*Pages 1--75 from Microsoft Word - 39204* Federal Communications Commission FCC 04- 127 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of Federal- State Joint Board on Universal Service ) ) ) ) CC Docket No. 96- 45 NOTICE OF PROPOSED RULEMAKING Adopted: June 2, 2004 Released: June 8, 2004 Comment Date: 30 days after publication in the Federal Register Reply Comment Date: 60 days after publication in the Federal Register By the Commission: I. INTRODUCTION 1. In this Notice of Proposed Rulemaking (Notice), we seek comment on the Recommended Decision of the Federal- State Joint Board on Universal Service (Joint Board) concerning the process for designation of eligible telecommunications carriers (ETCs) and the Commission’s rules regarding high-cost universal service support. 1 In its Recommended Decision, the Joint Board recommended that the Commission adopt permissive federal guidelines for states to consider in proceedings to designate ETCs under section 214 of the Communications Act of 1934, as amended (Act). 2 In addition, the Joint Board recommended that the Commission limit the scope of high- cost support to a single connection that provides a subscriber access to the public telephone network. 3 Finally, the Joint Board recommended that the Commission further develop the record on specific issues identified in its Recommended Decision relating to the high- cost support mechanism, including identification of mobile wireless customer location, 4 and standards for the submission of accurate, legible, and consistent maps. 5 We seek comment on whether the Joint Board’s recommendations should be adopted, in whole or in part, in order to preserve and advance universal service, maintain competitive neutrality, and ensure long- term sustainability of the universal service fund. We also seek comment on several related proposals to streamline our rules governing annual certifications and submission of data by competitive ETCs seeking high- cost support. 1 Federal- State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96- 45, 19 FCC Rcd 4257 (2004) (Recommended Decision). 2 Recommended Decision, 19 FCC Rcd at 4258, para. 2. See also 47 U. S. C. § 214( e). The Communications Act of 1934 was amended by the Telecommunications Act of 1996. Pub. L. No. 104- 104, 110 Stat. 56 (1996) (1996 Act). 3 Recommended Decision, 19 FCC Rcd at 4258, 4280, paras. 3, 58. See also Recommended Decision, Separate Statement of Commissioner Kevin J. Martin, Dissenting in Part, Concurring in Part, 19 FCC Rcd at 4316- 17. 4 Id. at 4300, paras. 102- 03. 5 Id. at 4301, para. 105. 1 Federal Communications Commission FCC 04- 127 2 II. ISSUES FOR COMMENT 2. ETC Designation Process. We seek comment on the Joint Board’s recommendation regarding the ETC designation process, which we incorporate by reference. 6 In particular, in addition to the existing minimum eligibility requirements specified in section 214( e)( 1) of the Act, the Joint Board recommended that the Commission adopt permissive federal guidelines encouraging state commissions to consider certain additional minimum qualifications when evaluating ETC designation requests. 7 The Joint Board also recommended that the Commission further develop the record on ways in which state commissions may determine whether an applicant satisfies the additional minimum qualifications as part of the ETC designation process. 8 The Joint Board recommended that state commissions apply these permissive federal guidelines in all ETC proceedings, 9 and that state commissions use a higher level of scrutiny for ETC applicants seeking designation in areas served by rural carriers, consistent with section 214( e)( 2) of the Act. 10 While the Joint Board did not endorse adoption of a specific cost- benefit test for the purpose of making public interest determinations under section 214( e)( 2), it indicated that states may properly consider the level of federal high- cost per- line support to be received by ETCs in making public interest determinations. 11 The Joint Board noted that the public interest analysis should be consistent with the purposes and goals of the Act itself. 12 Finally, the Joint Board recommended that the Commission encourage states to use the annual certification process for all ETCs to ensure that federal universal service support is used to provide the supported services and for associated infrastructure costs. 13 We encourage commenters to address with particularity these issues concerning the ETC designation process in their comments. 3. Scope of Support. We seek comment on the Joint Board’s recommendation to limit the provision of high- cost support to a single connection that provides a subscriber access to the public telephone network. 14 Commenters should describe how the Commission may develop competitively neutral rules and procedures that do not create undue administrative burdens. We specifically request comments from USAC on the administration of a primary line approach. To minimize the potential impact of restricting the scope of support in areas served by rural carriers, the Joint Board recommended 6 See infra Attachment. 7 See Recommended Decision, 19 FCC Rcd at 4265- 72, paras. 21- 36. Pursuant to section 214( e)( 1), a common carrier designated as an ETC must offer and advertise the services supported by the federal universal service support mechanisms throughout the designated service area, either using its own facilities or a combination of its own facilities and resale of another carrier’s services (including the services offered by another ETC). 47 U. S. C. § 214( e)( 1); see 47 C. F. R. § 54. 201. 8 See, e. g., Recommended Decision, 19 FCC Rcd at 4266, 4268- 70, paras. 22, 27, 30. 9 Id. at 4262- 64, paras. 14- 18. 10 Id. at 4263- 64, 4272- 73, paras. 17- 18, 38. Under section 214( e)( 2), “[ u] pon request and consistent with the public interest, convenience, and necessity, the State commission may, in the case of an area served by a rural telephone company, and shall, in the case of all other areas, designate more than one common carrier as an eligible telecommunications carrier” for a designated service area, so long as the requesting carrier meets the requirements of section 214( e)( 1). Section 214( e)( 2) further states: “[ b] efore designating an additional eligible telecommunications carrier for an area served by a rural telephone company, the State commission shall find that the designation is in the public interest.” 47 U. S. C. § 214( e)( 2). 11 Recommended Decision, 19 FCC Rcd at 4274- 75, paras. 42- 45. 12 Id. at 4273, para. 39. 13 Id. at 4275- 76, paras. 46- 48. States currently are subject to annual certification requirements in order for ETCs operating within their jurisdictions to receive federal universal service support. See 47 C. F. R. §§ 54. 313, 54. 314, 54. 316. 14 Recommended Decision, 19 FCC Rcd at 4279- 80, paras. 56, 58. 2 Federal Communications Commission FCC 04- 127 3 that the Commission seek comment on restating, or “rebasing,” the total high- cost support flowing to a rural carrier’s study area on “primary” or single connections, and on other possible measures including “lump sum” and “hold harmless proposals associated with a primary line restriction. 15 In conjunction with certain of these measures, the Joint Board also recommended that high- cost support in areas served by rural carriers be capped on a per- line basis when a competitive carrier is designated as an ETC and be adjusted annually by an index factor. 16 We seek comment on the Joint Board’s recommended approach to limit the scope of support, specifically on the advantages and disadvantages of each of the three alternatives set forth in the Recommended Decision. We ask that commenters provide detailed projections on the potential effects of each of the alternatives. 4. The Joint Board also recommended that the Commission further develop the record on how best to implement support for primary connections, including consideration of proposals to allow consumers with more than one connection to designate an ETC’s service as “primary” 17 and rate issues associated with supporting primary connections. 18 We also ask commenters to address the treatment of certain types of connections under the Joint Board’s recommended approach, particularly the appropriate treatment of businesses with multiple connections. 19 Finally, the Joint Board recommended that the Commission seek comment on the potential impact of its primary connection proposal on investment in rural areas and consider adoption of transitional measures for support in areas served by competitive ETCs. 20 We encourage commenters to address these implementation issues in their comments, and to identify specifically the costs and benefits of any amended reporting and recordkeeping requirements. 5. Other Issues. In addition to seeking comment on the specific recommendations provided by the Joint Board, we also seek comment on several related proposals to modify our current rules governing the filing of annual certifications and data submissions by ETCs. Specifically, we seek comment on whether to amend our rules to allow newly designated ETCs to begin receiving high- cost support as of their ETC designation date, provided that the required certifications and line- count data are filed within sixty (60) days of the carrier’s ETC designation date. 21 We also seek comment on a procedure for accepting untimely filed certifications for Interstate Access Support (IAS). In the MAG Order, the Commission determined that a carrier that untimely files its annual certification for Interstate Common Line Support would not be eligible for support until the second calendar quarter after the certification is filed. 22 We propose adopting a similar procedure for accepting untimely certifications for IAS. 23 We 15 Id. at 4279- 80, 4287- 90, paras. 56, 72- 76. 16 Id. at 4279- 80, 4290- 91, paras. 56, 77- 80. As noted by the Joint Board in the Recommended Decision, if the Commission were to adopt the “hold harmless” approach to avoid reductions in the amount of high- cost support flowing to rural areas, the per- line support would not be capped for incumbent carriers. Id. at 4289, para. 75. 17 Recommended Decision, 19 FCC Rcd at 4280, 4291- 92, paras. 57, 81- 82. 18 Id. at 4292- 93, para. 83. 19 Id. at 4293- 94, paras. 84- 85. 20 Id. at 4294, paras. 86- 87. 21 See 47 C. F. R. §§ 54. 307, 54. 313, 54. 314. 22 Multi- Association Group (MAG) Plan for Regulation of Interstate Services of Non- Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, Federal- State Joint Board on Universal Service, Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate- of- Return Regulation, Prescribing the Authorized Rate of Return From Interstate Services of Local Exchange Carriers, Second Report and Order and Further Notice of Proposed Rulemaking in CC Docket No. 00- 256, Fifteenth Report and Order in CC Docket No. 96- 45, Report and Order in CC Docket No. 98- 77, Report and Order in CC Docket 98- 166, 16 FCC Rcd 19613, 19687- 88, para. 176 (2001) (MAG Order); 47 C. F. R. § 54. 904( d). 23 47 C. F. R. § 54. 809( c). 3 Federal Communications Commission FCC 04- 127 4 request that USAC address any operational issues relating to these proposals, particularly with respect to any administrative burdens that may be associated with them. III. PROCEDURAL MATTERS A. Ex Parte Presentations 6. This is a permit but disclose rulemaking proceeding. Ex parte presentations are permitted except during the Sunshine Agenda period, provided that they are disclosed as provided in the Commission’s rules. 24 B. Initial Regulatory Flexibility Analysis 7. As required by the Regulatory Flexibility Act of 1980, as amended (RFA), 25 the Commission has prepared this Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on a significant number of small entities by the policies and rules proposed in this Notice of Proposed Rulemaking. Written public comments are requested on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments on the Notice provided below in section IV. D. The Commission will send a copy of the Notice, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA). 26 In addition, the Notice and IRFA (or summaries thereof) will be published in the Federal Register. 27 1. Need for, and Objectives of the Proposed Rules 8. The Act requires the Commission to consult with the Joint Board in implementing the universal service requirements provided in section 254 of the Act, which establishes a number of principles for the preservation and advancement of universal service in a competitive telecommunications environment. 28 Given the increasing number of ETC designations since the Commission’s rules were first developed in 1997, the Commission asked the Joint Board to review the Commission’s rules relating to high- cost universal service support in study areas in which a competitive ETC is providing services, and to review the Commission’s rules regarding support for second lines. 29 The Commission also asked the Joint Board to examine the process for designating ETCs. 30 Consistent with the Commission’s request in the Referral Order, the Joint Board sought comment and held a public forum to address concerns regarding the designation and funding of ETCs in high- cost areas. 31 Based on its review and consideration of the record developed in this proceeding, the Joint Board issued its Recommended 24 See generally 47 C. F. R. §§ 1.1202, 1. 1203, 1. 1206. 25 See 5 U. S. C. § 603. The RFA, see 5 U. S. C. § 601- 612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104- 121, Title II, 110 Stat. 847 (1996). 26 See 5 U. S. C. § 603( a). 27 See id. 28 See 47 U. S. C. § 254( b). 29 Federal- State Joint Board on Universal Service, CC Docket No. 96- 45, Order, 17 FCC Rcd 22642, para. 1 (2002) (Referral Order). 30 Id. 31 Federal- State Joint Board on Universal Service Seeks Comment on Certain of the Commission’s Rules Relating to High- Cost Universal Service Support and the ETC Designation Process, Public Notice, CC Docket No. 96- 45, 18 FCC Rcd 1941 (Wir. Comp. Bur. 2003); Federal- State Joint Board on Universal Service to Hold En Banc Hearing on the Portability of High- Cost Universal Service Support and the ETC Designation Process, Public Notice, CC Docket No. 96- 45, 18 FCC Rcd 14486 (Wir. Comp. Bur. 2003) (providing notice of Joint Board en banc hearing). 4 Federal Communications Commission FCC 04- 127 5 Decision on February 27, 2004. The Joint Board stated that its overall recommendations were intended to preserve and advance universal service, maintain competitive neutrality, and ensure long- term sustainability of the universal service fund. 32 Specifically, the Joint Board recommended that the Commission adopt permissive federal guidelines for states to consider in proceedings to designate ETCs, noting that such guidelines would facilitate a more flexible and rigorous ETC designation process among states, and improve the long- term sustainability of the universal service fund, as only fully qualified carriers that are capable of, and committed to, provide universal service would be able to receive support. The Joint Board also recommended that the Commission limit the scope of high- cost support to a single connection that provides access to the public telephone network. It stated that limiting the scope of support to single connections is necessary to preserve the sustainability of the universal service fund, would send more appropriate entry signals in rural and high- cost areas, and would be competitively neutral. We now seek comment on the Joint Board’s recommendations, consistent with section 254( a)( 2) of the Act. 2. Legal Basis 9. This rulemaking action is supported by sections 4( i), 4( j), 201, 205, 214, 218- 220, 254, 403, and 410 of the Communications Act of 1934, as amended. 33 3. Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply 10. The RFA directs agencies to provide a description of, and, where feasible, an estimate of the number of small entities that may be affected by the rules adopted herein. 34 The RFA generally defines the term "small entity" 35 as having the same meaning as the terms "small business," 36 "small organization," 37 and "small governmental jurisdiction." 38 In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act, unless the Commission has developed one or more definitions that are appropriate to its activities. 39 Under the Small Business Act, a "small business concern" is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional criteria established by the Small Business Administration (SBA). 40 11. We have included small incumbent local exchange carriers in this present RFA analysis. As noted above, a "small business" under the RFA is one that, inter alia, meets the pertinent small business size standard (e. g., a telephone communications business having 1,500 or fewer employees), and "is not 32 Recommended Decision, 19 FCC Rcd at 4258, para. 1. 33 47 U. S. C. §§ 151- 54, 201- 05, 218- 20, 254, 410. 34 5 U. S. C. § 604( a)( 3). 35 5 U. S. C. § 601( 6). 36 5 U. S. C. § 601( 3). 37 5 U. S. C. § 601( 4). 38 5 U. S. C. § 601( 5). 39 5 U. S. C. § 601( 3) (incorporating by reference the definition of "small business concern" in 5 U. S. C. § 632). Pursuant to 5 U. S. C. § 601( 3), the statutory definition of a small business applies "unless an agency after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition in the Federal Register." 5 U. S. C. § 601( 3). 40 15 U. S. C. § 632. 5 Federal Communications Commission FCC 04- 127 6 dominant in its field of operation." 41 The SBA's Office of Advocacy contends that, for RFA purposes, small incumbent local exchange carriers are not dominant in their field of operation because any such dominance is not "national" in scope. 42 We have therefore included small incumbent local exchange carriers in this IRFA analysis, although we emphasize that this RFA action has no effect on Commission analyses and determinations in other, non- RFA contexts. 12. Wireline Carriers and Service Providers (Wired Telecommunications Carriers). 43 The SBA has developed a small business size standard for Wired Telecommunications Carriers, which consists of all such companies having 1500 or fewer employees. 44 According to Census Bureau data for 1997, there were 2,225 firms in this category, total, that operated for the entire year. 45 Of this total, 2,201 firms had employment of 999 or fewer employees, and an additional 24 firms had employment of 1,000 employees or more. 46 Thus, under this size standard, the great majority of firms can be considered small. 13. Local Exchange Carriers, Interexchange Carriers, Competitive Access Providers, Operator Service Providers, Payphone Providers, and Resellers. Neither the Commission nor SBA has developed a definition particular to small local exchange carriers (LECs), interexchange carriers (IXCs), competitive access providers (CAPs), operator service providers (OSPs), payphone providers or resellers. The closest applicable definition for these carrier- types under SBA rules is for Wired Telecommunications Carriers. 47 Under that SBA definition, such a business is small if it has 1,500 or fewer employees. 48 According to our most recent data, there are 1,337 incumbent LECs, 609 CAPs, 261 IXCs, 23 OSPs, 761 payphone providers and 758 resellers. 49 Of these, an estimated 1,032 incumbent LECs, 458 CAPs, 223 IXCs, 22 OSPs, 757 payphone providers, and 717 resellers reported that they have 1,500 or fewer employees; 305 incumbent LECs, 151 CAPs, 38 IXCs, 1 OSP, 4 payphone providers, and 41 resellers reported that, alone or in combination with affiliates, they have more than 1,500 employees. 50 We do not have data specifying the number of these carriers that are not independently owned and operated, and therefore we are unable to estimate with greater precision the number of these carriers that would qualify as small business concerns under SBA's definition. Consequently, most incumbent LECs, IXCs, CAPs, OSPs, payphone providers and resellers are small entities that may be affected by the decisions and rules adopted in this Order. 41 Id. 42 See Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to Chairman William E. Kennard, Federal Communications Commission (May 27, 1999). The Small Business Act contains a definition of "small business concern," which the RFA incorporates into its own definition of "small business." 15 U. S. C. § 632( a) (Small Business Act); 5 U. S. C. § 601( 3) (RFA). SBA regulations interpret "small business concern" to include the concept of dominance on a national basis. 13 C. F. R. § 121. 102( b). 43 For the limited purposes of this IRFA, we will use the term “Wired Telecommunications Carriers” to connote wireline carriers and service providers. 44 13 C. F. R. § 121.201, North American Industry Classification System (NAICS) code 513310. 45 U. S. Census Bureau, 1997 Economic Census, Subject Series: Information, “Employment Size of Firms Subject to Federal Income Tax: 1997,” Table 5, NAICS code 517110. 46 Id. The census data do not provide a more precise estimate of the number of firms that have employment of 1, 500 or fewer employees; the largest category provided is “Firms with 1,000 employees or more.” 47 NAICS code 513310. 48 13 C. F. R. § 121.201, NAICS code 517110. 49 FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, Trends in Telephone Service, Table 15. 3 (August 2003) (Trends in Telephone Report). The total for resellers includes both toll resellers and local resellers. The category for CAPs also includes competitive local exchange carriers (CLECs). 50 See Trends in Telephone Report at Table 5.3. 6 Federal Communications Commission FCC 04- 127 7 14. Wireless Service Providers. The SBA has size standards for wireless small businesses within the two separate Economic Census categories of Paging and of Cellular and Other Wireless Telecommunications. For both of those categories, the SBA considers a business to be small if it has 1,500 or fewer employees. 51 According to the most recent Trends in Telephone Report data, 1,387 companies reported that they were engaged in the provision of wireless service. 52 Of these 1,387 companies, an estimated 945 reported that they have 1,500 or fewer employees and 442 reported that, alone or in combination with affiliates, they have more than 1,500 employees. 53 Consequently, we estimate that most wireless service providers are small entities that may be affected by the rules adopted herein. 15. Broadband Personal Communications Service (PCS). The broadband PCS spectrum is divided into six frequency designated A through F, and the Commission has held auctions for each block. The Commission defined “small entity” for Blocks C and F as an entity that has average gross revenues of $40 million or less in the three previous calendar years. 54 For Block F, an additional classification for “very small business” was added and is defined as an entity that, together with affiliates, has average gross revenues of not more than $15 million for the preceding three calendar years. 55 These standards defining “small entity” in the context of broadband PCS auctions have been approved by the SBA. 56 No small businesses within the SBA- approved definition bid successfully for licenses in Blocks A and B. There were 90 winning bidders that qualified as small entities in the Block C auctions. A total of 93 small and very small business bidders won approximately 40 percent of the 1,479 licenses for Blocks D, E, and F. 57 On March 23, 1999, the Commission re- auctioned 347 C, D, E, and F Block licenses; there were 48 small business winning bidders. On January 26, 2001, the Commission completed the auction of 422 C and F Broadband PCS licenses in Auction No. 35. Of the 35 winning bidders in this auction, 29 qualified as “small” or “very small businesses.” Based on this information, we conclude that the number of small broadband PCS licensees will include the 90 winning C Block bidders, the 93 qualifying bidders in the D, E, and F blocks, the 48 winning bidders in the 1999 re- auction, and the 29 winning bidders in the 2001 re- auction, for a total of 260 small entity broadband PCS providers, as defined by the SBA small business size standards and the Commission's auction rules. Consequently, we estimate that 260 broadband PCS providers are small entities that may be affected by the rules and policies adopted herein. 16. Narrowband PCS. To date, two auctions of narrowband PCS licenses have been conducted. Through these auctions, the Commission has awarded a total of 41 licenses, out of which 11 were obtained by small businesses. For purposes of the two auctions that have already been held, small businesses were defined by the Commission as entities with average gross revenues for the prior three 51 13 C. F. R. § 121.201, NAICS code 517212. 52 Trends in Telephone Report at Table 5. 3. 53 Id. 54 See Amendment of Parts 20 and 24 of the Commission’s Rules – Broadband PCS Competitive Bidding and the Commercial Mobile Radio Service Spectrum Cap, Report and Order, WT Docket No. 96- 59, 11 FCC Rcd 7824, paras. 57- 60 (1996), 61 Fed. Reg. 33859 (July 1, 1996); see also 47 C. F. R. § 24. 720( b). 55 See Amendment of Parts 20 and 24 of the Commission’s Rules – Broadband PCS Competitive Bidding and the Commercial Mobile Radio Service Spectrum Cap, Report and Order, WT Docket No. 96- 59, 11 FCC Rcd 7824, paras. 57- 60 (1996), 61 Fed. Reg. 33859 (July 1, 1996). 56 See, e. g., Implementation of Section 309( j) of the Communications Act – Competitive Bidding, PP Docket No. 93- 253, Fifth Report and Order, 9 FCC Rcd 5532, 5581- 84, paras. 115- 17 (1994). 57 FCC News, Broadband PCS, D, E and F Block Auction Closes, No. 71744 (rel. Jan. 14, 1997); see also Amendment of the Commission’s Rules Regarding Installment Payment Financing for Personal Communications Services (PCS) Licensees, WT Docket No. 97- 82, Second Report and Order and Further Notice of Proposed Rulemaking, 12 FCC Rcd 16436 (1997), 62 Fed. Reg. 55348 (Oct. 24, 1997). 7 Federal Communications Commission FCC 04- 127 8 calendar years of $40 million or less. 58 To ensure meaningful participation of small business entities in the auctions, the Commission adopted a two- tiered definition of small businesses in the Narrowband PCS Second Report and Order. 59 A small business is an entity that, together with affiliates and controlling interests, has average gross revenues for the three preceding years of not more than $40 million. A very small business is an entity that, together with affiliates and controlling interests, has average gross revenues for the three preceding years of not more than $15 million. These definitions have been approved by the SBA. In the future, the Commission will auction 459 licenses to serve MTAs and 408 response channel licenses. There is also one megahertz of narrowband PCS spectrum that has been held in reserve and that the Commission has not yet decided to release for licensing. The Commission cannot predict accurately the number of licenses that will be awarded to small entities in future auctions. However, four of the 16 winning bidders in the two previous narrowband PCS auctions were small businesses, as that term was defined under the Commission’s Rules. The Commission assumes, for purposes of this IRFA, that a large portion of the remaining narrowband PCS licenses will be awarded to small entities. The Commission also assumes that at least some small businesses will acquire narrowband PCS licenses by means of the Commission’s partitioning and disaggregation rules. 17. Specialized Mobile Radio (SMR). The Commission awards "small entity" and "very small entity" bidding credits in auctions for Specialized Mobile Radio (SMR) geographic area licenses in the 800 MHz and 900 MHz bands to firms that had revenues of no more than $15 million in each of the three previous calendar years, or that had revenues of no more than $3 million in each of the three previous calendar years, respectively. 60 In the context of both the 800 MHz and 900 MHz SMR service, the definitions of "small entity" and "very small entity" have been approved by the SBA. These bidding credits apply to SMR providers in the 800 MHz and 900 MHz bands that either hold geographic area licenses or have obtained extended implementation authorizations. We do not know how many firms provide 800 MHz or 900 MHz geographic area SMR service pursuant to extended implementation authorizations, nor how many of these providers have annual revenues of no more than $15 million. One firm has over $15 million in revenues. We assume, for our purposes here, that all of the remaining existing extended implementation authorizations are held by small entities, as that term is defined by the SBA. The Commission has held auctions for geographic area licenses in the 800 MHz and 900 MHz SMR bands. There were 60 winning bidders that qualified as small and very small entities in the 900 MHz auctions. Of the 1,020 licenses won in the 900 MHz auction, bidders qualifying as small and very small entities won 263 licenses. In the 800 MHz SMR auction, 38 of the 524 licenses won were won by small and very small entities. Consequently, we estimate that there are 301 or fewer small entity SMR licensees in the 800 MHz and 900 MHz bands that may be affected by the rules and policies adopted herein. 18. Rural Radiotelephone Service. The Commission has not adopted a definition of small entity specific to the Rural Radiotelephone Service. 61 A significant subset of the Rural Radiotelephone Service is the Basic Exchange Telephone Radio Systems (BETRS). 62 For purposes of this IRFA, we will use the SBA's size standard applicable to wireless service providers, supra -- an entity employing no more than 1,500 persons. 63 There are approximately 1,000 licensees in the Rural Radiotelephone Service, and the 58 47 C. F. R. § 24. 720( b). 59 Amendment of the Commission’s Rules to Establish New Personal Communications Services, Narrowband PCS, Docket No. ET 92- 100, Docket No. PP 93- 253, Second Report and Order and Second Further Notice of Proposed Rulemaking, 15 FCC Rcd 10456 (2000). 60 47 C. F. R. § 90. 814. 61 The service is defined in section 22. 99 of the Commission's Rules. 47 C. F. R. § 22. 99. 62 BETRS is defined in sections 22. 757 and 22. 759 of the Commission's Rules. 47 C. F. R. §§ 22. 757, 22. 759. 63 13 C. F. R. § 121.201, NAICS code 517212. 8 Federal Communications Commission FCC 04- 127 9 Commission estimates that almost all of them qualify as small entities under the SBA's size standard. Consequently, we estimate that there are 1,000 or fewer small entity licensees in the Rural Radiotelphone Service that may be affected by the rules and policies adopted herein. 19. Air- Ground Radiotelephone Service. The Commission has not adopted a definition of small entity specific to the Air- Ground Radiotelephone Service. 64 For purposes of this IRFA, we will use the SBA's size standard applicable to wireless service providers, supra -- an entity employing no more than 1,500 persons. 65 There are approximately 100 licensees in the Air- Ground Radiotelephone Service, and we estimate that almost all of them qualify as small under the SBA definition. 4. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements 20. In its Recommended Decision, the Joint Board recommends that the Commission adopt permissive federal guidelines for states and the Commission to use in determining whether applicants are qualified to be designated as ETCs under section 214 of the Act. Should the Commission decide to adopt this recommendation, entities designated as ETCs under sections 214( e)( 2) and 214( e)( 6) of the Act could be subject to the additional compliance requirements described in the Recommended Decision as a condition of their ETC designation. 66 The Joint Board also recommended that the Commission limit the scope of support to single connections providing access to the public telephone network. If the Commission ultimately adopts this recommendation, entities could be subject to additional reporting, recordkeeping, and other compliance requirements as deemed necessary to implement this recommendation. 67 Without more certainty about which options we will or will not adopt as rules, we cannot accurately estimate the cost of compliance by small carriers. We therefore seek comment on the types of burdens carriers could face if the proposed recommendations are adopted. Entities, especially small businesses, are encouraged to quantify, if possible, the costs and benefits of potential reporting, recordkeeping and other compliance requirements. 21. On its own motion, the Commission is proposing to modify its current annual certification and line count data requirements to allow competitive ETCs to submit required data more frequently than provided in the current rules, in order to avoid lags between certification filings and the receipt of support. 68 Commenters, especially small businesses, are encouraged to quantify, if possible, the costs and benefits of the potential modifications. 5. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered 22. The RFA requires an agency to describe any significant, specifically small business, alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): (1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, standards; and (4) an exemption from coverage of the rule, 64 The service is defined in section 22. 99 of the Commission's Rules. 47 C. F. R. § 22. 99. 65 13 C. F. R. § 121.201, NAICS code 517212. 66 See e. g., Recommended Decision, 19 FCC Rcd at 4266- 67, 4270, paras. 24, 31. 67 Id. at 4291- 92, paras. 81- 82. 68 See supra para. 5. 9 Federal Communications Commission FCC 04- 127 10 or any part thereof, for small entities. 69 23. This IRFA seeks comment on how the Joint Board’s recommendations could be implemented in a manner that reduces the potential burden and cost of compliance for small entities. We also seek comment on the potential impact of the proposed recommendations related to the Commission’s proposal to limit support to a single connection on interested parties, including small entities. Specifically, the Commission has detailed three proposals that might avoid or mitigate reductions in the amount of high-cost support flowing to rural carriers, some of which might be small entities, as a result of implementing a primary- line restriction. 70 We seek comment on these three proposals (restatement, lump sum payment and hold harmless) and whether any or all of them would minimize the economic impact on small entities, which may include providers of wireless as well as wireline communications services. 71 6. Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules 24. None. C. Paperwork Reduction Act 25. As part of a continuing effort to reduce paperwork burdens, we invite the general public and the Office of Management and Budget (OMB) to take this opportunity to comment on the proposed information collections contained in this Notice, as required by the Paperwork Reduction Act of 1995, Public Law 104- 13. Public and agency comments are due at the same time as other comments on the Notice; OMB comments are due 60 days from the date of publication of the Notice in the Federal Register. Comments should address: (a) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission’s burden estimates; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology. D. Comment Filing Procedures 26. We invite comment on the issues and questions set forth in the Notice and Initial Regulatory Flexibility Analysis contained herein. Pursuant to applicable procedures set forth in sections 1.415 and 1.419 of the Commission’s rules, 72 interested parties may file comments on or before 30 days after Federal Register publication of this Notice, and reply comments on or before 60 days after Federal Register publication of this Further Notice. All filings should refer to CC Docket No. 96- 45. Comments may be filed using the Commission’s Electronic Comment Filing System (ECFS) or by filing paper copies. 73 27. Comments filed through the ECFS can be sent as an electronic file via the Internet to . Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appear in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number 69 5 U. S. C. § 603( c)( 1)–( 4). 70 See e. g., Recommended Decision, 19 FCC Rcd at 4287- 90, paras. 72- 76. 71 Id. 72 47 C. F. R. §§ 1. 415, 1. 419. 73 See Electronic Filing of Documents in Rulemaking Proceedings, 63 Fed. Reg. 24, 121 (1998). 10 Federal Communications Commission FCC 04- 127 11 referenced in the caption. In completing the transmittal screen, commenters should include their full name, U. S. Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e- mail. To get filing instructions for e- mail comments, commenters should send an e- mail to ecfs@ fcc. gov, and should include the following words in the body of the message, “get form .” A sample form and directions will be sent in reply. 28. Parties who choose to file by paper must file an original and four copies of each filing. If more than one docket or rulemaking number appears in the caption of this proceeding, commenters must submit two additional copies for each additional docket or rulemaking number. Filings can be sent by hand or messenger delivery, by commercial overnight courier, or by first- class or overnight U. S. Postal Service mail (although we continue to experience delays in receiving U. S. Postal Service mail). The Commission’s contractor, Natek, Inc., will receive hand- delivered or messenger- delivered paper filings for the Commission's Secretary at 236 Massachusetts Avenue, N. E., Suite 110, Washington, D. C. 20002. The filing hours at this location are 8: 00 a. m. to 7: 00 p. m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes must be disposed of before entering the building. Commercial overnight mail (other than U. S. Postal Service Express Mail and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD 20743. U. S. Postal Service first- class mail, Express Mail, and Priority Mail should be addressed to 445 12th Street, SW, Washington, D. C. 20554. All filings must be addressed to the Commission’s Secretary, Marlene H. Dortch, Office of the Secretary, Federal Communications Commission. 29. Parties also must send three paper copies of their filing to Sheryl Todd, Telecommunications Access Policy Division, Wireline Competition Bureau, Federal Communications Commission, 445 12th Street S. W., Room 5- B540, Washington, D. C. 20554. In addition, commenters must send diskette copies to the Commission’s copy contractor, Best Copy and Printing, Inc. (BCPI), Portals II, 445 12th Street, S. W., Room CY- B402, Washington, D. C. 20054. IV. ORDERING CLAUSES 30. Accordingly, IT IS ORDERED THAT, pursuant to the authority contained in sections 4( i), 4( j), 201, 205, 214, 218- 220, 254, 403, and 410 of the Communications Act of 1934, as amended, 47 U. S. C. §§ 154( i), 154( j), 201, 205, 214, 218- 220, 254, 403, and 410 this NOTICE OF PROPOSED RULEMAKING IS ADOPTED. 31. IT IS FURTHER ORDERED that the Commission’s Consumer and Governmental Affairs Bureau, Reference Information Center, SHALL SEND a copy of this NOTICE OF PROPOSED RULEMAKING, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 11 Attachment Federal Communications Commission FCC 04J- 1 12 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of Federal- State Joint Board on Universal Service ) ) ) ) CC Docket No. 96- 45 RECOMMENDED DECISION Adopted: February 27, 2004 Released: February 27, 2004 By the Federal- State Joint Board on Universal Service: Commissioners Abernathy, Jaber, and Dunleavy, and Consumer Advocate Gregg, issuing separate statements; Commissioner Martin dissenting in part, concurring in part, and issuing a separate statement; Commissioners Adelstein, Thompson, and Rowe approving in part, dissenting in part, and issuing a joint separate statement. TABLE OF CONTENTS Heading Para. I. INTRODUCTION ........................................................................................................................... 1 II. ETC DESIGNATION PROCESS.................................................................................................... 5 A. Background......................................................................................................................... 6 B. Discussion........................................................................................................................... 9 III. SCOPE OF SUPPORT .................................................................................................................. 56 A. Background....................................................................................................................... 58 B. Discussion......................................................................................................................... 62 IV. BASIS OF SUPPORT ................................................................................................................... 88 A. Background....................................................................................................................... 89 B. Discussion......................................................................................................................... 94 V. OTHER ISSUES............................................................................................................................ 98 A. Identification of Wireless Customer Location.................................................................. 98 B. Accurate, Legible, and Consistent Maps ........................................................................ 104 VI. RECOMMENDING CLAUSE.................................................................................................... 106 Appendix A – Parties Filing Comments and Reply Comments 12 Attachment Federal Communications Commission FCC 04J- 1 13 I. INTRODUCTION 1. In this Recommended Decision, the Federal- State Joint Board on Universal Service (“ Joint Board”) provides its recommendations concerning the process for designation of eligible telecommunications carriers (ETCs) and the Commission’s rules regarding high- cost universal service support. Citing changes in the marketplace since the Commission’s rules were first adopted in 1997, the Commission requested that the Joint Board “review certain of the Commission’s rules relating to the high- cost universal service support mechanisms to ensure that the dual goals of preserving universal service and fostering competition continue to be fulfilled.” 74 Consistent with the Commission’s directive in the Referral Order, we sought comment and held a public forum to address concerns regarding the designation and funding of ETCs in high- cost areas. 75 We provide our recommendations based on our review and consideration of the record developed in this proceeding. Overall, we believe that our recommendations will preserve and advance universal service, maintain competitive neutrality, and ensure long- term sustainability of the universal service fund. 2. Specifically, we recommend that the Commission adopt permissive federal guidelines for states to consider in proceedings to designate ETCs under section 214 of the Communications Act of 1934, as amended (“ Act”). 76 We believe that permissive federal guidelines for minimum ETC qualifications would allow for a more predictable application process among states. We also believe that our recommended guidelines would assist states in determining whether or not the public interest would be served by a carrier’s designation as an ETC. In so doing, we believe that guidelines should improve the long- term sustainability of the universal service fund, as only fully qualified carriers that are capable of, and committed to, providing universal service would be able to receive support. We recognize that there are instances where carriers are not subject to the jurisdiction of a state commission and that the Commission has explicit authority to designate carriers in these circumstances. Specifically, while section 214( e)( 2) of the Act gives state commissions the primary responsibility for designating ETCs, section 214( e)( 6) directs the Commission to designate the carriers when those carriers are not subject to the jurisdiction of the state commission. In these cases, we believe that the Commission should apply the proposed guidelines. 3. We also recommend that the Commission limit the scope of high- cost support to a single connection that provides access to the public telephone network. We believe that supporting a single connection is more consistent with the goals of section 254 of the Act than the present system, and is necessary to preserve the sustainability of the universal service fund. We also believe that it would send more appropriate entry signals in rural and high- cost areas, and would be competitively neutral. To minimize the potential impact of restricting the scope of support in areas served by rural carriers, we 74 Federal- State Joint Board on Universal Service, Order, CC Docket No. 96- 45, 17 FCC Rcd 22642, para. 1 (2002) (Referral Order). 75 On February 7, 2003, the Joint Board issued a Public Notice inviting public comment on whether the Commission’s rules concerning high- cost support and the ETC designation process continue to fulfill their intended purposes. See Federal- State Joint Board on Universal Service Seeks Comment on Certain of the Commission’s Rules Relating to High- Cost Universal Service Support and the ETC Designation Process, Public Notice, CC Docket No. 96- 45, 18 FCC Rcd 1941 (Jt. Bd. 2003) (Joint Board Portability- ETC Public Notice). On July 31, 2003, the Joint Board held an en banc hearing on the Commission’s rules on designation and funding of ETCs in high- cost areas. See http:// www. fcc. gov/ wcb/ universal_ service/ documents/ 030731. pdf. See also Federal- State Joint Board on Universal Service to Hold En Banc Hearing on the Portability of High- Cost Universal Service Support and the ETC Designation Process, Public Notice, CC Docket No. 96- 45, 18 FCC Rcd 14486 (Wir. Comp. Bur. 2003) (providing notice of Joint Board en banc hearing). 76 See 47 U. S. C. § 214. The Communications Act of 1934 was amended by the Telecommunications Act of 1996. Pub. L. No. 104- 104, 110 Stat. 56 (1996) (1996 Act). 13 Attachment Federal Communications Commission FCC 04J- 1 14 recommend that the Commission seek comment on restating the total high- cost support flowing to a rural carrier in terms of first connections, and on other possible measures. 77 As discussed below, we also recommend that the Commission seek comment on whether to restate support for non- rural carriers. 78 In conjunction with these measures, we also recommend that high- cost support in areas served by rural carriers be capped on a per- line basis where a competitive carrier is designated as an ETC, and adjusted annually by an index factor. 79 4. At this time, we decline to recommend that the Commission modify the basis of support (i. e., the methodology used to calculate support) in study areas with multiple ETCs. Instead, we recommend that the Joint Board and Commission consider possible modifications to the basis of support as part of an overall review of the high- cost support mechanisms for rural and non- rural carriers. 80 We believe that examining the basis of support for all ETCs under the rural and non- rural federal support mechanisms simultaneously would allow the Joint Board and the Commission to craft a more comprehensive approach and avoid the perils of piecemeal decision- making. If the Commission adopts our recommendations to limit the scope of support and to ensure that ETC designations are appropriately rigorous, such steps should slow fund growth due to competitive entry in the meantime. II. ETC DESIGNATION PROCESS 5. We recommend a variety of measures below that relate to state proceedings involving designation of ETCs. To increase the opportunities for state commissions to conduct rigorous proceedings, we recommend that the Commission adopt permissive guidelines for minimum ETC qualifications. We also offer some guidance for state commissions in interpreting the public interest test found in section 214( e). In addition, we address the annual certification requirements under section 254( e) and recommend that the Commission encourage states to use that process to ensure that all ETCs use federal universal service support to provide the supported services and for associated infrastructure costs. Finally, we offer some observations regarding the service area redefinition process and disaggregation of support by rural carriers. We note here that in instances where carriers are not subject to the jurisdiction of a state commission, we urge the Commission to apply these same measures. A. Background 6. Section 254( e) of the Act provides that “only an eligible telecommunications carrier 77 The term “rural carriers” refers to incumbent local exchange carriers (LECs) that meet the statutory definition of rural telephone company in section 153( 37) of the Act. See 47 U. S. C. § 153( 37). Under this definition, rural telephone companies are incumbent LECs that either serve study areas with fewer than 100,000 access lines or meet one of three alternative criteria. Id. The term “non- rural carriers” refers to incumbent LECs that do not meet the statutory definition of a rural telephone company. 78 See supra para. 76. 79 We note that, if the Commission were to adopt the “hold harmless” approach discussed below, per- line support would not be capped for incumbent carriers. See infra at para. 75. For purposes of this Recommended Decision, references to “line” or “per- line” are generally synonymous with “connection” or “per- connection.” The use of the term “line” is intended to relate to services provisioned over either wireline or wireless technology. 80 See Federal- State Joint Board on Universal Service, Multi- Association Group (MAG) Plan for Regulation of Interstate Services of Non- Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, Fourteenth Report and Order, Twenty- Second Order on Reconsideration, and Further Notice of Proposed Rulemaking in CC Docket No. 96- 45, Report and Order in CC Docket No. 00- 256, 16 FCC Rcd 11244, 11310, para. 169 (2001) (Rural Task Force Order); see also Federal- State Joint Board on Universal Service, Order on Remand, Further Notice of Proposed Rulemaking, and Memorandum Opinion and Order, CC Docket No. 96- 45, FCC 03- 249 (rel. Oct. 27, 2003) at para. 25 (Tenth Circuit Remand Order). 14 Attachment Federal Communications Commission FCC 04J- 1 15 designated under section 214( e) shall be eligible to receive specific Federal universal service support.” 81 Pursuant to section 214( e)( 1), a common carrier designated as an ETC must offer and advertise the services supported by the federal universal service mechanisms throughout the designated service area, either using its own facilities or a combination of its own facilities and resale of another carrier’s services (including the services offered by another ETC). 82 7. Section 214( e)( 2) of the Act gives state commissions the primary responsibility for performing ETC designations. 83 Under section 214( e)( 2), “[ u] pon request and consistent with the public interest, convenience, and necessity, the State commission may, in the case of an area served by a rural telephone company, and shall, in the case of all other areas, designate more than one common carrier as an eligible telecommunications carrier” for a designated service area, so long as the requesting carrier meets the requirements of section 214( e)( 1). Section 214( e)( 2) further states: “[ b] efore designating an additional eligible telecommunications carrier for an area served by a rural telephone company, the State commission shall find that the designation is in the public interest.” 84 8. A state commission must allow an ETC to relinquish its designation in any area served by more than one ETC pursuant to section 214( e)( 4) of the Act. 85 The relinquishing ETC must provide advance notice of such relinquishment to the state commission. 86 Prior to allowing the relinquishing carrier to cease providing universal service, the state commission must require the remaining ETC or ETCs to ensure that all customers served by the relinquishing carrier will continue to be served. The state commission also must require sufficient notice to the remaining ETC or ETCs to permit the purchase or construction of adequate facilities. 87 The state commission must establish a time, not to exceed one year after the state commission approves the relinquishment, within which such purchase or construction by the remaining ETC or ETCs must be completed. 88 The same ETC relinquishment procedure is also required of the Commission in instances where a carrier is not subject to the jurisdiction of a state commission. B. Discussion 1. Federal Guidelines for ETC Designations 9. We recommend that the Commission adopt permissive federal guidelines for states to use when determining whether applicants are qualified to be designated as ETCs under section 214. We believe that guidelines are appropriate because the ETC application and designation process should be 81 47 U. S. C. § 254( e). 82 47 U. S. C. § 214( e)( 1). The “service area” is the geographic area established by the state commission for the purposes of determining universal service support obligations and support mechanisms. 47 U. S. C § 214( e)( 5). In the case of an area served by a rural carrier, “service area” means such company’s “study area” unless and until the Commission and the States, after taking into account the recommendations of a Federal- State Joint Board instituted under section 410( c), establish a different definition of service area for such company. Id.; see infra paras. 49- 53. 83 47 U. S. C. § 214( e)( 2). We note that the Commission has authority for performing ETC designations for carriers that are not “subject to the jurisdiction of a State commission” pursuant to 214( e)( 6). 47 U. S. C. § 214( e)( 6). The Commission’s requirements for ETC designations in section 214( e)( 6) parallel the states’ requirements for ETC designations in section 214( e)( 2). Id. 84 47 U. S. C. § 214( e)( 2). 85 See 47 U. S. C. § 214( e)( 4). 86 Id. 87 Id. 88 Id. 15 Attachment Federal Communications Commission FCC 04J- 1 16 one that is rigorous. A rigorous ETC designation process should ensure that only fully qualified applicants receive designation as ETCs and that ETC designees are prepared to serve all customers within the designated service area. Additionally, a core set of minimum qualifications would allow for a more predictable application process among the states. We believe that our recommended guidelines would assist states in determining whether or not the public interest would be served by a carrier’s designation as an ETC. We also believe that guidelines should improve the long- term sustainability of the fund, as only fully qualified carriers that are capable of, and committed to, providing universal service would be able to receive support. 10. We believe that federal guidelines concerning ETC qualifications should be flexible and non-binding on the states. Under our recommendation, state commissions would retain their rights to determine eligibility requirements for designating ETCs. Each state commission will be uniquely qualified to determine its own ETC eligibility requirements as the entity most familiar with the service area for which ETC designation is sought. Because these guidelines would be permissive, we reject the parties’ arguments suggesting that such guidelines would restrict the lawful rights of states to make ETC designations. 89 We also believe that federal guidelines are consistent with the United States Court of Appeals for the Fifth Circuit holding that nothing in section 214( e) of the Act prohibits the states from imposing their own eligibility requirements beyond the statutory requirements described in section 214( e)( 1). 90 Even with the advent of permissive federal guidelines for ETC designations, states will continue to have the flexibility to impose additional eligibility requirements. 11. Federal guidelines concerning minimum qualifications should encourage state commissions to conduct rigorous reviews of ETC applications, including fact- intensive analyses. Because an ETC must be prepared to serve all customers within a designated service area, and must be willing to be the sole ETC should other ETCs withdraw from the market, states may appropriately establish minimum qualifications focused on the carrier’s ability to provide the supported services to all consumers in the designated area upon reasonable request. 91 Guidelines encouraging a rigorous application process are appropriate because section 214( e)( 2) requires that designation of an additional ETC serve the public interest. Consistent with Section 254( b)( 3) of the Act, we believe that a rigorous application process ensures that consumers in all regions of the nation, including rural and low- income consumers, have access to telecommunications services that are reasonably comparable to services provided in urban areas. 92 12. In recommending federal guidelines, we reject the arguments of some commenters that the current ETC criteria should not be expanded. 93 Instead, we believe that a specific, fact- intensive inquiry is the appropriate way to analyze the public interest when evaluating an ETC application for a rural area. For example, some commissions have cited generalized benefits of competition when evaluating ETC applications. While this may be appropriate, we do not believe that such an analysis is sufficient by itself. Section 214( e)( 2) requires states to undertake a fact- intensive analysis to ensure that the designation of any additional ETCs will promote the goals set forth in section 254 of the Act in the affected area. We 89 See, e. g., CTIA Comments at 10; Idaho Tel. Ass’n Comments at 12; Montana Telecomms. Ass’n Comments at 10; Nebraska Rural Indep. Cos. Comments at 27. 90 See Texas Office of Public Utility Counsel v. FCC, 183 F. 3d 393, 418 (5th Cir. 1999) (TOPUC v. FCC). The Fifth Circuit addressed the question of whether states may subject carriers designated as ETCs to eligibility requirements above and beyond the eligibility requirements of section 214( e)( 1) of the Act. Id. See also Washington Indep. Tel. Ass’n Comments at 17. 91 See 47 U. S. C. § 214( e)( 4). 92 47 U. S. C. § 254( b)( 3). 93 See, e. g., GCI Reply Comments at 27- 28; Western Wireless Reply Comments at 42; Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Reply Comments at 16- 17. 16 Attachment Federal Communications Commission FCC 04J- 1 17 discuss below some of the factors states may choose to consider in conducting this fact- intensive inquiry. 13. We believe that adopting a core set of minimum qualifications will promote a predictable application process across states and provide certainty for states in terms of what guidelines may be appropriate to consider in the public interest analysis. Many commenters, including incumbent LECs and their competitors, support this goal and achieving this goal should benefit incumbent LECs and competitors alike. 94 Permissive guidelines will enable state commissions, when evaluating ETC designation requests, to evaluate section 214( e)( 2) petitions in light of at least a minimum set of criteria. We agree with the commenters that permissive guidelines could improve consistency in the treatment of requests for ETC status. 95 However, the goal of predictability will be promoted if states and the Commission both apply similar guidelines. Thus, we strongly encourage the adoption of the proposed guidelines. Guidelines should also help address arguments about what is appropriate for states to consider as part of the public interest analysis. a. Applicability of Guidelines 14. We recommend that state commissions apply these permissive federal guidelines in all ETC proceedings. An ETC petition presented to a state commission can affect an area served by a non- rural carrier, 96 an area served by one or more rural carriers, 97 or both. 98 A single set of guidelines will encourage states to develop a single, consistent body of eligibility standards to be applied in all cases, regardless of the characteristics of the wireline incumbent carrier. 99 15. Permissive federal guidelines for all ETC cases would be consistent with section 214( e)( 2). That section prescribes that all state certification decisions must be consistent with the public interest, convenience, and necessity. We believe this statutory requirement demonstrates Congress’s intention that state commissions evaluate local factual situations in ETC cases and exercise broad discretion in reaching their ultimate conclusion regarding the public interest, convenience and necessity. This view is also consistent with the ruling of the Fifth Circuit in TOPUC v. FCC, which held that states may impose their own eligibility requirements beyond those listed in section 254( b)( 1). 100 16. We also believe that applying the permissive federal guidelines to all state ETC proceedings will best promote federal universal service goals found in section 254( b). While Congress delegated to individual states the right to make ETC decisions, collectively these decisions have national implications. 94 See, e. g., Alaska Tel. Ass’n Comments at 3- 5; BellSouth Reply Comments at 2- 4; Dobson Comments at 15; MCI Comments at 7. See also NASUCA Comments at 9. 95 See, e. g., Dobson Comments at 15 (stating that uniform applications and procedures for analyzing the statutory ETC designation criteria might make the ETC designation process easier and more predictable for states and carriers). 96 See, e. g., Designation of Eligible Telecommunications Carriers Under the Telecommunications Act of 1996, RCC Atlantic, Inc. d/ b/ a Unicel, Docket No. 5918 (Vt. Pub. Serv. Bd. June 26, 2003) (Vermont Unicel ETC Order). 97 See, e. g., Request by Alaska Digitel, LLC for Designation as a Carrier Eligible to Receive Federal Universal Service Support Under the Telecommunications Act of 1996, U- 02- 39, Order No. 10, Order Granting Eligible Telecommunications Carrier Status and Requiring Filings (Reg. Comm’n of Ala. Aug. 28, 2003) (Alaska Digitel ETC Order). 98 See, e. g., Wisconsin U. S. Cellular ETC Order. 99 Although we intend the guidelines to apply in areas served by both rural carriers and non- rural carriers, we believe that states and the Commission should apply a higher level of scrutiny when evaluating ETC applications for designations in areas served by rural carriers. See infra paras. 17- 18. 100 See TOPUC v. FCC, 183 F. 3d at 418. 17 Attachment Federal Communications Commission FCC 04J- 1 19 own facilities or a combination of its own facilities and resale of another carrier’s services. 107 The services that are supported by the federal universal service support mechanisms are defined as: (1) voice grade access to the public switched network; 108 (2) local usage; 109 (3) Dual Tone Multifrequency (DTMF) signaling or its functional equivalent; 110 (4) single- party service or its functional equivalent; 111 (5) access to emergency services, including 911 and enhanced 911; 112 (6) access to operator services; 113 (7) access to interexchange services; 114 (8) access to directory assistance; 115 and (9) toll limitation for qualifying low-income customers. 116 Second, throughout the service area for which designation is received, the ETC must advertise the supported services and the charges therefore using media of general distribution. 117 Pursuant to section 214( e)( 1)( B), an ETC is required to advertise the availability and prices charged for the services that are supported by federal universal service support. 118 An ETC must also advertise the 107 Id. An entity that offers the supported services exclusively through resale shall not be designated as an ETC. See 47 C. F. R. § 54. 201( i). 108 “Voice grade access” is defined as a “functionality that enables a user of telecommunications services to transmit voice communications, including signaling the network that the caller wishes to place a call, and to receive voice communications, including receiving a signal indicating there is an incoming call.” For the purposes of Part 54, bandwidth for voice grade access should be, at a minimum, 300 to 3, 000 Hertz. 47 C. F. R. § 54. 101( a)( 1). 109 “Local usage” means an “amount of minutes of use of exchange service, prescribed by the Commission, provided free of charge to end users.” 47 C. F. R. § 54.101( a)( 2). 110 “Dual tone multi- frequency'” (DTMF) is a defined as a “method of signaling that facilitates the transportation of signaling through the network, shortening call set- up time.” 47 C. F. R. § 54.101( a)( 3). 111 “Single- party service” is defined as “telecommunications service that permits users to have exclusive use of a wireline subscriber loop or access line for each call placed, or, in the case of wireless telecommunications carriers, which use spectrum shared among users to provide service, a dedicated message path for the length of a user's particular transmission.” 47 C. F. R. § 54. 101( a)( 4). 112 “Access to emergency services'' includes access to services, such as 911 and enhanced 911, provided by local governments or other public safety organizations. “911” is defined as a “service that permits a telecommunications user, by dialing the three- digit code “911,” to call emergency services through a Public Service Access Point (PSAP) operated by the local government.” “Enhanced 911” is defined as “911 service that includes the ability to provide automatic numbering information (ANI), which enables the PSAP to call back if the call is disconnected, and automatic location information (ALI), which permits emergency service providers to identify the geographic location of the calling party.” “Access to emergency services” includes access to 911 and enhanced 911 services to the extent the local government in an eligible carrier's service area has implemented 911 or enhanced 911 systems. 47 C. F. R. § 54. 101( a)( 5). 113 “Access to operator services” is defined as “access to any automatic or live assistance to a consumer to arrange for billing or completion, or both, of a telephone call.” 47 C. F. R. § 54. 101( a)( 6). 114 “Access to interexchange service” is defined as the “use of the loop, as well as that portion of the switch that is paid for by the end user, or the functional equivalent of these network elements in the case of a wireless carrier, necessary to access an interexchange carrier's network.” 47 C. F. R. § 54. 101( a)( 7). 115 “Access to directory assistance” is defined as “access to a service that includes, but is not limited to, making available to customers, upon request, information contained in directory listings.” 47 C. F. R. § 54. 101( a)( 8). 116 “Toll limitation” means either toll blocking or toll control for ETCs that are incapable of providing both services. For ETCs that are capable of providing both services, “toll limitation” means both toll blocking and toll control. 47 C. F. R. §§ 54. 101( a)( 9) and 54. 400( d). “Toll blocking” is a service provided by carriers that allows consumers to elect not to allow the completion of outgoing toll calls from their telecommunications channel. 47 C. F. R. § 54. 400( b). “Toll control” is a service provided by carriers that allows consumers to specify a certain amount of toll usage that may be incurred on their telecommunications channel per month or per billing cycle. 47 C. F. R. § 54. 400( c). 117 47 U. S. C. § 214( e)( 1)( B). 118 Id. 19 Attachment Federal Communications Commission FCC 04J- 1 20 availability of Lifeline and Link Up services in a manner reasonably designed to reach those likely to qualify for those services. 119 20. While section 214( e)( 1) requires an ETC to “offer” the services supported by the federal universal service support mechanisms, the Commission has determined that this does not require a competitive carrier to actually provide the supported services throughout the designated service area before designation as an ETC. 120 In the Section 214( e) Declaratory Ruling, the Commission concluded that interpreting section 214( e)( 1)( A) to require the provision of service throughout a service area before ETC designation prohibits, or has the effect of prohibiting, the ability of competitive carriers to provide telecommunications service, in violation of section 253( a). 121 The Commission found that such an interpretation of section 214( e)( 1) is not competitively neutral, consistent with section 254, or necessary to preserve and advance universal service. In addition, the Commission concluded that such a requirement conflicts with section 214( e) and stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress as set forth in section 254. 122 Consequently, the Commission concluded that requiring the provision of service throughout the service area before designation would effectively preclude designation of new entrants as ETCs in violation of the intent of Congress. c. Additional Minimum Eligibility Requirements 21. For the reasons stated above, we recommend that state commissions consider the additional minimum qualifications listed below when evaluating ETC designation requests. (i) Adequate Financial Resources 22. We recommend that the Commission adopt guidelines encouraging states to evaluate whether ETC applicants have the financial resources and ability to provide quality services throughout the designated service area. We believe that it would neither be prudent nor serve the public interest if a financially unsound carrier is designated as an ETC, receives universal service support and yet is still unable to achieve long- term viability that is sufficient to sustain its operations. In order to provide guidance in this area, we recommend that the Commission seek to further develop the record on the ways in which state commissions may determine whether an ETC applicant has adequate financial resources. Long- term viability can be based, for example, on plans that tie investment to customer growth and demands. In this regard, we note that the Commission has held that a new entrant “cannot reasonably be expected to be able to make the substantial financial investment required to provide the supported services in high- cost areas without some assurance that it will be eligible for federal universal service support” and “[ i] n fact, the carrier may be unable to secure financing or finalize business plans due to 119 47 C. F. R. §§ 54. 405( b) and 54. 411( d). Lifeline is a program that provides discounts to consumers on their monthly telephone bills. See 47 C. F. R. §§ 54. 401- 54. 409. Link Up helps consumers with telephone installation costs. See 47 C. F. R. §§ 54. 411- 54.415. In its Twelfth Report and Order, the Commission created a fourth tier ($ 25. 00 per month) of federal Lifeline support and established additional Link- Up support ($ 70. 00 per consumer) which is available to ETCs serving qualifying low- income individuals living on tribal lands. See Federal- State Joint Board on Universal Service; Promoting Deployment and Subscribership in Unserved and Underserved Areas, Including Tribal and Insular Areas, Twelfth Report and Order, Memorandum Opinion and Order, and Further Notice of Proposed Rulemaking, CC Docket No. 96- 45, 15 FCC Rcd 12208 (2000) (Twelfth Report and Order). 120 Federal- State Joint Board on Universal Service; Western Wireless Corporation Petition for Preemption of an Order of the South Dakota Public Utilities Commission, Declaratory Ruling, CC Docket No. 96- 45, 15 FCC Rcd 15168, 15172- 73 (2000), recon. pending (Section 214( e) Declaratory Ruling). 121 Id. 122 Section 214( e) Declaratory Ruling, 15 FCC Rcd at 15179- 81. 20 Attachment Federal Communications Commission FCC 04J- 1 21 uncertainty surrounding its designation as an ETC.” 123 (ii) Commitment and Ability to Provide the Supported Services 23. We recommend that the Commission adopt a guideline encouraging state commissions to require ETC applicants to demonstrate their capability and commitment to provide service throughout the designated service area to all customers who make a reasonable request for service. States should require a demonstration of capability and commitment because this will help them ensure that an ETC applicant is willing and able to provide the supported services throughout the designated service area and to be the sole ETC in a service area if the incumbent LEC relinquishes its designation. States should have flexibility in implementing this guideline. 24. State commissions may choose to implement this requirement, for example, by requiring a formal build- out plan for areas where facilities are not yet built out at the time the ETC application is considered. State commissions have examined ETC applicants’ plans to serve new customers and build out their networks in a variety of ways. For example, the Arizona Corporation Commission (Arizona Commission) has evaluated an ETC’s plans to assist potential customers to receive service by employing various technical means. 124 The Arizona Commission noted that the ETC had been operating for nearly ten years and had worked with five Native American tribes to secure adequate cell sites on Native American lands. 125 In another case, a Minnesota Administrative Law Judge (Minnesota ALJ) examined an ETC’s plans to provide universal service to customers using .6- watt handheld phones or a 3- watt telephone and noted the applicant’s commitment to building 15 specific cell sites in high- cost areas that it would not otherwise include in its network expansion plans because of cost issues. 126 In its final order, the Minnesota Public Utilities Commission (Minnesota Commission) found it adequate that the company was able to offer its services through approximately 200 cell sites in and around the state; pledged to build an additional 15 cell sites upon designation as an ETC; pledged to meet customer orders for new service through a variety of measures including additional cell sites, cell extenders, rooftop antennae, high-powered phones, and the resale of existing service; and was willing to address a customer's request for service by developing a schedule for extending service. 127 The Regulatory Commission of Alaska (Alaska Commission) recently granted ETC status to a commercial mobile radio services (CMRS) provider and stated that the provider need not prove its ability to build facilities throughout every portion of the incumbent LEC’s service area but must demonstrate that its methods of providing service throughout the incumbent LEC’s service area are reasonable. 128 The Alaska Commission found 123 Id. at 15173, para. 13. 124 See Arizona Smith Bagley ETC Order at 6. 125 Id. 126 See Petition of Midwest Wireless Communications, L. L. C., for Designation as an Eligible Telecommunications Carrier (ETC) Under 47 U. S. C. § 214( e)( 2), OAH Docket No. 3- 2500- 14980- 2, PUC Docket No. PT- 6153/ AM- 02- 686, Findings of Fact, Conclusions of Law, and Recommendation at 6, 11 (Minn. Office of Admin. Hearings Dec. 31, 2002) (Minnesota ALJ ETC Recommendation). 127 See Minnesota Midwest Wireless ETC Order at 6. 128 See Alaska Digitel ETC Order at 8- 9. A “commercial mobile service” is defined as any mobile service that is provided for profit and makes interconnected service available to the public or to such classes of eligible users as to be effectively available to a substantial portion of the public, as specified by regulation by the Commission. 47 U. S. C. § 332( d)( 1). A “mobile service” is defined as a radio communication service carried on between mobile stations or receivers and land stations, and by mobile stations communicating among themselves, and includes: (1) both one- way and two- way radio communication services; (2) a mobile service which provides a regularly interacting group of base, mobile, portable, and associated control and relay stations (whether licensed as an individual, cooperative, or multiple basis) for private one- way or two- way land mobile radio communications by (continued....) 21 Attachment Federal Communications Commission FCC 04J- 1 22 reasonable a seven- step plan that Alaska Digitel proposed for serving customers. 129 25. In the Minnesota proceeding discussed above, the Minnesota ALJ examined the cost of equipment as another way to determine whether the carrier was willing and able to compete for local exchange service as an ETC. 130 Specifically, the ALJ determined that the cost of installation and customer premises equipment necessary to provide the ETC applicant’s basic universal service package should be considered as part of this analysis. The ALJ found that the cost of this equipment to the consumer is relevant in determining whether a carrier has a bona fide intent to compete for local exchange service. Further, the ALJ determined that the ETC applicant’s commitment to provide the necessary equipment at little or no cost was driven by a desire to compete for local service. 26. State commissions may also choose to require competitive ETCs to explore the possibility of serving customers through the resale of another carrier’s service. If an ETC receives a reasonable request for service and yet is unable to extend its network to meet the request, it still has the option of serving that customer through resale. States have discretion to require ETC applicants to incorporate resale in their plans to serve all customers upon reasonable request as a condition of ETC designation. The commitment to incorporate resale into such plans may demonstrate an applicant’s capability and commitment to providing service. We note that, while section 214( e)( 1) permits an ETC to offer the services supported by universal service using its own facilities, or a combination of its own facilities and resale, ETCs may not provide such services solely through resale. 131 A state commission is not authorized to designate as an ETC a carrier that offers the supported services solely through the resale of another carrier’s services. 132 27. States should determine, pursuant to state law, what constitutes a “reasonable request” for service. Once designated as an ETC, a new entrant is required, as the incumbent LEC is required, to serve new customers upon reasonable request. 133 For example, as part of the seven- step plan in the Alaska Digitel ETC Order, if the ETC finds that it is unable to provide service to a customer short of constructing a new cell site, the ETC will report that to the Alaska Commission, providing the cost of construction, its position on whether the request for service is reasonable and whether high- cost funds should be expended on the request. 134 The Alaska Commission found that the ETC applicant’s plan was a (... continued from previous page) eligible users over designated areas of operation; and (3) any service for which a license is required in a personal communications service established pursuant to the proceeding entitled “Amendment to the Commission’s Rules to Establish New Personal Communications Services” or any successor proceeding. 47 U. S. C. § 153( 27). 129 See Alaska Digitel ETC Order at 8- 9. The plan states that if a customer is not in an area where the CMRS provider, Alaska Digitel, currently provides service, Alaska Digitel will: (1) Determine whether the customer’s equipment can be modified or replaced to provide acceptable service; (2) Determine whether a roof- mounted antenna or other network equipment can be deployed at the premises to provide service; (3) Determine whether adjustments at the nearest cell site can be made to provide service; (4) Determine whether a cell extender or repeater can be employed to provide service; (5) Determine whether there are any other adjustments to network or customer facilities that can be made to provide service; (6) Explore the possibility of resale; and (7) Determine whether an additional cell site can be constructed to provide services, and evaluate the costs and benefits of using high cost support to serve the number of customers. 130 See Minnesota ALJ ETC Recommendation at 14- 15. 131 47 U. S. C. § 214( e)( 1). 132 47 C. F. R. § 54.201( i). 133 See Section 214( e) Declaratory Ruling, 15 FCC Rcd at 15175, para. 17 (stating that once designated as an ETC, a new entrant is required, as the incumbent is required, “to extend its network to serve new customers upon reasonable request.”). 134 Alaska Digitel ETC Order at 9. 22 Attachment Federal Communications Commission FCC 04J- 1 23 reasonable means for the carrier to provide service throughout the service area upon reasonable customer request and determined that it would address any requests by the ETC to deny service on a case- by- case basis. 135 We recognize that states have different requirements regarding line extensions and policies regarding carrier- of- last resort obligations. We recommend that build- out requirements be harmonized with any existing policies regarding line extensions and carrier- of- last resort obligations. 28. We also recommend that the Commission adopt guidelines encouraging states, as a condition of ETC designation, to require competitive ETCs to be prepared to provide equal access if all other ETCs in that service area exercise their rights to relinquish their designations pursuant to section 214( e)( 4). Under section 214( e)( 4), when an ETC seeks to relinquish its ETC designation, the state commission will require the remaining ETC or ETCs to serve the customers that had been served by the relinquishing carrier. 136 Incumbent LECs are required to provide equal access. 137 Thus, this recommended guideline will protect consumers in the event of relinquishment by ensuring that consumers will continue to have equal access to long distance providers, without imposing any unnecessary administrative burdens on the remaining ETC or ETCs. 138 We recognize that the Commission did not resolve the issue of whether to include equal access in the definition of universal service. 139 In the Definitions Order, the Commission stated that it believed that any determination regarding equal access would be premature because of the scope of the instant proceeding. 140 It deferred consideration of the equal access issue pending resolution of this proceeding. 141 As discussed below, we decline to recommend that the Commission modify the basis of support in areas served by multiple ETCs at this time, but recommend that the Joint Board and the Commission continue to consider possible modifications to the basis of support in a broader context. 142 We make no recommendation as to whether to include equal access in the definition of universal service at this time. 29. We recommend that the Commission clarify its decision in the Western Wireless Kansas CMRS Order. 143 In that order, the Commission determined that Western Wireless’ Basic Universal Service (BUS) offering in Kansas was a CMRS service and therefore, the Kansas Corporation 135 Id. 136 47 U. S. C. § 214( e)( 4). The statutory provision states that “[ a] State commission . . . shall permit an eligible telecommunications carrier to relinquish its designation as such a carrier in any area served by more than one eligible telecommunications carrier.” Id. The carrier seeking to relinquish its designation must give advance notice to the state commission. Prior to allowing the carrier to cease providing universal service in the area, the remaining ETC or ETC will be required to ensure that all customers served by the relinquishing carrier will continue to be served. The remaining ETC or ETCs will be permitted up to one year from the approval of the request to relinquish ETC status to purchase facilities or equipment and complete construction to be able to serve the relinquishing carrier’s customers. Id. 137 See 47 U. S. C. § 251( g). 138 We note that as stated above, the remaining ETC or ETCs will have one year from the date of a state commission’s approval of relinquishment to purchase equipment and/ or construct facilities in order to serve the relinquishing carrier’s customers. See 47 U. S. C. § 214( e)( 4). 139 See Federal- State Joint Board on Universal Service, Order and Order on Reconsideration, CC Docket No. 96- 45, 18 FCC Rcd 15090, 15104, para. 33 (2003) (Definitions Order). 140 Id. 141 Id. 142 See infra discussion at Part IV. 143 Petition of the State Independent Alliance and the Independent Telecommunications Group for a Declaratory Ruling that the Basic Universal Service Offering Provided by Western Wireless in Kansas Is Subject to Regulation as Local Exchange Service, Memorandum Opinion and Order, WT- Docket No. 00- 239, 17 FCC Rcd 14802 (2002) (Western Wireless Kansas CMRS Order). 23 Attachment Federal Communications Commission FCC 04J- 1 24 Commission was preempted from regulating BUS entry or rates and from requiring equal access for telephone toll services. 144 We believe that this case could be interpreted as precluding states from imposing equal access requirements on CMRS carriers under any conditions. We believe, however, that section 332( c)( 8) may be interpreted differently, and we recommend that the Commission clarify what it intended. For example, in a separate proceeding some parties argued that section 332( c)( 8) of the Act does not prevent the Commission from requiring CMRS providers to provide equal access in order to receive universal service funds. 145 They argued that section 332( c)( 8) only prevents the Commission from requiring CMRS carriers to provide equal access as a general condition of mobile service. 146 (iii) Ability to Remain Functional in Emergencies 30. We recommend that the Commission adopt a guideline encouraging states to require ETC applicants to demonstrate the ability to remain functional in emergency situations. We believe this to be an important guideline because as noted by at least one commenter, the “security of a carrier’s network and the ability to protect critical telecommunications infrastructure should be a major consideration in evaluating the public interest.” 147 We recommend that the Commission further develop the record on specific requirements state commissions may choose to consider in evaluating an ETC applicant’s ability to remain functional in emergencies. For example, the State of Vermont Public Service Board (Vermont Commission), in analyzing the public interest in an ETC proceeding, recently examined an ETC applicant’s ability to remain functional in emergencies. 148 The Vermont Commission made a detailed factual finding about the applicant’s technical capabilities to remain functional in emergencies, as well as the applicant’s track record for maintaining its network in a power outage. 149 Additionally, the Public Utility Commission of Texas (Texas Commission), as a condition of receiving universal service support, required an ETC to provide a minimum of four hours of battery reserve without voltage falling below the level required for proper operation of all equipment. 150 (iv) Consumer Protection 31. We recommend that the Commission adopt a guideline indicating that state commissions may properly impose consumer protection requirements as part of the ETC designation process. We believe 144 Id. at 14820, para. 34. 145 Definitions Order, 18 FCC Rcd at 15103, para. 31. 146 Id. 147 OPASTCO Comments, Attachment at 35. 148 See Vermont Unicel ETC Order at 12- 13. 149 Id. (" RCC provides most cell sites with backup power to maintain the continuity of its service in the event its main power supply goes down. RCC uses batteries that provide between two to three hours of power backup. RCC also equips hub cell cites . . . or remote cell cites with additional power backup from a propane or diesel generator, which extends the power backup to at least 12 hours. RCC maintains a large diesel generator at its switch location in Colchester, Vermont, that will provide up to two days of extended power backup before requiring refueling. The power backup facilities enable RCC to maintain its wireless network, including its 911 service, even in the event of a sustained power outage. RCC demonstrated its ability to maintain its network during the 1998 ice storm, with its resultant extended power and landline- telephone- service outages, when RCC kept a majority of its cell sites and switch operational, served as the primary line of communications for public- safety personnel, and donated numerous cell phones to the National Guard, Red Cross and the State Police to ensure those organizations maintained critical lines of communications."). 150 See Application of WWC Texas RSA Limited Partnership for Designation as an Eligible Telecommunications Carrier Pursuant to 47 U. S. C. § 214( e) and PUC Subst. R. 26. 418, PUC Docket No. 22289, SOAH Docket No. 473- 00- 1167, Order at 25 (Tex. Pub. Util. Comm’n Oct. 30, 2000) (Texas WWC ETC Order). 24 Attachment Federal Communications Commission FCC 04J- 1 25 that imposing consumer protection requirements as part of the ETC designation process may be consistent with “the public interest, convenience and necessity” to ensure that consumers are able to receive an evolving level of universal service. 151 Any consumer protection requirements imposed on ETCs should further the universal service goals contemplated in section 254( b) of the Act, and should not be imposed merely for the sake of regulatory parity. 152 32. State commissions have imposed various consumer protection requirements as a condition of granting a request for ETC designation. The Vermont Commission, for example, has subjected ETCs to its rules regarding disconnections and treatment of customer deposits as a condition of ETC designation. 153 Similarly, as a condition of receiving ETC designation, the Arizona Commission required a wireless carrier to submit consumer complaints “arising from its offering as an ETC.” 154 In extending consumer protection requirements to competitive ETCs as a condition of granting ETC designations, state commissions have noted that states are free to impose their own eligibility requirements in making ETC determinations, consistent with the Fifth Circuit’s interpretation of the Act. 155 33. We reject arguments that subjecting competitive ETCs, particularly wireless competitive ETCs, to consumer protection requirements is inconsistent with section 332 of the Act. 156 While section 332( c)( 3) of the Act generally preempts states from regulating the rates and entry of CMRS providers, it specifically allows states to regulate the other terms and conditions of commercial mobile services. 157 Accordingly, while wireless competitive ETCs, for example, otherwise may not be subject to state consumer protection requirements, we believe that states may extend generally applicable requirements to all ETCs in order to preserve and advance universal service, consistent with sections 214 and 254 of the Act. 158 In addition, seeking ETC designation is a choice. We therefore agree with commenters that preemption from state regulation afforded under section 332 of the Act should not be equated with conditions that apply only to carriers that choose to seek ETC designation and universal service support. 159 34. Even if some ETCs, including CMRS carriers, otherwise would not be subject to state consumer protection requirements, states may extend generally applicable requirements to all ETCs to 151 See 47 U. S. C. § 254( c). 152 47 U. S. C. § 254( b). 153 Vermont Unicel ETC Order at 74. 154 Arizona Smith Bagley ETC Order at 14 (finding that Smith Bagley’s ETC designation application should be granted subject to the condition that the carrier submit consumer complaints arising from its offering as an ETC to the Arizona Commission’s Consumer Service Division and provide a regulatory contact). 155 Vermont Unicel ETC Order at 23- 34; Arizona Smith Bagley ETC Order at 12- 14. 156 Western Wireless Reply Comments at 45- 47; Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Comments at 18. 157 See 47 U. S. C. § 332( c)( 3). Additionally, section 332( c)( 3) of the Act also states that “[ n] othing in this subparagraph shall exempt providers of commercial mobile services (where such services are a substitute for land line telephone exchange service for a substantial portion of the communications within such State) from requirements imposed by a State commission on all providers of telecommunications services necessary to ensure the universal availability of telecommunications services at affordable rates.” We note, however, that at this time, although they may reach this level in the future, commercial mobile services are not yet known to be a substitute for a substantial portion of communications in any state. 158 47 U. S. C. §§ 214, 254. 159 See, e. g., CenturyTel Reply Comments at 7- 9; Nebraska Rural Indep. Cos. Comments at 30; OPASTCO Reply Comments at 27- 28. 25 Attachment Federal Communications Commission FCC 04J- 1 26 ensure that universal service goals are met. Our recommendation here, however, is not that competitive ETCs should be required to comply with all of the standards imposed on wireline incumbent LECs as some commenters have proposed. 160 States should not require regulatory parity for parity’s sake. Rather, requirements should be imposed on ETCs only to the extent necessary to further universal service goals, including the provision of high- quality service throughout the designated service area. (v) Local Usage 35. Consistent with the requirement that ETCs offer local usage, states may consider how much local usage ETCs should offer as a condition of federal universal service support. In the First Universal Service Report and Order, the Commission determined that ETCs should provide some minimum amount of local usage as part of their "basic service" package of supported services. 161 Thus, local usage is one of the supported services that ETCs are required to provide in order to receive federal universal service support. Although the Commission has not set a minimum local usage requirement, there is nothing in the Act, Commission’s rules, or orders that would limit state commissions from prescribing some amount of local usage as a condition of ETC status. As determined by the Fifth Circuit in TOPUC v. FCC, states may establish their own eligibility requirements for ETC applicants. 162 In fact, in recently deciding that unlimited local usage should not be added to the list of services supported by federal universal service, the Commission found that the states are in a better position to determine whether unlimited local usage offerings are beneficial in particular circumstances. 163 36. In considering local usage, states may choose to compare an incumbent LEC’s offering of a local calling plan to the local calling plan proposed by the ETC applicant. For example, the Arizona Commission noted an ETC applicant’s plan to propose 30 free minutes per month throughout its network, which was a much larger area than the local exchange area provided by the LECs in the same region. 164 The Arizona Commission compared the ETC applicant’s calling plan with that of the landline service offerings and determined that based on the size of the calling area, toll calling on the ETC applicant’s network would cost the same, or less, as it would on the incumbent LEC’s network. 165 It also considered the applicant’s plan to provide unlimited free calls to a long list of government, social service, health facilities, educational institutions, and emergency numbers. 166 2. Public Interest Determinations 37. The minimum eligibility requirements recommended above will assist states in ensuring that additional ETCs are able and willing to serve all customers in the designated service area upon reasonable 160 See, e. g., CenturyTel Reply Comments at 6- 8; OPASTCO Reply Comments at 25- 28; USTA Comments at 14. 161 See Federal- State Joint Board on Universal Service, Report and Order, CC Docket No. 96- 45, 12 FCC Rcd 8776, 8812- 14 (1997) (First Universal Service Report and Order) (subsequent history omitted). Although the Commission's rules define "local usage" as "an amount of minutes of use of exchange service, prescribed by the Commission, provided free of charge to end users," the Commission has not specified a number of minutes of use. See 47 C. F. R. § 54. 101( a)( 2). 162 See TOPUC v. FCC, 183 F. 3d at 418. 163 See Definitions Order, 18 FCC Rcd at 15096, para. 14. 164 Arizona Smith Bagley ETC Order at 6. 165 Id. at 7 (noting that a local incumbent LEC charged $15.90 for a single residential access line but that this access provides a local calling area which is a small fraction of that being provided by Smith Bagley (SBI), and with most calls being toll, 30 minutes of toll calling will result in an approximate total charge of $25. 40 for the wireline package as opposed to $24. 99 for the equivalent SBI offering). 166 Id. 26 Attachment Federal Communications Commission FCC 04J- 1 27 request. Before an additional ETC can be designated, however, the state commission must also determine that the designation is consistent with the public interest, convenience and necessity. Additionally, for areas served by rural carriers, the Act requires a separate finding that designation of an additional ETC is in the public interest. While Congress did not specifically prescribe how these public interest tests would be applied, state commissions and the Commission have developed analyses that address various factors affecting the public interest. These include, but are not limited to, benefits of increased competition and choice and potential harm to consumers. Below, we discuss the statutory public interest requirement, how different states have applied it, and additional factors states may consider in making public interest determinations. Before reaching those factors, however, we make some observations concerning the statutory provisions that apply when an ETC application covers an area served by a rural carrier. a. Additional ETCs in Areas Served by Rural Carriers 38. The Joint Board interprets section 214( e)( 2) as contemplating use of a higher level of scrutiny for ETC applicants seeking designation in areas served by rural carriers. 167 In these areas, the public interest determination for an additional ETC is subject to two special statutory rules. First, section 214( e)( 2) requires states to designate more than one ETC in areas served by non- rural carriers (so long as doing so is “consistent with the public interest, convenience, and necessity”); but it confers discretion on the states to designate more than one ETC in areas served by rural carriers. In these areas, the Act provides that a state commission “may” grant the designation. 168 Also, as noted above, the last sentence of section 214( e)( 2) requires that before a state designates an additional ETC in an area served by a rural carrier, the state must find the designation to be in the public interest. 169 These two additional requirements demonstrate Congress’s recognition that supporting competition might not always serve the public interest in areas served by rural carriers, and Congress’ intent that state commissions exercise discretion in deciding whether the designation of an additional ETC serves the public interest. As discussed above, the low customer densities and high per- customer cost characteristics of many rural carrier study areas also support a more rigorous standard of eligibility. 170 Thus, we agree with commenters that section 214( e)( 2) provides the state commissions with the obligation and statutory duty to perform an in- depth public interest analysis concerning ETC applications in rural carrier study areas. 171 b. Public Interest Considerations 39. While Congress did not establish specific criteria to be applied under the public interest tests in section 214( e)( 2) of the Act, it is clear that the public interest must be analyzed in a manner that is consistent with the purposes and goals of the Act itself. 172 Certain state commissions have already based their public interest findings on relevant universal service principles. For example, the public interest test performed by the Texas Commission is guided by the fundamental goals of preserving and advancing universal service, and the component goals of ensuring the availability of quality telecommunications services at just, reasonable and affordable rates, and promoting the deployment of advanced telecommunications and information services to all regions of the Nation, including rural and high- cost areas. 173 167 47 U. S. C. § 214( e)( 2). 168 Id. See also TOPUC v. FCC, 183 F. 3d at 418. 169 47 U. S. C. § 214( e)( 2). 170 See supra para. 18. 171 See, e. g., Fred Williamson and Assocs. Comments at 19; OPASTCO Comments at 40- 41. 172 Western Wireless Comments, Attachment E at 7. 173 See generally Texas WWC ETC Order. See also 47 U. S. C. § 254. 27 Attachment Federal Communications Commission FCC 04J- 1 28 40. Several state commissions have considered various additional factors in analyzing the public interest, such as the potential benefits consumers could receive from designation of an additional ETC in a particular area. 174 The elements that the Alaska Commission has considered in determining the public interest include: new choices for customers; affordability; quality of service; service to unserved customers; comparison of benefits to public cost; and considerations of material harm. 175 Similarly, the Commission has considered whether consumers were likely to benefit from increased competition; whether the additional designation will provide benefits not available from incumbent carriers; whether consumers may be harmed should the incumbent withdraw from the service area; and whether there would be harm to a rural incumbent LEC. 176 41. These commissions have also applied the public interest factors to the particular facts before them in an ETC proceeding. In evaluating service to unserved customers, the Alaska Commission took note of an ETC’s plan to build out six additional cell sites and ability to reach unserved customers in three specific communities if it received ETC designation. 177 The Commission, in evaluating whether an additional designation would provide benefits not available from incumbent carriers, noted that the ETC applicant could offer a wider local calling area than that provided by the rural incumbent LEC and could provide a variety of calling plans to consumers. 178 The Commission determined that such options may make intrastate toll calls more affordable to those consumers. 179 The Commission also evaluated whether there would be harm to the rural incumbent LEC and affected rural consumers by undertaking an extensive cream skimming analysis. 180 Based on the analysis, the Commission determined that the ETC applicant would not be serving only low- cost areas at the exclusion of any high- cost areas. 181 42. We disagree with commenters who contend that we should encourage states to adopt a specific cost- benefit test for the purpose of making public interest determinations. 182 Several commenters propose that state commissions should more explicitly balance the benefits of granting an ETC application (e. g., enhancement of competition, extension of service to previously unserved areas, or introduction of mobile services) against the costs (e. g., impact of supporting multiple ETCs on fund growth). 183 While we agree that a consideration of both benefits and costs is inherent in conducting a public interest analysis, we decline to provide any more specific guidance on how this balancing should be performed. We believe that the difficulty of quantifying and weighing the various factors that may be relevant to determining the public interest militate against attempting to create a rigid formula for balancing costs and benefits. 174 See Alaska Digitel ETC Order at 12. 175 Id. at 12- 16. 176 See, e. g, Federal- State Joint Board on Universal Service; Western Wireless Corporation Petition for Designation as an Eligible Telecommunications Carrier for the Pine Ridge Reservation in South Dakota, Memorandum Opinion and Order, CC Docket No. 96- 45, 16 FCC Rcd 18133 (2001) (Western Wireless Pine Ridge Order); see also Federal State Joint Board on Universal Service; RCC Holdings, Inc. Petition for Designation as an Eligible Telecommunications Carrier Throughout its Licensed Service Area In the State of Alabama, Memorandum Opinion and Order, CC Docket No. 96- 45, 17 FCC Rcd 23532 (Wir. Comp. Bur. 2002) (RCC Holdings Order). 177 See Alaska Digitel ETC Order at 14. 178 RCC Holdings Order, 17 FCC Rcd at 23541, para. 24. 179 Id. 180 Id. at 23542- 44, paras. 27- 31. 181 Id. at 23543- 44, para. 30. 182 See, e. g., OPASTCO Comments at 41- 42; USTA Comments at 11- 14; Western Alliance Comments at 11- 14. 183 See, e. g., OPASTCO Comments, Attachment A at 27- 30. 28 Attachment Federal Communications Commission FCC 04J- 1 29 43. We believe, however, that states making public interest determinations may properly consider the level of federal high- cost per- line support to be received by ETCs. 184 High- cost support is an explicit subsidy that flows to areas with demonstrated levels of costs above various national averages. Thus, one relevant factor in considering whether or not it is in the public interest to have additional ETCs designated in any area may be the level of per- line support provided to the area. If the per- line support level is high enough, the state may be justified in limiting the number of ETCs in that study area, because funding multiple ETCs in such areas could impose strains on the universal service fund. Moreover, if the Commission were to cap per- line support upon entry of a competitive ETC and impose a primary-connection restriction, as discussed below, designating an excessive number of ETCs could dilute the amount of support available to each ETC to the point that each carrier’s ability to provide universal service might be jeopardized. State commission consideration of high- cost support on a dollar per line basis would allow equivalent comparison of support among study areas. Per- line support is a single “marker” that encompasses various underlying factors that may impact the determination of whether it is in the public interest to have an additional subsidized carrier entering a carrier’s study area. Many factors mentioned by commenters as relevant to the public interest determination – such as topography, population density, line density, distance between wire centers, loop lengths and levels of investment – may all affect the level of high- cost support received in an individual study area. High- cost support is also a concrete, objective, transparent, and readily obtainable factor that may help state commissions avoid generalized or abstract arguments about the harms or benefits of additional ETCs. 185 44. Although we believe that state commissions may consider the amount of per- line support as part of the public interest analysis, we decline to adopt specific benchmarks based on per- line support to guide the states’ public interest determinations. We are concerned that any benchmark we recommend would be arbitrary. We do, however, recommend that the Commission solicit comment on whether such national benchmarks merit additional consideration. We recommend that the Commission solicit comment on the basis, calculation, practical impact, and examples of any proposed benchmarks based on per- line support. 45. We also recommend that the Commission seek comment on the applicability of the proposed designation guidelines to ETCs that have already been designated. We believe states (and the Commission) already possess the authority to rescind ETC determinations for failure to comply with the requirements of Section 214( e) of the Act and any other conditions imposed by the state. 186 The Commission should provide guidance on whether states choosing to apply the new federal guidelines to currently designated competitive ETCs should also rescind the designation of a previously designated competitive ETC if the state finds that the competitive ETCs designation no longer serves the public interest. We believe the Commission should also consider if it would be beneficial to issue guidance on whether states should allow ETCs some reasonable transition period to bring their operations into compliance with any new state ETC requirements. Alternatively, the Commission may wish to consider whether ETC designation for competitive carriers could be grandfathered for some period of time to avoid significant market disruptions. 184 As used here, “high- cost support” means high- cost model support, high- cost loop support, safety net additive support, local switching support, long- term support, interstate access support, and interstate common line support. 185 Line counts and support amounts for each study area served by rural carriers are published quarterly by the Universal Service Administrative Company (USAC). 186 See Section 214( e) Declaratory Ruling, 15 FCC Rcd at 15174, para. 15. By this Recommended Decision, it is not the intent of the Joint Board to limit the discretion possessed by states and the Commission to review and rescind previous ETC determinations. 29 Attachment Federal Communications Commission FCC 04J- 1 30 3. Annual Certification Requirement 46. We recommend that the Commission encourage states to use the annual certification process for all ETCs to ensure that federal universal service support is used to provide the supported services and for associated infrastructure costs. We make this recommendation in order to ensure the accountability of all ETCs for proper use of funds. Annual review provides states the opportunity for periodic review of ETC fund use. 187 Additionally, we continue to believe that the state certification process provides the most reliable means of determining whether carriers are using support in a manner consistent with section 254. 188 47. States should use the annual certification process to ensure that federal universal service support is used to provide the supported services and for associated infrastructure costs. States should examine compliance with build- out plans. Some commenters also suggest that states should consider instituting reporting requirements and conducting audits on all ETCs. 189 States could implement regulatory provisions similar to those in Alaska where the competitive ETC is required to make the same filing that the rural carriers makes through the Alaska Commission’s annual use- of- funds certification process. 190 As a condition of ETC status, the Public Service Commission of West Virginia required a competitive carrier to file annual certifications including the amount of support it received in the year and a statement of how such funds were spent or invested. 191 The Minnesota Commission requires ETCs to file affidavits, additional documentation pertaining to the amount of federal high- cost support received for the prior year, and the ETC’s operational and capital expenditures. 192 These are merely examples of what a state commission’s annual certification requirement may entail. State commissions will, of course, have the flexibility to adopt certification requirements that are appropriate for their state and the particular service area in which an ETC is designated. 193 48. Where an ETC fails to comply with requirements in section 214( e) and any additional requirements proposed by the state commission, the state commission may decline to grant an annual certification or may rescind a certification granted previously. 194 Several states have already adopted such requirements in their ETC designation processes. The Alaska Commission required a competitive ETC to 187 See Federal- State Joint Board on Universal Service, Ninth Report and Order and Eighteenth Order on Reconsideration, CC Docket No. 96- 45, 14 FCC Rcd 20432, 20482- 83, para. 95 (1999) (Ninth Report and Order) (stating that accountability for the use of federal funds in the state ratemaking process is an appropriate mechanism to ensure that non- rural carriers use high- cost support for the provision, maintenance and upgrading of facilities and services for which the support is intended); see also Rural Task Force Order, 16 FCC Rcd at 11317- 18, para. 187 (anticipating that states would take the appropriate steps to account for the receipt of high- cost support and ensure that federal support is being applied in a manner consistent with section 254). 188 Rural Task Force Order, 16 FCC Rcd at 11317- 18, para. 187. 189 See Letter from David L. Sieradzki, Counsel for Western Wireless, to Marlene Dortch, FCC, dated Sept. 8, 2003 (Western Wireless Sept. 8 ex parte). 190 See Alaska Digitel ETC Order at 18- 19. 191 See Petition for Consent and Approval for Highland Cellular to be Designated as an Eligible Telecommunications Carrier, in Areas Served by Citizens Telecommunications Company of West Virginia, Case No. 02- 1453- T- PC, Recommended Decision at Conclusions of Law para. 30 (Pub. Serv. Comm’n of W. Va. Sept. 15, 2003). 192 See Minnesota Midwest Wireless ETC Order at 9. 193 We note that states are currently subject to annual certification requirements in order for ETCs operating within their jurisdictions to receive federal universal service support. See 47 C. F. R. §§ 54. 313, 54. 314, 54. 316. 194 See Section 214( e) Declaratory Ruling, 15 FCC Rcd at 15174, para. 15. 30 Attachment Federal Communications Commission FCC 04J- 1 31 file an annual certification in order to monitor the continued appropriate use of funds. 195 4. Service Area Redefinition Process/ Rural Carrier Disaggregation of Support 49. In this subsection, we review the service area redefinition process for areas served by rural carriers and assess the impact that disaggregation and targeting of support has on that process. We begin by reviewing service area redefinition procedures. Section 214( e)( 5) of the Act provides that states may establish geographic service areas within which ETCs are required to comply with universal service obligations and are eligible to receive universal service support. 196 However, the Act states that for an area served by a rural carrier, a company’s service area for the purposes of ETC designation will be the rural carrier’s study area “unless and until the Commission and the States, after taking into account the recommendations of a Federal- State Joint Board instituted under section 410( c), establish a different definition of service area for such company.” 197 Thus, the Act established different procedures and standards for determining ETC service areas depending on whether a rural or non- rural carrier’s study area is involved. 50. In the First Recommended Decision, the Joint Board generally recommended that the Commission retain the study areas of rural telephone companies as the service areas for ETCs. The Joint Board provided three reasons for its recommendation: (1) the potential for “cream skimming” is minimized by retaining study areas because competitors, as a condition of eligibility, must provide services throughout the rural carrier's study area; (2) the 1996 Act, in many respects, places rural carriers on a different competitive footing from other local exchange companies; and (3) there would be an administrative burden imposed on rural carriers by requiring them to calculate costs at something other than the study area level. 198 51. In response to the Joint Board’s recommendations, the Commission agreed that, at that time, the study areas of rural telephone companies should be retained as the rural carrier service areas. 199 However, the Commission also discussed the state commissions’ authority to redefine the service area served by a rural carrier and adopted rules providing the process for service area redefinition. 200 Section 54.207( c) of the Commission’s rules provides the mechanism by which a state commission may propose to redefine a rural carrier’s service area for purposes of determining universal service obligations and support mechanisms. 201 Section 54. 207( c)( 3) provides that the Commission may initiate a proceeding to consider a state commission’s proposal to redefine the area served by a rural carrier within ninety days of 195 See Alaska Digitel ETC Order at 18- 19. 196 See 47 U. S. C. § 214( e)( 5). “The term ‘service area’ means a geographic area established by a State commission (or the Commission under paragraph (6)) for the purpose of determining universal service obligations and support mechanisms.” 197 Id. 198 See Federal- State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96- 45, 12 FCC Rcd 87, 179- 80, paras. 172- 74 (Jt. Bd. 1996) (First Recommended Decision). 199 First Universal Service Report and Order, 12 FCC Rcd at 8881- 82, para. 189. 200 Id. at 8880- 81, para. 186- 88. As required by Section 214( e)( 5) of the Act, the rural service area redefinition rules require the state commission to take into account the Joint Board’s recommendations cited above, and provide for approval of the service area redefinition by both the state and the Commission. See 47 C. F. R. § 54. 207. 201 See 47 C. F. R. §§ 54. 207( a), (c). The Commission has authority to propose a service area redefinition on its own motion under section 54. 207( d) of the Commission’s rules but such redefinition would not go into effect without the agreement of the relevant state commission. See 47 C. F. R. § 54. 207( d). 31 Attachment Federal Communications Commission FCC 04J- 1 32 the release date of a public notice. 202 If the Commission initiates a proceeding to consider the petition, the proposed definition will not take effect until both the state commission and the Commission agree upon the definition of a rural carrier service area, in accordance with section 214( e)( 5) of the Act. 203 If the Commission does not act on a petition to redefine a service area within 90 days of the release of the public notice, the definition proposed is deemed approved by the Commission and takes effect in accordance with state procedures. 204 The Commission’s intent in adopting these procedures was, in part, to minimize administrative delay. 205 52. In the First Universal Service Report and Order, the Commission also interpreted the language in Section 214( e)( 5) of the Act requiring state commissions and the Commission to take into account the recommendations of the Joint Board. 206 The Commission concluded that this language indicates that the states and the Commission must give full consideration to the Joint Board’s recommendations on service area redefinition and must explain why they are not adopting the recommendations of the Joint Board. 207 When proposing to redefine service areas, state commissions and the Commission have considered the Joint Board’s recommendations in the First Recommended Decision and evaluated the Joint Board’s reasons for recommending that the Commission retain the study area of a rural carrier as the service area. 208 Therefore, when proposing to redefine rural carrier service areas, state commissions and the Commission have analyzed the potential for cream skimming as a result of the proposed redefinition. 209 53. In evaluating whether a service area redefinition will provide opportunities for cream skimming, some state commissions and the Commission have considered, among other things, whether universal service support in the affected rural service area has been disaggregated. 210 In the Rural Task 202 47 C. F. R. § 54. 207( c)( 3). Under section 54.207( c)( 1), a state may petition the Commission for a redefinition or a party may petition the Commission with the state’s proposal to redefine. The petition must contain: (i) the definition proposed by the state commission; and (ii) the state commission’s ruling or other official statement presenting the state commission’s reason for adopting its proposed definition, including an analysis that takes into account the recommendations of any Federal- State Joint Board convened to provide recommendations with respect to the definition of a service area served by a rural carrier. See 47 C. F. R. § 54. 207( c)( 1). 203 See 47 C. F. R. § 54. 207( c)( 3)( i); 47 U. S. C. § 214( e)( 5). Under section 54. 207( e) of the Commission’s rules, the Commission delegates its authority under section 54. 207( c) to the Chief of the Wireline Competition Bureau. 47 C. F. R. § 54. 207( e). 204 47 C. F. R. § 54.207( c)( 3)( ii). 205 First Universal Service Report and Order, 12 FCC Rcd at 8881, para. 188. 206 By its rules the Commission has concluded that the Joint Board referred to in Section 214( e)( 5) of the Act is the Federal- State Joint Board on Universal Service. We endorse this interpretation. We do not believe that the Act requires a special Joint Board to be convened every time there is a request for rural service area redefinition. Such an interpretation would obviously be administratively unworkable. 207 First Universal Service Report and Order, 12 FCC Rcd at 8880- 81, para. 187. 208 See, e. g., Petition of the Minnesota Public Utilities Commission for Agreement to Redefine the Service Areas of Twelve Minnesota Rural Telephone Companies, CC Docket No. 96- 45, filed on August 7, 2003 (Minnesota Redefinition Petition); Petition by the Colorado Public Utilities Commission, Pursuant to 47 C. F. R. § 54. 207( c), for Commission Agreement in Redefining the Service Area of Wiggins Telephone Association, A Rural Telephone Company, CC Docket No. 96- 45, filed on May 30, 2003; RCC Holdings Order, 17 FCC Rcd at 23547- 48, paras. 38-41. 209 Id. See also Federal- State Joint Board on Universal Service, Virginia Cellular, LLC Petition for Designation as an Eligible Telecommunications Carrier in the Commonwealth of Virginia, Memorandum Opinion and Order, CC Docket No. 96- 45, FCC 03- 338 (rel. Jan. 22, 2004), at paras. 41- 42 (Virginia Cellular ETC Order). 210 See, e. g., RCC Holdings Order¸ 17 FCC Rcd at 23544, para. 31; Minnesota Redefinition Petition at 11- 12. 32 Attachment Federal Communications Commission FCC 04J- 1 33 Force Order, the Commission determined that support should be disaggregated and targeted below the study area level to eliminate uneconomic incentives for competitive entry caused by the averaging of support across all lines served by a carrier within its study area. 211 Under disaggregation and targeting, per- line support is more closely associated with the cost of providing service. 212 In the Rural Task Force Order, the Commission also concluded that one of the factors the state commissions should consider in determining whether to certify new ETCs for a service area other than the entire study area of a rural carrier is the level of disaggregation. 213 54. The provisions contained in the Rural Task Force Order for disaggregation and targeting of universal service support may help alleviate some concerns regarding cream skimming. Permitting rural carriers to disaggregate and target universal service support allows them to direct universal service support to those zones within the study area where support is most needed. Targeting support in this manner also promotes a better matching of per- line support to the rural carriers’ costs of providing service, and helps reduce the economic distortions that could lead to cream skimming. In a study area with disaggregated support, a competitive ETC designated for a service area smaller than the study area will be limited to receiving only the per- line support established for that area. In many cases, the levels of disaggregated support have been established by the rural carrier itself under “Path 3” disaggregation. 214 Although disaggregation may alleviate some concerns regarding cream- skimming by competitive ETCs, we hesitate to say that it necessarily addresses all concerns. For instance, the Commission has recognized that cream skimming may still be a concern where a competitor proposes to serve only the low- cost areas of a rural carrier’s study area to the exclusion of high- cost areas. 215 55. We continue to endorse the procedures established by the Commission in 1997 for redefinition of rural service areas. These procedures establish a presumption that a rural carrier’s study area should be the service area for a new ETC, unless and until the state and the Commission working in concert decide that a different service area definition would better serve the public interest. 216 In making this determination, the states and the Commission place the burden of proof upon the ETC applicant. If a service area redefinition is proposed, the existing rules also require the states and the Commission to analyze the Joint Board’s previously expressed concerns about cream skimming in the particular area 211 See Rural Task Force Order, 16 FCC Rcd at 11302, para. 145. 212 Id. 213 Id. at 11308- 09, para. 164. The Commission stated that it believed that the level of disaggregation should be considered to ensure that competitive neutrality is maintained between incumbents and competitive ETCs. Id. 214 47 C. F. R. § 54. 315( d). The rules establishing procedures for disaggregation and targeting of support provided rural carriers three choices or “paths.” Under Path 1 a carrier could choose not to disaggregate support. Under Path 2 a carrier could seek to disaggregate subject to state commission approval. Under Path 3 a carrier could file a self-certified disaggregation plan with the state commission. Such self- certified plans were effective upon filing. See 47 C. F. R. § 54. 315. We are aware that most rural carriers voluntarily chose Path 1 and did not disaggregate support. See USAC Universal Service Projections for the 4th Quarter 2002 (Aug. 2, 2002), Appendix HC19. Some commenters have argued that rural carriers should be allowed another round of self- certified disaggregation if there is a change in the basis of high- cost support. See, e. g., OPASTCO Comments at 48- 51. We do not believe another round of self- certification is necessary since the Commission’s rules already allow rural carriers, state commissions or other interested parties to seek subsequent modifications of disaggregation plans. See 47 C. F. R. §§ 54. 315( b)( 4), 54. 315( c)( 5) and 54. 315( d)( 5). 215 See, e. g., RCC Holdings Order, 17 FCC Rcd at 23546, para. 35; Virginia Cellular ETC Order, FCC 03- 338 at paras. 32- 33. 216 See generally Virginia Cellular ETC Order, FCC 03- 338 at para. 41( outlining procedures for redefinition of rural service areas). 33 Attachment Federal Communications Commission FCC 04J- 1 34 covered by the ETC application. 217 Public comment is invited during every step in this process. Because we believe these rules are working to thoroughly examine public interest concerns inherent in service area redefinition, we do not believe any change is needed in these rules at this time. As with other aspects of the ETC designation process discussed above, we encourage the states and the Commission to conduct a rigorous and fact- intensive analysis of requests for service area redefinition. III. SCOPE OF SUPPORT 56. We recommend that the Commission limit the scope of high- cost support to a single connection that provides access to the public telephone network. As discussed below, we believe that supporting a single connection is more consistent with the goals of section 254 than the present system, and is necessary to preserve the sustainability of the universal service fund. We also believe that it would send more appropriate entry signals in rural and high- cost areas, and would be competitively neutral. To minimize the potential impact of restricting the scope of support in areas served by rural carriers, we recommend that the Commission seek comment on restating, or “rebasing,” the total high- cost support flowing to a rural carrier’s study area on “primary” or single connections, and on other possible measures. Restating support would avoid any immediate effect on the total amount of high- cost support that a rural carrier receives: its support would be reduced in the future only to the extent that a competitive ETC captures primary connections. In conjunction with these measures, we also recommend that high- cost support in areas served by rural carriers be capped on a per- line basis when a competitive carrier is designated as an ETC and be adjusted annually by an index factor. 218 57. We recognize that implementing support for a single connection may present significant administrative challenges. As discussed below, the record contains proposals under which consumers with more than one line would designate a primary connection, and carriers would be free to compete for the “primary” designation. These proposals hold the promise of allowing consumers, the intended beneficiaries of universal service, 219 to make their own universal service choices. Questions remain about the administrative feasibility of such proposals, however. We recommend that the Commission further develop the record on these and other proposals for limiting the scope of high- cost support. Our recommendations to limit the scope of support, as described herein, are conditioned on the Commission’s ability to develop competitively neutral rules and procedures that do not create undue administrative burdens. 220 A. Background 58. Under the Commission’s current rules, all residential and business connections provided by ETCs are eligible for high- cost support. 221 In its 1996 recommendations to the Commission regarding universal service, the Joint Board recommended that support for designated services be limited to those 217 As discussed in Section V. B. below, we recommend that USAC be delegated authority to develop uniform standards for support disaggregation maps in electronic format. The ready availability of such support disaggregation maps should assist in the analysis of the potential for cream skimming in any particular area. 218 As discussed below, if the Commission were to adopt the “hold harmless” approach to avoid reductions in the amount of high- cost support flowing to rural areas, the per- line support would not be capped for incumbent carriers. See infra para. 75. We also recommend that the Commission seek comment on whether to restate support for non-rural carriers, and on whether transitional measures should be adopted for support received by competitive ETCs operating as of the release date of this Recommended Decision. See infra paras. 76, 87. 219 Alenco Communications, Inc. v. FCC, 201 F. 3d 601, 621 (5th Cir. 2001) (Alenco v. FCC) (“ The purpose of universal service is to benefit the customer, not the carrier.”). 220 See infra paras. 81- 83. 221 First Universal Service Report and Order, 12 FCC Rcd at 8829- 30, paras. 95- 96. 34 Attachment Federal Communications Commission FCC 04J- 1 35 services carried on a single connection to a subscriber’s primary residence and to businesses with only a single connection. 222 The Joint Board concluded that support for a single connection providing the supported services would allow the “access” to telecommunications and information services contemplated in section 254( b)( 3) of the Act. 223 59. In the First Universal Service Report and Order, the Commission declined to adopt the Joint Board’s recommendation regarding the scope of support for designated services. 224 While the Commission stated that it shared the Joint Board’s concern that supporting multiple connections for residences and businesses in high- cost areas may be inconsistent with the goals of universal service, the Commission concluded at that time that limiting the scope of support prior to the introduction of a forward- looking cost methodology was unnecessary. 225 At the request of the Joint Board and rural carriers, the Commission concluded that it would establish a forward- looking mechanism for non- rural carriers prior to reforming the high- cost support mechanism for rural carriers. 226 60. Consistent with the blueprint for universal service reform established in the First Universal Service Report and Order, the Commission took action to establish a forward- looking cost mechanism for non- rural carriers in 1999. 227 In May 2001, the Commission adopted a modified embedded cost mechanism for rural carriers for a five- year period. 228 The Commission found that continuing to base high- cost support for rural carriers on embedded costs for five years, rather than attempting to modify the 222 See First Recommended Decision, 12 FCC Rcd at 132- 33, para. 89. 223 Id. 224 First Universal Service Report and Order, 12 FCC Rcd at 8829- 30, paras. 95- 96. 225 Id. In the First Universal Service Report and Order, the Commission concluded that, ultimately, universal service support should be based on the forward- looking economic costs of constructing and operating the network used to provide the supported services, rather than embedded costs. The Commission indicated that, as it developed a forward- looking methodology, it would evaluate whether it was appropriate to continue supporting multiple connections for residences and businesses. Id. at 8829- 30, 8927, 8937, paras. 95- 96, 274, 296. 226 Id. at 8934- 37, paras. 291- 95. The Commission established timeframes for transitioning carriers to a forward-looking cost methodology. Recognizing that, compared to non- rural LECs, rural LECs generally serve fewer subscribers, serve more sparsely populated areas, and generally do not benefit as much from economies of scale and scope, the Commission established a more gradual transition period for rural LECs. Id. at 8936, para. 294. 227 See Ninth Report and Order 14 FCC Rcd at 20439; Federal- State Joint Board on Universal Service, Forward-Looking Mechanism for High- Cost Support for Non- Rural LECs, Tenth Report and Order, CC Docket Nos. 96- 45, 97- 160, 14 FCC Rcd 20156 (1999) (Tenth Report and Order), affirmed, Qwest Corp. v. FCC, 258 F. 3d 1191 (10th Cir. 2001). The forward- looking mechanism for non- rural carriers became effective on January 1, 2000. See Ninth Report and Order, 14 FCC Rcd at 20439, para. 11. The Commission recently modified the non- rural high- cost support mechanism and adopted measures to induce states to ensure reasonably comparable rural and urban rates in areas served by non- rural carriers. See Tenth Circuit Remand Order, FCC 03- 249. 228 See Rural Task Force Order, 16 FCC Rcd at 11246, para. 1. In the First Universal Service Report and Order, the Commission determined that federal high- cost support should be based on forward- looking economic costs, but that non- rural carriers would transition to forward- looking mechanisms first. First Universal Service Report and Order, 12 FCC Rcd at 8899, 8935- 36, paras. 224, 293- 94. Subsequently, the Joint Board established the Rural Task Force to assist in developing a forward- looking mechanism appropriate for rural carriers. The Rural Task Force recommended modifying the existing high- cost loop support mechanism for a five- year period, rather than attempting to modify the non- rural mechanism so that it could be applied to rural carriers. The Joint Board recommended that the Commission use the Rural Task Force recommendation as a foundation for implementing a universal service plan for rural carriers for five years, and undertake a comprehensive review of the high- cost support mechanisms for rural and non- rural carriers to ensure that both mechanisms function efficiently and in a coordinated action. See Federal- State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96- 45, 16 FCC Rcd 6153, 6159, 6162- 63, paras. 13, 21 (Jt. Bd. 2000). 35 Attachment Federal Communications Commission FCC 04J- 1 36 forward- looking high- cost support mechanism for non- rural carriers so that it could be applied to rural carriers, was a reasonable approach to take in light of the record in the proceeding. 229 In so doing, the Commission and the Joint Board recognized that the plan adopted in the Rural Task Force Order was an interim plan. 230 61. The Commission did not adopt the Rural Task Force’s specific proposal to freeze per- line high- cost loop support upon competitive entry into a rural carrier study area, concluding that adoption of the proposal was not warranted at that time. 231 The stated purpose of this proposal was to prevent excessive growth in the universal service fund as a result of an incumbent carrier’s loss of lines to a competitive ETC. 232 While the Commission recognized that excessive growth in the fund might be possible during the life of the five- year plan under certain circumstances, it concluded that the likelihood of excessive fund growth due to an incumbent carrier’s loss of lines to a competitive ETC in the immediate future was speculative. 233 The Commission, however, indicated its intent to closely monitor these matters, consistent with its obligation under section 254 to maintain a specific, predictable, and sufficient universal service fund. 234 B. Discussion 1. Supporting a Single Connection Is Consistent With the 1996 Act 62. We believe that limiting the scope of high- cost support to a single connection to the public telephone network would be more consistent with the goals of section 254 than the present system. Supporting a single connection to the public telephone network fulfills the goal of “reasonably comparable” access in all regions of the Nation. 235 Section 254( b)( 3) ’s objective is that consumers in rural areas have access to rates and services, including advanced services, that are reasonably comparable to those available in urban areas. 236 Supporting a single connection provides access to all of the services included in the definition of universal service under section 254( c), because each ETC is required to provide all of the supported services. 237 Supporting a single connection also provides access to all of the additional telecommunications and information services, including advanced services, available to consumers through the public telephone network. 238 Thus, supporting multiple connections is not 229 See Rural Task Force Order, 16 FCC Rcd at 11248- 49, paras. 8- 10. 230 Id. at 11248, para. 8. 231 Id. at 11294, para. 123. The proposed per- line cap would have applied to high- cost loop support. Id. 232 Id. at 11294, para. 125. 233 Id. at 11294, 11325- 26, paras. 123- 24, 207 (“[ A] s an incumbent “loses” lines to a competitive eligible telecommunications carrier, the incumbent must recover its fixed costs from fewer lines, thus increasing its per- line costs. With higher per- line costs, the incumbent would receive greater per- line support, which would also be available to the competitive eligible telecommunications carrier for each of the lines that it serves. Thus, a substantial loss of an incumbent’s lines to a competitive eligible telecommunications carrier could result in excessive fund growth.”). 234 Id. at 11297- 98, para. 131. 235 47 U. S. C. § 254( b)( 3). 236 Id.; see also id. at § 254( b)( 2) (“ Access to advanced telecommunications and information services should be provided in all regions of the Nation.”). 237 Id. at § 254( c); see id. at § 214( e)( 1)( A). 238 See Rural Task Force Order, 16 FCC Rcd at 11322, para. 200 (“ The public switched telephone network is not a single- use network. Modern network infrastructure can provide access not only to voice services, but also to data, graphics, video, and other services.”); see also Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Universal Service Obligations of Broadband Providers, Computer III Further Remand (continued....) 36 Attachment Federal Communications Commission FCC 04J- 1 37 necessary to achieve reasonably comparable access in rural areas. Supporting a single connection faithfully accomplishes this objective. 239 63. We disagree with commenters who argue that supporting a single point of access is inconsistent with section 254( b)( 3) because rates might rise for second lines, which are often used for access to information services such as dial- up Internet access or fax services. 240 We recognize, of course, that supporting multiple connections is advantageous to consumers in high- cost areas. Section 254( b)( 3) encourages access to connectivity, however, not unlimited connections at supported rates. Advanced services increasingly are being provided along with voice services over a single connection. 241 Nothing in the Act supports the argument that multiple connections should be supported for access to dial- up Internet access or fax services, neither of which is a supported service. For similar reasons, we disagree with commenters who argue that supporting multiple connections is necessary to ensure reasonably comparable access to wireless service in rural areas. 242 Mobility is not a supported service. 243 Deployment of rural wireless infrastructure is an important policy goal, 244 but the reasonable comparability principle does not justify supporting multiple connections to achieve it. We emphasize that, under our recommended approach, support would be available for wireless connections to the extent that customers choose to obtain connectivity through primary connections provided by wireless ETCs. (... continued from previous page) Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review - Review of Computer III and ONA Safeguards and Requirements, Notice of Proposed Rulemaking, CC Docket Nos. 02- 33, 95- 20, 98- 10, 17 FCC Rcd 3019, 3025- 26, para. 11 n. 19 (2002) (“ With the addition of certain electronics to the telephone line, carriers can transform the copper loop that already provides voice service into a conduit for high-speed traffic.”). 239 See First Recommended Decision, 12 FCC Rcd at 132- 33, para. 89 (“ We conclude that support for a single residential connection will permit a household complete access to telecommunications and information services.”). 240 See, e. g., Idaho Tel. Ass’n Comments at 9; OPASTCO Reply Comments at 21; Texas Statewide Tel. Coop. Comments at 11. Some commenters challenge the assumption that rates for second lines will rise if support is limited to single connections. See, e. g., AT& T Comments at 16 (“ The costs of digging the trench or erecting the poles must be incurred fully in order to provide first- line service. There are few incremental costs to providing additional connections.”); NASUCA Reply Comments at 14- 15 (“ Given the architecture of both wireline and wireless facilities, it is very likely that the cost of subsequent connections by either type of provider is much lower than the initial connection. Second lines provided by a single firm to a single household or business tend to be more profitable than the initial line. . . . Therefore, second lines may be provided at an affordable price in rural areas even without support, obviating concerns about increases to the price of second lines.”); see also GCI Comments at 68- 69 (“ The vast majority of multiple connections provided today – the overwhelming bulk of the 148 million CMRS handsets – are not subsidized. . . . Moreover, studies have shown little if any difference in pricing between rural and urban markets.”). 241 See OPASTCO Comments at 6 (“ many rural [incumbent] LECs provide DSL services, which provide a substitute for the second line a customer may have purchased to use for dial- up Internet access.”). Commission data indicate that most asymmetric DSL connections are provided by LECs, which generally provision the service over the same line as their voice service. See Industry Analysis and Technology Division, Wireline Competition Bureau, High-Speed Services for Internet Access: Status as of December 31, 2002 at Tbl. 5 (rel. June 10, 2003), available at www. fcc. gov/ wcb/ stats (high- speed asymmetric DSL technologies in service increased by 27% during the second half of 2002, from 5. 1 million to 6. 5 million lines). 242 See, e. g., Western Wireless Comments at 10- 11, Attachment B at 3- 7. 243 See AT& T Comments at 10- 11 (“ if wireless functionality were added to the characteristics of a supported service in Section 54. 101( a), non- wireless carriers (including [incumbent] LECs’ wireline operations) could no longer be ETCs because they would not be able to provide a component of the supported services.”). 244 See generally Facilitating the Provision of Spectrum- Based Services to Rural Areas and Promoting Opportunities for Rural Telephone Companies to Provide Spectrum- Based Services, Notice of Inquiry, WT Docket No. 02- 381, 17 FCC Rcd 25554 (2003). 37 Attachment Federal Communications Commission FCC 04J- 1 38 64. We also believe that supporting a single connection would fulfill the statutory principles of sufficiency and predictability. 245 The Joint Board and the Commission have defined sufficiency as enough support to achieve relevant universal service goals without unnecessarily burdening all consumers for the benefit of support beneficiaries. 246 The Fifth Circuit similarly noted that excessive funding may violate the sufficiency requirements of the Act, because excess support may detract from universal service by causing unnecessary increases in rates, thereby pricing some consumers out of the market. 247 Supporting multiple connections for multiple networks is not necessary to achieve reasonably comparable access in rural areas, and creates a potential for fund growth that threatens the sustainability of the universal service fund. 248 Accordingly, supporting primary connections better fulfills the sufficiency requirements of the Act. 65. Furthermore, contrary to the arguments of some commenters, the sufficiency and predictability principles do not provide that cost recovery should be guaranteed for particular carriers. OPASTCO, for example, argues that “[ i] f rural ILECs are uncertain that they will be able to recover their network costs due to a primary connection support restriction, the incentive to continue investing in infrastructure will be inhibited. As a result, rural consumers’ access to high- quality services that are reasonably comparable to those offered in urban areas will be jeopardized.” 249 Notably, no rural carrier would lose any high- cost support under our recommended approach unless a competitive ETC captures primary connections from the rural carrier following competitive ETC entry. 250 But even if a rural carrier were to lose support in the future, that would not be inconsistent with sufficiency or predictability. The Fifth Circuit explained that “[ t] he Act does not guarantee all local telephone service providers a sufficient return on investment; quite to the contrary, it is intended to introduce competition into the market. . . . The Act only promises universal service, and that is a goal that requires sufficient funding of customers, not providers.” 251 Congress clearly envisioned the presence of competitive ETCs in some areas served by rural carriers, provided a state makes the threshold determination that designating a competitive ETC is in the public interest. 252 The Act does not require or encourage supporting multiple connections for multiple networks, however. Supporting a single connection may not ensure sufficient funding of every ETC, but it would provide sufficient support for universal service. 253 245 See 47 U. S. C. §§ 254( b)( 5), 254( e). 246 Tenth Circuit Remand Order, FCC 03- 239 at paras. 36- 37 (“ We also agree with the Joint Board that the principle of sufficiency encompasses the idea that the amount of support should be only as large as necessary to achieve the relevant statutory goal. Because support is ultimately recovered from customers, collecting more support than is necessary to benefit certain customers would needlessly burden all customers.”); see also Federal- State Joint Board on Universal Service, Second Recommended Decision, CC Docket No. 96- 45, 13 FCC Rcd 24744, 24746, para. 3 (Jt. Bd. 1998) (Second Recommended Decision). 247 Alenco v. FCC, 201 F. 3d at 620. 248 See infra paras. 67- 68. 249 OPASTCO Reply Comments at 20. 250 See infra paras. 72- 76. We note, however, that one proposal discussed below would “hold- harmless” incumbent carriers from any loss of universal service support. See infra para. 75. 251 Alenco v. FCC, 201 F. 3d at 620; see also id. at 623 (“ the Commission reasonably construed the predictability principle to require only predictable rules that govern distribution of the subsidies, and not to require predictable funding amounts. Indeed, to construe the predictability principle to require the latter would amount to protection from competition and thereby would run contrary to one of the primary purposes of the Act.”). 252 See 47 U. S. C. §§ 214( e)( 1), (2). As discussed in Section II above, we recommend establishing rigorous and fact-intensive guidelines for public interest determinations required in ETC applications. 253 See Alenco v. FCC, 201 F. 3d at 620 (“ So long as there is sufficient and competitively- neutral funding to enable all customers to receive basic telecommunications services, the FCC has satisfied the Act and is not further required (continued....) 38 Attachment Federal Communications Commission FCC 04J- 1 39 66. Although we do not believe that the federal support mechanism should continue to support multiple connections, we believe that states have the flexibility to establish their own support mechanisms for multiple connections, mobility, or other functionalities not supported at the federal level. Section 254( f) makes clear that states “may adopt regulations not inconsistent with the Commission’s rules to preserve and advance universal service” and that a state may “provide for additional definitions and standards” so long as those supplements do not rely on or burden the federal support mechanisms. 254 Although such state support would go beyond the scope of federal high- cost support, we do not believe that such supplementary state funding would “rely on or burden Federal universal service support mechanisms” in contravention of section 254( f) of the Act. 2. Supporting a Single Connection Is Necessary to Protect Fund Sustainability 67. Continued support of multiple connections for multiple networks in rural and high- cost areas threatens fund sustainability. Currently, the support flowing to a high- cost area increases automatically when a competitive ETC is designated, according to the number of connections it serves. 255 Competitive ETCs now receive a small fraction of total high- cost support, but their support has increased dramatically over the past few years. 256 Much of this growth represents supported wireless connections that supplement, rather than replace, wireline service. 257 Our examination of the record reveals a potential for uncontrolled growth as more and more competitive ETCs are designated in rural and high- cost areas. 258 This potential is compounded by the calculation of support under the current rules. 259 The Commission (... continued from previous page) to ensure sufficient funding of every local telephone provider as well.”). Congress thought that competition and new technologies would reduce, not increase, the overall need for universal service support by lowering costs. See S. Rep. No. 23, 104 th Cong., 1st Sess. 26 (“ The Committee expects that competition and new technologies will greatly reduce the actual cost of providing universal service over time, thus reducing or eliminating the need for universal service support mechanisms as actual costs drop to a level that is at or below the affordable rate for such service in an area . . .”) (cited in Tenth Circuit Remand Order, FCC 03- 249 at para. 77 n. 296). 254 47 U. S. C. § 254( f). 255 See NASUCA Comments at 5 (current rules “allow each new competitive entrant to impose incremental costs on all existing telecommunications customers”). 256 Based on USAC data, 2 competitive ETCs received just over $500,000 in high- cost support in 1999, 4 competitive ETCs received $1.5 million in 2000, 25 competitive ETCs received $17 million in 2001, and 64 competitive ETCs received $47 million in 2002. In 2003, 109 competitive ETCs received approximately $131.5 million in high- cost support. Based on USAC quarterly projections, support for competitive ETCs will increase from $62. 9 million in the fourth quarter of 2003, to $111. 5 million in the second quarter of 2004, an increase of 77%. See Federal Universal Service Support Mechanisms Fund Size Projections and Contribution Base for the Second Quarter 2004, Appendix HC 18- 21 (Universal Service Administrative Company, Jan. 31, 2004). We note that USAC quarterly projections include ETC applicants that have filed line count data with USAC, but are not yet designated as ETCs. 257 One study estimates that 3 to 5 percent of wireless customers use their wireless phones as their only phone. See Implementation of Section 6002( B) of the Omnibus Budget Reconciliation Act of 1993, Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Radio Services, Seventh Report, 17 FCC Rcd 12985, 12989- 90, para. 33 (Seventh Annual CMRS Report). See also AT& T Comments at 6- 7; Sprint Comments at 7- 8. There also is evidence in the record reflecting that some customers are replacing wireline phone usage with wireless service, and relying on wireless as their “primary” service. See OPASTCO Comments at 5; Smith Bagley Comments at 7; Texas Statewide Tel. Comments at 3; Western Wireless Comments, Attachment B at 5- 6, Attachment C at 1- 7. 258 See, e. g., Independent Tel. & Telecomms. Alliance Reply Comments at 2- 3; NASUCA Comments at 1- 3; NTCA Comments at 10; OPASTCO Comments at 9- 11. See supra note 183. 259 See, e. g., AT& T Comments at 20- 21 (“ as a [competitive] ETC enters and takes lines from an [incumbent] LEC, total High Cost support to the study area increases because the [incumbent] LEC’s support does not fall to offset the (continued....) 39 Attachment Federal Communications Commission FCC 04J- 1 40 declined to adopt the Joint Board’s recommendation to limit support to single connections in 1997, based largely on its expectation that a forward- looking support methodology could be implemented for all incumbent LECs as early as January 1, 2001. 260 Support for rural carriers likely will continue to be based on embedded costs at least until mid- 2006, however. 261 We believe that the Commission should no longer defer limiting the scope of high- cost support. By limiting fund growth due to competitive ETC entry in rural and high- cost areas, our recommended approach would protect fund sustainability. High-cost support would increase with primary connection growth, rather than with growth in the total number of connections provided by both incumbent and competitive ETCs. 68. We reject arguments that supporting a single connection is not an effective means to slow fund growth because competitive ETCs receive a small percentage of total high- cost support and most fund growth over the past few years is attributable to support increases received by incumbent LECs. 262 The total amount of support received by competitive ETCs, for what appear to be supplemental connections for many subscribers, has increased substantially over the past few years. We believe that further growth due to supporting multiple connections presents a significant threat to fund sustainability. Our recommended approach addresses this concern directly in a manner that is consistent with statutory goals. To the extent that increases in high- cost funding for incumbent LECs present additional fund sustainability concerns, we expect to address those concerns in conjunction with our reexamination of the basis of support for all ETCs. 263 3. Supporting a Single Connection Would Send More Appropriate Entry Signals and Would Be Competitively Neutral 69. Supporting a single point of access would send more appropriate entry signals in rural and high- cost areas. Some commenters argue that carriers increasingly are seeking ETC designation based on perverse incentives created by the current rules. 264 Our recommended approach would not artificially encourage entry by competitive ETCs in areas where a rational business case cannot be made absent assumptions of support for all connections. Competitive ETCs instead would have incentives to enter rural and high- cost areas only where doing so makes rational business sense under a model assuming incremental support only for subscribers captured from, or unserved by, the incumbent LEC. Furthermore, by preventing automatic support of multiple connections, supporting a single point of access would address alleged incentives under the current rules for states to designate additional ETCs to attract more universal service funding. 265 (... continued from previous page) [competitive] ETC’s support. . . . The amount of support increases to even higher levels because there is a subsequent up- tick in [competitive] ETC support based on the [incumbent] LEC’s now- increased effective per- line support.”); see also Rural Task Force Order, 16 FCC Rcd at 11294- 95, para. 125. 260 First Universal Service Report and Order, 12 FCC Rcd at 8829- 30, paras. 95- 96. See also supra paras. 59- 60. 261 See Rural Task Force Order, 16 FCC Rcd at 11246, 11248- 49, paras. 1, 8- 11. 262 See, e. g., Centennial Reply Comments at 2- 3; CTIA Reply Comments at 2- 4; Nextel Comments at 2, 6- 8. 263 See infra paras. 94- 97. 264 See, e. g., ACS- F Comments at 7, 12- 13; AT& T Comments at 22; GCI Comments at 41- 43; OPASTCO Comments at 9- 11. 265 See, e. g., NASUCA Comments at 8- 9 (“ Under current rules, states have something of a conflict of interest. That is, here may be a bias toward granting of ETC status because, when new ETCs are created, more federal dollars flow into the state. Conversely, there is a disincentive for states to ensure that the public interest is fulfilled on a national basis because the benefit of additional federal funds may outweigh state regulators’ concerns about the sustainability of the federal program.”). 40 Attachment Federal Communications Commission FCC 04J- 1 41 70. Supporting a single connection also would be competitively neutral. 266 Support would be available to all ETCs for providing primary connections. To the extent that a competitive ETC replaced an incumbent ETC as the primary connection provider, the competitive ETC would receive support for providing the connection. 267 In addition, rural carriers would no longer be insulated from the effects of universal service competition, because they would lose per- line support to the extent that they lose primary connections. 268 Our recommended approach also would prevent upward spirals in per- line support amounts as a result of loss of lines by incumbent carriers, an unfortunate effect of the current rules that commenters argue creates potential windfalls for competitive ETCs. 269 71. We disagree with commenters who argue that limiting support to a single connection would unfairly advantage imcumbent LECs because they preceded competitive ETCs in rural and high- cost areas. 270 Under our recommended approach, consumers would be free to designate any ETC as “primary” based on the service attributes that it offers. 271 We also reject an alternative proposal from Western Wireless to cap total high- cost support in an area upon competitive ETC entry and allocate the support among ETCs based on market share, in lieu of limiting support to a single connection. 272 Western Wireless contends that its alternative proposal would contain fund growth due to competitive ETC entry, but would be more competitively neutral and less administratively burdensome than a primary- connection limitation. 273 In our view, however, this measure would continue support of multiple connections for multiple networks, contrary to the provisions of the Act discussed above. It also could lead to sudden, major shifts in support in areas where a new competitive ETC already serves a significant number of connections. 266 See First Universal Service Report and Order, 12 FCC Rcd at 8801- 02, paras. 46- 48 (pursuant to section 254( b)( 7), adopting the principle that federal support mechanisms should be competitively neutral, neither unfairly advantaging nor disadvantaging particular service providers or technologies). 267 See AT& T Comments at 15- 16; NASUCA Comments at 6. 268 See GCI Comments at 38 (“ In an unsubsidized market, an [incumbent] LEC loses all of the revenue associated with service to a customer when it loses that customer to a competitor. By contrast, in an area receiving high cost support, although the [incumbent] LEC loses the end user revenue associated with that customer, it retains the high cost support associated with the facilities that were formerly used to serve that customer, because its high cost support does not decline when it loses the line.”); see also AT& T Comments at 15- 16. We note, however, that if the Commission adopts the “hold- harmless” approach discussed below, incumbent carriers would not lose high- cost support upon capture of primary lines by a competitive ETC. See infra para. 75. 269 See Rural Task Force Order, 16 FCC Rcd at 11294- 95, para. 125; AT& T Comments at 22 (“ Over the long term, these revenue guarantees give [competitive] ETCs a windfall by increasing the amount of [competitive] ETC support per line as ILEC per- line support increases. This allows [competitive] ETCs to enjoy increased revenue per connection, without any work or ingenuity on their part.”); see also OPASTCO Comments at 13- 14 (arguing that competitive ETCs receive a windfall under the current rules). 270 See generally Western Wireless Reply Comments, Attachment B (arguing that any distinction based on which connection is the “first line” would operate to benefit incumbent LECs and would not be competitively neutral because being “first” should not provide a carrier with “regulatorily conferred advantages.”). 271 In this regard, we note that Western Wireless cites studies indicating that “more and more consumers view their wireless phones as their ‘primary’ voice services” because of the service attributes offered by wireless carriers. Western Wireless Comments, Attachment J at 4; see id. at Attachment B at 4- 6 (providing data to support contention that subscribers are “substituting wireless for traditional wireline service”). 272 See Western Wireless Comments at 18. 273 See Western Wireless Comments, Attachment J at 7- 8. 41 Attachment Federal Communications Commission FCC 04J- 1 42 4. Maintaining Sufficient Support for Rural Areas 72. We recommend that the Commission take steps to avoid or mitigate reductions in the amount of high- cost support flowing to rural areas as a result of implementing a primary- line restriction. a. Restatement Proposal 73. One way the Commission might accomplish this end would be to restate total current support paid to a rural carrier in terms of first lines. Rural carriers are eligible for high- cost support based on total embedded costs averaged on a study- area level. 274 The total amount of high- cost support flowing to an area served by a rural carrier could be restated in terms of support per first line, rather than support per line, without any effect on the amount of support received by the rural carrier at the time support is restated. 275 Restating support is a method of limiting the scope of support in areas served by rural carriers without modifying the basis of support (that is, the methodology used to calculate support). 276 b. Lump Sum Payment Proposal 74. Alternatively, rather than increase the amount of per- line support available in areas served by rural carriers by restating support in terms of first lines, the Commission could provide supplemental lump sum payments to avoid any immediate effects on rural carriers as a result of limiting the scope of support. Under this approach, a rural carrier would receive the same amount of high- cost support on a per- line basis as it did previously, but would receive such support only for primary lines. The rural carrier also would receive a lump sum payment to compensate for the loss of support associated with existing second lines. Thus, this interim lump sum proposal, like the restatement proposal described in the previous paragraph, would prevent support reductions in rural areas based on the termination of support for second lines; high- cost support would be reduced only with the future loss of primary lines to competitors. But unlike the restatement proposal, the lump sum payment alternative would not increase the amount of per- line support for incumbent carriers, and thus would not encourage competitive carriers to seek ETC status merely for arbitrage purposes. 277 On the other hand, we recognize that making lump-sum payments available to incumbents, but not to competitive ETCs, could be inconsistent with the 274 See 47 C. F. R §§ 36. 601, et seq. (high- cost loop support), 54. 301 (local switching support), 54. 303 (long term support), 54. 901, et seq. (interstate common line support). Interstate access support also is available to rural carriers subject to price cap regulation of their interstate access rates. See 47 C. F. R. § 54. 801, et seq. The Joint Board does not recommend limiting the scope of interstate access support at this time, because the interstate access support methodology prevents support increases due to competitive ETC entry. See AT& T Comments at 13 (“ Because [interstate access support] is subject to a hard cap, it cannot be the source of uncontrolled High Cost Support growth.”). 275 See AT& T Comments at 13. 276 As discussed below, we recommend that the Joint Board and the Commission consider possible modifications to the basis of support for all ETCs when they undertake the “comprehensive review of the high cost support mechanisms for rural and non- rural carriers as a whole to ensure that both mechanisms function efficiently and in a coordinated fashion” in the Rural/ Non- Rural Review proceeding. Our recommendations do not impact or prejudge anything that the Joint Board and Commission may do in the future in examining the basis of support for all ETCs in all areas. 277 Several commenters argue that providing support to competitive carriers based on the incumbent LEC’s costs creates arbitrage opportunities, because competitive carriers generally have lower costs. See e. g., Alaska Tel. Ass’n Reply Comments at 18- 19; CenturyTel Comments at 32- 39; South Dakota Telecomms. Ass’n Reply Comments 4- 6. To the extent this problem exists in some areas, increasing the amount of per- line support available to competitive carriers would exacerbate it. 42 Attachment Federal Communications Commission FCC 04J- 1 43 principle of competitive neutrality. 278 c. “Hold Harmless” Proposal 75. We also seek comment on a different alternative designed to maintain support for rural areas that does not encourage competitive carriers to seek ETC status merely for arbitrage purposes. Under this proposal, per line support available to competitive ETCs would freeze upon competitive entry. Competitive ETCs would only be able to obtain USF support for customers who designated their service as the primary line. We recognize that many parties contend that a per- line approach would jeopardize the sufficiency of support distributed to incumbent carriers. Such parties note that incumbent LECs have made substantial investments in infrastructure in reliance on such support. This proposal would not cap per- line support for incumbent carriers and would thus “hold harmless” incumbent carriers from the loss of universal service support. 76. We recommend that the Commission seek comment on the relative pros and cons of the restatement, the lump sum and hold harmless proposals. Leaving aside the question of which of these approaches has the most merit, we believe that if the Commission implements a primary- line restriction, it must adopt some means of preventing or mitigating reductions in the support available to rural carriers. The Joint Board and the Commission consistently have recognized the importance of a cautious approach to universal service reform in areas served by rural carriers, in light of their size, diversity, and regulatory history. 279 Restating support or implementing the lump sum or hold harmless proposal would avoid any immediate effects on rural carriers as a result of limiting the scope of support, by placing them in the same total support position as they were in beforehand. 280 In other words, a rural carrier would not be required to forego any of the support that it received before implementation of the primary- line restriction. Its support would be reduced in the future only to the extent that a competitive ETC captures primary lines from the rural carrier (except under the hold harmless proposal). Rural carriers also would forego future support increases associated with new, non- primary lines. 281 Restating support, providing a lump sum payment, or adopting a hold- harmless proposal will ensure that the transition to supporting basic access is not unduly disruptive in areas served by rural carriers. 282 We also recommend that the Commission seek comment on whether to restate support, provide lump sum payments or hold- harmless 278 We recommend that the Commission seek comment on whether to phase out the lump sum available to incumbent carriers, and, if so, over what time period. 279 See, e. g., Multi- Association Group (MAG) Plan for Regulation of Interstate Services of Non- Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, Federal- State Joint Board on Universal Service, Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate- of- Return Regulation, Prescribing the Authorized Rate of Return From Interstate Services of Local Exchange Carriers, Second Report and Order and Further Notice of Proposed Rulemaking in CC Docket No. 00- 256, Fifteenth Report and Order in CC Docket No. 96- 45, Report and Order in CC Docket No. 98- 77, Report and Order in CC Docket 98- 166, 16 FCC Rcd 19613, 19620, 19668- 69, paras. 12, 130- 31 (2001) (MAG Order), recons. pending; Rural Task Force Order, 16 FCC Rcd at 11247, paras. 4- 5. 280 For example, if an incumbent rural ETC receives $10,000 in high- cost support based on its embedded costs for that study area, and provides supported services to 9,000 first lines and 1,000 additional lines, it receives high- cost support that equates to $1. 00 per line under the current rules. Under our recommended approach, that incumbent rural ETC would continue to receive a total of $10,000 in high- cost support based on its embedded costs, but restating its support in terms of first lines would translate into $1. 11 effective per- first line support. 281 We believe that such increases likely would be minimal due to trends such as the provision of voice and data services over a single digital subscriber line. See OPASTCO Comments at 6- 7. Both rural carriers and competitive ETCs would be eligible for additional support for primary service to new customers previously unserved by any ETC. See NASUCA Comments at 6. 282 See e. g., NASUCA Reply Comments at 25- 26 (asserting that rebasing “will reduce the impact on the smaller rural incumbent LECs” of a single- line limitation). 43 Attachment Federal Communications Commission FCC 04J- 1 44 support in areas served by non- rural carriers. 283 5. Cap on Per- Line Support Upon Competitive Entry 77. In conjunction with the measures discussed above, we recommend that high- cost support in areas served by rural carriers be capped on a per- primary line basis when a competitive ETC is present or when a competitive ETC enters the market and be adjusted annually by an index factor. This recommendation is a modified version of a Rural Task Force proposal. 284 Under our recommended approach, the total support flowing to a rural carrier (including high- cost loop support, local switching support, long term support, and interstate common line support 285 ) would be capped on a per- primary line basis upon competitive entry. Thereafter, per- primary line support would be adjusted annually based on an index factor, rather than changes in the rural carrier’s embedded costs. We also recommend that the Commission seek comment on the alternative approach of capping per- primary line support available to competitive ETCs upon competitive entry, consistent with the “hold- harmless” proposal discussed above. 286 78. Capping per- primary line support in areas served by rural carriers is necessary to implement a primary- line limitation and to prevent an upward spiral in support due to capture of primary connections by competitive ETCs. As we have stated, the high- cost universal service mechanisms calculate support for rural carriers based on total embedded costs averaged on a study- area basis. Under these mechanisms, a rural carrier’s per- primary line support automatically increases as its total embedded costs are spread over fewer lines. 287 This has several implications for purposes of a primary- connection limitation. First, absent a per- primary line cap, a rural carrier would continue to receive support for new lines served— regardless of whether such lines provide primary connectivity— because any costs associated with the new connections would increase the rural carrier’s total embedded costs and, therefore, the per- line support associated with the primary lines it serves. Likewise, a rural carrier would not lose support if it loses primary connections to a competitive ETC. Thus, the absence of a per- line cap would obviate the effect of a single- connection limitation. Moreover, fund size could grow significantly if rural carriers lose primary connections to competitive ETCs, because rural carriers would continue to receive the same total support, but the per- line support amounts available to both the incumbent LEC and competitive ETCs would increase as rural carriers’ per- line costs were spread over fewer primary lines. 288 79. We recognize that the Commission declined to cap per- line support in the Rural Task Force Order. 289 Nevertheless, we believe that the Commission should adopt a modified version of the Rural Task Force’s proposal at this time. As discussed above, support for competitive ETCs has increased 283 We also recommend that the Commission seek comment on whether transitional measures should be adopted for support paid to competitive ETCs operating as of the release date of this Recommended Decision. See infra para. 87. 284 See Rural Task Force Order, 16 FCC Rcd at 11293, para. 120; see also supra para. 61. 285 See supra, para. 61, n. 158. We, however, recommend a broader cap on per- line support. See AT& T Comments at 23 (advocating a cap on high- cost loop support (HCLS), local switching support (LSS), long- term support (LTS), and interstate common line support (ICLS)). 286 See supra para. 75. 287 See Rural Task Force Order, 16 FCC Rcd at 11294- 95, para. 125; see also AT& T Comments at 17- 18 (“ an [incumbent] LEC will only lose support under HCLS, LSS and ICLS to the extent that its study areas costs decline, irrespective of the number of lines served.”). 288 See Rural Task Force Order, 16 FCC Rcd at 11294- 95, para. 125; AT& T Reply Comments at 17- 18; GCI Comments at 36- 38. 289 See Rural Task Force Order, 16 FCC Rcd at 11294- 97, paras. 123- 130; see also supra, para. 61. 44 Attachment Federal Communications Commission FCC 04J- 1 45 dramatically since 2001, and the danger of excessive fund growth that the Commission recognized at the time of the Rural Task Force Order is now clear and present. 290 In addition, the Commission viewed the Rural Task Force proposal as having a relatively narrow purpose— to limit fund growth due to capture of connections by competitive ETCs 291 —whereas our recommendations have the broad purpose of limiting the scope of high- cost support to primary connections. Furthermore, the danger of an upward spiral in support would be exacerbated because, to the extent that a competitive ETC captures primary connections, there would be fewer supported lines over which to spread a rural carriers’ increased per- line costs. 80. We recommend that the Commission further develop the record on what index factor should be used to adjust capped per- line support each year. The Rural Task Force originally recommended the rural growth factor, which is equal to the sum of annual changes in the total number of lines served by rural carriers and the Gross Domestic Product- Chained Price Index (GDP- CPI), an inflation measure. 292 Alternatively, a modified rural growth factor that reflects annual changes in the total number of primary lines served by rural carriers might be appropriate. The Commission also should consider using the GDP-CPI alone. In this regard, the Commission noted in the Rural Task Force Order that because the rural growth factor includes annual rural line growth, “its application to individual lines receiving frozen support would result in double counting of line growth.” 293 Some commenters express similar concerns. 294 6. Administrative Issues 81. We recommend that the Commission seek comment on how best to implement our recommended approach for supporting primary connections. Opponents raise various administrative concerns regarding a primary- connection limitation. 295 On the other hand, proponents argue that limiting the scope of high- cost support is administratively feasible, and that the burdens would be small compared to the potential benefits. 296 We reject arguments that a primary- connection limitation is inherently unworkable. As NASUCA points out, rules distinguishing between primary and other connections are not unprecedented, and the Commission has successfully implemented regulatory initiatives involving consumer choice. 297 Nevertheless, we recognize that limiting the scope of high- cost support presents 290 See supra para. 67; Rural Task Force Order, 16 FCC Rcd at 11326, para. 209. 291 See Rural Task Force Order, 16 FCC Rcd at 11294, para. 123 (“ the purpose of this proposal is to prevent excessive fund growth in the universal service fund as a result of an incumbent carrier’s loss of lines to a competitive [ETC].”). The Commission concluded that the likelihood of such growth occurring in the near future was speculative because, among other things, it would occur “only if a competitive [ETC] captures subscriber lines from an incumbent, not if it adds new lines.” Id. at 11295- 96, para. 126. 292 See Rural Task Force Order, 16 FCC Rcd at 11266, para. 48. 293 Id. at 11295, para. 126. 294 See AT& T Comments at 23 n. 57. 295 Opponents argue, among other things, that limiting the scope of high- cost support would require complex new rules to define “primary” lines, require costly tracking of primary lines, give rise to consumer gaming and a new type of carrier “slamming,” and intrude on consumer privacy. See, e. g., Alabama Rural LECs Reply Comments at 9; Centennial Reply Comments at 12; Fred Williamson and Assocs. Comments at 26- 27. 296 See, e. g., AT& T Reply Comments at 12- 13; GCI Comments at 69; NASUCA Comments at 6- 7; see also NASUCA Reply Comments at 13 (“ None of the commenters’ concerns appear to be without a readily available remedy.”). 297 NASUCA Comments at 7 (asserting that LECs are currently required to distinguish between primary and other lines for assessing subscriber line charges (SLCs) and allowing Lifeline support, and noting that “[ w] hen equal access and intraLATA presubscription began, every customer had to make new choices that were more complicated (continued....) 45 Attachment Federal Communications Commission FCC 04J- 1 46 administrative challenges. The present record does not allow us to resolve these issues. We recommend, therefore, that the Commission further develop the record on how to implement support for primary connections. Our recommendations are conditioned on the Commission’s ability to develop competitively neutral rules and procedures that do not create undue administrative burdens. 82. In particular, we recommend that the Commission further develop the record on proposals to allow consumers with more than one connection to designate an ETC’s service as “primary.” 298 We believe that this is a promising approach because it would allow consumers— the intended beneficiaries of universal service 299 —to decide whether an ETC’s service is “truly a substitute for basic universal service.” 300 Such proposals also have the merit of competitive neutrality, as consumers would be free to designate a primary ETC based on the service attributes that the ETC offers. In addition, they may avoid the need for complex and possibly artificial distinctions between primary and other connections by placing choice in the hands of consumers. We are not persuaded by arguments that competition for primary designations would disserve the public interest by diverting ETCs’ resources from infrastructure investment to marketing and promotion. 301 Where a state makes the threshold determination under the Act that universal service competition in a rural area would serve the public interest, 302 we expect that increased competition and choice will encourage investment and benefit consumers. 83. We also recommend that the Commission further develop the record on rate issues associated with supporting primary connections. Some commenters argue that limiting the scope of high- cost support would require local rate increases or pricing flexibility for second connections, and create ratemaking complexities for states. 303 Others argue that supporting a single point of access need not mean different end- user rates for primary and other connections. 304 AT& T argues that rate- of- return carriers should be permitted to increase federal subscriber line charges on non- supported lines to recover (... continued from previous page) than a selection of what firm provides the primary line.”). Opponents argue that difficulties in administering a primary/ non- primary line distinction for price cap carriers’ SLC rates would be exacerbated for small rural carriers in a multi- carrier environment. See e. g., OPASTCO Comments at 35- 37. 298 See NASUCA Comments at 6 (“ The primary line should be designated by each customer with more than one line, and carriers should be free to compete for the designation as ‘primary. ’ The Commission should allow a reasonable transition period within which consumers could exercise their choice if they have more than one line or if they are served by more than one ETC. However, the Commission will have to devise a system to deal with customers who fail to indicate a choice by the end of the transition period. One way to determine the primary line would be to designate the initial [incumbent] LEC line as the default primary connection. Another alternative is to require a ballot to be submitted by every customer with multiple connections, which entails more administrative burden. While the default assumption would be that a single address represents a single household, there should be flexibility to allow a customer to rebut that presumption by submitting contrary information to the carrier.”); see also Western Wireless Comments, Attachment J at 6- 7 (advocating use of vouchers or “phone stamps” as a means of implementing a primary connection restriction with consumer choice).. 299 Alenco v. FCC, 201 F. 3d at 621 (“ The purpose of universal service is to benefit the customer, not the carrier.”). 300 NASUCA Comments at 6. 301 See, e. g., Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Comments, Exhibit 1 at 20; Letter from Karen Brinkman, Counsel for CenturyTel Inc., to Marlene Dortch, FCC, dated Dec. 18, 2003 (CenturyTel Dec. 18 ex parte) 302 See 47 U. S. C. § 214( e)( 2). 303 See, e. g., OPASTCO Comments at 38- 39; MUST Comments at 36; Townes et al. Comments at 8- 9; see also AT& T Comments at 24- 27; SBC Comments at 16- 17. 304 See NASUCA Reply Comments at 10- 11. NASUCA argues that carriers can charge averaged rates, and that states can provide support for secondary connections if they so choose. See id. at 13- 14, 22- 23. 46 Attachment Federal Communications Commission FCC 04J- 1 47 any lost interstate common line revenues, although it maintains that such increases are unlikely. 305 States will determine local rate issues in the intrastate ratemaking process, but further development of the record may assist states in addressing these issues. 7. Other Issues 84. We also recommend that the Commission further develop the record on the appropriate treatment of businesses with multiple connections, particularly small businesses, under our recommended approach. 306 Historically, the Joint Board and Commission have concluded that universal service concerns are not as great for multi- line business customers. 307 Some commenters, however, have raised concerns that limiting support to a single point of access provided for residential and business customers may discourage operation of businesses, particularly small businesses, in rural areas. 308 Commenters have noted that rural economies are highly dependent on the presence of businesses to provide jobs and services. 309 Restating support should address these concerns to a large extent by avoiding upward pressure on rates for all customers in rural areas. 310 Nevertheless, we believe that these concerns warrant careful consideration. One possible means to address such concerns with regard to small businesses is to allow high- cost support for some designated number of multiple connections for businesses, rather than restricting support to a single business connection. 311 85. As the Commission develops the record in this proceeding, it also should consider the treatment of lines provided by unbundled network element (UNE)- based competitive ETCs under our recommended approach. Unlike loss of a customer to a facilities- based carrier, loss of a customer to a UNE- based provider does not eliminate the need to continue operating the incumbent’s network for the benefit of that customer. 312 UNE rates compensate incumbent LECs for the forward- looking economic costs of providing UNEs under the current rules. 313 Some commenters, however, argue that UNE rates do not compensate incumbents for their embedded costs of providing UNEs and that this disparity creates arbitrage opportunities. 314 Under the current universal service rules, incumbent LECs do not normally 305 See AT& T Comments at 24- 27. 306 Under the Regulatory Flexibility Act, the term “small business” has the same meaning as the term “small business concern” under the Small Business Act. See 5 U. S. C. § 601( 3) (incorporating by reference the definition of “small business concern” in the Small Business Act, 15 U. S. C. § 632). A “small business concern” is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration. 15 U. S. C. § 632. 307 See, e. g., Access Charge Reform, Price Cap Performance Review for Local Exchange Carriers, Transport Rate Structure and Pricing, End User Common Line Charges, First Report and Order, CC Docket Nos. 96- 262, 91- 213, 95- 72, 12 FCC Rcd 15982, 16005, paras. 58- 60 (1997) (Access Charge Reform Order) (subsequent history omitted) (concluding that higher SLC caps were warranted for such users). 308 See e. g., Idaho Tel. Ass’n Comments at 9; OPASTCO Comments at 37- 38; USTA Comments at 6; Washington Commission Comments at 15. 309 Washington Commission Comments at 15- 16. See also OPASTCO Comments at 37. 310 See supra para. 76. See also AT& T Comments at 12- 16. 311 In Texas, for example, lines eligible for intrastate support are currently limited to all flat rate residential lines and the first five flat rate single- line business lines at the business customer’s location within the state of Texas. See Texas Commission Comments at 10. 312 See e. g., ACS- F Reply Comments 9- 12. 313 47 C. F. R. § 54.307( a)( 2). See also GCI Comments at 58- 61 (noting that “the Commission rejected embedded costs as a measure of the [incumbent] LEC’s true economic costs for the purposes of setting UNE prices based on costs”). 314 See ACS- F Comments at 13- 17; NTCA Comments at 13; OPASTCO Comments at 18- 22. 47 Attachment Federal Communications Commission FCC 04J- 1 48 receive high- cost support when they lose lines to UNE- based competitive ETCs unless the support exceeds the UNE price. 315 We believe that these matters warrant consideration by the Commission. 86. More generally, we encourage the Commission to seek comment on the impact of our primary connection proposal on investment in rural areas. Opponents of this proposal contend that it would undermine investment by incumbent LECs and competitors. 316 We do not expect such an outcome, but we urge the Commission to give this issue careful consideration. 87. Finally, we encourage the Commission to consider whether it should adopt transitional measures for support in areas where competitive ETCs are operating as of the release date of this Recommended Decision. We recognize that business plans may be contingent on support received under the current rules. Like restating per- line support for rural carriers, transitional measures for support received by competitive ETCs may be appropriate. Transitional measures also may be appropriate to avoid rapid shifts in support and provide all ETCs with time needed to adjust their business plans. One possible approach would be to establish a transitional period during which support for non- primary connections is phased down annually. 317 In addition, any shifts in support due to customer choice of a primary connection provider could be limited to a given percentage for all ETCs during the transition period. 318 IV. BASIS OF SUPPORT 88. We decline to recommend that the Commission modify the basis of support in areas with multiple ETCs at this time, but we will continue to consider possible modifications to the basis of support in this proceeding. We recommend that the Joint Board and the Commission continue to consider possible modifications to the basis of support in a broader context. Specifically, we recommend that the Joint Board and the Commission consider possible modifications to the basis of support for all ETCs when they undertake the “comprehensive review of the high- cost support mechanisms for rural and non-rural carriers as a whole to ensure that both mechanisms function efficiently and in a coordinated fashion” in the Rural/ Non- Rural Review proceeding. 319 Examining the basis of support in areas with multiple ETCs in conjunction with review of the rural and non- rural mechanisms would allow the Joint Board and the Commission to craft a more comprehensive approach and avoid the perils of piecemeal decision-making. For the present, the Joint Board will continue its review of the methodology for calculating support for ETCs in areas with multiple ETCs. A. Background 89. In the First Universal Service Report and Order, the Commission determined that federal high- cost support for all eligible carriers eventually should be based on the forward- looking economic cost of constructing and operating the network facilities and functions used to provide the supported 315 See 47 C. F. R. § 54. 307( a)( 2). 316 See, e. g., Idaho Tel. Ass’n Comments at 9; OPASTCO Comments at 31- 33; Texas Statewide Tel. Coop. Comments at 11. 317 See e. g., Federal- State Joint Board on Universal Service, Thirteenth Report and Order and Further Notice of Proposed Rulemaking, CC Docket No. 96- 45, 15 FCC Rcd 24422 (2000) (Thirteenth Report and Order) (phasing down interim hold- harmless support for non- rural carriers). 318 See NASUCA Reply Comments at 21- 33; SBC Comments at 14- 16. 319 Rural Task Force Order, 16 FCC Rcd at 11310, para. 169; see also Tenth Circuit Remand Order, FCC 03- 249 at para. 25. 48 Attachment Federal Communications Commission FCC 04J- 1 49 services. 320 The Commission agreed with the Joint Board that, “in the long run, forward- looking economic cost best approximates the costs that would be incurred by an efficient carrier in the market,” 321 and, therefore, the use of forward- looking economic cost as the basis for determining support will send the correct signals for entry, investment, and innovation. 322 The Commission concluded that “the 1996 Act’s mandate to foster competition in the provision of telecommunications services in all areas of the country and the principle of competitive neutrality compel [the Commission] to implement support mechanisms that will send accurate market signals to competitors.” 323 90. Although the Commission generally concluded that federal high- cost support should be based on forward- looking economic costs rather than embedded costs, it agreed with the Joint Board that rural carriers should transition to support based on forward- looking costs at a later date than non- rural carriers. 324 The Commission wanted to allow ample time for rural carries to adjust to any changes in support calculations. In the meantime, rural carriers would receive support based on the existing embedded cost mechanisms, as modified in the First Universal Service Report and Order. 325 91. In order not to discourage competition in high- cost areas, the Commission determined that an incumbent’s high- cost support should be portable to other eligible carriers prior to the transition to forward- looking economic cost mechanisms. 326 The Commission found that the least burdensome way to administer the support mechanisms would be to calculate an incumbent LEC’s per- line support amount based on its embedded costs and provide this per- line amount to all ETCs serving customers within the service territory. 327 The Commission recognized that a competitive ETC may have different costs than the incumbent LEC, but explained that competitive ETCs must comply with section 254( e) of the Act, and that section 214( e) requirements would prevent competitive ETCs from profiting by limiting service to low cost areas. 328 In addition, the Commission determined that the alternative, requiring competitive ETCs to submit forward- looking cost studies without requiring the incumbent LEC’s support to be calculated in the same manner, could place either the incumbent LEC or the competitive ETC at a competitive disadvantage. 329 92. In the Rural Task Force Order, the Commission further modified the embedded cost support mechanisms for rural carriers for a five- year period based on the recommendations of the Rural Task Force. The Commission stated its intention to refer to the Joint Board the issue of the appropriate rural mechanism to succeed the Rural Task Force plan. 330 In the context of the Joint Board’s consideration of 320 See First Universal Service Report and Order, 12 FCC Rcd at 8899, para. 224; see also First Recommended Decision, 12 FCC Rcd at 230- 32. 321 First Universal Service Report and Order, 12 FCC Rcd at 8899, para. 224; see also First Recommended Decision, 12 FCC Rcd at 230, para. 270. 322 See First Universal Service Report and Order, 12 FCC Rcd at 8899, para. 224 323 First Universal Service Report and Order, 12 FCC Rcd at 8935, para. 292. 324 Id. at 8934- 37, paras. 291- 95. 325 Id. at 8937- 45, paras. 297- 313. 326 Id. at 8934, 8944, paras. 291, 311. 327 Id. at 8933, 8945, paras. 288, 313. 328 Id. at 8933, para. 289. 329 Id. at 8945, para. 313. It does not appear that the Commission considered the alternative of requiring competitive ETCs to submit embedded cost studies. This is not surprising given the emphasis in the First Universal Service Report and Order on eventually basing support for all carriers on forward- looking economic cost. 330 Rural Task Force Order, 16 FCC Rcd at 11310, para. 168. 49 Attachment Federal Communications Commission FCC 04J- 1 50 an appropriate rural mechanism, the Commission stated that it anticipated “conducting a comprehensive review of high- cost support mechanisms for rural and non- rural carriers as a whole to ensure that both mechanisms function efficiently and in a coordinated fashion.” 331 The Commission said that it would “use the transitional period during which a modified embedded cost mechanism is in place to develop a long- term universal service plan that better targets support to rural telephone companies serving the highest cost areas and recognizing the significant distinctions among rural carriers and between rural and non- rural carriers.” 332 The Commission also said that it would include consideration of general issues related to excessive fund growth and competitive neutrality in that comprehensive review. 333 93. In the Referral Order, the Commission asked the Joint Board to review the methodology for calculating support for ETCs in competitive study areas. 334 The Commission noted that some groups have argued that basing a competitive ETC’s support on the incumbent LEC’s embedded costs provides a windfall and creates an unfair advantage for competitive ETCs with lower costs, whereas others have argued that the current rules are necessary for competitive neutrality and are the least administratively burdensome way to administer support. 335 The Joint Board sought comment regarding the methodology for calculating support for ETCs in areas served by multiple ETCs. 336 Among other things, the Joint Board sought comment on: whether the current rules promote efficient competition in high- cost areas and operate in a competitively neutral manner; whether the Commission should calculate support for a competitive ETC based on it own costs; whether the methodology used to calculate competitive ETC support should be the same as the methodology used to calculate support for the incumbent; and whether support in competitive areas should be based on the lowest- cost provider’s costs, in order to promote efficiency. 337 B. Discussion 94. We recommend that the Commission ask the Joint Board to continue to consider possible modifications to the basis for determining support for competitive ETCs in conjunction with review of the appropriate high- cost mechanism for rural carriers to succeed the five- year plan adopted in the Rural Task Force Order. The Commission recently reiterated its intention to ask the Joint Board “to conduct a comprehensive review of the high- cost support mechanism for rural and non- rural carriers as a whole to ensure that both mechanisms function efficiently in a coordinated fashion.” 338 Because the Commission anticipates that the Joint Board will conduct a comprehensive review of both rural and non- rural mechanisms in the context of our consideration of an appropriate rural mechanism, we recommend that the Joint Board be asked to consider the basis of support for all ETCs in all areas in the Rural/ Non- Rural Review proceeding. For the present, the Joint Board will continue its review of the methodology for calculating support for ETCs in areas with multiple ETCs. 339 95. Considering the basis of support under the rural and non- rural mechanisms simultaneously 331 Id. at 11310, para. 169. 332 Id. 333 Id. 334 Referral Order, 17 FCC Rcd at 22645- 46, para. 7. 335 Id. 336 Joint Board Portability- ETC Public Notice, 18 FCC Rcd at 1948- 51, paras. 15- 23. 337 Id. at 1948- 50, paras. 16, 18- 19. 338 Tenth Circuit Remand Order, FCC 03- 249 at para. 25. 339 Referral Order, 17 FCC Rcd at 22645, para. 7 (asking Joint Board "to review the methodology for calculating support for ETCs in competitive study areas.”). 50 Attachment Federal Communications Commission FCC 04J- 1 51 would allow the Joint Board to craft a more comprehensive approach and avoid the perils of piecemeal decision- making. We anticipate that the Commission in the Rural/ Non- Rural Review proceeding will ask us to simultaneously consider both the rural and non- rural support mechanisms and to develop recommendations regarding the possible harmonization of the divergent approaches (embedded costs vs. forward- looking costs). 340 We believe that it would be appropriate to consider the basis of support in competitive areas in this broader context. Our approach to harmonizing the two mechanisms will necessarily influence our recommendations on the basis of support in competitive areas. 341 96. For areas served by rural carriers, we are concerned that funding a competitive ETC based on the incumbent LEC’s embedded costs may not be the most economically rational method for calculating support. However, we do not yet have an adequate record to analyze and understand the consequences of recommending a change in the basis of support for areas served by rural carriers that face competition. We agree that universal service payments should not distort the development of nascent competitive markets. Universal service support should neither incent nor discourage competitive entry. We also believe that further work may be needed to decide if and how support should be adjusted to reflect differences in service obligations, service quality and functionality. While we do not have an adequate record at this time to determine how, and if, the current basis of support should be modified to achieve these goals, we are concerned about any potential negative consequences for rural markets. Therefore, we believe that further analysis should be conducted before potential changes are made. Rural carriers were put on notice that the Joint Board and Commission would begin reviewing the current mechanism that provides support to rural carriers based on their embedded costs before 2006. In the Rural/ Non- Rural Review proceeding, we plan to consider methods for determining support to high cost areas. These methods should be competitively neutral, administratively simple and consistent with the Commission’s goal of ensuring that the high- cost mechanisms function efficiently. We encourage all carriers that may be affected by this potential change to actively participate in the development of the record. We also emphasize that we have not yet determined whether it is appropriate to continue to maintain separate support mechanisms for rural and non- rural carriers. 97. We do not believe that delaying our consideration of the basis of support will undermine the sustainability of the universal service fund. Because the Commission determined that the Rural Task Force plan should remain in place until 2006, the Joint Board and the Commission have adequate time to conduct a comprehensive proceeding on the basis of support. 342 Moreover, if the Commission adopts the 340 In developing a long- term universal service plan, the Commission said that it intends “to consider all options, including the use of forward- looking costs, to determine appropriate support levels for both rural and non- rural carriers.” Rural Task Force Order, 16 FCC Rcd at 11310, para. 170. The Commission also emphasized that the Act does not require separate rural and non- rural support mechanisms. Id. at 11310, para. 171 n. 402. Although the Commission found that a distinct rural mechanism, based on embedded cost, was appropriate for the five- year period, it expressed its belief “that there may be significant problems inherent in indefinitely maintaining separate mechanisms based on different economic principles.” Id. at 11311, para. 173. 341 Many commenters agree that the basis of support for competitive ETCs is "inextricably linked" with broader issues in the Rural/ Non- Rural Review proceeding. See, e. g., Western Wireless Comments at 4 (" the issues raised to date in this proceeding are inextricably linked with the broader issues involved with the forthcoming ‘comprehensive review of the high- cost support mechanisms for rural and non- rural carriers as a whole to ensure that both mechanisms function efficiently and in a coordinated fashion, ’ a process that the Commission has stated it intends to complete by 2006.”). 342 In the Rural Task Force Order, the Commission determined that the modified embedded cost mechanisms should remain in place to “provide certainty and stability for rural carriers for the next five years.” Rural Task Force Order, 16 FCC Rcd at 11249, para. 11. See also Western Wireless Comments at 4 (" the industry remains in year two of a five- year plan for supporting universal service in rural [incumbent] LEC areas. The Commission found that the five- year duration of Rural Task Force (‘ RTF’) plan, in which full portability of all explicit funding plays a critical role, was important to establish a stable and predictable environment for rural service providers."). 51 Attachment Federal Communications Commission FCC 04J- 1 52 Joint Board’s recommendations, discussed above, to adopt a primary- connection restriction and measures to ensure that ETC designations are appropriately rigorous, such steps should slow fund growth due to competitive ETC entry in the meantime. Accordingly, we recommend that the Commission refer to the Joint Board early this year the Rural/ Non- Rural Review proceeding, including the consideration of the basis of support for all ETCs. V. OTHER ISSUES A. Identification of Wireless Customer Location 1. Background 98. Currently, competitive ETCs that provide mobile wireless service are required to use the customer’s billing address to identify the location of a mobile wireless customer within a disaggregation zone. 343 In the Rural Task Force Order, the Commission concluded that this approach was reasonable and the most administratively simple solution to the problem of determining the location of a wireless customer for universal service purposes. 344 The Commission recognized, however, that the use of a customer’s address could allow arbitrage, such as “identifying a customer in a high- cost zone when service is primarily taken in a low- cost zone for the purpose of receiving a higher level of per- line support.” 345 The Commission stated that it would take appropriate enforcement action if an ETC were to engage in such arbitrage, and that it might revisit the use of a customer’s billing address as more mobile wireless carriers are designated as eligible to receive support. 346 99. The Commission declined to use the Mobile Telecommunications Sourcing Act (MTSA) definition of “place of primary use” to determine a mobile wireless customer’s location. 347 The MTSA, which was intended to address the difficulty in identifying the sites of a mobile telephone call for transactional tax purposes, sources all wireless calls and mobile telecommunications services to the “place of primary use.” 348 The place of primary use is defined as “the street address representative of where the customer’s use of the mobile telecommunications service primarily occurs, which must be—( A) the residential street address or the primary business street address of the customer; and (B) within the licensed service area of the [customer’s mobile telecommunications service provider].” 349 In declining to adopt the MTSA definition to determine wireless customer location for universal service purposes, the Commission expressed concern that states might not have established databases pursuant to the Act, and that use of the MTSA definition might impose undue administrative burdens on mobile wireless ETCs. 350 343 Rural Task Force Order, 16 FCC Rcd at 11314, para. 180. 344 Id. at 11314- 15, paras. 180- 181. 345 Id. at 11315- 16, para. 183. 346 Id. 347 Id. at 11315, para. 182. 348 The MTSA gives states the option of providing mobile providers with a statewide database that designates the appropriate taxing jurisdiction for each street address in the state, including, to the extent practicable, multiple postal addresses applicable to one street location. If the state fails to provide such a database, the mobile provider may use an enhanced zip code system to assign each street address to a specific taxing jurisdiction. Under the MTSA, a mobile provider that uses a state- assigned database or an enhanced zip code system to assign addresses will be held harmless for any taxes that might otherwise be due as a result of erroneous assignment. Mobile Telecommunications Sourcing Act, 4 U. S. C. §§ 116- 126. 349 Id. 350 Rural Task Force Order, 16 FCC Rcd 11315, para. 182. 52 Attachment Federal Communications Commission FCC 04J- 1 53 100. Commenters allege that some ETCs may be engaged in the type of arbitrage that the Commission identified in the Rural Task Force Order, and state that the Commission should direct the Universal Service Administrative Company (USAC) to take measures to prevent abuse regarding the location of the connections of the wireless provider’s customers 351 A number of commenters also express a general concern that the billing address for a mobile wireless phone number has no relationship to where the customer actually uses the phone. 352 Other commenters advocate defining mobile wireless customer location in terms of the place of primary use, and offer different proposals for defining this concept, including the MTSA definition. 353 The Texas Commission requires wireless ETCs to provide a wireless access unit (WAU) to determine the actual location of a connection for universal service purposes. 354 101. Other commenters advocate the continued use of billing addresses to determine mobile wireless customer location. 355 One commenter asserts that billing address is an accurate means to determine the location for high- cost support purposes, 356 and others point out that line counts are publicly available and can be audited by USAC. BellSouth suggests that wireless ETCs be required to demonstrate that they provide a signal to a customer’s billing address. BellSouth states that this demonstration could take the form of a customer certification that service at the billing address is available, working, and adequate. 357 2. Discussion 102. The Joint Board recommends that the Commission further develop the record on defining mobile wireless customer location in terms of place of primary use for universal service purposes. The Joint Board believes that the place of primary use represents the preferred definition of wireless customer location for universal service purposes because it reflects whether a customer actually uses mobile wireless phone service as a primary connection in a high- cost area. Based on our examination of the present record, however, we cannot determine whether any of the definitions proposed by commenters, including the MTSA definition, are capable of being implemented in a competitively neutral manner that would not impose undue administrative burdens. Accordingly, the Joint Board recommends that the Commission further develop the record on this matter. 103. In particular, the Joint Board recommends that the Commission develop the record on the following issues: First, is the MTSA’s place of primary use approach an efficient method to redefine the 351 See OPASTCO Comments at 24- 26, Reply Comments at 15- 16. OPASTCO cites comments filed by the Washington Indep. Tel. Ass’n, USTA, and SBC to support the contention that the record documents the potential abuse of the rules that use a customer’s billing address to identify the service location of a mobile wireless customer’s service area. 352 See, e. g., CenturyTel Comments at 35- 36; Rural Indep. Competitive Alliance Comments at 19, 21. 353 See, e. g., Montana Telecomms. Ass’n Comments at 11- 12; Washington Indep. Tel. Ass’n Comments at 14; Western Wireless Sept. 8 ex parte. Montana Telecomms. Ass’n and Western Wireless support use of the MTSA definition of place of primary use. Washington Indep. Tel. Ass’n recommends requiring a wireless carrier to certify that at least 50% of the originating calls on a wireless service originate in a cell cite within the exchange for which the lie is designated to receive USF support. 354 Texas Commission Comments at 12. Wireless carriers report access lines in accordance with the actual location of the WAU that is utilized to provide the service. 355 Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Comments at 26; Smith Bagley Comments at 13; Western Wireless Comments at 49- 50. 356 Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Comments at 26. 357 See BellSouth Comments at 2, Reply Comments at 5; see also GVNW Comments at 11, Reply Comments at 8- 9. 53 Attachment Federal Communications Commission FCC 04J- 1 54 location of mobile service lines? This may in part depend on the extent to which post office boxes are used to misrepresent customer locations. Second, should the use of a place of primary use- based definition be optional or mandatory? Third, what amount of fraudulent use of billing addresses is occurring today that use of a definition based on place of primary use would address? If place of primary use is adopted how should it work in conjunction with virtual NXX? B. Accurate, Legible, and Consistent Maps 1. Background 104. Under the Commission’s rules, a rural carrier electing to disaggregate and target high-cost support must submit to USAC “maps which precisely identify the boundaries of the designated disaggregation zones of support within the carrier’s study area.” 358 In the Rural Task Force Order, the Commission explained that “the integrity and flow of information to competitors is central to ensuring that support is distributed in a competitively neutral manner.” 359 The Commission went on to state that, “in order to ensure portability and predictability in the delivery of support,” it would require rural carriers to “submit to USAC maps in which the boundaries of the designated disaggregation zones of support are clearly specified.” 360 USAC was directed to make those maps available for public inspection by competitors and other interested parties. 361 Some commenters indicate that the maps filed by rural carriers pursuant to section 54.315( f)( 1) and the information available through USAC are of varying quality and utility. 362 Others suggest that improved quality and reliability of maps submitted by incumbents would allow for better targeting of support. 363 2. Discussion 105. We recommend that the Commission delegate authority to USAC to develop standards for the submission of any maps that ETCs are required to submit to USAC under the Commission’s rules in a uniform, electronic format. We believe that the development of such standards would promote the integrity and flow of information to competitive ETCs by increasing the accuracy, consistency, and usefulness of maps submitted to USAC, and that as the universal service administrator USAC is the appropriate entity to develop such standards. 358 47 C. F. R. § 54.315( f)( 4). 359 Rural Task Force Order, 16 FCC Rcd at 11307- 08, para. 161 360 Id. 361 Id. 362 See, e. g., USCC Comments at 17- 18; Rural Indep. Competitive Alliance Comments at 27. 363 Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Comments at 26 (“ What will improve the ability to target subscribers is an FCC requirement that ILECs who disaggregate support submit accurate and legible cost zone maps in a consistent electronic format so that competitive ETCs are able to easily determine the appropriate cost zones for customers.”). 54 Attachment Federal Communications Commission FCC 04J- 1 55 VI. RECOMMENDING CLAUSE 106. For the reasons discussed herein, the Federal- State Joint Board on Universal Service, pursuant to sections 254( a)( 1) and 410( c) of the Communications Act of 1934, as amended, 47 U. S. C. §§ 254( a)( 1), 410( c), recommends that the Commission adopt recommendations set forth herein concerning the process for designation of eligible telecommunications carriers and the Commission’s rules regarding high- cost universal service support. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 55 Attachment Federal Communications Commission FCC 04J- 1 56 APPENDIX A PARTIES FILING COMMENTS AND REPLY COMMENTS Commenter Abbreviation ACS of Fairbanks, Inc. ACS- F Alaska Telephone Association Alaska Tel. Ass’n AT& T Corp. AT& T Beacon Telecommunications Advisors, LLC Beacon BellSouth Corporation BellSouth Cellular Telecommunications & Internet Association CTIA CenturyTel, Inc. CenturyTel Dobson Communications Corporation Dobson Fred Williamson and Associates, Inc. . Chouteau Telephone Company (Oklahoma) H& B Telephone Communications, Inc. (Kansas) Moundridge Telephone Company, Inc. (Kansas) Pine Telephone Company, Inc. (Oklahoma) Pioneer Telephone Association, Inc. (Kansas) Totah Telephone Company, Inc. (Kansas & Oklahoma) Twin Valley Telephone, Inc. (Kansas) Fred Williamson & Assocs. General Communication, Inc. GCI GVNW Consulting, Inc. GVNW ICORE, Inc. ICORE Idaho Telephone Association Idaho Tel. Ass’n Interstate Telcom Consulting, Inc. ITCI Montana Telecommunications Association Montana Telecomms. Ass’n Montana Universal Service Task Force MUST Moultrie Independent Telephone Company Moultrie Indep. Tel. Co. National Association of State Utility Consumer Advocates NASUCA National Telecommunications Cooperative Association NTCA Nebraska Rural Independent Companies Nebraska Rural Indep. Cos. Nextel Communications, Inc. and Nextel Partners, Inc. Nextel Organization for the Promotion and Advancement of Small Telecommunications Companies OPASTCO Rural Cellular Association and Alliance of Rural CMRS Carriers Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Rural Independent Competitive Alliance Rural Indep. Competitive Alliance Rural Telephone Finance Cooperative Rural Tel. Finance Coop. SBC Communications Inc. SBC Several Rural Telephone Companies Accipiter Communications, Inc. (Arizona) Alenco Communications, Inc. d/ b/ a ACI (Texas) Arkansas Telephone Company, Inc. (Arkansas) 56 Attachment Federal Communications Commission FCC 04J- 1 57 Beehive Telephone Company, Inc. Nevada (Nevada) Beehive Telephone Company, Inc. (Utah) Blossom Telephone Company, Inc. (Texas) Central Arkansas Telephone Cooperative, Inc. (Arkansas) Chickasaw Telephone Company (Oklahoma) Goodman Telephone Company, Inc. (Missouri) North Central Telephone Cooperative, Inc. (Tennessee) Ozark Telephone Company (Missouri) Pioneer Telephone Cooperative, Inc. (Oklahoma) San Carlos Apache Telecommunications Utility, Inc. (Arizona) Santa Rosa Telephone Cooperative, Inc. (Oklahoma) Scott Country Telephone Company, Inc. (Arkansas) Seneca Telephone Company (Missouri) South Arkansas Telephone Company, Inc. (Arkansas) Star Telephone Company, Inc. (Louisiana Valliant Telephone Company (Oklahoma) Assorted Rural Tel. Cos. Smith Bagley, Inc. Smith Bagley Sprint Corporation Sprint TCA, Inc. – Telcom Consulting Associations TCA Texas Public Utility Commission Texas Commission Texas Statewide Telephone Cooperative, Inc. Texas Statewide Tel. Coop. Townes Telecommunications, Inc. Townes et al. United States Cellular Corporation USCC United States Telecom Association USTA United Utilities, Inc. United Utilities Verizon Telephone Companies Verizon Washington Independent Telephone Association Washington Indep. Tel. Ass’n Washington Utilities and Transportation Commission Washington Commission Western Alliance Western Alliance Western Wireless Corporation Western Wireless WorldCom, Inc., D/ B/ A MCI MCI Reply Commenter Abbreviation AT& T Corp. AT& T ACS of Fairbanks, Inc. ACS- F Alabama Rural Local Exchange Carriers Ardmore Telephone Company Blountsville Telephone Company Brindlee Mountain Telephone Company, Inc. Butler Telephone Company, Inc. Farmers Telephone Cooperative, Inc. Frontier Communications of Alabama, Inc. Frontier Communications of Lamar County, Inc. Frontier Communications of the South, Inc. Graceba Total Communications, Inc. GTC, Inc. 57 Attachment Federal Communications Commission FCC 04J- 1 58 Gulf Telephone Company Hayneville Telephone Company, Inc. Hopper Telecommunications Company, Inc. Interstate Telephone Company Millry Telephone Company, Inc. Mon- Cre Telephone Cooperative, Inc. Moundville Telephone Company, Inc. National Telephone Company of Alabama, Inc. New Hope Telephone Cooperative, Inc. Oakman Telephone Company OTELCO Telephone LLC Peoples Telephone Company Pine Belt Telephone Company, Inc. Ragland Telephone Company Roanoke Telephone Company, Inc. Union Springs Telephone Company, Inc. Valley Telephone Company Alabama Rural LECs Alaska Telephone Association Alaska Tel. Ass’n Beacon Telecommunications Advisors, LLC Beacon BellSouth Corporation BellSouth Cellular Telecommunications & Internet Association CTIA Centennial Communications Corp. Centennial CenturyTel, Inc. CenturyTel Dobson Communications Corporation Dobson General Communication, Inc. GCI GVNW Consulting, Inc. GVNW Independent Telephone & Telecommunications Alliance Indep. Tel. & Telecomms. Alliance Montana Universal Service Taskforce MUST National Association of State Utility Consumer Advocates NASUCA National Telecommunications Cooperative Association NTCA Nebraska Rural Independent Companies Nebraska Rural Indep. Cos. Organization for the Promotion and Advancement of Small Telecommunications Companies OPASTCO Rural Cellular Association- The Alliance of Rural CMRS Carriers Rural Cellular Ass’n/ Alliance of Rural CMRS Carriers Rural Independent Competitive Alliance Rural Indep. Competitive Alliance South Dakota Telecommunications Association South Dakota Telecomms. Ass’n Sprint Corporation Sprint United States Cellular Corporation USCC United States Telecom Association USTA Verizon Verizon Washington Independent Telephone Association Washington Indep. Tel. Ass’n Western Wireless Corporation Western Wireless WorldCom, Inc. D/ B/ A MCI MCI 58 Attachment Federal Communications Commission FCC 04J- 1 59 SEPARATE STATEMENT OF COMMISSIONER KATHLEEN Q. ABERNATHY Re: Federal- State Joint Board on Universal Service, Recommended Decision This Recommended Decision addresses several critical issues regarding the distribution of universal service support to carriers serving rural areas. These issues concern the designation and funding of eligible telecommunications carriers (ETCs) in rural areas facing competition, and they go to the heart of the Commission’s administration of the federal high- cost support mechanisms. As Chair of the Joint Board, I have made this undertaking our highest priority, and I am grateful that my colleagues have responded with extremely thoughtful recommendations. While our work continues in some important respects, I am proud of the progress we have made, and I commend my colleagues and the outstanding staff for their diligent and insightful participation in this proceeding. We were able to reach consensus on several critical issues and we narrowed our differences on others. Where we have been forced to disagree, our divergences have been principled and respectful. It has been a privilege for me to serve with such a committed group of public servants. A major impetus for initiating this proceeding was widespread uncertainty regarding the appropriate standards for determining whether the designation of a competitive ETC serves the public interest. We have responded to requests for guidance from state commissions and carriers by setting forth a comprehensive set of recommended minimum standards for the designation of ETCs. As I explained in a recent FCC designation decision, I believe that an ETC must be prepared to serve all customers upon reasonable request, and it must offer high- quality services at affordable rates throughout the designated service area. 364 State commissions, acting under section 214( e)( 2), and the FCC, acting under section 214( e)( 6), plainly should be able to impose conditions designed to ensure that all ETCs are appropriately qualified. Perhaps most importantly, the certifying authority should make sure that a prospective ETC has the ability and commitment to build out facilities as necessary to serve the entire designated area. I am pleased that my federal and state colleagues have unanimously agreed on this principle as well as other core standards that should make the designation process more rigorous, and also more uniform and predictable. I hope that state commissions and the FCC heed this guidance in upcoming designation proceedings. The Commission’s other principal charge to the Joint Board was to consider a variety of means to ensure the sustainability of high- cost funding in rural areas as competition grows. A majority of the Joint Board believe that the most promising proposals call for some kind of modification to the current system that funds all connections from all carriers (although, as discussed below, I believe that we must also continue to explore possible changes to the basis for calculating support). I do not know at this stage whether I will ultimately vote to adopt a primary- line restriction of the sort discussed in this Recommended Decision, but it seems clear that the universal service fund can no longer subsidize an unlimited number of connections provided by an unlimited number of carriers. Nor do I believe that the Communications Act contemplates such a result. Section 254 at bottom requires a “lifeline” connection to the PSTN 364 Separate Statement of Commissioner Kathleen Q. Abernathy, Federal- State Joint Board on Universal Service, Virginia Cellular, LLC Petition for Designation as an Eligible Telecommunications Carrier in the Commonwealth of Virginia, Memorandum Opinion and Order, CC Docket No. 96- 45, FCC 03- 338 (rel. Jan. 22, 2004). 59 Attachment Federal Communications Commission FCC 04J- 1 61 SEPARATE STATEMENT OF COMMISSIONER LILA A. JABER, FLORIDA PUBLIC SERVICE COMMISSION Re: Federal- State Joint Board on Universal Service, Recommended Decision The FCC has asked the Joint Board to review the FCC’s current rules relating to high-cost universal service support mechanisms to ensure that the dual goals of preserving universal service and promoting competition continue to be fulfilled. By no means is this an easy task. On the other hand, this review is overdue in light of an evolving telecommunications market and the ongoing responsibility to maintain accessible, affordable telephone service for every American, while addressing the unintended consequence of a rapidly growing federal universal service fund. In meeting these obligations, I am optimistic that the recommended decision, if adopted by the FCC, has the potential of advancing the goal of universal service, ensuring long- term sustainability of the fund, and maintaining competitive neutrality. With that said, I recognize that there may be administrative difficulties that will have to be overcome should the FCC choose to go forward with our recommendations. I do believe that these difficulties, or “opportunities,” can be addressed. This recommended decision at the very least will generate additional comments and constructive implementation suggestions to the FCC from various stakeholders. I recognize the hard work of the universal service joint board staff and offer my sincere thanks. Their dedication and expertise in putting this complex matter into a simple form is evident in the work product. This document is yet another example of federal- state cooperation. In that same spirit, I applaud the tireless efforts of my joint board colleagues. This was an extremely difficult decision with good, plausible arguments on each side of every issue. At the end of the proverbial day, I remain hopeful that the ongoing dialogue from this point forward will result in optimal solutions to these matters. ETC Designation Process In the recommended decision, we propose that the FCC adopt permissive, minimum guidelines that state commissions and the FCC may use for all ETC designation proceedings. Use of these permissive guidelines should provide a more consistent application process among states. More importantly, these guidelines should further assist state regulators in determining if the public interest would be served by designating additional carriers as ETCs, thereby qualifying additional carriers for federal universal service support. I agree with the commenters who suggested that encouraging a more rigorous fact- finding ETC designation process for all carriers, in both rural and nonrural areas, should ensure that only carriers fully committed to meeting universal service obligations have access to the already- growing federal universal service fund. 367 Examples of the guidelines we propose be considered in the review process include suggesting that a carrier demonstrate its overall financial viability as well as its technical ability to provide quality services throughout its entire designated area. I find these permissive guidelines eminently reasonable. In fact, it should be clear that a state may impose additional requirements for ETC certification if the state so chooses. By this recommended decision, we 367 See, e. g., BellSouth Comments at 2 (“ Strengthening the eligibility requirements for obtaining ETC status is a critical step in ensuring that the universal service fund remains ‘specific, predictable and sufficient, ’ as required by Section 254.”); see also NASUCA Comments at 8- 9. 61 Attachment Federal Communications Commission FCC 04J- 1 62 clearly intend to maintain state flexibility in the ETC designation process — authority some state commissions can clearly find in Section 214( e)( 2). For other states, where certain carriers are not subject to the jurisdiction of a state commission, this recommended decision clarifies that the FCC, in implementing Section 214( e)( 6), should apply these same guidelines. Scope of Support At the center of this recommended decision is a proposal to limit high- cost support to a primary connection for residential and business customers. This is a departure from the current structure that allows all ETCs to receive federal universal service support for all lines. This structure has created a situation where multiple ETCs in high- cost rural areas automatically receive support even if a carrier does not have an economically rational business case to support such entry. We should not support the current framework that allows subsidies to flow to multiple competitors where it is already cost prohibitive for a single provider. Some commenters believe that states have used multiple carrier ETC designation as a means to attract more universal service funds into the state. 368 While I do not know if this has happened, I do believe that the universal service fund should not be used to artificially induce competitive entry that would not have otherwise occurred. Instead, universal service funds should be used for the purpose intended --- to provide universal access to a customer by providing the appropriate funding for a single connection. This is the goal of universal service, as recognized as early as 1996 by the Joint Board. Implementation of the primary- connection proposal may well be essential in order to preserve the long- term sustainability of the federal universal service fund. Otherwise, excess support and resulting increases in USF assessment fees which flow through to consumers, thereby directly impacting their bills, can detract from the goal of universal access and affordability. Moreover, if this proposal is administratively feasible and can be implemented reasonably, the potential exists to provide the appropriate entry signals in rural and high cost areas. Carriers can and should compete for the primary connection since that is the trigger for receiving support from the fund under this proposal. I also recognize that it is absolutely necessary to mitigate any potentially adverse impact of a primary line restriction on the rural carriers. Therefore, I support the proposal to seek further comment on “rebasing” the high- cost support that carriers currently receive. In areas where only one ETC is present, carriers should receive no less support than they receive now. In areas served by more than one ETC, we envision that customers would select their primary carrier. Notably, a rural carrier would lose support under this primary- connection proposal only if it loses the customer to another ETC, whether it be a wireline or wireless competitor. I believe this answers, at least in part, the concern raised by some commenters that primary line restrictions will limit the availability of wireless service in rural areas, which could negatively impact the area’s economic development. Under this recommended decision, wireless carriers can be selected by customers as the primary carrier, thus enabling wireless carriers to receive support from the fund in rural and other areas. Recently in addressing Virginia Cellular’s application for ETC designation, FCC Chairman Powell stated that, “[ d] espite the importance of making rural, facilities- based competition a reality, we must ensure that increasing demands on 368 See, e. g. ,NASUCA Comments at 8- 9. 62 Attachment Federal Communications Commission FCC 04J- 1 63 the fund should not be allowed to threaten its viability.” 369 I wholeheartedly agree. Consistent with Chairman Powell’s statement, our recommended decision on this issue is an example of balancing legitimate concerns of our rural citizens with the goal of ensuring the long- term sustainability to the fund. 369 See Separate Statement of Chairman Michael K. Powell in Federal- State Joint Board on Universal Service, Virginia Cellular, LLC Petition for Designation as an Eligible Telecommunications Carrier in the Commonwealth of Virginia, Memorandum Opinion and Order, CC Docket No. 96- 45, FCC 03- 338 (rel. January 22, 2004). 63 Attachment Federal Communications Commission FCC 04J- 1 64 SEPARATE STATEMENT OF COMMISSIONER THOMAS J. DUNLEAVY, NEW YORK STATE PUBLIC SERVICE COMMISSION Re: Federal- State Joint Board on Universal Service, Recommended Decision The issues referred to us in this phase of this proceeding are among the most complex and contentious we have been asked to address. They go to the heart of what we expect a universal service program to achieve and how we expect it to interact with the forces of a competitive market. Although this Recommended Decision does not resolve all the issues before us, I believe the recommendations we make here today will help sustain the federal universal service program, enabling it to more effectively achieve our dual goals of fostering competition while preserving universal service. I support this Recommended Decision as a reasonable step in the right direction. Perhaps the most significant recommendation we make here today is to provide federal high cost support only for a subscriber's or household's primary connection to the telephone network. I believe this recommendation is entirely consistent with the fundamental purpose of the federal universal service program – ensuring that all homes and businesses can affordably connect to the rest of the world. When the Telecommunications Act of 1996 was being crafted, I doubt many people anticipated that in less than a decade most households would have both a wireline and a wireless phone and that many would have multiple wireless phones. I am convinced that, however much we might like to, we simply cannot sustain a universal service program that provides support to two, three, four or more phones in most households. At the same time, rules that would effectively preclude support to wireless services would not be competitively or technologically neutral and might artificially slow the deployment of desirable and potentially less costly services to high cost areas. While implementation of our recommendation to support only primary lines will no doubt involve some administrative complexities, I am confident that reasonable solutions will be found through further development of the record, as we here recommend. I also am confident that resolution of those challenges will place far fewer demands on the high cost support mechanism than will continuing to support multiple lines per household. That said, I am keenly aware that our primary line proposal could significantly affect the support currently provided to existing eligible telecommunications carriers. No rule should be thought to be permanent, yet when changes are made reasonable efforts should be made on a transitional basis to mitigate sudden and severe negative consequences. I am pleased that our Recommended Decision recognizes this by offering several alternative proposals for further comment. Without expressing a preference for any of the alternatives, I would emphasize that no mitigation effort can be expected to live on in perpetuity, nor should one be used as a means to forestall competition in any area. Congress was quite clear; it intended to open all telecommunications markets to competition, not just markets in low cost or urban areas. It is a testament to the dedication and professionalism of my Joint Board colleagues that we are able to suggest some significant changes to improve the federal universal service program, even as we continue to seek a fuller record on several issues. The state and federal staffs supporting this Joint Board once again have done an exemplary job helping us to understand the issues and our options and reducing our thoughts to writing. I offer them all my sincere appreciation. 64 Attachment Federal Communications Commission FCC 04J- 1 65 SEPARATE STATEMENT OF BILLY JACK GREGG, DIRECTOR OF THE CONSUMER ADVOCATE DIVISION, PUBLIC SERVICE COMMISSION OF WEST VIRGINIA Re: Federal- State Joint Board on Universal Service, Recommended Decision The most important aspect of our recommendation today is the decision to limit support to primary lines. Not only will this action slow the growth of the high cost fund stemming from support of multiple lines of multiple networks within the same area, but it will also fundamentally change the calculus for designating additional eligible telecommunications carriers (ETC’s) in areas served by rural carriers. Since current Commission rules provide support to all lines of all ETC’s, states have been faced with the perverse incentive of gaining more federal universal service support the more ETC’s they approve. 370 By limiting support to primary lines, we eliminate this incentive and return to the original concept of universal service in a competitive environment: namely, that carriers will compete for the universal service subsidy, 371 and that competition will eventually drive down the overall cost of subsidizing service in high- cost areas. 372 Several of my colleagues on the Joint Board have expressed concern over the fate of small, rural incumbent carriers if support is limited to primary lines. I share these concerns. However, under the Act, the proper place for these concerns is at the point when the decision is made whether to designate an additional ETC in an area served by a rural carrier. 373 If a state or the Commission believes that a particular rural area or a particular rural carrier cannot stand the loss or dilution of current levels of support, then under Section 214( e)( 2) of the Act, it should 370 This perverse incentive is especially strong in areas served by rural carriers since these areas generally receive higher levels of federal support. 371 See Federal- State Joint Board on Universal Service, Report and Order, CC Docket No. 96- 45, 12 FCC Rcd 8776 (May 8, 1997) (First Report and Order) at ¶¶ 19; 287- 289; 311- 312; “The [FCC’s universal service] order provides that the universal service subsidy be portable so that it moves with the customer, rather than stay with the incumbent LEC, whenever the customer makes the decision to switch local service providers… .” Alenco Communications, Inc. v. FCC, 201 F. 3d 608, 621 (5th Cir. 2000) (Alenco). 372 See House Report No. 104- 204 (I)( 1995), Arnold & Porter Legislative History P. L. 104- 104 (A& P) at 60: “… as the current system of internal and external subsidies is replaced by a system consisting primarily of external subsidies, the total amount of subsidies collected from low- cost customers and passed on to high- cost customers would not change significantly. Over time, CBO expects that the operating costs of telephone companies would tend to fall as a result of competitive pressures and the total amount of subsidies necessary would decline.” This view was also expressed by Senator Stevens during debate on the Act: “[ The Act] opens up the local market to competition while still preserving the concept of universal service. It does so by taking advantage of new technologies which are intended to reduce the cost of all services, including universal service. In fact, I find it interesting that the Congressional Budget Office has said that this bill will reduce the cost of universal service from the existing system by at least $3 billion over the next five years.” 141 Congressional Record S7881 (1995), A& P at 210. See also Senate Report No. 104- 23, A& P at 254 (1995): “… competition and new technologies will greatly reduce the actual cost of providing universal service over time, thus reducing or eliminating the need for universal service support mechanisms as actual costs drop to a level that is at or below the affordable rate for such service in an area… .” 373 It should be pointed out that under the integrated approach to primary line support outlined in the Recommended Decision, there would be no change in current support for a rural carrier unless and until an additional ETC is designated within the rural carrier’s study area by the state or Commission. 65 Attachment Federal Communications Commission FCC 04J- 1 66 find that additional ETC’s are not “in the public interest.” 374 If, on the other hand, states or the Commission find that multiple ETC’s are appropriate in a particular area, then the portability rules should apply equally to all ETC’s, regardless of the technology used, and regardless of whether the ETC is an incumbent or a new- comer. Proposals to reserve some support as the exclusive province of incumbent ETC’s - regardless of previous public interest decisions under Section 214( e)( 2) –violate, in my judgment, the principle of competitive neutrality. 375 I believe that there are certain areas of this country where it is so expensive to provide service that it makes no sense to have more than one carrier subsidized by the federal universal service fund. 376 Moreover, I believe that it is relatively easy to determine where these areas are. The universal service fund provides various levels of support to over 1400 incumbent study areas in this country. At root, these support levels are based on the cost to provide service to the number of customers within each area. By comparing the average levels of per line support provided to each study area, the Commission should be able to determine per line support benchmarks that divide study areas where multiple ETC’s are presumably in the public interest, and those areas where they are not. Adoption of such benchmarks will provide guidance to competitors and incumbents, will introduce a degree of certainty into the telecommunications marketplace, and will greatly simplify ETC decisions for state commissions. After further development in proceedings before the Commission, I hope that this benchmarking concept is adopted to guide public interest determinations under Section 214( e)( 2) of the Act. 374 See Alenco, at 621- 622: “To the extent petitioners argue Congress recognized the precarious competitive positions of rural LEC’s, their concerns are addressed by 47 U. S. C. §214( e), which empowers state commissions to regulate entry into rural markets.” 375 The Commission has defined “competitive neutrality” as “… universal service support mechanisms and rules [that] neither unfairly advantage nor disadvantage one provider over another, and neither unfairly favor nor disfavor one technology over another.” First Report and Order, ¶47. In Alenco the 5 th Circuit found competitive neutrality to be an integral component of portability: “… portability is not only consistent with predictability, but also is dictated by principles of competitive neutrality and the statutory command that universal service support be spent ‘only for the provision, maintenance, and upgrading of facilities and services for which the [universal service] support is intended. ’ ” Alenco, at 622. The Commission has also previously addressed the inappropriateness of support programs available only to incumbents: “We have previously held, in interpreting section 254 of the Communications Act, that ‘competitive neutrality in the collection and distribution of funds and determination of eligibility in universal service support mechanisms is consistent with congressional intent and necessary to promote a procompetitive, de- regulatory national policy framework. ’ As discussed above, it is doubtful that a universal service funding program that restricts eligibility to ILECs could be considered competitively neutral. Thus, a program of this nature may well be found to be inconsistent with and to impede the achievement of important Congressional and Commission goals.” In the Matter of Western Wireless Corp. Petition for Preemption, Memorandum Opinion and Order, File No. CWD 98- 90, 15 FCC Rcd 16227 (Aug. 28, 2000) at ¶11. 376 Indeed, but for explicit subsidies from the universal service fund and other federal programs, there would be no telephone service in large areas of this country. 66 Attachment Federal Communications Commission FCC 04J- 1 67 SEPARATE STATEMENT OF COMMISSIONER KEVIN J. MARTIN DISSENTING IN PART, CONCURRING IN PART Re: Federal- State Joint Board on Universal Service, Recommended Decision I am troubled by today’s Recommended Decision because it fails to provide sufficient guidance or a meaningful public interest test on the process for designating and funding eligible telecommunications carriers (“ ETCs”) that enter the market in high cost areas to serve rural consumers. As I have stated in the past, I have concerns with policies that use universal service support as a means of creating “competition” in high cost areas. 377 In my view, the main goals of the universal service program are to ensure that all consumers-- including those in high cost areas-- have access at affordable rates. I remain hesitant to subsidize multiple competitors to serve areas in which costs are prohibitively expensive for even one carrier. The Joint Board’s recommendations may continue to make it difficult for any one carrier to achieve the economies of scale necessary to serve all of the customers in rural areas. I believe the Joint Board should have recommended more immediate steps that the Commission should take to reform the ETC designation process. For example, I would have preferred that the Joint Board recommend that the Commission require ETCs to provide the same type and quality of services throughout the same geographic service area as a condition of receiving universal service support. In my view, competitive ETCs seeking universal service support should have the same “carrier of last resort” obligations as incumbent service providers in order to receive universal service support. Adopting the same “carrier of last resort” obligation for all ETCs is fully consistent with the Commission’s existing policy of competitive and technological neutrality amongst service providers. As I have supported in the past, I would have recommended that the Commission require ETCs to provide equal access. Equal access provides a direct, tangible consumer benefit that allows individuals to decide which long distance plan, if any, is most appropriate for their needs. As I have stated previously, I believe an equal access requirement would allow ETCs to continue to offer bundled local and long distance service packages, while also empowering consumers with the ability to choose the best calling plan for their needs. 378 An equal access obligation is also fully consistent with the Commission’s existing policy of competitive neutrality amongst service providers, facilitating competition on the basis of price and service quality for comparable service offerings. 377 Separate Statement of Commissioner Kevin J. Martin, Multi- Association Group (MAG) Plan for Regulation of Interstate Services of Non- Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, Second Report and Order and Further Notice of Proposed Rulemaking, CC Docket (No. 00- 256)( rel. October, 11, 2002): Separate Statement of Commissioner Kevin J. Martin, Federal- State Joint Board on Universal Service, Virginia Cellular, LLC Petition for Designation as an Eligible Telecommunications Carrier in the Commonwealth of Virginia, Memorandum Opinion and Order, CC Docket No. 96- 45, FCC 03- 338 (Jan. 22, 2004). 378 Separate Statement of Commissioner Kevin J. Martin, Federal- State Joint Board on Universal Service, CC Docket No. 96- 45, (rel. July 10, 2002); Separate Statement of Commissioner Kevin J. Martin, Federal- State Joint Board on Universal Service, FCC 03- 170, CC Docket No. 96- 45, (rel. July 14, 2003). 67 Attachment Federal Communications Commission FCC 04J- 1 68 I would have also preferred that the Joint Board recommend that the Commission require ETCs to provide service throughout the same geographic service area in order to receive universal service support. This obligation would help guard against the potential for creamskimming. I would have supported a recommendation to deny future requests to redefine the service areas of incumbent rural telephone companies-- and to deny ETC designations in instances where an ETC’s proposed service area does not cover the entire service area of the incumbent service provider. Given that a majority of my colleagues were unwilling to recommend that the Commission adopt these same competitively neutral obligations for all ETCs, I concur in the Joint Board’s recommendation to seek alternative means of limiting fund growth. To help slow the growth of the universal service fund, I specifically support one particular alternative of the primary line proposal. My support for the primary line proposals is limited to that “hold harmless” proposal. Under the “hold harmless” alternative, per line support available to competitive ETCs would freeze upon competitive entry. Competitive ETCs would only be eligible for universal service support for customers who designated their service as the primary line. Unlike the other primary line proposals, however, this alternative would not cap per- line support for incumbent carriers and would thus “hold harmless” incumbent carriers from the loss of universal service support. As my colleague Commissioner Rowe has observed, this proposal would work to address the incumbents overall network costs that are incurred. I look forward to working with my colleagues on the Commission as we address these critical issues regarding the distribution of universal service support to ETCs in high cost areas while ensuring that we maintain and preserve universal service in rural America. 68 Attachment Federal Communications Commission FCC 04J- 1 69 JOINT SEPARATE STATEMENT OF COMMISSIONERS JONATHAN S. ADELSTEIN, G. NANETTE THOMPSON, REGULATORY COMMISSISSION OF ALASKA, AND BOB ROWE, MONTANA PUBLIC SERVICE COMMISSION APPROVING IN PART, DISSENTING IN PART Re: Federal- State Joint Board on Universal Service, Recommended Decision We are pleased that this Joint Board has determined that it is useful to employ guidelines to ascertain whether it is appropriate to designate multiple eligible telecommunications carriers in particular areas. We are pleased that this Joint Board recognizes, as Congress did in 1996, that when designating an ETC in an area served by a rural telephone company we must take greater care in examining the public interest to determine the wisdom of multiple ETCs in rural, high cost areas. Establishing a meaningful public interest test 379 and providing meaningful guidance on ETC designations will help to limit federal universal service funding to those providers who are committed to serve rural communities. 380 We disagree, however, with the majority’s recommendation to limit funding to primary lines. We believe it is inconsistent with Congress’ intent when codifying the Universal Service provisions in the 1996 Act. It is also inconsistent with the December 18, 2003 letter from Senators Dorgan, Burns, Snowe, Johnson, Baucus, Lincoln and Daschle, stating that a primary line restriction would be “a major step backward that would thwart the essential purpose of universal service.” A primary line restriction would reduce incentives for deployment of both wireless and wireline networks. We are also disappointed that the Joint Board cannot yet make progress on how to determine the basis of support, which was a core element of this “portability” referral. The majority’s recommendation to restrict funding to primary lines is a well- intentioned effort that will have a deleterious effect on the provision of universal service. Restricting funding to primary lines is not necessary to control fund growth. There are other better means to control fund growth that do not have the same draconian consequences for rural consumers and that would better advance the long term goal of an equitable support system that affords all Americans reasonable access to telecommunications services. In this referral, the Joint Board faces the question of how the Act’s goals of competition and universal service are to be reconciled and balanced in rural areas. The majority’s recommendation would discourage network investment in rural areas. It also would distort rural markets in a way that would ultimately undermine the goal of universal service. Such a result is anathema to the purpose of universal service funding and the intent of Congress. 379 A meaningful public interest test will allow commissions to withhold granting ETC status to additional carriers if they believe that the dilution of support caused by the designation will undermine the ability of all carriers to offer comparable service at comparable rates as is required by Section 254( b)( 3) of the Act. 380 After further development of the record, it may be possible for the FCC to adopt more specific standards for consideration and adoption by the Commission or the states. For example, we note the specific recommendations offered by the Montana Independent Telecommunications Systems in an ex parte filed January 5, 2004. The ex parte suggested, inter alia, very specific provisions concerning coverage, network congestion, cost reporting based on existing NECA forms, and a method for achieving service quality standard comparability. 69 Attachment Federal Communications Commission FCC 04J- 1 70 We believe that a better policy would be to put in place a more stringent public interest test, as we recommend today, and to move away from the identical support rule by basing each ETC’s support on its own costs. This would limit fund growth, comply with Section 254( e) and encourage continued investment in rural markets. It also would limit funding only to those providers, whether incumbents or new entrants, who are committed to serve rural communities. Designating Primary Lines The majority recommends that support be distributed based on a carrier’s number of primary lines and that support, under one option, be “rebased” to ensure that the amount does not change initially. If the number of primary lines were to increase in the future, however, support would increase. Likewise, if the number of primary lines were to decrease, support would decrease in proportion. Future support therefore depends upon an ETC’s ability to get customers who will designate their line as primary. We foresee a number of harmful effects from such a system. The primary line recommendation would be harmful to consumers. Section 254( b)( 3) of the statute directs us to make reasonably comparable services available to consumers nationwide at reasonably comparable rates: Consumers in all regions of the Nation, including low- income consumers and those in rural, insular and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and are available at rates that are reasonably comparable to rates charged for similar services in urban areas. This section provides not only that the rates for services should be reasonably comparable, but also that access should be reasonably comparable. Moreover, the statute covers not just basic service, but also advanced telecommunications services and information services. 381 Limiting support to primary lines would deny rural consumers comparable access to a variety of telecommunications services: voice, data, fixed, and mobile. The majority’s recommendation would deny support for all second lines, including those used as second voice lines and data lines. 382 The economic development effects in rural areas 381 If this provision applied only to “access,” then the statute would use the singular “is” to describe what must be reasonably comparable. We therefore conclude that the “reasonably comparable” language in Section 254( b)( 3) focuses both on telecommunications and information services.” 382 In some cases, the consumer may be able to receive wireline and wireless service under the majority’s recommendation, but only one of these services will be the primary “line” that is funded. And in some cases, the consumer may be able to receive more than one type of service over a single wireline connection. For example, some consumers can receive voice and data over a DSL connection. However, the decision to restrict funding to one line is not technology- neutral because it favors carriers who can provide multiple services over one connection. We acknowledge that providing an economic incentive for technological efficiency is a good result, but we are more (continued....) 70 Attachment Federal Communications Commission FCC 04J- 1 71 could be quite harmful. Rates could become unaffordable for second lines in high cost areas because all consumers will be asked to pay the cost of a second line without any offsetting support. While the majority has offered options (e. g., rebasing, hold harmless provisions) to attempt to ameliorate the harmful affects of the lost support, we believe these options are likely to be anti- competitive, or will prove ineffective and impractical. Rural business customers would be particularly disadvantaged because they frequently have more than one line. Net costs for telephone service would increase significantly for many of these rural business customers. 383 Consumers would also face higher costs for “data lines” or fax lines. Given the distance limitations inherent in DSL services, these fax and data lines are essential to the economic life of rural communities. Just as one example, it will be very difficult to attract telecommuters to an area that not only has no DSL but that has high rates for fax and data lines. These higher costs could severely affect small business investment in rural areas and would be very likely to restrict rural economic development. The rural areas most in need of economic development will be left further behind. If we don’t care for these communities as Congress intended, photographs may well be all that is left as rural areas dwindle when faced with additional economic hardships. The primary line recommendation will also be harmful to existing ETCs, especially rural carriers. The majority says that its proposal would protect rural providers. In reality, the proposal offers only a limited and temporary protection. It presumes not only that services and rates are now comparable between rural and urban areas, but also that the level of service will remain adequate in perpetuity. Markets are not static, and as time progresses, existing ETCs in many areas will lose primary line “market share.” If the competitor is a wireless ETC, the loss in primary line market share may occur though the incumbent continues to serve their existing wireline customer base. Under the primary line proposal, even with the initial rebasing option, (... continued from previous page) concerned that where dual technologies are not available, a consumer will be limited to one means of communication. 383 The following chart illustrates the problem for rural businesses. Current Funding Primary Line Funding Customer Type Total Lines Primary Lines Per Line Funding Total Funding Per Primary Line Funding Per Line Funding Effective Per Line Funding Change in Per Line Funding Centrex 250 20 $10.00 $2,500 $15.27 $305 $1.22 ($ 8.78) Residential 10,000 7,500 $10.00 $100,000 $15.27 $114,557 $11.46 $1.46 Business 2,000 500 $10.00 $20,000 $15.27 $7,637 $3.82 ($ 6.18) Total 12,250 8,020 $122,500 $122,500 Average $10.00 $15.27 71 Attachment Federal Communications Commission FCC 04J- 1 72 ETCs that lose primary line market share will lose support. Over time, this will jeopardize the ability of carriers to provide rural consumers with access to comparable services at comparable rates. For at least seventy years, and both before and after 1996 when universal service principles were codified, universal service policies have supported the cost of networks in high cost areas. Customers are not served by individual lines, but by networks. 384 While “basic access” has been the touchstone of the Lifeline program, the rural high cost program has traditionally recognized the importance of network support and cost recovery of network investment to keep rates and services comparable. Adopting a primary line approach would reverse this historical policy and fundamentally redefine universal service for rural communities. The primary lines approach is contrary to the Act because, as its authors understood, communications work through networks, not individual connections. 385 Support limited to primary lines would not be sufficient in rural areas. Congress stated in Section 254( b)( 5) that support must be “specific, predictable and sufficient.” Rural carriers have higher operating costs and equipment costs because they have lower subscriber density and lack economies of scale. Losing support for “all lines” would potentially undermine the ability of these carriers to recoup their network costs without raising rates for rural consumers. Rebasing and similar hold harmless and lump sum payments would at best only temporarily address this problem. We should not be applying more temporary solutions to remedy the universal service programs. It is time to fix them with an eye towards the long term sustainability of the programs. Telecommunications technology is advancing rapidly. If, as the Act provides, rural services are to be comparable to urban services, rural carriers must continue to invest in state- of-the- art equipment. But under the majority’s primary line method, future revenues become much more uncertain. Any primary line market share loss to a competitor not only reduces the incumbent’s customer revenue, but it also reduces universal service revenue. This magnification of investor risk is likely to discourage prudent carriers from installing costly new technology. The Joint Board majority has cited with approval several recommendations in the 2000 report of the Rural Task Force. 386 An important concept in the Rural Task Force report was that there should be “no barriers” to deployment of advanced facilities. 387 While the Commission 384 Technology has not yet obviated the need for physical networks. Even the most exciting new technologies are deployed either in or over networks. Networks are efficient in themselves, and they create opportunities for innovation by network users of all kinds. That’s what customers need and expect. 385 The economics of providing telephone service results in substantial fixed costs for the network capable of providing any service throughout the service area. Those costs do not vary significantly if the lines per customer location change. Therefore, reducing support to a carrier if its primary lines decrease almost guarantees insufficient support in the future for that carrier. 386 E. g.: Recommendation, para. 18 (costs of rural carriers); paras. 53- 54 (disaggregation); paras. 76- 78 (cap on per-line support on competitive entry); para. 91 (adoption of embedded cost basis for support). 387 The Rural Task Force recommended that the “no barriers” policy incorporate the following general principles: (1) support should be provided for plant “that can, either as built or with the addition of plant elements, when available, provide access to advanced services[;]” (2) “carriers should be encouraged by regulatory measures to remove infrastructure barriers relating to access to advanced services[;]” and (3) “[ t] he federal universal service support fund should be sized so that it presents no barriers to investment in plant needed to provide access to (continued....) 72 Attachment Federal Communications Commission FCC 04J- 1 73 has never endorsed that concept fully, it has agreed that universal service policies should not inadvertently create barriers to the provision of access to advanced services. It also has stated a belief that the current universal service system does not create such barriers. 388 The majority here moves away from effectuating a “no barriers” approach. By basing support on primary lines, the majority would substantially reduce the incentive for continued rural investment in any facilities by creating uncertainty of sufficient universal service funding. This is indeed a substantial barrier and one that is contrary to the spirit of the Rural Task Force Report. The Act also anticipates that universal service will support an evolving level of services. 389 We cannot simultaneously put future investment at risk and increase the level of service. More Americans than ever have access to the Internet and mobile communications. 390 Unless providers can invest in their rural networks, they cannot provide that “evolving” level of service. Limiting support to primary lines may not only chill investment generally, but also may jeopardize funding for advanced services and cause networks to lag technologically for want of adequate investment. The majority’s recommendation also would jeopardize the continued availability of carriers of last resort. We cannot reasonably expect carriers to maintain responsibility as carrier of last resort if we deny them the funding necessary to build and maintain the network we demand. 391 The principle of a carrier of last resort is essential to universal service. However, by limiting funding to primary lines, we may inadvertently destroy the incentive to accept this responsibility. 392 The majority’s recommendation would effectively establish a virtual voucher system. Congress squarely addressed this issue in 1995, and dispatched it. During the debates about high cost funding, an amendment was offered that would have replaced the high cost funding (... continued from previous page) advanced services.” Rural Task Force Order, FCC 01- 157 (released May 23, 2001), para. 197, citing Rural Task Force Recommendation at 22- 23. 388 Rural Task Force Order, FCC 01- 157 (released May 23, 2001), para. 199. 389 In Section 254( c)( 1) Congress states that: “Universal service is an evolving level of telecommunications services that the Commission shall establish periodically under this section, taking into account advances in telecommunications and information technologies and services.” 390 According to the CTIA Semi- Annual Wireless Survey, published June 2003, the number of wireless subscribers has increased from 10% from 2002 to 2003. As of the report, there were 148,065, 824 wireless subscribers. From 2002- 2003, the number of cell sites increased 12% to 147, 719. According to the FCC Industry Analysis and Technology Division High- Speed Services for Internet Access Report, from Dec. 2002- June 2003, subscribership to high speed services increased by 18% during the first half of 2003 to a total of 23. 5 million lines. High speed ADSL lines in service increased by 19% during the first half of 2003 and high speed connections over coaxial cable systems increased by 20%. High speed connections to end users by means of satellite or fixed wireless technologies increased by 12% during the first half of 2003. 391 States assign the COLR obligation differently, but it has consistently been an important policy tool to insure that all potential customers in high cost and hard to serve areas receive service. 392 If the cost of acting as COLR is definable, the FCC should consider it as part of a funding system that bases support on provider costs. 73 Attachment Federal Communications Commission FCC 04J- 1 74 mechanism with a voucher mechanism under which low income individuals would receive a voucher and then determine which carrier would get that funding. Essentially, the individual customer would have been given the opportunity choose his or her primary carrier. This amendment would have conflated the high- cost and low- income programs. It was soundly defeated. Congress clearly rejected efforts to merge the high- cost and low- income funds and to establish a voucher system. The majority’s primary line recommendation violates Congressional intent in both ways. Basing support on primary lines would raise serious administrative issues and would create opportunities for gaming that will disadvantage and confuse consumers. Defining primary lines is problematic in a multitude of housing and living situations. We cannot expect providers to investigate and police the panoply of American housing and living arrangements. Who is to decide which line is primary? If we shift the focus away from funding the network and give each individual or household a choice of primary line, we will have to define “household” and “individual.” The telecommunications industry and its regulators are not well equipped to resolve these questions. A primary line restriction is also unauditable. A consumer could easily have his wireline bill sent to a residence, and a wireless bill sent to a post office box. The inability to verify that the funds are being used appropriately compromises both the fund’s integrity and the FCC’s ability to ensure that the funds are being properly expended. We are concerned that any potential gains from restricting funding to primary lines will be outweighed by the administrative costs of administering funding only to primary lines and the risks that necessarily follow an unauditable restriction. The FCC has moved away from its primary/ non- primary residential line distinction in the interstate ratemaking process. For price- cap carrier, the FCC found that different Subscriber Line Charges (SLCs) created consumer confusion and unnecessary costs that were ultimately borne by consumers. Later, the FCC abandoned the distinction entirely in the Multi Association Group (MAG) proceeding and cited the Federal Regulatory Flexibility Act, which requires the Commission to take into account the potential impact of its rules on small, local telephone companies. Carriers and customers would have a real opportunity for gaming with the primary line designation. The problem here is greater than with residential SLCs because there is potentially more money at stake. Carriers would have incentives to “slam” customers, and consumers would have incentives to game the system in order to maximize their household’s funding. Past problems with slamming in long distance competition will pale in comparison to those that could arise when carriers can collect funding for winning primary line designations. Rather than competing to best serve customers, providers will compete for new ways to win designation as the primary carrier. Basis of Support We are disappointed that the Joint Board did not make greater progress on the issue of the basis of support. We believe that we have a sufficient record to recommend a policy goal that the amount of universal service support paid to competitive providers should not be based on the 74 Attachment Federal Communications Commission FCC 04J- 1 75 incumbent’s costs. 393 We understand that our record does not support a final decision on how we would fairly administer support based on the competitors’ costs. 394 We are pleased that our Joint Board colleagues recognize the need to consider modifying the basis of support. 395 However, we believe that a clear policy statement here would better guide the development of the record and better enable the FCC to resolve sooner this complex issue. Equal Access Commissioner Adelstein deferred his vote on the inclusion of equal access in the list of supported services to this proceeding because he believed that there was intent to address and resolve the basis of support question. We should at least have addressed the issue of the funding impact of equal access. 396 Under the MAG plan, the Commission reduced access charges, and to make the universal service mechanism more explicit, moved that amount into the universal service fund. This was responsive to the need to make explicit, as far as possible, those federal universal service subsidies that were implicit, as intended by Congress. The resulting program, Interstate Common Line Support (ICLS) includes the cost of providing equal access. At the very least, this Joint Board should recommend to the Commission that, pending determination of the appropriate basis of support, competitors that do not provide equal access should not receive at least that portion of ICLS that is based upon equal access costs. For these reasons, we approve in part and dissent in part. We concur in the portion of the recommended decision relating to certification of eligible telecommunications carriers, but dissent from the portion relating to designation of primary lines. 393 Commissioners Adelstein and Rowe recommend that carriers receive support based on their own costs. Commissioner Thompson would not yet rule out the options that in high cost competitive markets support be based on a forward looking methodology or a bidding process. 394 For example, we need to understand how support will be calculated when providers use different technologies to serve customers, have different accounting systems and varying levels of service. We would consider specific interim measures to address immediate concerns, like a rigorous, interactive workshop to develop an appropriate costing regime. We suggest that the FCC ask for comments on whether reopening the “Path 3” window for self-certification of disaggregation would address cream- skimming concerns until a new basis of support is implemented. 395 The deadline for review of the use of embedded costs to determine rural carrier support looms, and providers in those markets are better served by as much advance notice of possible changes as we can provide so that they can make reasonable planning decisions. 396 Commissioner Thompson opposed including equal access in the list of supported services. Commissioner Rowe supported its inclusion. 75