only those "new" ULTS customers as described above. Without some method to verify that, there is room for abuse, and we do not want to adopt a program that does nothing but promote churn, with carriers having an incentive to steal each other's customers and pass them off as "new." The same holds true for unscrupulous carriers who sign up customers who are not eligible for ULTS service. If the financial incentive is significant enough, a carrier could decide to sign up ineligible consumers, in the interest of its own bottom line. The pilot project, as presented by FONES4ALL, has $13 million in incentives for CLECs to thwart the rules and attempt to garner a significant share of the project budget. We do not mean to imply that all CLECs would behave in that manner, but with strong incentives and inadequate or nonexisting monitoring of CLEC activities, some could be tempted to "bend" the rules.

The ACR asked for comment on whether it is duplicative to have marketing conducted by both CLECs and the ULTS-MB, and also requested comment on what CLECs can accomplish that the ULTS-MB cannot. Verizon indicates that it believes that it would be duplicative to have CLECs and the ULTS-MB engage in marketing activities and asserts that the ULTS Fund, and ultimately ratepayers, should not have to bear the expense of each individual CLEC's ULTS marketing efforts. There could be multiple CLEC s vying for, and directing their marketing efforts at, the same customers. Reimbursing every CLEC for marketing ULTS service to customers is a misuse of the ULTS Fund.

The Coalition states that carriers always have the right to conduct marketing activities; however, they do not have the right to receive reimbursement from the ULTS program for such activities.

Roseville and the Small LECs indicate that, at best, CLECs operating under the FONES4ALL proposal would duplicate the effort and focus of the ULTS-MB. Like the ULTS-MB, FONES4ALL apparently utilizes bilingual representatives and has connections to Community Based Organizations (CBOs) and community events. While FONES4ALL is within its rights to seek out customers from underserved neighborhoods, there is simply no reason for California ratepayers to subsidize FONES4ALL's separate, yet duplicative, outreach and marketing efforts. Roseville and the Small LECs assert that the outreach efforts under FONES4ALL's pilot program are likely to be inferior to the efforts consistently provided by the ULTS-MB. CLECs are not under the same directive as the ULTS-MB to seek out only those without basic telephone service, and can increase their customer base most easily by taking ULTS customers away from ILECs. Moreover, Roseville and the Small LECs assert that CLECs under the proposed pilot program could never duplicate the ULTS-MB's broad-based view of California's ULTS needs.

The ULTS-AC states the issue is not whether it is duplicative for both the Commission and carriers to market ULTS service to low income households, but whether the expenses of marketing by carriers should be subsidized by ULTS funds collected from other customers. ULTS-AC enumerates a variety of reasons that the expense of individual carriers' marketing efforts should be borne by the carriers themselves and should not be subsidized by surcharges paid by customers. A highly compelling reason not to subsidize individual carrier marketing activities is the Act's requirement that state universal service surcharges and subsidies must operate on a "competitively neutral basis." (47 USC § 253(b).) ULTS-AC notes that it would be difficult, if not impossible, to design a carrier-administered marketing effort that would treat all carriers equally and not be biased in favor of the carrier engaged in the marketing activity. It would be difficult, if not impossible, to design a carrier-administered marketing effort that would not violate the federal requirement for competitive neutrality.

The ULTS-AC points out that in its 1996 opinion, the Commission noted that marketing by a single entity "limits the size of the ULTS marketing expenses.²⁰ Devoting ULTS funds to duplicative marketing would increase the total paid for marketing. Being less well focused, that would result in a less efficient and less productive expenditure of ULTS funds.

In addition, we are concerned that CLEC marketing efforts could overlap and duplicate each other, as various carriers market service to the same target population of potential customers. This would not be an efficient or cost-effective method of marketing.

We find that having CLECs market ULTS service is clearly duplicative of marketing efforts by a Commission-selected contractor and conclude that marketing funded by the ULTS should be the exclusive providence of the Commission's contractor. This brings us to the issue of the contracts.

We are disturbed with TD's failure to process the contracts and get them in place in a timely fashion. Those contracts represent the Commission's total marketing effort for ULTS, and we require TD to hasten in getting those contracts implemented. Within 15 days of the effective date of this order, TD shall provide an update on its progress in getting the contracts in place to those on the service list for this proceeding.

3.2.2 Recovery of Administrative Costs

D.00-10-028 outlined the administrative expenses that carriers can recover from the ULTS Fund. Ordering Paragraph 18 reads as follows:

The ULTS Fund shall reimburse utilities for the reasonable costs and lost revenues they incur to provide ULTS to the extent that such costs and lost revenues meet all of the following criteria: (i) directly attributable to the ULTS program, (ii) would not be incurred in the absence of the ULTS program, and (iii) not recovered by the utility from other sources, such as the rates paid by ULTS customers, the utility's general rates, or the federal programs.

As noted in the ACR, D.00-10-028 does not provide guidelines to assist TD to make the determination that a particular carrier's costs are reasonable. The ACR acknowledged the need to develop guidelines so that TD's review will be ministerial, and less contentious. Parties were asked to comment on several specific questions relating to requests from carriers for reimbursement of administrative expenses associated with the ULTS program, including one question that asked whether the Commission should revisit the idea of having a set fee for administrative expenses per ULTS customer, rather than requiring small CLECs to perform time and motion studies to determine their incremental costs of various functions relating to provisioning of ULTS service.

In its comments, the Coalition makes the point that CLECs that provide ULTS service under the current guidelines are, in general, under-reporting their administrative costs and operating expenses associated with providing the service, due to the burden of conducting detailed cost studies that could "prove" their costs to TD staff. The Coalition believes that adoption of a simpler ministerial approach to reimbursement for operating expense would be less costly for CLECs and less costly for the Commission to administer and review.

The Coalition proposes that the Commission adopt the average operating expenses of the largest ILECs-Pacific and Verizon-as the best proxy for reasonable operating expenses of other carriers. Verizon recommends that the Commission establish a rebuttable presumption that requests that deviate too far from the mean are unreasonable. The Commission could hold workshops to determine how far from the mean a request can be before it is presumed to be unreasonable.

Roseville and the Small LECs point out that although D.00-10-028 does not provide any explicit guidance on how to interpret the "reasonableness" of ULTS costs sought to be recovered under General Order (GO) 153, Resolution T-16591 spells out clearly the types of expenses that are appropriate for recovery. The Commission's reasonable obligations should be co-extensive with the mandates of this list, set forth in the modifications to GO 153, attached as Appendix A to the resolution.²¹ According to this list, for example, carriers can recover for "the incremental costs incurred" in dealing with ULTS certification, re-certification, or eligibility issues.

Roseville and the Small LECs ask the Commission not to rely on the average ULTS rate of other CLECs. If other CLECs were to flock to the ULTS-exclusive business, relying on the average costs of CLECs could be misleading. According to Roseville and the Small LECs, the ILEC rate limitation currently imposed more accurately reflects a reasonable cost of serving a ULTS customer for a given service area. However, Roseville and the Small LECs conclude that if the Commission is looking for the best barometer of reasonableness, the only true measure is actual costs associated with a delimited and easily ascertainable set of administrative functions.

ULTS costs associated with providing local service must be incremental to the provision of basic service for the purpose of filing for reimbursement from the ULTS-AC. A local telephone company, regardless of whether its customer base is 100% ULTS subscribers, will only be reimbursed in accordance with this principle. One example includes time spent by service representatives. Rule 8.3.10 lists the following as falling within the scope of reimbursable items:

The demonstrably incremental costs associated with the time spent by utility service reps to (i) notify residential customers about the availability of ULTS, (ii) ask residential customers if they are eligible to participate in the ULTS program, (iii) obtain verbal certification from residential customers regarding their eligibility to participate in the ULTS program, (iv) inform enrolled customers that they must return the signed self-certification form within 30 days of being admitted into the ULTS program, and (v) inform enrolled customers of the yearly re-certification requirement.

The items listed in Rule 8.3.10 are quite specific, and do not include all the time spent discussing phone service with the customer. It does not include time spent obtaining information about the customer's name and address for service and billing purposes. It does not include getting information from the customer about the appropriate directory listing, or if the customer will request non-published service. It does not include time spent discussing the various feature options available to customers, or describing the blocking options available. It does not include the time spent discussing the customer's choice of toll carrier. This list is merely illustrative of the type of customer representative functions that cannot be charged to the ULTS program, and is not intended to be all-encompassing.

While we believe that Resolution T-16591 provides clear guidelines on the costs that carriers may recover, we acknowledge that it could be costly and time-consuming for a small CLEC to perform time and motion studies of the incremental costs of various functions attributed to the ULTS program. The Coalition suggests that we allow CLECs to claim a set amount for each ULTS customer and recommends that we use the average of the two largest ILECs, while Roseville and the Small LECs warn against using the average rate for the CLECs. We plan to use the ILEC rate, but rather than the rate for the two largest companies, we will use the average for all 21 ILECs, which has the benefit of including the experience of smaller ILECs, as well as the two largest ILECs. Including smaller ILECs in the calculation will give a broader base, rather than basing our calculation on the largest ILECs who, presumably, would have lower rates due to economies of scale.

In other words, we will allow a CLEC the option of receiving its reimbursement for ULTS administrative expenses based on the incremental costs delineated in T-16591. However, if a CLEC believes that it is too costly and burdensome to accurately calculate those incremental costs, the CLEC may exercise the option of using the cost factor we developed based on the average incremental operating expense per customer per month excluding any zero claims filed by the ILECs and approved by TD. However, in the interests of making this as simple as possible for TD, once a CLEC exercises the cost factor option, that selection will remain in effect for the entire fiscal year (FY).

The initial cost factor will be set based on ILEC costs for calendar year 2001 shown in Table 1 below:

Table 1: Operating Expenses²² Per ULTS Customer

Month and Year	21 ILEC Average Cost (A)	21 ILECs Total ULTS Customers (B)	8 CLECs Average Cost (C)	8 CLECs Total ULTS Customers (D)	Fones4All Average Cost (E)	Fones4All Total ULTS Customers (F)
09-00	$0.65	2,650,464	$2.03	33,523	$7,576.97	63
10-00	$1.07	3,243,424	$1.96	59,737	$183.64	303
11-00	$0.67	3,123,679	$1.01	51,263	$131.18	461
12-00	$0.96	3,127,175	$0.82	53,751	$111.41	690
01-01	$0.78	3,127,186	$0.65	53,933	$57.08	913
02-01	$1.07	3,151,484	$0.86	45,313	$48.20	1,157
03-01	$3.51	3,149,127	$0.97	46,746	$33.23	1,599
04-01	$3.26	3,179,160	$0.72	54,846	$28.11	1,872
05-01	$4.25	3,178,040	$0.75	50,076	$26.08	2,150
06-01	$2.25	3,007,523	$6.59	55,819	$21.23	2,316
07-01	$1.03	3,045,256	$1.08	57,052	$28.53	2,463
08-01	$1.18	3,070,441	$0.98	48,742	$15.10	2,638
09-01	$2.58	3,119,682	$1.00	54,282	$18.65	2,715
10-01	$0.49	3,174,541	$1.50	53,373	$15.93	2,866
11-01	$0.70	3,062,272	$1.62	53,274	$12.04	2,995
12-01	$1.07	3,084,578	$1.87	54,581	$11.25	3,116
01-02	$0.72	3,018,685	$2.44	45,526	$11.13	3,273

(A)(C)(E) are the average operating expense claim per ULTS customer for the group of carriers.

(B)(D)(F) are the total number of ULTS customers for the group of carriers.

The above data are based on claims filed by carriers.

For FY 2002-2003, the cost factor is set at $1.85 per ULTS customer per month. By April 15, 2003 and each year thereafter, TD shall adjust this cost factor to be applied in the coming FY based on the incremental operating expense claimed by the ILECs during the previous calendar year and the formula identified in our adopted § 8.13.1 of GO 153. Any CLEC that wants to exercise this option for the current FY, must notify TD within 30 days of the effective date of this order. Beginning in FY 2003, each CLEC must notify TD before the FY begins if it chooses to receive its incremental operating expense based on this cost factor. We order that GO 153 be modified as shown in Appendix A to implement this change.

In addition, we would like to assist TD in resolving any outstanding claims for administrative costs from FONES4ALL or other CLECs. We will allow CLECs with pending claims the option of using the $1.85 adopted in this order for FY 2002-2003, rather than basing reimbursement on the incremental costs delineated in T-16591. This will enable FONES4ALL and other CLECs to receive reimbursement for those claims that TD has previously denied and will eliminate the need for TD to determine the reasonableness of the amounts claimed. Any CLEC that wishes to exercise this option should notify TD within 30 days of the effective date of this order.

By giving CLECs a choice, we have eliminated CLECs' concerns about the difficulties of measuring their incremental costs of providing ULTS service. A CLEC can choose to use the adopted cost factor, rather than measuring its own incremental costs. Since our $1.85 is based on the average of each ILEC's average costs, it takes the experience of both large and small ILECs into account, and is a fair approximation of average costs a CLEC will incur. There is nothing in the record to indicate that the functions performed by CLECs differ from those of the ILECs. This will serve to simplify the process for both CLECs that select the cost factor option, as well as the TD, which is charged with reviewing the reasonableness of carrier claims. For those carriers that opt for the cost factor option, this will remove all subjectivity from the Commission's review of their operating expenses.