IV. Preliminary Scoping Memo
The Commission recognized that competition and technology would evolve over time and determined that a review of the B-Fund should occur on a regular basis.72 In D.96-10-066, the Commission determined that an initial review of the fund should take place in 1999 and every three years thereafter. This would allow sufficient time to determine whether new entrants are willing to serve high cost areas of the state with the subsidies provided, and to adjust the B-Fund for technological advancements.
In this proceeding, the Commission seeks comments as well as updated information to comprehensively reassess the B-Fund program. It has been nearly ten years since D.96-10-066 was issued, and the reviews every three years have not occurred. There have been dramatic changes to the telecommunications landscape as evidenced in the URF proceeding. Ten years ago, competition for local residential service was in its infancy. Today, ILECs compete with wireless, cable TV providers, and Voice over Internet Protocol providers in both the local and long distance communications markets. Although there is competition for long distance services, "long distance" is disappearing as a stand-alone service as more and more consumers opt for bundled service packages73 or use internet protocol-based networks.74 Consumers are in fact increasingly communicating in ways that bypass traditional telephone networks entirely. For example, it is now common to exchange voice, e-mail, and text messages through wireless phones, personal computers, and other means without ever having to use the public switched telephone network. These changes to the telecommunications landscape, coupled with the fact that we have not conducted a periodic review of the B-Fund program as required by D.96-10-066 75 nor have we have we met the mandate of SB 1276 to conduct a review of the program by January 1, 2006, requires the Commission to now conduct a fully comprehensive examination into the B-Fund program. We intend our review to be forward looking in scope, and to focus on ways to make our program more competitively neutral, sufficient and predictable, and of the quality of service expected by law.
In this OIR, as a basis to meet these objectives, we request comment and proposals regarding the following issues:
A. Updating Program Costs
In D.96-10-066, we adopted a Cost Proxy Model (Model) to determine the cost of providing telephone service in each Census Block Group (CBG) in California's fifty eight (58) counties. Based on this Model, we defined high cost Census Block Groups as those areas where the cost of providing telephone services exceeded the statewide average cost of $20.30 per access line.
Inputs to the Cost Proxy Model were based on 1994 cost data and utilized 1990 census information. Since that time, demographics in this state have changed significantly. As foreseen in that decision, technological innovations in the telecommunications industry have driven down the incremental costs per access line served (costs).76 An example of this can be seen today in how telecommunications providers are moving to Internet Protocol (IP) platforms, significantly reducing their costs of providing basic telephone service. Therefore, the Commission tentatively concludes that cost assumptions underlying the B-Fund subsidy levels need to be updated for current conditions.
The Model is not supported and is no longer available for use due to the purchase of the last proponent of the Model by another company. However, even if the model was available, it would be difficult to update as we continue to move further away from cost-of-service regulation. Given these circumstances, we believe it is not practical to revisit the updating of the Model.
While we elect not to update the inputs to the Model, we tentatively conclude that we should still update the estimated total cost of providing basic telephone service to Californians in each CBG or similar discernable area for current conditions. Such a reevaluation is long overdue given the changes in technology in the past decade. We also tentatively conclude that we should investigate ways of more accurately estimating the level of subsidy needed, if any, to promote the goal of universal service. The methodology developed to assess both estimated costs of basic service and subsidy levels needs to be simple, repeatable in the future, and must, at the same time, account for advances in technology. The resulting process should be capable of accommodating modifications and/or policy changes from both the FCC and the California State Legislature which impact this program. In this proceeding, we will consider the following alternatives for updating the estimated cost of basic service for purposes of the B-Fund:
In general, the higher the population density, the lower is the incremental cost of providing telephone service. Much of the current and likely future population growth has been in areas near cities. As a result, because population growth in high cost areas are likely to drive down the costs of provisioning service, it is highly probable that certain areas that were designated as "High Cost" areas in 1996 no longer belong in that category now. See Appendix A, Table 1 for a list of 28 California counties that have experienced population growth exceeding 15% from 1990 to 2000.
Currently, a fixed per line subsidy amount is paid to carriers for each primary residential access line in eligible "high cost" areas. Therefore, population growth in these areas permits carriers to make larger and larger subsidy claims for areas where costs may actually be declining. This trend will continue as more and more population growth occurs in low density "high cost" suburban and rural areas. Thus, while carriers' real costs may be declining, their claims on the Fund may actually be increasing, resulting in an inappropriate large share of fund recipient cost recovery being borne by the fund.
We solicit comment on whether it is reasonable to revise our list of High Cost areas based on the most currently available census data concerning population density and if so, what revisions in the listing of designated High Cost areas would result. Parties may also offer any alternative criteria that they believe should be considered in updating the list of designated High Cost areas.
2. Use De-averaged Costs and Commission-Adopted UNE-P Based Costs for SBC and Verizon
Competitive Local Exchange Carriers may offer services to their customers using Unbundled Network Elements (UNE) purchased from the ILEC networks. By purchasing UNEs, competitors are able to use portions of these incumbents' networks to offer competitive local exchange services. The primary UNE is the copper twisted wire pair or "loop" that provides the "last mile" connection to a customer's premise. When a Competitive Local Exchange Carrier purchases an incumbent's UNE loop plus its switching services, it is termed a "UNE platform" or UNE-P.77 The UNE costs are an outcome of the Commission's Open Access and Network Architecture Development (OANAD) proceeding.78
In D.04-09-063 and D.05-03-037, the Commission adopted UNE rates for Pacific Bell / SBC service territories. In D.06-03-025, the Commission adopted UNE rates for Verizon's service territory.79 These Decisions de-average the UNE related costs in each of these ILEC service territories. See Appendix A, Table 2 for Commission-adopted UNE loop costs.
The UNE loop costs adopted by the Commission can be overlaid on the CBGs based on the 2000 census. This proposal will result in de-averaging costs over zones that have been adopted by the Commission. The advantage of this approach is that it will result in forward-looking costs being used for CBGs. The disadvantage is that the de-averaged zones are much larger than that currently being used by CBGs. As a result, certain high cost fund areas within each zone will not be captured while other, low cost areas will be included as high cost fund areas.
We intend to explore the extent to which UNE costs may provide a reasonable basis upon which to establish current estimates of B-Fund statewide average and CBG-specific costs. Such a methodology would also take into account the impact of telecommunications technology advancements in High Cost Fund areas. We recognize that our consideration of using adopted UNE costs will only be useful in AT&T's and Verizon's service territories. We also recognize that UNE rates reflect the wholesale cost of discrete network elements while the B-Fund proxy has used the estimated costs of providing basic retail service as a surrogate for meeting the statutory requirement of affordable basic retail service. We thus seek comments on whether, or to what extent, using UNE-loop costs for computing CBG specific costs of basic retail service is a reasonable way to proceed in updating the B-Fund, or whether other proxies should be used.
3. Modify CBG Costs for Frontier Communications and SureWest
Frontier Communications and SureWest do not have Commission-authorized UNE costs established for their respective service territories. However, as discussed later, in D.05-08-004 we have required SureWest to develop and submit a cost proxy model using its current costs and to report on its impact on several funds including the B-Fund.80 Accordingly, as part of its comments in this OIR, SureWest shall provide the status of the development, results, and submission of its cost proxy model. We also seek parties' comments on the methodologies to be considered for B-Fund costs of basic service and subsidies in the service territories of Frontier Communications, incorporating, as appropriate, updated CBG population data as discussed above.
B. Evaluate Whether Universal Service Rate Support Levels Can Be Reduced While Still Meeting the Goals of This Program
One of the goals of the B-Fund program is to maintain a fair and equitable local rate structure for access to universal service in high cost fund areas for all Californians. In the current telecommunications landscape, we need to determine if the program is competitively and technologically neutral and whether the rate structure is "fair and equitable." Pursuant to statute, we must evaluate whether, or to what extent, universal service rate support levels can be reduced while still meeting the goals of this program.
B-Fund carrier subsidies have shown significant swings from one year to the next. For example, at Fund inception in February 1997, the B-Fund was designated to provide $352 million per year in carrier subsidies. By 2001, the subsidy had grown to $439 million. By 2004, the subsidy amount was at $401.4 million. Details are given in Appendix A, Table 3. Similarly, the contribution rate has also fluctuated greatly over time.81
Contrary to the expectation when the B-Fund was created, costs have not gone down. Costs have actually shown significant swings while generally trending higher. We believe that we should investigate why costs are not going down as technology advances and to consider appropriate actions to control the size of the B-Fund while maintaining program goals.
B-Fund subsidies work to lower the cost of local service to consumers by allowing carriers to either maintain lower than cost local rates or pass the subsidy through to customers through a surcredit. As such, the Public Utilities Code does not permit a recipient to cross-subsidize other services.82 However, competitive carriers in the Uniform Regulatory Framework proceeding argue that such potential exists.83 Those parties also argue that the B-Fund has not encouraged competition for local residential subscribers in high cost areas. 84 We ask parties if they agree or disagree with these arguments and submit supporting documentation to demonstrate their positions.
We seek comments on whether we should continue or eliminate the B-Fund. If we should continue the B-Fund in its present form, then what is the rationale for this action and should we consider reducing its size? Alternatively, if parties believe that we should discontinue and/or alter provisions governing the B-Fund, comments should address how such discontinuance or alteration would affect the goals of universal service. We seek comments on the following options to modify the B-Fund program: (1) Modify the B-Fund threshold level; (2) Cap the B-Fund subsidies; or (3) Apply a means test for subsidies in high income areas.
In D.96-10-066, based on inputs to a Model, we defined high cost CBG's as those areas where the cost of providing telephone services exceeded the statewide average cost of $20.30 per line in service territories of the state's four large and mid-sized LECs. The $20.30 per line cost figure acts as a threshold level beyond which carriers may qualify for B-Fund support. Since the adoption of CBG costs in 1996, however, the makeup of the states population demographics, technology and costs of providing service have changed significantly. As a result, the threshold level has become outdated. To the extent that we update the basic service costs as discussed in the preceding section, there will be a corresponding change in the statewide average cost threshold which is currently based on the outdated $20.30 per line figure.
We also seek to examine other ways to revise the threshold level beyond which carriers may qualify for B-Fund support. In particular, we seek comment on whether to set the threshold level above statewide average cost based upon criteria established by the FCC. The FCC modified the federal high-cost support mechanism for non-rural carriers and adopted measures to induce states' to ensure reasonable comparability of rural and urban rates in areas served by non-rural carriers.85 The FCC requires states to certify that rates in rural areas served by non-rural carriers are reasonably comparable to a national urban rate benchmark of two standard deviations above the average urban rate or about 140% of the average urban nationwide rate of $24.31 per line.86 That threshold rate level, within two standard deviations ($34.21) from the average urban rate, is considered a "safe harbor" rate. Rates less than the threshold would be presumed reasonably comparable, and states could certify that basic service rates are reasonably comparable without submitting rate information. A state would have the option of submitting rate information to show that factors other than basic service rates affect the comparability of its rates in high-cost areas.87
A review of claims filed by the largest four B-Fund eligible COLR indicates that increasing the threshold of high cost fund from the current $20.30 to the FCC adopted "safe harbor" benchmark of $34.21 per subsidized line would reduce their B-Fund draw by approximately $30 million each month.
We seek parties' comments on whether the Commission should increase the current High Cost Fund subsidy threshold level from the current $20.30 per line benchmark to the FCC adopted "safe harbor" benchmark of $34.21 per line. Parties should provide supporting rationale for their position, focusing on how the goals of universal service would be impacted and what other relevant impacts should be considered. We anticipate that this benchmark would be changed to mirror any changes adopted by the FCC.
We seek parties' comments on whether the Commission should adopt its own subsidy threshold level separate from the FCC benchmark. Parties should provide supporting rationale for their position, focusing on how the goals of universal service would be impacted, what other relevant impacts should be considered, and how the benchmark would be updated over time.
We also seek input on whether we should require each incumbent local carrier to provide confidential data to assist the Commission in calculating a benchmark, or for other reasons related to calculating high cost support. To the extent that any such data is deemed necessary, parties should present proposals concerning the use of nondisclosure agreements and other appropriate protocols to safeguard the confidentiality of such data consistent with adequate due process in developing the record.
A primary goal of universal service is to increase the penetration of basic telephone service in the state. Another important goal is to maintain "competitive neutrality" in offering of telecommunications services. When the original Cost Proxy Model was adopted in D.96-10-066, alternate cost effective technologies like wireless and satellite telephones were not readily available in certain low density high cost areas. As a result, the subsidy amounts for lines in some high cost areas were quite high. See Appendix A, Table 5 for a list of counties where CBG costs exceed $85.00. In view of changes in the competitive landscape and advances in technology in recent years, we seek to examine the prospects for relying on competitive market forces to increase the penetration of basic telephone service into high cost areas. In this context, we intend to explore the prospect for capping the B-Fund subsidy amount, as explained below.
A review of claims filed by the largest four B-Fund eligible Carriers of Last Resort indicates that less than 1% of claims are for subsidies that exceed $85.00 per line. From a public policy perspective, the continuation of paying excessively high subsidies appears to be an inefficient burden on other ratepayers. Therefore, given it represents less than 1% of claims, we solicit comments on capping the maximum subsidy amount that should be given for B-Fund lines at $85.00 per line. We request information on impacts such a policy may have on users in excessively high cost areas (usually very remote or insular areas). We also seek comments on whether, or to what extent, the availability of Voice over Internet Protocol services offered by cable carriers or other communication services provide competitive constraints that limit the need for B-Fund subsidies in many regions.
We seek comments particularly from cable, wireless, and satellite companies to ascertain if a cap of $85.00 is a meaningful incentive for provisioning of basic services using alternative technologies especially in sparsely populated rural high cost areas of the state. In the alternative, parties may propose alternative caps or limitations on subsidies available through the B-Fund. Whatever position parties take with respect to subsidy caps, they should provide supporting rationale and documentation, as relevant. We also seek comments from all parties on how we can reduce any barriers to entry and promote incentives to get wireless providers or other non-traditional carriers to offer basic residential telephone services in sparsely populated high cost areas. We also seek comment on whether or through what means the Commission should actively encourage deployment of new technologies as a competitive force to drive down the costs of basic service in very high cost areas.
Residents in a number of California counties have per capita incomes that far exceed the statewide median per capita income. See Appendix A, Table 6 for a list of counties with per capita incomes exceeding the median per capita income for all Californians. While most residents of such counties can afford to pay for basic residential telecommunications services without a subsidy, some residents cannot afford those services without a subsidy. Therefore, we will consider applying a "means test" filter to residents of High Cost Fund area CBGs to exclude B-Fund support to individuals with the highest per capita income. By applying such a filter, ULTS and other qualifying customers would continue to receive the same subsidies as they do now based on the CBG cost. Carriers would not be impacted since they will continue to be subsidized for their high cost of providing service by customers through higher rates.
We seek comment on impacts to universal service goals should we exclude high cost support to high income consumers. We seek comments on whether to apply a "means test" filter for high cost subsidies to residents of high cost fund areas whose household income exceeds a specified limit, and if so, what limits on income level would be reasonable. In particular, we seek comments as to whether 115% of the statewide per capita income would serve as a reasonable limit. We seek comments on how such a filter could be applied given how the support is generated for the carrier's network and is not currently specific to any particular household. We are also interested in comments on alternative methodologies that can be efficiently applied to accomplish the goal of limiting subsidies to such households.
C. Should "Extended Area Service" Payments from the B-Fund to SureWest Be Discontinued?
In D.00-11-039, the Commission ordered the use of the B-Fund to make annual payments of $11.5 million to SureWest until further ordered by the Commission.88 Those payments were originally made by Pacific Bell to offset SureWest's intrastate regulated operating expenses but were replaced by payments from the B-Fund on an interim basis during pendency of an OII to determine a permanent replacement mechanism for Extended Area Service revenues that it had received from Pacific Bell. In D.05-08-004, we authorized SureWest to continue receiving these interim payments from the B-Fund and required SureWest to develop and submit a Model utilizing its current costs and to report on the impact of the same on: a) its rates; b) the Universal Lifeline Telephone Service fund; and c) the B-Fund within 12 months of adoption of D.00-11-039. We also authorized SureWest to file an application to request authority to modify the Model in its service territory for the B-Fund at the time of its filing. We invite parties to comment on discontinuance of the Extended Area Service payments to SureWest from the B-Fund. We also invite parties to comment concerning the advisability and impacts of phasing out the EAS payments gradually over a period of approximately 5 years, versus immediate elimination.
D. Revenue Neutrality and Utility Reimbursement
Under rate of return regulation appropriate to a local service monopoly provider, the Commission traditionally applied the principle of "revenue neutrality" to ensure that regulatory changes imposed on carriers did not adversely affect carriers' financial viability or result in an unwarranted windfall. For example, when the Commission established the B-Fund, it determined that "in order to make subsidies for high cost areas explicit, there must be a correlating downward adjustment of rates or price caps through a surcredit or reduction in tariffed rates or price caps so as to prevent the ILECs from recovering implicit subsidy support as well."89 The Commission required a reduction in rates for certain SBC services (except residential basic service) for the company to remain revenue neutral.90 Since then, as the Commission relies more on competitive markets to set prices, the requirement of revenue neutrality makes little sense in a competitive environment. For example, the NRF ILECs have considerable pricing flexibility for their competitive services. Currently when NRF ILECs increase or lower prices for competitive services, there is no attempt to achieve revenue neutrality. Therefore, we intend to examine whether the concept of revenue neutrality has become incompatible with the competitive market that exists in modern telecommunications.
In the case of the B-Fund, the issue of revenue neutrality is further complicated by the fact that both incumbent and competitive carriers receive subsidies. The Commission has never applied the concept of revenue neutrality to competitive carriers.
D.96-10-066 anticipated that the need for subsidies may diminish over time due to competition and technological advancement.91 The Commission also anticipated that a Carrier of Last Resort (COLR) may want to withdraw as the only COLR in a particular high cost area. To address these concerns, the Commission proposed an auction mechanism that eliminates the need for contentious cost studies. The auction approach also appears to resolve concerns over revenue neutrality.
Under the current rules, a designated COLR may opt out of its obligations in a high cost area by advice letter, unless it is the only carrier remaining in the area, in which case it must file an application to withdraw as the COLR, and continue to act as the COLR until the application is granted or a new COLR has been designated as a result of an auction.92 Therefore, should the Commission determine that subsidies should be reduced, capped or be otherwise limited, an existing COLR may seek to withdraw from a high cost area. Thus, the Commission is not required to make subsidy adjustments revenue neutral for an existing COLR, and the COLR would not be required to continue providing service at the reduced subsidy level. The Commission would then hold an auction and designate a new COLR with the lowest bid to serve the area. That winning bidder could very well be the existing COLR willing to provide service at the reduced subsidy level (depending on its bid).
The Commission ordered workshops to assist in developing an auction mechanism for serving high cost areas.93 Workshops were held on May 8 and May 9, 1997. Telecommunications Division issued a workshop report on November 7, 1997.94 However, the auction mechanism explored in those workshops was never put in place and further proceedings would be required before an auction could be implemented. We discuss the prospects for an auction mechanism to deal with not only the designation of a new Carrier of Last Resort, but also for establishing support levels for existing Carriers of Last Resort supra.
Should there be a revenue shortfall for those telecommunications utilities that currently receive B-Fund program subsidies, we request comment on whether, and if so, how to address any such revenue loss. Assuming that the concept of revenue neutrality was found to be incompatible with the modern telecommunications market, we seek comment on whether there would be any basis justifying reimbursement through the B-Fund for shortfalls. On the other hand, if prices are permitted to move closer to cost, there would be a diminished need for the B-Fund support. We thus seek comments from parties as to whether we should continue to reimburse carriers for their expected shortfalls as a result of pending changes to the B-Fund program particularly as we examine whether the concept of revenue neutrality continues to have any relevance in today's market environment. Parties should likewise address what other alternatives, if any, we should be considering as a means of meeting the goal of universal service besides providing explicit reimbursement to carriers for claimed shortfalls in serving such High Cost areas.
E. Auction Universal Service Support by Disaggregated Area
As discussed infra the Commission previously considered the use of auctions in the universal service context in D.96-10-066, where it examined using auctions in the context of designating a new carrier of last resort where the incumbent carrier of last resort had filed to withdraw from that status. Auctions could also be used to determine support levels for all carriers of last resort.95 In an auction process the true economic cost for providing service to the designated area would be established through the bidding process, while at the same time providing affordable service to customers.
Under such a process, carriers would bid for the lowest amount needed from the fund in order to become the primary carrier for the specified area. An area could constitute an entire serving area or some smaller subdivision thereof. Universal service support would be allocated for the network of the lowest bidder in a particular geographic region rather than multiple operators in one region. In exchange for receiving universal service support for a period, a carrier would be designated the carrier of last resort. Some auction proposals limit support to one carrier of last resort, while others permit more than one carrier to receive the same or less support (second lowest bid or some ratio of the lowest bid). We seek comment on the merits of adopting such a system and input on the entire process for delivering universal service support through such a mechanism. Most proposals for using such an auction process would hold the auction every five years. Is this timeframe too short, too long, or just right? What level of disaggregating should be used in such an auction mechanism? How many carriers should be eligible in a given area and how should support be allocated if more than one carrier is eligible? We solicit auction proposals that comprehensively address the delivery of universal service support.
F. Program Administration Implementation Issues
In this rulemaking, we also seek to examine ways to make the B-Fund Program administration more efficient and streamlined. The Commission's Telecommunications Division has automated parts of the claims validation process. However, the claims review process continues to be labor intensive. Carriers of Last Resort submit claims in a specified format and Telecommunications Division staff verifies the appropriateness of filed claims. Validation of claims is done by comparison of claims with backup information and through periodic audits. We believe that further automation for claims processing will be cost effective in the long run and save program administration costs.
We request comments on whether the Telecommunications Division should investigate setting up of an automated claims review program. Such a program would require claimants to file claims electronically. A program can then be developed that will automate some of the repetitious tasks that are currently performed by TD staff. This will not obviate the need for verification of claims against actual Carrier of Last Resort records but, this will reduce the total time taken for review of claims.
72 D.96-10-066.
73 Local Exchange Carriers offer both local and long distance calling in one package, and compete against wireless providers that offer "bucket plans" of minutes in interstate calling areas.
74 Voice over Internet Protocol service is national or international in scope. Vonage Holdings Corporation Petition for Declaratory Ruling Concerning an Order of the Minnesota Public Utilities Commission, WC Docket No. 03-211, Memorandum Opinion and Order, 19 FCC Rcd 22404 (2004).
75 D.96-10-066, Appendix B, Rule 6.C.4.
76 Ibid. at Appendix A citing D.95-07-050 Proposed Rule 6.A.7.
77 UNE-P refers to the combination of a 2-wire loop, 2 wire-port, tandem switching and transport and is calculated assuming 1,400 local minutes and 300 toll minutes of usage. Based on recent federal actions, local exchange carriers are no longer required to sell UNE-P to competitors. [In the Matter of Review of Unbundled Access to Network Elements, Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers (WC Docket No. 04-313, CC Docket No. 01-338); Order on Remand, FCC No. 04-290, (rel. Feb. 4, 2005) ("TRRO")] Nevertheless, UNE-P rates may provide a reasonable basis upon which to establish current estimates of B-Fund statewide average and CBG-specific costs.
78 OANAD Proceeding. R.93-04-003.
79 OANAD Proceeding. R.93-04-003.
80 D.05-08-004, Ordering Paragraph 2.
81 The B-Fund is funded by an all-end-user surcharge that is billed and collected by telecommunications carriers from their customers. The surcharge rate is based on the level of B-Fund claims and reserve levels maintained by the program. At program inception in 1997 the surcharge was set at 2.7%. That rate was increased to 3.8% in 1999, was gradually reduced to 1.42% in July 2002. That rate grew steadily to 2.7% in July 2003, went down to 2.2% in January 2004, increased to 2.43% in January 2005 and is set at 2.00% for 2006. CPUC Resolution T-16964, adopted December 1, 2005. See Appendix A, Table 4 for a history of B-Fund surcharge rates.
82 PU Code Section 728.
83 R05-04-005; Opening Briefs of Cox California Telecom, LLC, p.19 and of, California Cable & Telecommunications Association (CCTA), pp. 8-10; Reply Brief of Cox California Telecom, LLC, pp. 6-7; Transcript at 833 (Cox); Transcript at 836-837 (CCTA).
84 R05-04-005; .Opening Brief of Cox California Telecom, LLC, p18; Reply Brief of Cox California Telecom, LLC, pp. 6-7.
85 FCC 03-249, issued October 16, 2003, remanded, Qwest Corp. v. FCC, 398 F.3d 1222 (10th Cir. 2005).
86 Federal Communications Commission Reference Book of Rates, Price Indices, and Household Expenditures for Telephone Service, May 25, 2005. Non-rural carriers may receive high-cost support based on forward-looking costs, as estimated by an FCC cost model. For each state, the cost model calculates the wire center forward-looking cost per line incurred by non-rural carriers to provide supported services. The statewide average cost per line is then compared to the national average cost per line to determine eligibility for support. The forward-looking support mechanism provides support to non-rural carriers in those states that have a statewide average forward-looking cost per line greater than the national benchmark, which was set at about 140 percent of the national average forward-looking cost per line. Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Ninth Report and Order and Eighteenth Order on Reconsideration, 14 FCC Rcd 20432 (1999)(Ninth Report and Order), remanded, Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2003)(Qwest I), Order on Remand, 18 FCC Rcd 22559 (2003), remanded, Qwest II, 398 F.3d 1222.)(the current benchmark is set at two-standard deviations above the national average cost, which is currently about 140 percent of the national average forward-looking cost per line).
87 For example, if its rural rates exceeded the benchmark, a state would be permitted to explain in its certification why its rural rates were reasonably comparable. Similarly, a state could explain in its certification that its rural rates were not reasonably comparable to nationwide urban rates, despite being within the safe harbor created by the nationwide urban rate benchmark.
88 D.00-11-039, Ordering Paragraph 2.
89 D.96-10-066 at 207.
90 D.98-07-033 implemented the rate reductions to offset explicit subsidy support provided by the B-Fund.
91 D.96-10-066 at 215.
92 The rules are as follows: If there is only one carrier in a high cost area and that carrier has filed an application to withdraw as the Carrier of Last Resort (COLR) in that area, and no other provider is willing to assume the COLR responsibility at the current subsidy level, the Commission will initiate an auction whereby service providers shall bid on the amount of subsidy each would require to operate as the COLR. Such auction will be held within 180 days from the time the application to withdraw as the COLR is filed. The qualified bidder who places a bid representing the lowest amount of subsidy required to offer service in the GSA would become the subsidized COLR for a period of three years. Competitive entry would be allowed, but only 1/2 the subsidy would be available to the competitor. A COLR who loses the bid shall have the option to sell its facilities in the area to any interested party. One-hundred(180) days prior to the expiration of the three-year COLR obligation, all carriers desiring to become a designated COLR in the GSA shall file applications stating their intention to become the designated COLR for that particular service area. The Commission will then determine whether the same designated COLR should be retained at the current subsidy, whether multiple carriers of last resort should be permitted and at what subsidy amount, or if another auction should be held. D.96-10-066, Appendix B, Rule 6.D.7.
93 OP 16(d) of D.96-10-066 as modified by D.97-01-020 (in R.95-01-020/021) regarding Universal Service.
94 In the conclusion section of the Workshop Report, Telecommunications Division (TD) recommended that the Commission pursue the development of an auction mechanism on three separate tracks. First, the Commission should investigate the outstanding legal issues surrounding competitive bidding: (1) Can the Commission restrict support to only winning bidders or does this constitute an additional condition on eligible carriers which violates the Telecommunications Act? (2) Can the Commission relieve a COLR of its interconnection obligations? And (3) Can the Commission require an exiting ILEC COLR to sell its facilities according to a specified pricing formula? While the first issue is critical as to whether or not an auction mechanism can work, the second and third issue may or may not be critical, but would shape the way a competitive bidding system is structured.
95 The idea of using an auction mechanism to allocate universal service support has also been raised recently at the federal level. FCC Chairman Kevin Martin discussed the "reverse auction" concept at the Bank of America Media and Telecommunications Conference in New York City on March 29, 2006. Computerwire (March 30, 2006), http://www.computerwire.com/industries/research/?pid=5CC92278%2D7D1A%2D4C3F%2DB6B2%2D76BB295E091D [last checked May 31, 2006].
