Before the

Federal Communications Commission

**Washington, D.C. 20554**

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| In the Matter of                 | * | CC Docket No. 96-45          |
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| Federal-State Joint Board on     | ) | CC Docket No. 00-256         |
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**FOURTEENTH REPORT AND ORDER, TWENTY-SECOND ORDER ON**

**RECONSIDERATION, AND FURTHER NOTICE OF PROPOSED RULEMAKING**

**IN CC DOCKET NO. 96-45, AND REPORT AND ORDER IN CC DOCKET NO. 00-256**

**Adopted:** May 10, 2001 **Released:** May 23, 2001

**Comment Date: 30 days from publication in the Federal Register**

**Reply Comment Date: 60 days from publication in the Federal Register**

By the Commission: Chairman Powell and Commissioner Ness issuing
separate statements; Commissioner Furchtgott-Roth concurring in the
result.

> **TABLE OF CONTENTS**
>
> Paragraph

I. Introduction and Overview 1

II\. Executive Summary 12

III\. Background 13

A. High-Cost Support for Rural Carriers 13

B. The Act 14

C. Prior Joint Board and Commission Actions 15

D. Rural Task Force Recommendation 17

E. Joint Board Recommended Decision 21

IV\. Discussion 24

A. Consistency with Principles of the Act 24

B. Modified Embedded Cost Mechanism 31

1\. The Indexed Cap on High-Cost Loop Fund and the Rural Growth Factor
31

2\. National Average Loop Cost 54

3\. Corporate Operations Expenses 60

C. Support Above the Cap 77

1\. Safety Net Additive 77

2\. Mergers and Acquisitions Cap and "Safety Valve" Mechanism 91

3\. Support in Study Areas with Competitive Eligible Telecommunications
Carriers 120

D. Disaggregation and Targeting of Support 136

E. Duration of the Rural Task Force Plan 165

F. Identification of Service Locations 178

G. State Certification Under Section 254(e) 185

H. Advanced Services 194

I. Interstate Access Universal Service Support for Rate-of-Return
Carriers 202

V. FURTHER NOTICE OF PROPOSED RULEMAKING 207

VI\. PROCEDURAL MATTERS 212

A. Final Regulatory Flexibility Analysis 212

B. Paperwork Reduction Act 237

C. Effective Date of Final Rules 240

D. Initial Regulatory Flexibility Analysis 241

E. Initial Paperwork Reduction Act of 1995 Analysis 261

F. Ex Parte 262

G. Comment Filing Procedures 263

VII\. ORDERING CLAUSES 268

Appendix A -- Final Rules

Appendix B -- Comments in the Rural Task Force Proceeding

Appendix C -- Comments in the MAG Proceeding

Appendix D -- Corporate Operations Expense Limitation Chart

# Introduction and Overview

1.  In this Order, consistent with the recommendation of the
    Federal-State Joint Board on Universal Service (Joint Board), we
    modify our rules for providing high-cost universal service support
    to rural telephone companies for the next five years based upon the
    proposals made by the Rural Task Force.[^1] We find that these
    modified rules strike a fair and reasonable balance among the
    universal service principles and goals enumerated in section 254 of
    the Communications Act of 1934, as amended by the Telecommunications
    Act of 1996.[^2] As the Commission continues to develop a long-term
    coordinated universal service plan, this five-year plan will provide
    predictable levels of support so that rural carriers can continue to
    provide affordable service in rural America, while ensuring that
    consumers in all areas of the nation, including rural areas, have
    access to affordable and quality telecommunications services. [^3]

2.  The Telecommunications Act of 1996 codified the Commission's
    historical commitment to promote universal service to ensure that
    all Americans have access to affordable, quality telecommunications
    services. Specifically, in section 254, Congress instructed the
    Commission, after consultation with the Joint Board, to establish
    specific, predictable, and sufficient mechanisms to preserve and
    advance universal service.[^4] Moreover, Congress articulated a
    national goal that consumers in all regions of the nation, including
    rural, insular and high cost areas, should have access to
    telecommunications and information services at rates that are
    reasonably comparable to rates charged for similar services in urban
    areas.

3.  

4.  Our action today is an important step in completing the process
    begun in 1996 to reform our universal service system so that it is
    sustainable in an increasingly competitive marketplace. In 1997, the
    Commission established a comprehensive blueprint for universal
    service reform.[^5] In 1999, we took action to ensure that the rates
    for supported services provided by non-rural carriers remain
    reasonably comparable and affordable for all Americans.[^6] Today,
    we take action with respect to rural carriers.

5.  In implementing the universal service provisions of the 1996 Act,
    the Joint Board and the Commission have consistently recognized that
    rural carriers face diverse circumstances and that "one size does
    not fit all" in considering universal service support mechanisms
    that are appropriate for rural carriers. When the Commission
    determined in May 1997 that universal service support should be
    based on the forward-looking economic cost of constructing and
    operating the network facilities and functions used to provide the
    supported services, it also determined that rural carriers would
    shift gradually to a forward-looking economic cost methodology.[^7]
    The Commission wanted to allow ample time for rural carriers 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 Report and Order*.[^8]

6.  The Commission recognized that the forward-looking cost mechanisms
    available at that time could not predict the costs of serving rural
    areas with sufficient accuracy.[^9] Because rural carriers generally
    have higher operating and equipment costs, which are attributable to
    lower subscriber density, small exchanges, and a lack of economies
    of scale, the Commission recognized that additional effort would be
    needed to develop a forward-looking mechanism appropriate for rural
    carriers. To assist in this challenge, the Commission encouraged the
    Joint Board to establish a task force representing a broad range of
    interests.[^10] To that end, the Joint Board established the Rural
    Task Force, which was comprised of individuals representing rural
    telephone companies, competitive local exchange carriers,
    interexchange carriers, wireless providers, consumer advocates, and
    state and federal agencies, to assist it in making its
    recommendation to the Commission.[^11]

7.  After exhaustive deliberations and considerable effort, including
    issuing six white papers, the Rural Task Force submitted its
    Recommendation to the Joint Board on September 29, 2000.[^12] Rather
    than attempting to modify the Commission's forward-looking cost
    mechanism that currently is used to determine non-rural support, the
    Rural Task Force proposed modifications to the current embedded cost
    system for a five-year period.[^13] The consensus reached by the
    Rural Task Force members reflects the result of a process in which
    strongly held opposing views were aired, argued, and eventually
    accommodated. In recommending a modified embedded cost mechanism,
    the Rural Task Force attempted to "strike a careful balance between
    the need to provide a fund that is 'sufficient' under the provisions
    of the 1996 Act while insuring that the overall size of the fund is
    reasonable." [^14]

8.  After reviewing the Rural Task Force's proposal to modify the
    current embedded cost system for rural carriers, the Joint Board
    submitted its recommendation to the Commission on December 22, 2000.
    The Joint Board encouraged the Commission to take advantage of the
    consensus achieved by the diverse interests represented on the Rural
    Task Force and use the Rural Task Force Recommendation as a
    foundation for implementing a universal service plan for rural
    carriers for the next five years. The Joint Board also recognized
    that this is an interim plan. To that end, the Joint Board
    recommended that the Commission undertake a comprehensive review of
    the high-cost support mechanisms for both rural and non-rural
    carriers to ensure that both mechanisms function efficiently and in
    a coordinated fashion. The Joint Board urged the Commission to use
    this five year period to develop a long-term universal service plan
    that better targets support to rural carriers serving the highest
    cost areas.[^15]

9.  Based on the record before us, we find that adopting a modified
    embedded cost mechanism for rural carriers for a five-year period
    strikes a fair and reasonable balance among the goals and principles
    enumerated in section 254 of the Act. As the Joint Board suggested,
    we intend to develop over the next few years a long-term universal
    service plan for rural carriers that is better coordinated with the
    non-rural mechanism. In particular, we intend to develop a long-term
    plan that better targets support to carriers serving high-cost
    areas, while at the same time recognizing the significant
    differences among rural carriers, and between rural and non-rural
    carriers.

10. Throughout this proceeding, we have grappled with complex issues and
    balanced competing interests. We are mindful of the adage "Let not
    the perfect be the enemy of the good." The 1996 Act charged the
    Commission with the task of resolving the difficult issues
    surrounding universal service, consistent with the principles
    enunciated in section 254. We take action today that is consistent
    with the statutory requirements, recognizing that views may differ
    on the best policies to effectuate those requirements. In balancing
    the competing interests, we draw heavily from the recommendations of
    the Rural Task Force to the Joint Board, which exhaustively
    considered the issues before us over a two-year period. We build
    upon and modify those recommendations only in those areas where we
    conclude that implementation as proposed may have adverse
    consequences.

11. We conclude that the plan we adopt today will preserve and advance
    universal service, consistent with the goals and principles set
    forth in section 254 of the Act, and encourage competition in
    high-cost areas, consistent with the competitive goals of the 1996
    Act. In particular, we find that adoption of the modified embedded
    cost mechanism is consistent with our obligation to ensure that the
    support provided to rural carriers over the next five years is
    specific, predictable, and sufficient. In addition, we find that the
    mechanism is consistent with the goals of section 254 to ensure that
    consumers in rural, insular, and high-cost areas have access to
    telecommunications services at rates that are affordable and
    reasonably comparable to rates charged for similar services in urban
    areas. We find further that the flexible plan for disaggregating and
    targeting support adopted in this Order will facilitate competitive
    entry into high-cost areas, bringing the benefits of competition to
    consumers in rural areas.

12. The plan adopted today will provide certainty and stability for
    rural carriers for the next five years, enabling them to continue to
    provide supported services at affordable rates to American
    consumers. While we take an important step today on rural universal
    service reform, our task is not done. Our universal service rules
    cannot remain static in a dynamic marketplace. As we move forward,
    we will continue to refine our policies to preserve and advance
    universal service, consistent with the mandates in section 254.

# Executive Summary

13. In this Order, we take the following actions in response to the
    Rural Task Force's recommended reforms to rural high-cost universal
    service support and the proposals made by the Multi-Association
    Group (MAG) relating to this mechanism:

-   We adopt the Rural Task Force's recommendation to re-base the
    high-cost loop support fund for rural telephone companies and retain
    an indexed cap on the fund. We conclude that re-basing the indexed
    fund will ensure that rural carriers are able to continue providing
    supported services at affordable and reasonably comparable rates
    during the transition to a more permanent high-cost support
    mechanism for rural carriers.

-   We adopt a "rural growth factor" that allows the high-cost loop
    support fund to grow based on annual changes in the Gross Domestic
    Product-Chained Price Index (GDP-CPI) and the total number of
    working loops of rural carriers. We find that allowing the fund to
    grow in this fashion over the next five years will enable rural
    carriers to make prudent investments in rural America.

-   We adopt the Rural Task Force's recommendation to freeze the
    national average loop cost at \$240.00. We conclude that freezing
    the national average loop cost will provide rural carriers with
    greater certainty as to their eligibility for high-cost loop
    support.

-   We adopt a modified version of the Rural Task Force's proposal as it
    relates to corporate operations expenses. We revise the corporate
    operations expense limitation calculation so that the dollar values
    in the formula are re-based and indexed by the GDP-CPI.

-   We also raise the minimum cap in the revised corporate operations
    expense limitation formula. Specifically, we permit small rural
    carriers to receive support for corporate operations expenses of up
    to \$600,000 or amounts derived from the revised corporate
    operations expense formula, whichever is greater. We find that
    raising the minimum cap from \$300,000 to \$600,000 will enable
    small rural carriers to receive more support for corporate
    operations expenses without having to file for waiver of our rules.

-   We adopt a modified version of the Rural Task Force's proposed
    "safety net additive" so that a carrier will receive support for its
    incremental expense adjustment associated with new investment,
    rather than 50 percent of the difference between capped and uncapped
    support in a given year as proposed by the Rural Task Force. By
    modifying safety net support in this way, we ensure that carriers
    that meet the threshold requirement for eligibility will receive
    support for their incremental investment, but do not recover more
    than the costs incurred as a result of the additional investment.

-   Consistent with the Rural Task Force's recommendation, we retain
    section 54.305 of the Commission's rules, which provides that a
    carrier acquiring exchanges from an unaffiliated carrier shall
    receive the same per-line levels of high-cost support for which the
    acquired exchanges were eligible prior to their transfer. We modify
    the rule, however, to provide a "safety valve" that provides support
    for additional investment made in the acquired exchanges.

-   We decline at this time to adopt the Rural Task Force's proposal to
    freeze high-cost loop support upon competitive entry in rural
    carrier study areas. The proposal may be of limited benefit in
    serving its intended purpose of preventing excessive fund growth,
    and in some circumstances might increase high-cost loop support
    levels. We also conclude that the Rural Task Force's proposal would
    be administratively burdensome and may have the unintended
    consequence of discouraging investment in rural America. In the
    attached Further Notice of Proposed Rulemaking, we invite comment on
    possible alternative measures.

-   We address the Rural Task Force's concerns regarding frequency of
    reporting and the lag in support in study areas with competitive
    eligible telecommunications carriers. First, we require all eligible
    telecommunications carriers serving such areas to report updated
    line counts on a regular quarterly basis. Second, we clarify that
    competitive eligible telecommunications carriers may submit data and
    receive high-cost loop support on a regular quarterly basis.

-   We adopt, with certain modifications, the three paths for the
    disaggregation and targeting of high-cost universal service support
    proposed by the Rural Task Force. We also adopt the general
    requirements that the Rural Task Force proposed for all
    disaggregation plans. We find that providing rural carriers
    flexibility in the methods of disaggregation and targeting is a
    reasonable approach to address the significant diversity among such
    carriers and will facilitate competitive entry in rural areas.

-   We find that the Rural Task Force's proposed framework, with certain
    modifications, shall remain in place for five years and
    implementation shall begin as of July 1, 2001.

-   We adopt the use of a wireless mobile customer's billing address as
    the basis for determining the customer's location for purposes of
    delivering high-cost universal service support.

-   We conclude that states should file annual certifications with the
    Commission to ensure that eligible telecommunications carriers
    providing service in the service area of a rural carrier use
    universal service support "only for the provision, maintenance and
    upgrading of facilities and services for which the support is
    intended" consistent with section 254(e) of the Act.

-   Consistent with the Rural Task Force's recommendation, the Joint
    Board on Universal Service is currently considering the definition
    of supported services. We agree with the Rural Task Force that our
    universal service policies should not inadvertently create barriers
    to the provision of access to advanced services, and believe that
    our current universal service system does not create such barriers.
    We commit to further consideration of the Rural Task Force's
    proposed "no barriers to advanced services" policy in the future.

-   We find the Rural Task Force's recommended principles for access
    reform to be reasonable and generally consistent with prior
    Commission actions to reform the access rate structure of price cap
    carriers. These principles will aid our consideration of access
    charge reform issues in the pending MAG proceeding. We recognize the
    importance of completing access reform for rate-of-return carriers
    and intend to act expeditiously to resolve issues raised in the MAG
    proceeding.

# Background

## High-Cost Support for Rural Carriers

14. The purpose of high-cost universal service support is to help
    provide access to telecommunications service in areas where the cost
    of such service otherwise might be prohibitively expensive.[^16]
    Historically, this purpose has been achieved both through explicit
    monetary payments and implicit support flows to enable carriers to
    serve high-cost areas at below-cost rates.[^17] Currently, three
    federal universal service mechanisms provide high-cost support for
    rural carriers. High-cost loop support, with which we are
    principally concerned here, provides support based on embedded costs
    averaged over entire study areas.[^18] Carriers receive high-cost
    loop support for a variable percentage of their unseparated loop
    costs, depending on the number of loops they serve and the degree to
    which their costs exceed the national average cost per loop.[^19]
    High-cost loop support for rural carriers is subject to an indexed
    cap, which limits total support to the previous year's total,
    increased by the rate of annual loop growth for all carriers.[^20]
    Rural carriers also receive federal high-cost support through the
    Long Term Support (LTS) and Local Switching Support (LSS)
    mechanisms.[^21] These three mechanisms provide approximately
    \$1.617 billion in annual universal service support to over 1,300
    rural carriers.[^22]

## The Act

15. In the 1996 Act, Congress established principles for the
    preservation and advancement of universal service in a competitive
    telecommunications environment. In particular, section 254 of the
    Act provides that consumers in all regions of the nation, including
    consumers in rural, insular, and high-cost areas, should have access
    to telecommunications services at rates that are affordable and
    reasonably comparable.[^23] Section 254 also provides that federal
    universal service support mechanisms should be specific,
    predictable, and sufficient to preserve and advance universal
    service.[^24] The Commission adopted the additional principle that
    federal support mechanisms should be competitively neutral, neither
    unfairly advantaging nor disadvantaging particular service providers
    or technologies.[^25] We have concluded that federal universal
    service policies should strike a fair and reasonable balance among
    these principles and goals enumerated in section 254.[^26] In so
    doing, we have held that promotion of any one goal or principle
    should be tempered by a commitment to ensuring the advancement of
    each of the principles enumerated above.[^27]

## Prior Joint Board and Commission Actions

16. With passage of the 1996 Act, particularly section 254, the
    Commission took a fresh look at its universal service support
    mechanisms. Based on the recommendations of the Joint Board, the
    Commission began reforming its high-cost support mechanisms in its
    *First Report and Order* released on May 8, 1997.[^28] Among other
    things, the Commission concluded that federal universal service
    support for all carriers should be based on the forward-looking
    economic cost of constructing and operating the network used to
    provide the supported services, rather than each carrier's embedded
    costs.[^29] The Commission explained that support based on
    forward-looking economic costs provides sufficient support without
    giving carriers an incentive to inflate their costs or to refrain
    from efficient cost cutting.

17. Although the Commission generally concluded that universal service
    support should be based on forward-looking economic costs rather
    than embedded costs, at the request of the Joint Board and rural
    carriers it proceeded initially with reform of the high-cost support
    mechanism for non-rural carriers.[^30] The new, forward-looking
    mechanism for non-rural carriers became effective on January 1,
    2000.[^31] With regard to rural carriers, the Commission agreed with
    the Joint Board that, compared to the large non-rural carriers,
    "rural carriers generally serve fewer subscribers, serve more
    sparsely populated areas, and generally do not benefit as much from
    economies of scale and scope. For many rural carriers, universal
    service support provides a large share of the carriers' revenues,
    and thus, any sudden change in the support mechanisms may
    disproportionately affect rural carriers' operations."[^32]
    Accordingly, the Commission stated that it would not implement a
    forward-looking high-cost support mechanism for rural carriers
    before January 1, 2001, and only after selecting an appropriate
    mechanism based on recommendations from the Joint Board and a task
    force appointed by the Joint Board.[^33] In this regard, the
    Commission agreed with the state Joint Board members that a task
    force "should provide valuable assistance in identifying the issues
    unique to rural carriers and analyzing the appropriateness of proxy
    cost models for rural carriers."[^34]

## Rural Task Force Recommendation

18. The Rural Task Force members were appointed by the Joint Board in
    July 1998, and deliberated for over two years before presenting
    their Recommendation to the Joint Board on September 29, 2000.[^35]
    These deliberations included 12 meetings and 28 conference calls, as
    well as numerous sub-group calls.[^36] The foundation for the
    Recommendation is a series of six white papers addressing, among
    other things, the differences between rural and non-rural carriers,
    and the appropriateness of using the Commission's forward-looking
    economic cost model for non-rural carriers to calculate support for
    rural carriers.[^37] The Recommendation represents the consensus of
    individual Rural Task Force members, who work for a broad range of
    interested parties, often with competing interests, including rural
    telephone companies, competitive local exchange carriers,
    interexchange carriers, wireless providers, consumer advocates, and
    state and federal government agencies.[^38] The Rural Task Force
    offered its Recommendation as an integrated package, and asked that
    it be adopted without modification. It urged that the Recommendation
    be implemented immediately and remain in place over a five-year
    period. The Rural Task Force's specific proposals are discussed in
    detail below. Here, we briefly summarize the Recommendation.

19. The Rural Task Force recommended against use of the Commission's
    forward-looking high-cost mechanism for non-rural carriers to
    calculate high-cost support for rural carriers.[^39] Instead, it
    recommended the use over the next five years of a modified version
    of the current high-cost loop support mechanism used for rural
    carriers. The Rural Task Force's proposed modifications to the
    high-cost loop support mechanism include various upward adjustments
    to current limits on universal service support for rural carriers.
    Specifically, the Rural Task Force proposed that: (a) the indexed
    cap on high-cost loop support and the corporate operations expense
    limitation be recomputed as if they had not been in effect for the
    calendar year 2000;[^40] (b) a "safety net additive" mechanism be
    created to provide above-the-cap support for carriers with over 14
    percent growth in telecommunications plant in service on a per-line
    basis;[^41] and (c) a "safety valve" mechanism be created to provide
    additional support for "meaningful new investments" in exchanges
    acquired by rural carriers.[^42] The Rural Task Force also
    recommended that, once a competitive eligible telecommunications
    carrier initiates service in a study area served by a rural carrier,
    per-line support within the study area be fixed and subsequently
    adjusted for growth in lines and inflation rather than changes in
    cost.[^43]

20. In addition, the Rural Task Force recommended the use of a new
    annual index or "rural growth factor" to adjust the cap on high-cost
    loop support, the corporate operations expense limitation, and fixed
    per-line support in competitive study areas on a going-forward
    basis.[^44] The rural growth factor would be the sum of annual line
    growth for rural carriers and a general inflation factor (Gross
    Domestic Product-Chained Price Index). Under the Rural Task Force's
    proposal, safety net additive support, support for acquired
    exchanges, and safety valve support, as well as support for
    competitive eligible telecommunications carriers, would be excluded
    from the indexed cap on high-cost loop support. The Rural Task Force
    provided an example of a safety valve mechanism, in which safety
    valve support would be limited to five percent of the overall
    indexed cap on high-cost loop support.[^45]

21. The Rural Task Force also suggested certain other reforms. It
    proposed that rural carriers be permitted to elect, within nine
    months of the effective date of the proposed new rules, whether and
    how to disaggregate and target universal service support on a
    per-line basis.[^46] It recommended adoption of a "no barriers to
    advanced services" policy, and identified principles for replacing
    any implicit support in interstate access charges with explicit
    universal service support.[^47] Furthermore, it recommended that the
    Commission delegate to the states responsibility for oversight of
    rural carriers' compliance with section 254(e) of the 1996 Act, in a
    manner similar to that adopted for non-rural carriers.[^48] Finally,
    the Rural Task Force recommended that the Commission address a
    number of issues, such as stranded costs and the interval between
    the provision of service and receipt of support, regarding which it
    did not reach agreement or did not formulate specific
    proposals.[^49]

## Joint Board Recommended Decision

22. As noted above, the Rural Task Force presented its Recommendation to
    the Joint Board on September 29, 2000. The Joint Board issued a
    public notice requesting written comments from interested parties,
    and held an *en banc* hearing regarding the Recommendation in
    November 2000.[^50] The Joint Board submitted its *Recommended
    Decision* to the Commission on December 22, 2000.

23. In its *Recommended Decision*, the Joint Board concluded that the
    Rural Task Force Recommendation "presents a good foundation for
    implementing a rural universal service plan."[^51] It stated that
    the Rural Task Force plan would provide rural carriers with
    stability for planning their investments over the next several
    years, while seeking to encourage competition in high-cost
    areas.[^52] It also observed that the Rural Task Force's proposed
    upward adjustments to limits on universal service support for rural
    carriers are "generally designed to provide carriers serving rural
    areas with increased incentives to invest in new infrastructure and
    technologies."[^53] The Joint Board remarked that the range of
    comments it received---from rural carriers that argued the plan
    would provide too little support to state commissions and other
    carriers that argued it would provide too much---were "consistent
    with a recommendation that is a consensus proposal put forth by
    representatives of disparate interests."[^54] The Joint Board
    encouraged the Commission "to take advantage of this opportunity to
    craft a rural universal service plan that enjoys widespread support
    among diverse interests."[^55]

24. In addition, the Joint Board observed that the Rural Task Force's
    proposals to modify the Commission's rules might raise
    implementation issues that the Commission would have to
    address.[^56] It highlighted specific issues in connection with the
    proposals for a safety valve mechanism, fixed per-line support in
    competitive study areas, and safety net additive support.[^57] With
    regard to access charge reform, the Joint Board recognized that the
    access charge issues raised by the Rural Task Force and the MAG plan
    are interstate in nature and, therefore, are properly before the
    Commission.[^58] It urged the Commission, however, to ensure that
    the Joint Board remains actively involved in review of those aspects
    of the MAG plan that relate to universal service. Finally, the Joint
    Board recommended future steps for consideration of an appropriate
    universal service mechanism to succeed the Rural Task Force plan,
    urging the Commission "to 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
    companies serving the highest cost areas, while at the same time
    recognizing the significant distinctions among rural carriers and
    between rural and non-rural carriers."[^59]

# Discussion

## Consistency with Principles of the Act

25. Based on the record before us, we conclude that the Rural Task Force
    plan that we adopt today will preserve and advance universal
    service, consistent with the goals and principles set forth in
    section 254 of the Act, and encourage efficient competition in
    high-cost areas, consistent with the competitive goals of the 1996
    Act. In particular, we find that adoption of the modified embedded
    cost mechanism is consistent with our obligation to ensure that the
    support provided to rural carriers over the next five years is
    specific, predictable, and sufficient. In addition, we find that
    this mechanism is consistent with the principles and goals of
    section 254 to ensure that consumers in rural, insular, and
    high-cost areas have access to telecommunications services at rates
    that are affordable and reasonably comparable to rates charged for
    similar services in urban areas. We find further that the flexible
    plan for disaggregating and targeting support adopted in this Order
    will facilitate competitive entry into high-cost areas, bringing the
    benefits of competition to consumers in rural areas.[^60]

26. We find that continuing to base support for rural carriers on
    embedded cost for the next five years is a reasonable and prudent
    approach to take in light of the record before us. The present
    record fails to provide the analysis necessary to permit a
    transition of rural carriers to a forward-looking high-cost support
    mechanism.[^61] Before we could transition to such a mechanism, it
    would need to be fully analyzed and considered. Even commenters who
    urge the Commission to move toward a forward-looking support
    methodology for rural carriers as soon as possible recognize the
    need for additional time to develop an appropriate mechanism.[^62]
    In light of the diversity among rural carriers, and based on our
    experience in developing the forward-looking high-cost support
    mechanism for non-rural carriers, we find that five years is a
    reasonable amount of time to maintain the Rural Task Force plan in
    place, while we consider long-term solutions. In the meantime,
    providing support based on embedded costs will provide important
    certainty to rural carriers, which generally receive a greater
    proportion of their revenues from universal service support
    mechanisms than non-rural carriers. Accordingly, we conclude that
    the Rural Task Force plan will provide specific and predictable
    support to rural carriers over the next five years.

27. In addition, we find that the modified embedded cost mechanism will
    provide sufficient support for purposes of section 254 of the Act,
    consistent with the goal of ensuring that consumers in rural,
    insular, and high-cost areas have access to telecommunications
    services at rates that are affordable and reasonably comparable to
    rates charged for similar services in urban areas. The record
    developed on the sufficiency issue reflects the opposing viewpoints
    of those receiving support from the fund and those contributing to
    it. Many commenters representing the interests of rural telephone
    companies argue that universal service support for rural carriers
    must be based on embedded costs to be consistent with section 254's
    sufficiency requirement.[^63] Some argue explicitly that the
    existing and proposed caps on the high-cost loop fund violate this
    requirement and, by implication, that any mechanism that does not
    permit full recovery of embedded costs also would violate the
    Act.[^64] Other commenters, namely contributors to the fund and net
    payor states, oppose any increases in support for rural carriers.
    They argue that the Rural Task Force has not demonstrated that the
    current level of rural high-cost support is insufficient, and that
    sufficiency requires that the universal service support mechanisms
    provide no more support than is necessary.[^65] Notably, although a
    number of commenters argue generally that the Rural Task Force plan
    would provide support that is either inadequate or excessive,
    neither side of the debate has proffered specific evidence
    supporting their positions.[^66]

28. Determining whether support is "sufficient" for purposes of the Act
    is not a precise exercise: there is a range of funding levels that
    may be deemed sufficient. As the Fifth Circuit has observed, section
    254(e) is ambiguous as to what constitutes "sufficient"
    support.[^67] Thus, the Commission must use its expertise and
    informed judgement to make a reasonable determination as to what
    constitutes "sufficient" support. The Fifth Circuit has provided
    guidance, however. Rejecting challenges by rural telephone companies
    that, among other things, the continued imposition of the overall
    cap on high-cost loop support and the corporate operations expenses
    limitation violated the Act, the court stated that "\[s\]o 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 to ensure sufficient
    funding of every local telephone company."[^68] The court also
    cautioned that "excessive funding may itself violate the sufficiency
    requirements of the Act."[^69] Thus, in crafting universal service
    policies and programs, the Commission must strike a fair and
    reasonable balance among the goals and principles of the Act, and
    consider both the adequacy of support and the burden on
    contributors.[^70]

29. We find that the modified embedded cost mechanism that we adopt in
    this Order strikes the appropriate balance at this time. In reaching
    this conclusion, we reject the contention that no increase in
    current high-cost loop support levels is warranted. In 1997, when
    the Commission decided to continue using an embedded cost mechanism
    to determine high-cost loop support for rural carriers pending
    permanent reform, it declined to adopt a Joint Board recommendation
    to freeze support for rural carriers at then-current levels.[^71] In
    addition, the Commission did not anticipate that the embedded cost
    mechanism for rural carriers would be in place for this long. As
    stated above, there is a range of funding levels that could be
    deemed sufficient for purposes of the Act, and the Rural Task Force
    proposal is the product of the consensus of divergent interests. At
    this time, we find that it is reasonable to modify the high-cost
    loop support levels for rural carriers established in 1997 to
    account for changes in costs and technology, and to ensure that
    rural carriers can maintain existing facilities and make prudent
    facility upgrades until such time as a long-term rural plan is
    adopted. Based on the estimates provided by the Rural Task Force and
    the Joint Board, we estimate that the modified embedded cost
    mechanism will result in an increase in rural carrier support of
    approximately \$1.26 billion over the five-year period.[^72] We
    anticipate that any increases in the universal service contribution
    factor as a result of such increases will be modest, ranging from
    two-tenths to four-tenths of one percent.[^73]

30. We also reject the assertions of several commenters, notably state
    commissions, that any universal service support mechanism should
    provide each area no more than the amount of support needed to
    enable the relevant state to ensure reasonably comparable rates
    among states.[^74] These commenters argue, either expressly or
    implicitly, that because support under the modified embedded cost
    mechanism will be determined at the study-area level, and not at the
    state level consistent with the approach of the forward-looking
    mechanism for non-rural carriers adopted in the *Ninth Report and
    Order*, the modified embedded cost mechanism will provide excessive
    support to states that have low costs on average but contain
    high-cost study areas. The approach adopted in the *Ninth Report and
    Order*, however, depends on the ability to determine a statewide
    average forward-looking cost. In the *Ninth Report and Order* we
    found that, as a policy matter, federal high-cost support should be
    sufficient to enable reasonably comparable rates among states, while
    leaving states with sufficient resources to set rates for intrastate
    services that are reasonably comparable to rates charged for similar
    services within their borders.[^75] To that end, we adopted a
    mechanism to calculate support for non-rural carriers by comparing
    the forward-looking costs of providing the supported services,
    averaged at the statewide level, to a national benchmark.[^76] We
    found that statewide averaging, together with the other components
    of the forward-looking methodology adopted for non-rural carriers,
    is consistent with the division of federal-state responsibility for
    achieving reasonably comparable rates for customers of non-rural
    carriers.[^77] When we adopted the forward-looking methodology for
    non-rural carriers, we noted that our decision did not necessarily
    mean that we would adopt a similar approach for rural carriers.[^78]
    As explained above, we will continue to refine our rules as we
    develop a long-term universal service support mechanism for rural
    carriers. During the duration of the plan, which we are adopting for
    the interim, we will continue to consider a forward-looking
    methodology for rural carriers. Meanwhile, we will rely on the
    modified embedded cost mechanism to calculate support for rural
    carriers.

31. In sum, we find that the modified embedded cost mechanism we adopt
    will provide rural carriers with specific, predictable, and
    sufficient support over the next five years, consistent with the
    goals and principles set forth in section 254 of the Act. As a
    result, rural carriers will be able to continue to provide
    affordable service in rural America.

## Modified Embedded Cost Mechanism

### The Indexed Cap on High-Cost Loop Fund and the Rural Growth Factor

#### Background

32. The high-cost loop support fund currently is subject to an indexed
    cap, originally adopted in 1993,[^79] which limits the maximum
    growth in the total amount of support available from the high-cost
    loop support fund to the previous year's support amount, increased
    by an index factor that is equal to the rate of growth in the total
    number of working loops nationwide for the calendar year preceding
    the annual data filing.[^80] For example, in 1998, the total number
    of working loops grew 3.43 percent. Thus, the amount of high-cost
    loop support available in 2000 was the 1999 support amount (\$864.2
    million) increased by 3.43 percent, which equals \$893.8 million.

33. The Commission originally adopted the indexed cap on the high-cost
    loop fund in order to limit fund growth and moderate annual
    fluctuations in the size of the fund pending the Commission's
    consideration of permanent changes to the high-cost assistance
    mechanisms.[^81] Prior to the adoption of the indexed cap, the
    high-cost loop fund had grown by approximately 60 percent in eight
    years, with annual rates of growth ranging from one percent to more
    than 19 percent.[^82] The Commission reasoned that moderating the
    growth of the high-cost loop fund would provide carriers with
    certainty regarding overall support levels and would facilitate the
    Commission's ability to revise the universal service mechanisms, if
    necessary, without jeopardizing the continued availability of local
    telephone service at reasonable rates.[^83]

34. After passage of the 1996 Act, the Commission reassessed the
    operation of the indexed cap and decided to retain the indexed cap
    until all carriers receive high-cost support based on a
    forward-looking economic cost mechanism.[^84] The Commission
    reasoned that the indexed cap would prevent excessive growth in the
    existing high-cost loop fund during the period preceding the
    implementation of a forward-looking support mechanism.[^85]
    According to the Commission, rapid growth in high-cost loop support
    would make the transition to a forward-looking mechanism more
    difficult for rural carriers if the new system provided for
    significantly different levels of support.[^86] In short, the
    Commission concluded that the indexed cap effectively limits overall
    growth of the fund, while protecting individual carriers from
    experiencing extreme reductions in support.[^87]

35. In the *Fourth Reconsideration Order*, the Commission concluded that
    the indexed cap is a reasonable means of limiting the overall growth
    of the high-cost loop fund, and thus protects contributors from
    excess universal service contribution requirements, while allowing
    the high-cost loop fund to grow to support the growth in lines
    served by carriers in high-cost areas.[^88] In the absence of
    evidence showing that the indexed cap will result in insufficient
    support, the Commission also concluded that the indexed cap is
    consistent with the goal of section 254(b)(5) to ensure that
    universal service support is sufficient.[^89]

36. Against this backdrop, the Rural Task Force recommended that the
    Commission retain an indexed cap on the high-cost loop support
    mechanism, but increase the size of the rural carrier portion of the
    high-cost loop support fund to reflect increased costs for rural
    carriers and tie the annual rate of growth of the rural carrier
    portion of the fund to an index that reflects increased costs and
    lines over time. In particular, the Rural Task Force recommended
    that the Commission recompute or "re-base" the indexed cap on the
    rural incumbent local exchange carrier portion of the high-cost loop
    support fund as if the indexed high-cost loop fund cap and a
    limitation on support for corporate operations expenses had not been
    in effect for the calendar year 2000.[^90] The Rural Task Force also
    recommended that the Commission annually increase the re-based rural
    incumbent local exchange carrier portion of the high-cost loop
    support fund by an annual "rural growth factor" representing the sum
    of rural line growth and changes in a general inflation factor \--
    the United States Department of Commerce's Gross Domestic
    Product-Chained Price Index (GDP-CPI).[^91] The Rural Task Force
    further recommended that the Commission resize the indexed cap
    whenever the definition of supported services is changed.[^92] Under
    the Rural Task Force's proposal, "safety net additive" support,[^93]
    support for acquired exchanges and "safety valve" support,[^94] and
    support for competitive eligible telecommunications carriers[^95]
    would be calculated without regard to the re-based cap on high-cost
    loop support. In other words, these forms of support would be
    "uncapped."

37. The Joint Board observed that the modifications to the caps and
    limitations on high-cost loop support proposed by the Rural Task
    Force, including the modifications to the cap on the high-cost loop
    fund, are "generally designed to provide carriers with increased
    incentives to invest in new infrastructure and technologies."[^96]
    The Joint Board concluded that the Rural Task Force Recommendation
    presents a good foundation for implementing a rural universal
    service plan.[^97]

#### Discussion

38. As discussed in greater detail below, we adopt the Rural Task
    Force's recommendation to re-base the high-cost loop support fund
    for rural telephone companies and retain an indexed cap on the fund.
    Rural carriers shall receive re-based high-cost loop support
    effective July 1, 2001. We believe that an indexed cap balances the
    various goals enunciated in section 254 of the Act.[^98] These goals
    include, among others, keeping the fund specific, predictable, and
    competitively neutral, as well as the need to achieve service and
    rate comparability.[^99] Moreover, the indexed cap will ensure that
    the fund is within the range of sufficiency, and will minimize
    burdens on carriers to contribute to the universal service
    mechanisms.[^100]

39. We agree with the Rural Task Force that "safety net additive"
    support and support for acquired exchanges and "safety valve"
    support should be excluded from the re-based cap on high-cost loop
    support. We believe that the exclusion of such support from the
    re-based cap on high-cost loop support is consistent with the
    universal service goals enunciated in section 254 of the Act. By
    providing carriers above-the-cap support for new investments in
    their existing networks and acquired exchanges, we introduce an
    element of predictability that has not been present under the
    current high-cost universal service mechanism.

40. In addition, we adopt the Rural Task Force's proposal to increase
    the portion of the high-cost loop support fund that is distributed
    to rural incumbent local exchange carrier study areas by a rural
    growth factor equal to annual increases in the GDP-CPI and growth in
    the total number of working loops of rural incumbent local exchange
    carriers. As discussed in greater detail below, by reforming the
    growth factor in this way, we make high-cost support more specific
    to the needs of rural carriers. We also agree with the proposal
    included in the Rural Task Force's example of a safety valve
    mechanism in Appendix D of its Recommendation that all access lines
    transferred to rural carriers should be excluded from the rural
    growth factor.[^101] We conclude that the Rural Task Force's
    proposal, as modified herein, represents a reasonable compromise
    between disparate interests. We also conclude that the Rural Task
    Force's proposal is consistent with the universal service goals
    enunciated in section 254 of the Act. Specifically, the Rural Task
    Force's proposal will ensure that rural telephone companies receive
    sufficient, specific, and predictable high-cost universal service
    support during this transition period, while minimizing the burden
    on carriers to contribute to the universal service mechanisms.

41. *[Indexed Cap on the High-Cost Loop Fund]{.underline}*. We agree
    with the Rural Task Force and commenters that the indexed cap on the
    rural incumbent local exchange carrier portion of the high-cost loop
    fund should be recomputed or "re-based" as if the indexed fund cap
    and the corporate operations expense limitation had not been in
    effect for the calendar year 2000.[^102] Effective July 1, 2001,
    rural carriers shall receive increased high-cost loop support based
    on uncapped support amounts for the calendar year 2000, plus a rural
    growth factor equal to the sum of annual changes in the total number
    of working loops for rural carriers and the GDP-CPI.[^103] In
    reaching this conclusion, we are mindful that the Rural Task Force's
    recommendation represents the consensus of the Rural Task Force
    members, a diverse group representing all points of view affected by
    a change in the high-cost loop fund.[^104] The need for such a
    consensus is evidenced by the widely differing comments received
    regarding the Rural Task Force's proposal to re-base the high-cost
    loop fund. The MAG and some commenters support removal of the
    indexed cap on the high-cost fund in its entirety,[^105] while
    certain other commenters argue that the high-cost loop fund should
    not be re-based at this time.[^106] Most commenters, however,
    support the Rural Task Force's proposal to re-base the rural carrier
    portion of the high-cost loop fund as an acceptable compromise
    between disparate interests.[^107]

42. In the *First Report and Order*, the Commission concluded, in part,
    that rural carriers may require a greater amount of support than
    fixed support mechanisms would provide in order to maintain existing
    facilities and make prudent facilities upgrades until such time as a
    forward-looking support mechanism is in place.[^108] On the other
    hand, the Commission concluded that the indexed cap on high-cost
    loop support would moderate growth in the high-cost loop fund until
    final rules implementing the universal service provisions of the
    1996 Act take effect.[^109] More than seven years have passed since
    the Commission originally implemented the indexed cap on the
    high-cost loop support fund. We observe that the weighted average
    unseparated per-line loop cost for rural carriers increased by an
    annual average of approximately one percent per year from 1995
    to 1999. The weighted average unseparated per-line loop cost for
    non-rural carriers decreased by an annual average of approximately
    1.2 percent over the same period. Increases in the weighted average
    unseparated per-line loop cost for rural carriers currently are not
    reflected in the indexed cap on the high-cost loop fund, which is
    based on the rate of growth in the total number of rural and
    non-rural working loops nationwide for the preceding calendar
    year.[^110] Therefore, the indexed cap on the high-cost loop fund
    increasingly has limited the amount of high-cost loop support for
    rural carriers. According to the Rural Task Force, without the
    indexed cap, the portion of the high-cost loop fund that is
    distributed to rural telephone company study areas would have been
    \$83.9 million higher in calendar year 2000.[^111] The Rural Task
    Force has responded, in part, by recommending that the Commission
    recompute or "re-base" the indexed cap on the rural carrier portion
    of the high-cost loop fund as if the indexed cap was not in effect
    for the calendar year 2000. As discussed above, this proposal
    represents a compromise of competing interests.[^112]

43. Based on the record before us, we find it reasonable to reevaluate
    and re-base the high-cost loop support fund to ensure that rural
    telephone companies have incentives to maintain existing facilities
    and make prudent investments in facility upgrades. At the same time,
    the record does not reflect a specific point at which support should
    be set. Indeed, we believe that there is no one specific such point.
    Rather, establishing sufficient support requires a balancing of
    goals such as providing incentives for prudent investment and
    preventing excessive support to the detriment of carriers
    contributing to the fund.[^113] In light of these goals, we believe
    it is reasonable to re-base the rural incumbent local exchange
    carrier portion of the high-cost loop fund as if the indexed cap and
    the corporate operations expense limitation were not in effect for
    the calendar year 2000. Although this approach may appear more
    generous to rural carriers than the current mechanism, we believe it
    is a reasonable approach to accomplishing the sufficiency balance
    here because we do not want to stifle prudent investment while we
    continue to transition rural carriers to a support mechanism based
    on forward-looking economic costs. The adjustments to the indexed
    cap we adopt today will prevent excessive and erratic growth in the
    high-cost loop fund, while ensuring that rural telephone companies
    are able to provide supported services at affordable and reasonably
    comparable rates.

44. We therefore adopt the Rural Task Force's proposal to re-base the
    rural carrier portion of the high-cost loop fund as if the indexed
    cap and the corporate operations expense limitation had not been
    effect for calendar year 2000. We concur with the Joint Board's
    observation that the modifications to the caps and limitations on
    high-cost loop support proposed by the Rural Task Force are
    \"generally designed to provide carriers with increased incentives
    to invest in new infrastructure and technologies.\"[^114] We
    conclude that re-basing the indexed fund will ensure that eligible
    rural telephone companies are able to continue making prudent
    investments in rural facilities for the next five years, while we
    develop a more targeted high-cost support mechanism for rural
    telephone companies.

45. We also agree with the Rural Task Force that safety net additive
    support, support for acquired exchanges, and safety valve support
    should be excluded from the re-based cap on high-cost loop
    support.[^115] As discussed in greater detail below, we believe that
    the exclusion of such support from the re-based cap on high-cost
    loop support is consistent with the universal service goals
    enunciated in section 254 of the Act. The availability of uncapped
    safety net additive support will ensure that rural carriers that
    make significant investments in telecommunications plant in service
    receive sufficient, specific, and predictable support for the
    incremental costs associated with new investment, while minimizing
    the burden on carriers that contribute to the universal service
    mechanisms.[^116] Support for acquired exchanges in the form of
    safety valve support will be subject to a cap of five percent of the
    portion of the annual indexed cap on the high-cost loop fund that is
    distributed to rural incumbent local exchange carrier study
    areas.[^117] We believe that a five percent cap will ensure that
    sufficient support is available for acquired exchanges and will
    protect contributors from excessive universal service contributions.

46. We clarify, however, that, because support for acquired exchanges
    and safety valve support will be provided outside the cap, the
    overall size of the rural high-cost loop fund should be reduced to
    reflect the removal of support for access lines transferred from
    rural carriers to non-rural carriers or to other rural carriers. The
    reduction shall equal the amount of the expense adjustment available
    to the transferred access lines at the time of the transfer and
    shall be effective in the next calendar quarter after the access
    lines are transferred. Without such an exclusion from the rural
    incumbent local exchange carrier portion of the high-cost loop fund,
    the remaining access lines might receive increased per-line support
    when access lines are transferred from a rural incumbent local
    exchange carrier study area to a non-rural carrier or to another
    rural incumbent local exchange carrier.[^118] Under such a scenario,
    the lines included in the rural incumbent local exchange carrier
    portion of the high-cost loop fund would decrease, without a
    corresponding decrease in the overall rural incumbent local exchange
    carrier portion of the high-cost loop fund. Over time, per-line
    support for the remaining access lines would increase to the extent
    that more exchanges are transferred from rural incumbent local
    exchange carrier study areas. Such a result would be inconsistent
    with the statutory goal of providing no more support than is
    sufficient and would not prevent excessive growth in the high-cost
    loop fund.[^119] We expect that the exclusion of support for
    transferred access lines from the rural incumbent local exchange
    carrier portion of the indexed high-cost loop fund will maintain the
    relationship between the size of the high-cost loop fund and the
    number of supported lines.

47. We disagree with commenters and the MAG that the Commission should
    remove the indexed cap on the high-cost loop fund in its
    entirety.[^120] We find that the MAG proposal to remove the indexed
    cap on the high-cost fund is incompatible with the modified
    high-cost loop support mechanism recommended by the Joint Board and
    adopted in this Order. Based on the record before us, we
    specifically disagree that an indexed cap on the high-cost loop fund
    will prevent rural carriers from receiving adequate universal
    service support.[^121] The indexed cap we adopt today will result in
    an immediate increase in the high-cost loop support available to
    rural telephone companies and will grow by the rural growth factor,
    which includes an inflation adjustment -- an additional growth
    element that is not part of our existing cap. In addition, several
    mechanisms we adopt today, such as safety net additive support[^122]
    and safety valve support[^123] will provide carriers with additional
    support. We also continue to believe that an indexed cap is a
    reasonable means of limiting the overall growth of the high-cost
    loop fund, and thus protects contributors from excessive universal
    service obligations.[^124] As discussed above, we also believe that
    an indexed cap balances the universal service goals, such as
    sufficiency, specificity, and predictability, enunciated in section
    254 of the Act.[^125]

48. The Rural Task Force also recommended that the indexed cap be
    resized whenever the definition of supported services is
    changed.[^126] We note that, in accordance with section 254(c)(2) of
    the Act,[^127] the Commission recently requested that the Joint
    Board review the definition of services eligible for high-cost and
    low-income universal service support.[^128] The Commission
    specifically asked the Joint Board to address the implications of
    any proposed modifications to the list of supported services.[^129]
    We therefore will await the Joint Board's recommendations regarding
    the definition of supported services prior to considering whether
    the indexed cap should be resized to reflect any modifications to
    the list of supported services.

49. *[Rural Growth Factor]{.underline}*. We adopt the Rural Task Force's
    proposal to grow the portion of the high-cost loop support mechanism
    that is distributed to rural incumbent local exchange carrier study
    areas by a rural growth factor equal to the sum of annual changes in
    the total number of working loops of rural incumbent local exchange
    carriers and the GDP-CPI, not the rate of growth for all rural and
    non-rural working loops.[^130] The rural growth factor shall be
    based on the GDP-CPI for the year in which costs are incurred and
    the difference between the total number of rural incumbent local
    exchange carrier working loops for the cost year and the preceding
    calendar year. For example, for support disbursed in the year 2001,
    the rural growth factor shall be based on the percentage change in
    the GDP-CPI for calendar year 1999 and the percentage change in the
    total number of rural incumbent local exchange carrier working loops
    between calendar years 1998 and 1999.

50. We note that growth in rural working loops nationwide recently has
    been higher than growth in non-rural working loops nationwide.[^131]
    We therefore believe that it is appropriate to limit growth in the
    rural incumbent local exchange carrier portion of the high-cost loop
    fund based on the growth in the total number of working loops of
    rural incumbent local exchange carriers. Using a rural growth factor
    will more accurately reflect changes in the number of rural lines
    over time. We disagree with commenters who argue that the Commission
    should retain the current index factor, which reflects both rural
    and non-rural line growth, instead of adopting the Rural Task
    Force's proposal for a rural growth factor.[^132] These parties do
    not suggest that the high-cost loop fund should remain stagnant,
    rather they disagree with the factor to be used to grow the fund.

51. We also note that the current index factor does not account for
    varying costs that are unrelated to the increase in working loops.
    When the Commission extended the indexed cap in the *First Report
    and Order*, it expected to move rural carriers to a universal
    service support mechanism based on forward-looking economic costs
    more quickly than will actually occur.[^133] Because the timeframe
    for moving to a forward-looking economic cost mechanism is now
    extended for rural carriers, we believe that it is reasonable to
    acknowledge, in the portion of the high-cost loop support mechanism
    that is distributed to rural incumbent local exchange carrier study
    areas, that costs may vary for reasons unrelated to the growth in
    working loops. For the duration of this plan, we therefore adopt the
    Rural Task Force's recommendation to use the GDP-CPI as a proxy for
    cost changes.

52. We reject proposals to include a rural telephone company or
    telecommunications industry productivity factor in the rural growth
    factor.[^134] Although it appears that rural carrier costs recently
    have grown at a slightly slower annual rate than growth in the GDP
    price index (indicating that rural carriers have experienced modest
    productivity gains over time), at this time, we do not have a
    reliable methodology for measuring productivity gains for rural
    telephone companies.[^135] Moreover, parties have not submitted a
    methodology that specifically measures the productivity gains of
    rural carriers.[^136] We note that the high-cost loop fund will be
    subject to an indexed cap for the life of the plan, thus ensuring
    that rural carriers do not receive excessive support. We therefore
    adopt the consensus recommendation of the Rural Task Force to
    include an inflation factor, the GDP-CPI, in the rural growth factor
    without also including a productivity factor.

53. We conclude that the rural growth factor proposed by the Rural Task
    Force will further the universal service goals, such as sufficiency,
    specificity, and predictability, enunciated in section 254 of the
    Act.[^137] Because the rural growth factor will ensure that the
    portion of the high-cost loop support mechanism that is distributed
    to rural incumbent local exchange carrier study areas better
    reflects growth in rural lines and changed costs over time, we
    conclude that the rural growth factor will provide rural incumbent
    local exchange carriers with sufficient support. The rural growth
    factor also will provide rural incumbent local exchange carriers
    with specific and predictable growth in the high-cost loop support
    mechanism over time.

54. In addition, we adopt the proposal, included in the Rural Task
    Force's example of a safety valve mechanism, to exclude all access
    lines transferred to rural carriers from the rural growth factor
    calculation.[^138] This conclusion is consistent with our reasons
    for excluding support for access lines transferred to rural
    incumbent local exchange carrier study areas from the rural
    incumbent local exchange carrier portion of the indexed cap on the
    high-cost loop fund.[^139] Including access lines transferred to
    rural incumbent local exchange carriers in the rural growth factor,
    but not in the portion of the indexed high-cost loop fund that is
    distributed to rural incumbent local exchange carrier study areas,
    would result in growth in the indexed high-cost loop fund that
    reflects neither growth in lines eligible to receive support from
    the indexed high-cost loop fund nor growth in the GDP-CPI for those
    lines. If transferred loops were included in the rural growth
    factor, but not in the rural incumbent local exchange carrier
    portion of the indexed high-cost loop fund, the remaining access
    lines would receive increased per-line support whenever access lines
    are transferred to a rural carrier study area. Over time, per-line
    support for the remaining access lines would increase as more loops
    are transferred to rural carrier study areas. Such a result would be
    inconsistent with the goal, enunciated in the *First Report and
    Order*, of preventing excessive growth in the high-cost loop
    fund.[^140] Consistent with the exclusion of support for competitive
    eligible telecommunications carriers from the indexed cap, we also
    will exclude lines operated by competitive eligible
    telecommunications carriers from the rural growth factor.[^141]

### National Average Loop Cost 

#### Background

55. The Rural Task Force's recommendation to re-base the high-cost loop
    fund includes a proposal to freeze the national average loop cost at
    \$240.00 for the life of the plan, which, according to the Rural
    Task Force, approximates the actual national average loop cost for
    year 2000 support (based on 1998 cost data).[^142] Under the
    Commission's existing rules, a rural carrier is eligible for
    high-cost loop support if its embedded loop costs for a particular
    study area exceed 115 percent of the national average loop
    cost.[^143] According to section 36.622 of the Commission's rules,
    the national average loop cost is the greater of: (1) the sum of
    loop costs nationwide divided by the total number of working loops
    nationwide; or (2) an amount calculated to maintain the indexed cap
    on the high-cost loop support fund.[^144] If the sum of actual
    high-cost loop support nationwide exceeds the indexed cap on the
    high-cost loop support fund (in essence, the indexed cap on the
    high-cost loop support fund is triggered), the national average loop
    cost is increased in order to ensure that the total amount of
    high-cost loop support disbursed does not exceed the indexed cap.

#### Discussion

56. We adopt the Rural Task Force's recommendation to freeze the
    national average loop cost at \$240.00 for purposes of calculating
    rural high-cost loop support.[^145] We conclude that freezing the
    national average loop cost for the duration of this plan will
    provide rural carriers with greater certainty as to their
    eligibility for high-cost loop support.[^146] Because the national
    average loop cost will be frozen at \$240.00, carriers will know in
    advance whether they may be eligible for high-cost loop support.
    Such certainty will assist carriers in short- and long-term planning
    for infrastructure investment, consistent with the goals of
    specificity and predictability in section 254 of the Act.[^147]
    Because freezing the national average loop cost for rural carriers
    at \$240.00 will provide carriers with greater predictability as to
    their eligibility for high-cost loop support, carriers also will be
    better able to achieve rate and service comparability, another goal
    of section 254 of the Act.[^148]

57. At this time and based on the record, we do not believe that
    freezing the national average loop cost at \$240.00 will result in
    significant numbers of carriers with higher than average loop costs
    being denied support and carriers with lower than average loop costs
    being awarded support. If in a given year the actual national
    average loop cost is significantly above \$240.00, support may be
    directed to certain rural carriers that otherwise would not be
    eligible for high-cost loop support. If, on the other hand, the
    actual national average loop cost falls below \$240.00, support may
    be withheld from rural carriers that otherwise would be eligible for
    high-cost loop support under our current rules.

58. In support of this conclusion, we note that the national average
    loop cost has experienced only minor fluctuations over the past four
    years. For example, the national average loop cost (with the
    corporate operations expense limitation in effect) for high-cost
    loop support disbursed in 1998 was \$247.34, while the national
    average loop cost (with the corporate operations expense limitation
    in effect) for high-cost loop support disbursed in 2001 is
    \$239.86.[^149] This represents only an approximately three percent
    reduction in the national average loop cost in four years. We
    therefore do not anticipate a dramatic increase or decrease in the
    actual national average loop cost in the near future such that large
    numbers of carriers with lower than average loop costs will
    inappropriately receive high-cost loop support or that carriers with
    higher than average loops costs will inappropriately be denied
    high-cost loop support. In light of this relatively small percentage
    change, we believe that the specificity and predictability provided
    by a frozen national average loop cost outweighs any potential
    distortions that might occur with a freeze for the limited five-year
    duration of the plan we adopt today.[^150]

59. We also note that, as provided by section 36.622 of the Commission's
    rules, if the sum of the actual high-cost loop support nationwide
    exceeds the indexed cap on the high-cost loop support fund, NECA
    increases the amount of the national average loop cost in order to
    ensure that the total amount of high-cost loop support disbursed
    does not exceed the indexed cap.[^151] Thus, certain carriers with
    average loop costs slightly above the proposed frozen national
    average loop cost would not receive support. To the extent that the
    frozen national average loop cost is increased to accommodate the
    indexed cap on the high-cost loop fund, carriers with average loop
    costs below the actual national average loop cost but above the
    proposed frozen national average loop cost would not receive
    high-cost loop support. Although we adopt a national average loop
    cost of \$240.00 for the duration of this plan, if the actual
    national average loop cost experiences significant increases or
    reductions, we may consider appropriate actions at that time.[^152]

60. Under section 36.612 of our rules, every non-rural telephone company
    is required to submit loop cost data and loop counts on a quarterly
    basis.[^153] Under section 36.611 of our rules, all incumbent local
    exchange carriers are required to submit loop cost data and loop
    counts on an annual basis.[^154] Because the national average loop
    cost is based on embedded loop cost data for both rural and
    non-rural study areas, non-rural carriers currently are required to
    file such data with the fund administrator even though non-rural
    carriers now receive high-cost support based on a forward-looking
    methodology.[^155] If we freeze the national average loop cost at
    \$240.00, it will no longer be necessary for NECA to calculate the
    national average loop cost on a quarterly basis, and, thus, it is
    unnecessary for non-rural carriers to file loop cost data on a
    quarterly basis. Nor is there any other reason to require non-rural
    carriers to file this quarterly loop cost data.[^156] Because NECA
    will no longer make such calculations, it is unnecessary to require
    submission of that information. We therefore will no longer require
    non-rural carriers to submit the loop cost data listed in section
    36.611 of our rules to NECA on a quarterly basis. In order to enable
    the Commission to accurately evaluate the operation of the frozen
    national average loop cost over time, we will continue to require
    non-rural carriers to submit loop cost data on an annual basis and
    loop counts on a quarterly basis. Such information is necessary for
    NECA and USAC to determine the amount of high-cost support available
    to non-rural carriers.

### Corporate Operations Expenses

#### Background

61. The high-cost loop support fund provides support for a portion of
    the corporate operations expenses incurred by rural carriers in
    providing supported services. Corporate operations expenses consist
    of total company costs associated with the following activities:
    formulating corporate policy and providing overall administration
    and management; long-range planning; providing accounting and
    financial services; maintaining relations with government,
    regulators, other companies, and the general public; performing
    personnel administration activities; operating general purpose
    computers; providing legal services; procuring material and
    supplies; developing new products; and performing other general
    administrative activities.[^157] Prior to 1998, the amount of
    corporate operations expenses that was supported through our
    universal service mechanisms was determined by multiplying the total
    corporate operations expense by the ratio of loop investment to
    total plant in service. As explained below, in the *First Report and
    Order* the Commission concluded that a carrier's ability to receive
    universal service support for corporate operations support should
    not be unlimited.

62. The corporate operations expense limitation, adopted by the
    Commission in the *First Report and Order*, limits the amount of
    corporate operations expenses that a carrier may include in the
    high-cost loop support mechanism.[^158] Under the current mechanism,
    a carrier compares its actual corporate operations expenses with the
    expenses calculated by the existing corporate operations expense
    limitation formula and the lesser amount is used to calculate the
    carrier's high-cost loop support. The formula was developed to
    \"ensure that carriers use universal service support only to offer
    better service to their customers through prudent facility
    investment and maintenance consistent with their obligations under
    section 254(k).\"[^159] The Commission agreed with commenters that
    corporate operations expenses do not appear to be costs inherent in
    providing telecommunications services, but rather may result from
    managerial priorities and discretionary spending.[^160] The
    Commission decided to \"limit universal service support for
    corporate operations expense to a reasonable per‑line amount," but
    recognized that "small study areas . . . may experience greater
    amounts of corporate operations expense per line than larger study
    areas.\"[^161] The formula allows a greater amount of corporate
    expense per line for smaller study areas than larger ones because
    statistical analysis of carrier data show that study areas with
    fewer loops have more corporate operations expense per loop.

63. In the *First Reconsideration Order* and the *Fourth Reconsideration
    Order*, the Commission made further refinements to the corporate
    operations expense cap formula specifically to recognize problems of
    smaller carriers.[^162] On its own motion, the Commission
    established a floor (or minimum cap) on the corporate operations
    expense cap to allow carriers with relatively few lines to receive
    sufficient support to recover initial or fixed corporate operations
    expenses.[^163] Subsequently, the Commission reconsidered, to a
    limited extent, the dollar amount of the minimum cap on allowable
    corporate operations expenses for small carriers.[^164]

64. In response to requests by small carriers to reconsider its decision
    to place a limit on the support available for corporate operations
    expenses, the Commission explained more fully in the *Fourth
    Reconsideration Order* its reasons for limiting the amount of
    corporate operations expenses that a carrier could include in the
    high-cost loop support mechanism.[^165] The Commission explained
    that carrier expenditures for corporate operations expenses may be
    discretionary in many instances, in contrast to expenditures for
    maintaining plant and equipment.[^166] Corporate operations expenses
    include, for example, travel, lodging, and other expenses associated
    with attending industry conventions and corporate meetings. While
    participation in such activities may be prudent, the levels of these
    expenditures are subject to managerial discretion. The Commission
    also noted that carriers with 200,000 or fewer working loops had
    little incentive to minimize these expenses because the previous
    rules allowed carriers to recover a large percentage of their
    corporate operations expenses from federal universal service support
    mechanisms.[^167]

65. Although the Commission retained the limitation on support for
    corporate operations expenses, the Commission raised the minimum cap
    so that the need for the smallest carriers to seek a waiver would be
    reduced.[^168] Specifically, the Commission adjusted the maximum
    allowable corporate operations expense formula by permitting
    carriers with 6,000 or fewer working loops to include in the
    high-cost loop support mechanism corporate operations expenses of up
    to \$300,000 or amounts derived from the corporate operations
    expense formulas, whichever is greater, provided that the amount is
    not greater than a carrier's actual corporate operations
    expenses.[^169] The Commission concluded that "imposing a cap that
    is relatively generous to small carriers, but still imposes a
    limitation, is a reasonable method of encouraging carriers to assign
    corporate operations expenses to the proper accounts and
    discouraging carriers from incurring excessive expenditures."[^170]

66. The Rural Task Force proposed modifying the existing corporate
    operations expense limitation formula by re-basing and indexing the
    dollar values in the formula.[^171] Since this cap was imposed, the
    Rural Task Force estimated that the number of rural carriers
    affected by it \-- 205 rural study areas in 2000 \-- has increased
    by 15 percent.[^172] To reflect increased work requirements, labor,
    and other costs since the formula was put in place, the Rural Task
    Force proposed increasing the dollar values in the formula by the
    rural growth factor for each year since the cap was adopted. In
    subsequent years, the dollar values in the formula would be
    increased each year by the rural growth factor. The Rural Task Force
    estimated that the number of rural carriers affected by the
    corporate operations expense cap would have decreased, rather than
    increasing by 15 percent, if the dollar limitations derived from the
    formula had been increased annually by five percent.[^173] Rather
    than \$34.6 million being excluded by operation of the corporate
    operations expense limitation in 2000, the Rural Task Force
    estimated that only \$15.1 million would have been excluded.[^174]

67. The Rural Task Force also proposed an additional calculation that
    carriers could use to determine the maximum amount of corporate
    operations expenses that could be included in the high-cost loop
    support mechanism. The Rural Task Force noted that some companies
    consistently have corporate operations expenses above the existing
    limitation and acknowledged that the waiver process can be
    economically infeasible for some rural carriers.[^175] In order to
    provide an option other than the waiver process for carriers that
    would continue to have corporate operations expenses above the
    section 36.621(a)(4) limitation, even after the dollar amounts in
    the formula are re-based and indexed, the Rural Task Force proposed
    an alternative calculation based on uncapped corporate operations
    expenses for the year 2000. The new alternative formula begins with
    the uncapped corporate operations expense per line for the year
    2000, increases this amount each year by the rural growth factor,
    and multiplies this amount by the number of lines for the year in
    question.[^176]

68. Under the Rural Task Force proposal, the carrier first compares the
    amount calculated by the re-based and indexed corporate operations
    expense limitation formula with the amount calculated under the
    proposed alternative formula.[^177] If the alternative amount based
    on year 2000 actual expenses is greater than the amount calculated
    by the re-based and indexed corporate operations expense limitation
    formula, this is the amount compared with a carrier's actual
    corporate operations expenses for the year in question and the
    lesser amount is included in the high-cost loop support mechanism.

69. The Joint Board observed that the modifications to the caps and
    limitations on high-cost loop support proposed by the Rural Task
    Force are "generally designed to provide carriers with increased
    incentives to invest in new infrastructure and technologies."[^178]
    The Joint Board concluded that the Rural Task Force Recommendation
    presents a good foundation for implementing a rural universal
    service plan, but did not address the corporate operations expense
    limitation in specific detail.[^179]

#### Discussion

70. We generally agree with the Rural Task Force that modifications to
    the existing corporate operations expense limitation are appropriate
    to reflect changes in costs since the limitation was imposed
    in 1998. Accordingly, as discussed below, we adopt a revised formula
    to reflect these changes. We also agree with the Rural Task Force's
    goal of reducing the need for carriers to request waivers due to the
    operation of section 36.621(a)(4) of our rules.[^180] We decline,
    however, to adopt the Rural Task Force's proposed alternative
    calculation. Instead, as explained below, in order to reduce the
    need for the smallest carriers to seek a waiver of section
    36.621(a)(4), we raise the minimum cap on allowable corporate
    operations expenses supported by universal service to \$600,000.

71. We disagree with the MAG and other commenters who argue that the
    Commission should remove the limitation on support for corporate
    operations expenses entirely.[^181] Because expenditures for
    corporate operations expenses are discretionary in many instances,
    and carriers with 200,000 or fewer loops have little incentive \--
    absent the limitation \-- to minimize these expenses, we continue to
    believe that some limitation on the universal service support
    available for these expenses is reasonable and appropriate. We also
    disagree with those commenters who argue that no adjustment to the
    corporate operations cap is justified.[^182] As discussed below, we
    find that it is reasonable to make certain adjustments to the
    corporate operations expense limitation formula.

72. We share the Rural Task Force's concern that the number of rural
    carriers impacted by the corporate operations expense limitation has
    increased by 15 percent, affecting 205 rural study areas, in the two
    years since this limitation was imposed and, therefore, believe that
    the formula should be revised.[^183] The limitation is intended to
    encourage carriers to assign corporate operations expenses to the
    proper accounts and to discourage carriers from incurring excessive
    expenditures. The Rural Task Force suggested that the reason more
    carriers have been affected by the corporate operations expense
    limitation is due to "increased work requirements, labor, and other
    costs."[^184] Analysis of carrier data over this period shows that,
    on average, corporate operations expenses per line have remained
    essentially constant.[^185] For some carriers, however, corporate
    operations expenses clearly have increased since the limitation was
    imposed. Without adjustment, the number of rural carriers affected
    by the cap in 2001 would be 215 -- an increase of almost 21 percent
    since the cap was imposed. We therefore conclude that it is
    reasonable to revise the formula by increasing the dollar values in
    the formula.

73. We decline, however, to increase the limitation by the rural growth
    factor, as suggested by the Rural Task Force. Instead, we adopt a
    revised corporate operations expense limitation formula in which the
    dollar values in the formula are re-based and indexed by the Gross
    Domestic Product-Chained Price Index (GDP-CPI). The Rural Task Force
    proposed that the dollar values in the corporate operations expense
    limitation formula be re-based and indexed by the rural growth
    factor, which is the sum of the GDP-CPI and total annual line growth
    for rural carriers.[^186] We find that it is more appropriate to
    re-base and index the formula only by the GDP-CPI, without including
    annual rural line growth. Because the corporate operations expense
    limitation is calculated as a per-line amount, which is then
    multiplied by lines to determine the total amount of corporate
    operations expenses that is used to determine support, the formula
    already accounts for a carrier's line growth. Multiplying the amount
    by another line growth factor -- the rural line growth -- would
    result in double counting of line growth.

74. In re-basing the dollar values in the formula, we will increase the
    dollar values for each of four years. We believe that this is more
    consistent with the Rural Task Force's proposal to increase the
    dollar values in the formula for each year since the cap was
    implemented, than the two years referenced in the
    Recommendation.[^187] Although the corporate operations expense cap
    was implemented in 1998, the formula was based on 1995 cost
    data.[^188] Because support in year 2001 is based on 1999 cost data,
    we will increase the dollar values in the formula to reflect
    increases in GDP-CPI from 1995 to 1999. In subsequent years, the
    per-line allowable expense amount shall be adjusted annually by
    GDP-CPI. We find that these modifications to the corporate
    operations expense limitation will adequately account for increases
    in corporate operations expenses since the cap originally was
    adopted.

75. We recognize that smaller carriers in particular may be affected by
    the current corporate operations expense limit and agree with the
    Rural Task Force that the waiver process can be a very expensive
    option for small carriers.[^189] To reduce the need for small
    carriers to seek a waiver, the Commission previously raised the
    minimum cap in the corporate operations expense limitation formula
    to \$300,000.[^190] We adopt further protections for small carriers
    by raising the minimum cap in the revised formula. Specifically, we
    permit carriers with 6,000 or fewer loops to receive support for
    corporate operations expenses of up to \$600,000 or amounts derived
    from the revised corporate operations expense formulas, whichever is
    greater.[^191] We find that by raising the minimum cap from
    \$300,000 to \$600,000 an increased number of small carriers will
    have expenses that fall within the revised limitation. Consistent
    with current rules, we propose that if a carrier's actual corporate
    operations expenses are less than \$600,000 then the carrier would
    recover high-cost loop support based on its actual corporate
    operations expenses.

76. We find that raising the minimum cap in the corporate operations
    expense limitation formula to address the needs of smaller carriers
    is preferable to the alternative proposed by the Rural Task Force.
    The Rural Task Force's proposed alternative calculation would
    essentially eliminate the corporate operations expense limitation
    currently in effect. We note that the corporate operations expense
    limitation was adopted, in part, to prevent carriers from recovering
    from the high-cost loop support mechanism excessive expenditures
    unrelated to the provision of supported services.[^192] The
    limitation is designed to allow carriers to receive support for
    corporate operations expenses based on typical expenses for
    companies of comparable size. As demonstrated by the graph in
    Appendix D, some carriers are extreme outliers and have corporate
    operations expenses that far exceed the average range of expenses
    for companies of comparable size. The Rural Task Force's proposal
    would permit these outliers to receive support for these uncapped
    expenses as if the corporate operations expense limitation had never
    been adopted.[^193] For example, under the Rural Task Force
    proposal, these outliers could include in the high-cost loop support
    mechanism either their actual corporate operations expenses in 2001
    or their actual per-line expenses in the year 2000, increased by the
    rural growth factor and the number of lines served in 2001. The
    latter would be more than 2001 actual expenses if a carrier's per
    line actual expenses increase by more than the rural growth factor.
    A carrier would only receive less than the adjusted, uncapped 2000
    amount in future years if its actual corporate operations expenses
    were lower in those years. The Rural Task Force's proposal therefore
    would provide no incentive for carriers to limit their corporate
    operations expenses.

77. By imposing a reasonable limit on the universal service support
    available for carriers' corporate operations expenses, we are not
    precluding carriers that incur unusually high corporate operations
    expenses from receiving support for such expenses. To the extent
    that individual companies continue to incur corporate operations
    expenses that exceed the limitation, they may ask the Commission to
    waive these rules on a case-by-case basis.[^194]

## Support Above the Cap

### Safety Net Additive 

#### Background

78. In addition to the existing support provided by the high-cost loop
    fund, the Rural Task Force proposed a "safety net additive," which
    would provide additional support to carriers "who make significant
    investment in rural infrastructure."[^195] Safety net additive
    support would only be available in years in which support levels
    would otherwise exceed the new indexed cap on the high-cost loop
    support fund.[^196] To receive such support in a particular study
    area, a carrier would need to show that growth in telecommunications
    plant in service (TPIS)[^197] per line is at least 14 percent
    greater than the study area's TPIS per line in the prior year, or
    the "base year."[^198] As proposed, safety net additive support
    would allow a carrier to recover 50 percent of the difference
    between the capped and uncapped expense adjustment for the
    qualifying year.[^199] Any study area that initially qualifies for
    safety net additive support would also qualify for such support in
    each of the four succeeding years if the cap is again triggered,
    regardless of whether the study area meets the 14 percent criterion
    in the succeeding years.[^200]

79. In the *Further Notice*, the Commission sought comment on issues
    relating to implementation of the safety net additive mechanism.
    Specifically, the Commission asked whether the safety net additive
    mechanism would allow carriers to recover more than 100 percent
    reimbursement of their incremental loop investment and on any other
    implementation issues raised by the Rural Task Force's plan.[^201]

#### Discussion

80. We agree with the Joint Board, the Rural Task Force, and several
    commenters that we should adopt some form of safety net additive
    that will provide additional support to those rural carriers that
    have made significant investment in years in which the fund is
    capped.[^202] We believe that providing this additional support will
    provide rural carriers with appropriate incentives to invest in the
    network infrastructure serving their communities. As the Rural Task
    Force stated in *White Paper 3*, which reviewed alternatives to the
    current embedded cost mechanism, no mechanism for universal service
    support is without weaknesses.[^203] The Rural Task Force, however,
    also recognized that a mechanism could be designed so that it
    mitigates specific weaknesses.[^204] One of the identified
    weaknesses of an embedded cost mechanism that incorporate an overall
    cap is that it may hinder the ability of rural carriers to invest in
    infrastructure.[^205]

81. While we make modifications to the operation of the safety net
    additive mechanism proposed by the Rural Task Force, we find that
    the implementation of a safety net mechanism is a reasonable
    consensus approach arrived at by competing interests to mitigate the
    potential negative effects of a cap, and provide rural carriers with
    the predictability to make investments in their communities.[^206]
    As detailed below, we modify the safety net additive so that a
    carrier will receive support for its incremental, or additional,
    expense adjustment associated with new investment, as opposed to 50
    percent of the difference between the study area's capped and
    uncapped support in a given year.[^207] By tying the amount of
    additional support to a carrier's incremental expense adjustment
    associated with new investments, we ensure that carriers do not
    receive additional support for more than the costs incurred as a
    result of the additional investment. We also address below certain
    implementation issues regarding the safety net additive. We believe
    that by modifying the safety net additive mechanism in this way, we
    provide carriers with predictability in investing in infrastructure,
    while minimizing the potential burden such a mechanism could have on
    contributors.

82. We find that a 14 percent increase in a carrier's TPIS per line
    investment, as proposed by the Rural Task Force, provides a
    reasonable method for assessing whether the carrier has made
    significant investment to qualify its study area for safety net
    additive support. We find that growth in TPIS is a reasonable
    benchmark for triggering the safety net additive mechanism because
    increases in TPIS reflect the carrier's overall increases in
    investment over the past year. [^208] While we recognize that not
    all TPIS investments are supported through the high-cost loop fund,
    we find that using TPIS as a benchmark for the safety net additive
    is a reasonable proxy for defining rural infrastructure investment
    requirements. We note in this regard that investments made in
    categories other than those supported by high-cost loop support may
    allow a carrier to qualify for safety net support, but the
    investment itself would not qualify for additional support under the
    safety net additive mechanism. Unless the incremental costs
    associated with new investment are in the categories eligible for
    support under section 36.621 of our rules, the carrier's incremental
    costs, for purposes of high-cost loop support, appear unchanged and
    therefore the carrier would realize no additional support from the
    safety net additive. [^209] Carriers are thus provided with the
    appropriate incentive to make investments in those categories that
    affect supported services to the end user, which is the underlying
    goal of the safety net additive.

83. Moreover, we find that 14 percent growth in TPIS is a reasonable
    trigger given historical TPIS per-line investment trends. In order
    to determine which wire centers and study areas are entitled to an
    expense adjustment, the Commission requires the National Exchange
    Carrier Association (NECA) to collect data from all incumbent local
    exchange carriers.[^210] Based on the information reported by those
    carriers, NECA calculates the national and study area average cost
    per loop.[^211] A comparison of the 1999 NECA cost study results to
    1998 cost study results shows that, in approximately five percent of
    cost-study areas, TPIS per-line investment increased by 14 percent
    or more, while only nine cost-study areas had TPIS per-line
    investment over 40 percent. The average increase was approximately
    two percent. While we realize that prospectively this pattern may be
    altered by inclusion of the safety net additive, our concern and
    those expressed by commenters regarding the potential for gaming by
    rural carriers is mitigated because the types of investments the
    safety net additive supports require time and extensive
    planning.[^212]

84. Accordingly, we conclude that the Rural Task Force has proposed a
    reasonable figure for what constitutes significant investment and
    thus we set the safety net trigger at 14 percent. We therefore
    disagree with those commenters who claim that setting the threshold
    as high as 14 percent effectively denies the neediest of rural
    carriers access to the additional support under this new
    mechanism.[^213] In doing so, we ensure that carriers that make
    significant investment will receive additional support in years in
    which the cap is reached.[^214]

85. While we agree that study areas with at least 14 percent increase in
    TPIS should qualify for safety net additive support, we conclude
    that the Rural Task Force's proposed safety net mechanism should be
    modified to ensure that carriers do not receive support in excess of
    the incremental costs associated with new investment. We note that,
    with the modification we adopt below, any carrier that makes the
    requisite investment will receive support for the incremental
    expense adjustment associated with that investment as if the fund
    had not been capped.[^215]

86. As proposed, the safety net additive support mechanism would allow
    carriers to recover "50 percent of the difference between the capped
    expense adjustment and the uncapped amount for the study area" in
    each year that the cap is implicated.[^216] A carrier could recover
    more than 100 percent of the incremental expenses associated with
    new investment because under the Rural Task Force's proposal the
    safety net additive mechanism fails to isolate only the additional
    investment. Instead, safety net additive support would be calculated
    based on a carrier's total expense adjustment in the year in which
    the carrier qualifies for safety net additive (qualifying year),
    which includes the base year expense adjustment as well as the
    additional expense adjustment resulting from the additional
    investment. For example, assume that a carrier's overall expenses
    would make it eligible to receive support for 65 percent of its
    study area's average unseparated loop cost that is above 115 percent
    of the national average loop cost.[^217] Further assume that in the
    base year the carrier receives \$1000, and that capped support is
    \$950. Also assume that, in the year in which the carrier qualifies
    for the safety net additive, the carrier's uncapped support would be
    \$1200, while the capped support would be \$1140. As proposed by the
    Rural Task Force, the carrier would receive its capped support of
    \$1140, plus 50 percent of the difference between the capped support
    and the uncapped support in the qualifying year, or \$30 ((\$1200 -
    \$1140 ÷ 2)). The incremental expense adjustment support not
    received as a result of the cap, however, is \$10 ((\$1200 - \$1000)
    -- (\$1140 - \$950) or (\$200) -- (\$190)). In this example, the
    \$200 increase in expenses in the qualifying year is the amount that
    should be isolated because it represents the additional investment
    causing an increase in the carrier's expense adjustment. This amount
    should then be compared to the amount that the carrier's capped
    support has grown, or \$190, because that is the additional amount
    that the cap is already supporting without safety net additive.

87. Because the safety net additive is intended to provide support to
    eligible carriers that incur costs associated with additional
    investment, we find that safety net additive should be based on the
    additional expense adjustment resulting from the additional
    investment only.[^218] We therefore modify the safety net additive
    so that, in the qualifying year, safety net additive will be
    determined by subtracting from the carrier's expense adjustment in
    the qualifying year its expense adjustment in the base year, and
    then subtracting from that amount the difference between the capped
    support in the qualifying year and the capped support in the base
    year. This amount will be in addition to the capped support it
    receives in that year.[^219] In no event shall a carrier that is
    eligible for safety net additive receive less support than it would
    normally receive under the cap. We believe that, by allowing
    carriers to receive the same level of support they would have
    received had the cap not been in effect, we encourage new investment
    by making support predictable while ensuring that carriers do not
    receive support for more than their incremental costs. Consistent
    with the principle of competitive neutrality, we conclude that
    safety net additive shall be available to competitive eligible
    telecommunications carriers in an amount equal to that received by
    the incumbent.[^220]

88. We clarify that, if our safety additive net formula results in a
    negative amount, the carrier will not be eligible for safety net
    additive in that year. For example, it is possible that the
    incremental increase in expense adjustment incurred by a carrier
    when compared to the incremental support received by the carrier
    through the indexed fund may result in a negative amount. Such a
    result would indicate that the carrier actually received support for
    the incremental expense adjustment available under the safety net
    mechanism through operation of the cap.[^221]

89. We adopt the Rural Task Force's proposal that, once a study area
    qualifies for safety net additive, the study area will receive such
    support in any of the remaining years of this plan in which the cap
    is triggered, whether or not the study area meets the 14 percent
    TPIS trigger in those years. Providing support in the years
    succeeding the qualifying year is consistent with the manner in
    which carriers depreciate capital costs associated with new
    investments. Such costs generally are not recovered in one year;
    rather they are recovered over multiple years. Thus, by providing
    carriers with support over multiple years, we give them an
    opportunity to receive support for more of the expenses associated
    with their investments. In any of the succeeding four years in which
    the cap is again triggered, the carrier will be eligible for the
    lesser of the sum of capped support and the safety net additive
    received in the qualifying year or uncapped support. Therefore,
    qualifying carriers will receive safety net additive in each year
    that the cap is triggered under the five-year plan we adopt in this
    order.

90. We find that carriers shall be required to provide written notice to
    the Commission and USAC in conjunction with their annual or
    quarterly submissions to NECA indicating that a study area meets the
    14 percent TPIS trigger.[^222] If a carrier should fail to provide
    written notification to the Commission and USAC, the study area that
    otherwise would have qualified for safety net additive will not be
    eligible.[^223] By requiring written notification from the carrier,
    we minimize the administrative burden placed on USAC and will help
    control the costs associated with implementing this mechanism. To
    require USAC to determine eligibility would require it to monitor
    TPIS investment for all 873 cost study areas.

91. In the context of the modifications to the high-cost support
    mechanism that we adopt in this Order, we believe that safety net
    additive support is a reasonable means of ensuring that rural
    carriers that make significant investments receive adequate but not
    excessive support for such investments. By limiting safety net
    additive support to those carriers who have TPIS per-line investment
    increases of 14 percent or more in a given year, support is tailored
    to those carriers who make extraordinary investment. In addition, by
    ensuring that carriers have a mechanism that provides support
    outside the cap for new investment, we encourage carriers to make
    these needed investments in their communities.[^224] By crafting the
    mechanism to provide support based on incremental costs associated
    with new investments, we control for the possible overcompensation
    that would have occurred under the Rural Task Force's
    proposal.[^225]

### Mergers and Acquisitions Cap and "Safety Valve" Mechanism

#### Background

92. Section 54.305 of our rules provides that a carrier acquiring
    exchanges from an unaffiliated carrier shall receive the same
    per-line levels of high-cost universal service support for which the
    acquired exchanges were eligible prior to their transfer.[^226]
    Section 54.305 was adopted in the *First Report and Order* as a
    temporary measure aimed at discouraging carriers from transferring
    exchanges merely to increase their share of high-cost universal
    service support during the Commission's transition to universal
    service support mechanisms that provide support to carriers based on
    the forward-looking economic cost of operating a given
    exchange.[^227] The Commission was concerned that, until support for
    all carriers is based on a forward-looking economic costs
    methodology, potential universal service payments may unduly
    influence a carrier's decision to purchase exchanges from other
    carriers.[^228]

93. Under section 54.305 of the Commission's rules, if a rural carrier
    purchases an exchange from a non-rural carrier that receives support
    based on the Commission's new universal service support mechanism
    for non-rural carriers,[^229] the loops of the acquired exchange
    receive the same per-line support as calculated at the time of the
    transfer under the new non-rural mechanism, regardless of the rural
    carrier's cost characteristics or the support the rural carrier
    purchasing the exchange may receive for any other exchanges.[^230]
    High-cost support mechanisms that are subject to the limitations in
    section 54.305 include non-rural carrier forward-looking high-cost
    support,[^231] interim hold-harmless support for non-rural
    carriers,[^232] rural carrier high-cost loop support, local
    switching support,[^233] and Long Term Support (LTS).[^234] To the
    extent that a carrier acquires exchanges receiving any of these
    forms of support, the acquiring carrier will receive the same
    per-line levels of support for which the acquired exchanges were
    eligible prior to their transfer.

94. The Rural Task Force outlined principles for providing universal
    service support to exchanges acquired by rural carriers. The Rural
    Task Force acknowledged the valid policy considerations underlying
    section 54.305 of our rules, while recognizing that the operation of
    section 54.305 may discourage carriers from acquiring high-cost
    exchanges that currently are eligible for limited amounts of
    universal service support.[^235] According to the Rural Task Force,
    customers in high-cost rural exchanges involving transfers should
    not be "doomed" to poor service because the selling carrier has
    limited access to universal service support funds.[^236] The Rural
    Task Force also stated that universal service support should
    "provide incentives for new investment in rural America."[^237] On
    the other hand, the Rural Task Force asserted that a mere transfer
    of ownership should not result in increased support for acquired
    lines. The Rural Task Force stated that "universal service support
    also should not artificially inflate the price on sale/transfer
    transactions."[^238]

95. The Rural Task Force therefore recommended that the Commission
    establish an appropriate "safety valve" mechanism, which would
    enable rural carriers acquiring access lines to receive additional
    support over a period of five years reflecting "post-transaction
    investment made to enhance the infrastructure of and improve the
    service in these exchanges."[^239] The Rural Task Force also stated
    that any transferred support or additional support under the safety
    valve mechanism should be excluded from the re-based cap on
    high-cost loop support.[^240] Finally, the Rural Task Force stated
    that the safety valve mechanism should be capped at some appropriate
    level.

96. The Rural Task Force provided an example of a safety valve mechanism
    in Appendix D of its Recommendation.[^241] The Rural Task Force
    noted, however, that the safety valve example was used
    illustratively (*i.e*., it does not represent a consensus of the
    Rural Task Force members).[^242] In Appendix D, the Rural Task Force
    proposed that safety valve support should be based on the difference
    between an "index year expense adjustment" calculated for the
    acquired exchanges in accordance with section 36.631 of the
    Commission's rules and subsequent year expense adjustments.[^243]
    The "expense adjustment" formulas included in section 36.631 of the
    Commission's rules are used to calculate high-cost loop support for
    rural carriers. A carrier's expense adjustment is based on the
    relationship between a carrier's study area average unseparated loop
    cost per working loop and the national average cost per loop.[^244]
    The index year expense adjustment would be the study area's
    high-cost loop support expense adjustment calculated at the end of
    the acquiring company's first year of operations.[^245] Fifty
    percent of any positive difference between subsequent year expense
    adjustments and the index year expense adjustment would be
    designated as safety valve support and would be provided in addition
    to transferred support amounts available under section 54.305. The
    Rural Task Force's example also limited the total safety valve
    support available to all eligible study areas to no more than five
    percent of the indexed high-cost loop fund cap for rural
    carriers.[^246] Moreover, the Rural Task Force's example created a
    new study area for each transfer of exchanges and excluded
    transferred exchanges from the rural growth factor.[^247] The Rural
    Task Force's example also made per-loop transferred support portable
    to competitive eligible telecommunications carriers.[^248]

97. The Joint Board generally supported the Rural Task Force's proposal
    for providing additional support to rural carriers that acquire
    high-cost exchanges and make post-transaction investments to enhance
    the network infrastructure, but urged the Commission to address
    issues relating to the implementation of the safety valve
    mechanism.[^249] First, the Joint Board urged the Commission to
    consider how to distribute safety valve support if the total amount
    of eligible safety valve support exceeds the cap of five percent of
    the rural carrier portion of the indexed high-cost loop support
    fund.[^250] Next, the Joint Board asked the Commission to examine
    whether it would be more appropriate to define the index year
    expense adjustment for purposes of calculating safety valve support
    as the year prior to the subsequent year expense adjustment.[^251]
    In addition, the Joint Board urged the Commission to address whether
    a carrier's safety valve support should transfer to a different
    carrier as a result of a subsequent transfer of exchanges. Finally,
    the Joint Board requested that the Commission consider whether
    safety valve support is frozen when a competitive eligible
    telecommunications carrier enters the study area.[^252]

#### Discussion

98. We agree with the Rural Task Force, the Joint Board, and several
    commenters that we should provide additional support to rural
    carriers that acquire high-cost exchanges and make post-transaction
    investments to enhance network infrastructure.[^253] We continue to
    believe that section 54.305 serves the important purpose of
    discouraging carriers from transferring exchanges merely to increase
    their share of high-cost universal service support during the
    Commission's transition to universal service support mechanisms that
    provide support to all carriers based on the forward-looking
    economic cost of operating a given exchange.[^254] On other hand, we
    recognize that the section 54.305 of our rules may have some
    unintended consequences. Specifically, the operation of section
    54.305 may discourage rural carriers from acquiring high-cost
    exchanges from carriers with low average costs and may prevent rural
    carriers from receiving support for new investments in
    recently-acquired high-cost exchanges. As a result, we do not agree
    with commenters that support retaining section 54.305 without any
    modifications.[^255] We conclude that section 54.305 should be
    retained, but modified to provide additional support to rural
    carriers that make substantial investment after acquiring
    exchanges.[^256] In reaching this conclusion, we are mindful that
    the Rural Task Force's principles for providing additional support
    for significant post-transaction investments in the infrastructure
    of acquired exchanges represent a consensus of the Rural Task Force
    members. We therefore agree with commenters that oppose outright
    elimination of section 54.305 of our rules,[^257] and do not agree
    with the MAG and certain commenters that we should entirely
    eliminate section 54.305.[^258]

99. As discussed in greater detail below, we adopt certain aspects of
    the Rural Task Force's example of a safety valve mechanism. We
    conclude that a safety valve mechanism, as clarified herein, will
    provide appropriate incentives for rural carriers operating
    recently-acquired exchanges to invest in rural infrastructure. We
    conclude that safety valve support should be provided for up to 50
    percent of any positive difference between the rural incumbent local
    exchange carrier's index year expense adjustment for the acquired
    exchanges and subsequent year expense adjustments. We agree with the
    Rural Task Force's example and conclude that the total safety valve
    support available to all eligible study areas should be limited to
    no more than five percent of rural incumbent local exchange carrier
    support available from the annual high-cost loop fund, as set forth
    in the Rural Task Force's example.[^259] We do not agree with the
    Rural Task Force's example that a new study area should be created
    for each transfer of exchanges.[^260] We agree that per-loop
    transferred support should be transferable to competitive eligible
    telecommunications carriers.[^261] In addition, consistent with the
    Rural Task Force's principles for providing universal service
    support to acquired or transferred exchanges, we conclude that
    safety valve support should not be frozen whenever a competitor
    enters a study area eligible for such support.[^262]

100. *[Index Year Expense Adjustment]{.underline}*. We agree with the
     Rural Task Force's example that, for purposes of determining a
     rural carrier's safety valve support for acquired exchanges, the
     index year expense adjustment shall be defined as the high-cost
     loop support expense adjustment for the acquired exchanges
     calculated at the end of the company's first year operating the
     exchanges.[^263] Acquiring carriers will establish an index year
     expense adjustment for the acquired exchange through cost data
     submitted in accordance with section 36.611 or section 36.612 of
     our rules.[^264] Under section 36.611 of the Commission's rules,
     all incumbent local exchange carriers, including rural carriers,
     submit loop cost data to NECA on an annual basis.[^265] Under
     section 36.612 of our rules, rural carriers have the option of
     submitting loop cost data to NECA on a quarterly basis.[^266] NECA
     compiles and analyzes these data to determine an incumbent local
     exchange carrier's study area expense adjustment, which is based,
     in part, on the relationship between a carrier's study area average
     unseparated loop cost per working loop and the national average
     cost per loop.[^267] For carriers establishing an index year for
     acquired exchanges pursuant to section 36.611, the index year for
     the acquired exchange(s) shall commence at the beginning of the
     next calendar year after the transfer of said exchanges. For
     carriers establishing an index year for acquired exchanges pursuant
     to section 36.612, the index year for the acquired exchange(s)
     shall commence at the beginning of the next calendar quarter after
     the transfer of said exchanges. An acquiring carrier's expense
     adjustment for the acquired exchanges in subsequent years shall end
     on the same calendar quarter. By submitting loop cost data for
     acquired exchanges on a quarterly, as opposed to annual, basis, a
     carrier could establish its index year expense adjustment earlier
     and therefore potentially could begin receiving safety valve
     support earlier. In order to assist USAC in the administration of
     the safety valve mechanism, rural carriers shall provide written
     notice to USAC of when their index year has been established for
     purposes of calculating eligibility for safety valve support.

101. We conclude that basing safety valve support on the difference
     between an acquiring carrier's expense adjustment at the end of its
     first year of operations and subsequent year expense adjustments
     reasonably approximates a carrier's new investments in the acquired
     exchanges. We therefore believe that the safety valve mechanism
     will provide acquiring rural carriers with support for new
     investments that is within the range of sufficiency envisioned by
     the principles espoused in section 254(b)(5) of the Act. We also
     believe that calculating safety valve support on this basis will
     provide acquiring carriers with predictability as to whether they
     will qualify for safety valve support in a given year.[^268] In
     particular, because we freeze the national average loop cost at
     \$240.00, as long as an acquiring rural carrier's study area
     average unseparated loop cost per working loop is more in the
     current year than in the index year, the carrier likely will
     qualify for safety valve support.[^269] As discussed above, a
     carrier's expense adjustment is based on the relationship between
     the carrier's study area average unseparated loop cost per working
     loop and the national average cost per loop.[^270]

102. Consistent with section 254(d) of the Act, we also conclude that
     the proposed methodology for calculating safety valve support based
     on the difference between the acquired exchange's index year
     expense adjustment and subsequent year expense adjustments will
     minimize burdens on carriers to contribute to the universal service
     mechanisms.[^271] The Rural Task Force's proposal will ensure that
     acquiring rural carriers receive no more than 50 percent of the
     difference between their acquired exchange expense adjustment for
     the first full year of operation of the acquired exchange and
     subsequent year expense adjustments. In this manner, acquiring
     carriers will only receive safety valve support for new investments
     in rural infrastructure.

103. We decline to modify the Rural Task Force's proposal by defining
     the index year expense adjustment, for purposes of determining the
     annual safety valve support amounts in a particular year, as the
     year immediately prior to that particular year's expense
     adjustment.[^272] This modified proposal would prevent an acquiring
     carrier from receiving safety valve support if the carrier's
     expense adjustment does not increase in a given year. For example,
     if a carrier depreciates an investment made in year one equally
     over the subsequent four years, the carrier would not be able to
     receive support for amounts depreciated in each of those four years
     if the index year expense adjustment is defined as the year prior
     to that particular year's expense adjustment. Under this scenario,
     the carrier would only be eligible for safety valve support in the
     first year. Because there would be no year-to-year increase in the
     carrier's expense adjustment after the first year, the carrier
     would be ineligible for safety valve support in subsequent years.
     This modified proposal also may create incentives for a carrier to
     include all of its investment in one year's expense adjustment in
     order to maximize receipt of safety valve support. Similarly, this
     proposal may simply discourage carriers from making post
     transaction investments in acquired exchanges because they would be
     unable to recover costs associated with such investment. We
     therefore decline to define the index year expense adjustment as
     the year prior to the subsequent year expense adjustment.

104. We also decline to define the index year expense adjustment as
     prior to the end of an acquiring carrier's first year of operations
     of the acquired exchange.[^273] Because rural carriers most often
     acquire high-cost exchanges from non-rural carriers operating in
     large study areas with lower average costs,[^274] we conclude that
     it would be inappropriate for acquiring carriers to rely on the
     cost data of selling carriers in establishing the index year
     expense adjustment. We also conclude that carriers should not be
     permitted to rely on projected expenses when establishing their
     index year expense adjustment. Such a proposal would provide
     acquiring carriers with incentives to underestimate their expenses
     in the index year in order to maximize future safety valve support.
     Establishing the index year expense adjustment prior to the end of
     acquiring carriers' first year of operations also would result in
     additional filing requirements beyond those included in sections
     36.611 and 36.612 of our rules.[^275] We therefore decline to adopt
     proposals to define the index year expense adjustment prior to the
     end of an acquiring carrier's first year of operations.

105. We also conclude that certain clarifications are necessary to
     ensure that the safety valve mechanism does not enable carriers to
     receive excessive amounts of high-cost universal service support
     for acquired exchanges. We clarify that in no event shall a rural
     carrier's acquired exchanges receive more through the transfer of
     high-cost support and the safety valve mechanism than it would
     receive in uncapped high-cost loop support. That is, a study area's
     safety valve loop cost expense adjustment cannot exceed the
     difference between the acquired exchanges' uncapped annual study
     area loop cost expense adjustment calculated pursuant to section
     36.631 of our rules and transferred support amounts available under
     section 54.305(a) of our rules. Without this limitation, a rural
     carrier, for example, could acquire exchanges eligible for \$50 per
     loop in targeted interim hold-harmless support and an additional
     \$25 per loop in safety valve support, while only being eligible
     for \$60 per loop in uncapped high-cost loop support for the
     acquired exchanges. This would equal a \$15 per-loop over-recovery.

106. As proposed, the Rural Task Force's example would enable carriers
     with acquired exchanges that are not eligible for high-cost loop
     support to receive safety valve support.[^276] We clarify that
     safety valve support only will be available to rural carriers that
     would otherwise qualify for high-cost loop support for the acquired
     exchanges under section 36.631 of our rules.[^277] Consistent with
     the Commission's reasons for adopting section 54.305 of our rules,
     these clarifications will ensure that the potential for safety
     valve support does not unduly influence a rural carrier's decision
     to purchase exchanges from another carrier.[^278]

107. We also clarify that acquiring rural carriers shall not be
     permitted to qualify for safety net additive support for acquired
     exchanges that are subject to section 54.305 of our rules. As
     discussed above, both safety net additive support and safety valve
     support enable rural carriers to recover above-the-cap support for
     new investments.[^279] Safety net additive applies to new
     investments in existing exchanges while safety valve support
     applies to new investments in acquired exchanges. Permitting
     carriers to recover both safety net additive and safety valve
     support for investments in the same exchanges could result in the
     double recovery of costs. We therefore clarify that acquiring
     carriers shall not be permitted to qualify for safety net additive
     support for acquired exchanges and by application of this same
     analysis, we also conclude that safety net additive support shall
     not transfer with acquired exchanges.[^280]

108. *[Five Percent Cap on Safety Valve Support]{.underline}*. We agree
     with the Rural Task Force's example that the total amount of safety
     valve support available to all eligible study areas should be
     limited to no more than five percent of rural incumbent local
     exchange carrier support available from the annual high-cost loop
     fund.[^281] To the extent that rural carriers receive less than the
     indexed cap on the high-cost loop fund, the five percent cap on the
     safety valve mechanism shall be based on the lesser amount. Just as
     the indexed cap is a reasonable means of limiting the overall
     growth of the portion of the high-cost loop fund that is
     distributed to rural incumbent local exchange carrier study
     areas,[^282] we believe that a five percent cap on the safety valve
     mechanism will prevent uncontrollable growth. A five percent cap
     also will help minimize the burden on contributors to the universal
     service support mechanisms, while allowing the safety valve
     mechanism to grow at a rate that will encourage investment in rural
     areas.[^283]

109. We further conclude that a five percent cap on the safety valve
     mechanism will ensure the availability of specific and predictable
     support for new investment in acquired exchanges while at the same
     time not encouraging speculative purchases of exchanges for more
     than their book value.[^284] Based on estimates of growth in the
     rural carrier portion of the modified high-cost loop fund provided
     by the Rural Task Force, we project that the five percent cap on
     the safety valve mechanism will reach approximately \$63 million
     annually by June 30, 2006.[^285] It is unlikely that annual demand
     for safety valve support will exceed the proposed five percent cap.
     This conclusion is based on an analysis of projected transfers to
     rural carriers and annual increases in per line high-cost loop
     support for rural carriers, taking into account increases in the
     transfer of lines to rural carriers over time and the fact that
     rural carriers may have higher than average increases in annual
     expense adjustments for acquired exchanges. We therefore do not
     agree with commenters that no cap, or a higher cap, should be
     placed on the safety valve mechanism.[^286]

110. As discussed above, the Joint Board urges the Commission to
     consider the distribution of safety valve support if the total
     amount of eligible safety valve support exceeds the cap of five
     percent of the rural carrier portion of the indexed high-cost loop
     support fund.[^287] We agree with commenters that, if the total
     amount of eligible safety valve support in a given year exceeds the
     cap of five percent of the rural carrier portion of the indexed
     high-cost loop support fund, the percentage used to calculate the
     safety valve loop cost expense adjustment will be reduced until all
     safety valve support fits under the five percent cap.[^288] In such
     years, carriers eligible for safety valve support will receive less
     than 50 percent of the positive difference between the subsequent
     year expense adjustment and the index year expense
     adjustment.[^289] We believe that such a *pro rata* reduction will
     ensure that all carriers eligible for safety valve support continue
     to receive explicit and predictable support for new investments in
     infrastructure.

111. *[Creation of New Study Areas]{.underline}*. We decline to adopt
     the proposal in the Rural Task Force safety valve example to create
     a new study area for each transfer of exchanges.[^290] The
     Commission froze all study area boundaries effective November 15,
     1984, and an incumbent local exchange carrier must apply to the
     Commission for a waiver of the study area boundary freeze if it
     wishes to sell or purchase additional exchanges and the transaction
     requires the alteration of a study area boundary.[^291]

112. We are concerned that the creation of a new study area for each
     transfer of exchanges would enable carriers to gain an unfair
     advantage from the high-cost support mechanisms. For example, under
     the safety valve, an acquiring carrier could take advantage of the
     high-cost support mechanisms by structuring a transaction to create
     separate study areas that satisfy the definition of rural telephone
     company,[^292] and, therefore, qualify for rural high-cost support,
     including safety valve support. An acquiring carrier also could
     structure its transaction so that higher-cost exchanges are
     isolated into a separate study area.[^293] Such a result would
     undermine the goals the Commission sought to achieve when it froze
     all study area boundaries. The study area freeze is intended to
     prevent carriers from setting up high-cost exchanges within their
     existing service territory as separate study areas to maximize
     high-cost support.[^294] As a result, the Commission consistently
     has rejected requests to create multiple study areas in connection
     with acquisitions requiring study area waivers.[^295] The
     Commission specifically has concluded that, where an incumbent
     local exchange carrier is acquiring exchanges in a state in which
     it already operates, the creation of an additional study area is
     unwarranted.[^296] We therefore do not adopt the proposal in the
     Rural Task Force safety valve example to automatically create a new
     study area with each new transfer of exchanges.

113. For similar reasons, we also decline to adopt a proposal in the MAG
     plan to permit rate-of-return carriers to alter the boundaries of
     their study areas without obtaining a waiver of the study area
     definition.[^297] As discussed above, the study area freeze is
     intended to prevent carriers from setting up high-cost exchanges
     within their existing service territories as separate companies to
     maximize high-cost support. The MAG proposal would enable
     rate-of-return carriers to alter the boundaries of study areas in
     order to maximize high-cost loop support, potentially to the
     detriment of other carriers receiving support because of the
     indexed cap on the high-cost loop fund.[^298] The MAG proposal
     particularly would enable carriers to maximize their eligibility
     for safety valve support. We therefore decline to adopt the MAG
     proposal to permit rate-of-return carriers to alter study area
     boundaries without obtaining a waiver of the study area definition.

114. *[Transfer of Above-the-Cap Support with Acquired
     Exchanges]{.underline}*. We conclude that above-the-cap support,
     such as safety valve support or safety net additive support, should
     not transfer with acquired exchanges.[^299] Rather, subsequent
     acquiring carriers will have an opportunity to qualify for safety
     valve support based on their own costs for the acquired
     exchanges.[^300] The subsequent acquiring rural carrier will be
     permitted to receive safety valve support representing up to 50
     percent of any positive difference between the rural carrier's
     index year expense adjustment and subsequent year expense
     adjustments. To allow otherwise would be to relieve the subsequent
     acquiring rural carrier of the requirement that they make new
     investments in rural infrastructure in order to receive safety
     valve support.[^301] This conclusion also is consistent with our
     decision not to permit rural carriers to qualify for safety net
     additive support for acquired exchanges.[^302]

115. *[Safety Valve Support for Competitive Study Areas]{.underline}*.
     We agree with the Rural Task Force's example that per-loop
     equivalent amounts of safety valve support should be portable to
     competitive eligible telecommunications carriers. According to the
     principle of competitive neutrality adopted by the Commission and
     recommended by the Joint Board, universal service support
     mechanisms and rules should neither unfairly advantage nor
     disadvantage one provider over another.[^303] Consistent with this
     principle, the Commission implemented the universal service
     principles in section 254 of the Act to ensure that universal
     service support is "portable," in essence, available to all
     competing eligible telecommunications carriers.[^304] We therefore
     conclude that per-loop equivalents of safety valve support should
     be portable to competitive eligible telecommunications carriers.

116. Consistent with our decision in section IV.C.3. below, we also
     conclude that safety valve support should not be "frozen" when a
     competitive eligible telecommunications carrier enters a study
     area. In its *Recommended Decision*, the Joint Board asks the
     Commission to consider whether safety valve support is frozen when
     a competitive eligible telecommunications carrier enters the study
     area, just as high-cost loop support would be frozen when a
     competitive eligible telecommunications carrier enters the
     incumbent's service area.[^305] We believe that such an approach,
     which would freeze per-line safety valve support upon competitive
     entry in a study area, would unduly dissuade investment in new
     infrastructure. Under such an approach, the rural incumbent local
     exchange carrier would receive the same fixed amount of per-line
     safety valve support regardless of how much it invests in its
     telecommunications infrastructure. In this regard, affected
     carriers would be relieved of the requirement that they demonstrate
     that they have made new investment in rural infrastructure. We
     believe that such concerns outweigh the potential that per-line
     support amounts might escalate over time as incumbent carriers lose
     lines to competitors.[^306]

117. *[Reporting Requirements for Carriers with Transferred
     Exchanges]{.underline}*. In order to ensure that rural carriers
     receive the appropriate amount of high-cost support for acquired
     and existing exchanges, companies incorporating acquired exchanges
     into existing study areas consistently have been required to
     submit, as part of their universal service data submission in
     accordance with section 36.611 of our rules, a schedule showing
     their methodology for excluding the costs associated with the
     acquired exchanges from the costs associated with their
     pre-acquisitions study areas.[^307] To receive safety valve
     support, rural telephone companies also will need to segregate
     costs associated with the operation of acquired and existing
     exchanges in order for USAC to ultimately determine an acquiring
     carrier's eligibility for such support. We therefore clarify that
     rural telephone companies that incorporate acquired exchanges into
     existing study areas should exclude the costs associated with the
     acquired exchanges from the costs associated with the
     pre-acquisition study areas in annual universal service data
     submissions used to determine eligibility for high-cost loop
     support. Acquiring rural carriers shall separately provide the
     information listed in section 36.611 of our rules for both acquired
     and existing exchanges, as if these two categories of exchanges
     constitute separate study areas.

118. Consistent with the Rural Task Force's proposal, we also clarify
     that, once relevant regulatory approvals are obtained and the
     transaction is closed, the rural carrier shall provide written
     notice to USAC that they have acquired access lines that may become
     eligible for safety valve support.[^308] Rural carriers also shall
     provide written notice to USAC of when their index year has been
     established for purposes of calculating eligibility for safety
     valve support. Such notifications will assist USAC in the
     administration of the safety valve mechanism.

119. USAC will then determine whether acquired exchanges qualify for
     safety valve support based on expense adjustments calculated by
     NECA in accordance with section 36.631 of the Commission's
     rules.[^309] Once USAC determines that an acquired exchange does
     indeed satisfy the requirements for safety valve support, the
     amount of support in the qualifying year will be up to 50 percent
     of any positive difference between the rural carrier's index year
     expense adjustment and subsequent year expense adjustments, subject
     to the limitations described above.

120. *[Retroactive Application of Safety Valve.]{.underline}* We decline
     to apply the safety valve mechanism retroactively to all carriers
     currently operating exchanges subject to section 54.305 of our
     rules.[^310] The retroactive application of the safety valve
     mechanism would provide additional support for rural carriers with
     acquired exchanges, with no assurance that such support would be
     used to increase investment in rural infrastructure or reduce
     customer rates. We also note that the retroactive application of
     the safety valve mechanism was not included in the Rural Task
     Force's principles for providing support to exchanges acquired by
     rural carriers or in the Rural Task Force's example of a safety
     valve mechanism. We therefore will not apply the safety valve
     mechanism retroactively. We will, however, permit carriers
     currently operating exchanges subject to section 54.305 of our
     rules to receive safety valve support on a going-forward basis for
     new investments in the acquired exchanges. Carriers currently
     operating exchanges subject to section 54.305 of our rules may
     qualify for safety valve support for acquired exchanges in
     accordance with the procedures described above.[^311] For example,
     a carrier that will operate acquired exchanges subject to section
     54.305 for a full year by June 30, 2001, would establish its index
     year expense adjustment by filing a quarterly update on December
     30, 2001, in accordance with section 36.612 of our rules with cost
     data for the first six months of 2001 and the last six months
     of 2000. This conclusion is consistent with our decision to provide
     safety valve support to other rural carriers acquiring exchanges
     from unaffiliated carriers.

### Support in Study Areas with Competitive Eligible Telecommunications Carriers

#### Background

121. The Rural Task Force proposed that high-cost loop support be frozen
     on a per-line basis in rural carrier study areas where a
     competitive eligible telecommunications carrier initiates
     service.[^312] As discussed below, the purpose of this proposal is
     to prevent excessive fund growth following competitive entry.[^313]
     Under the Rural Task Force's recommended approach, frozen per-line
     support would be calculated based on the incumbent rural carrier's
     cost and line count data for the 12-month period prior to
     competitive entry. The incumbent and the competitive carrier would
     receive the same frozen support amount for each line served within
     the study area, subject to the disaggregation plan established for
     the study area, if any. Frozen per-line support would be adjusted
     annually by the rural growth factor, rather than for changes in
     costs. It would be subject to the indexed cap on high-cost loop
     support. In addition, incumbent rural carriers could request
     additional support to recover the costs of catastrophic events
     affecting their ability to provide supported services. Any
     adjustments to the frozen per-line support amount would apply
     equally to competitive carriers.

122. The Joint Board stated that, although it agreed with this proposal,
     "it is unclear how the high-cost loop fund cap would account for
     frozen carrier support."[^314] The Joint Board also stated that
     "\[t\]he Commission should seek further input on the impact of
     'catastrophic' support provided by other sources such as insurance,
     Rural Utilities Service loans, and federal or state emergency
     management relief."[^315]

123. The Rural Task Force also raised concerns about frequency of
     reporting and the interval between the provision of service and
     receipt of support in competitive study areas.[^316] The Rural Task
     Force recommended that this interval "should be as short as
     technically and administratively feasible to ensure provision of
     universal service."[^317] To ensure that carrier data is
     "sufficiently sensitive to mid-period competitive activity\[,\]" it
     also proposed that support be distributed based on line count data
     for "the average of the quarter (*i.e.*, beginning of quarter plus
     end of quarter divided by two)."[^318]

#### Discussion

124. *[Proposal to Freeze High-Cost Loop Support]{.underline}.* Based on
     consideration of the record in this proceeding, we decline at this
     time to adopt the Rural Task Force's proposal to freeze high-cost
     loop support upon competitive entry in rural carrier study areas.
     As discussed below, the purpose of this proposal is to prevent
     excessive growth in the universal service fund as a result of an
     incumbent carrier's loss of lines to a competitive eligible
     telecommunications carrier. The likelihood of this harm occurring
     in the immediate future is speculative, however, and in some
     instances the proposal may increase support levels. Moreover, the
     proposal has significant drawbacks, including administrative
     complexity and disincentives to infrastructure investment by rural
     carriers. We conclude, therefore, that adoption of the Rural Task
     Force's proposal is not warranted at this time.

125. We recognize, however, that, as competition develops in high-cost
     areas and rural incumbent carriers lose lines to competitors,
     excessive fund growth may occur. We therefore seek comment in the
     attached Further Notice on possible alternative measures to address
     this potential issue.[^319] During this proceeding, we intend to
     closely monitor the impact on the fund of competitive entry in
     rural carrier study areas to ensure that the fund remains specific,
     predictable, and sufficient consistent with section 254.[^320]

126. In its comments, the Rural Task Force explains that the purpose of
     this proposal is to prevent excessive fund growth following
     competitive entry.[^321] Due to the nature of telecommunications as
     an industry with high fixed costs, an incumbent carrier's loss of
     subscriber lines to a competitive eligible telecommunications
     carrier is unlikely to be offset by a corresponding reduction in
     its total embedded cost of service.[^322] If the incumbent's lines
     decreased while its fixed costs remained roughly the same, its
     per-line costs would increase. Consequently, the incumbent would be
     entitled to higher support per line.[^323] Because the higher
     per-line support amount would be available to both the incumbent
     and the competitor for each line served under our portability
     rules, the size of the fund could grow significantly as competition
     increases, particularly if there is a net increase in the total
     number of lines served in the study area.[^324] The indexed cap on
     high-cost loop support would not check this growth fully, because
     support received by competitive carriers currently is not included
     within the cap. Thus, by recommending that support be frozen on a
     per-line basis after competitive entry, and subsequently adjusted
     by a predetermined growth factor, the Rural Task Force sought to
     prevent excessive fund growth.

127. We are not convinced, however, that it is necessary to adopt the
     Rural Task Force's proposal at this time. The proposal may be of
     limited benefit in serving its intended purpose, and under some
     circumstances may contribute to fund growth rather than limiting
     it. First, the possibility of excessive fund growth is speculative.
     The harm the Rural Task Force sought to avoid arises only if a
     competitive eligible telecommunications carrier captures subscriber
     lines from an incumbent, not if it adds new lines. In addition, the
     competitive carrier presumably must capture a meaningful percentage
     of lines from the incumbent within the study area,[^325] but it is
     unclear what this threshold is, or how often it is likely to be
     reached during the five-year period in which the Rural Task Force
     plan is in effect.[^326] Second, the indexed cap on the high-cost
     loop fund will operate as a check on excessive fund growth to a
     certain extent. The support received by incumbent rural carriers is
     subject to the cap, and a competitive carrier will receive no more
     support on a per-line basis than the incumbent receives.[^327]
     Moreover, in years the cap is not triggered, frozen per-line
     support, as proposed by the Rural Task Force, actually might exceed
     the support that carriers would receive based on the incumbent's
     embedded costs. Embedded costs per line generally decrease with
     line growth, but frozen per-line support would increase annually by
     the rural growth factor. Thus, if the incumbent's lines increase
     and the cap is not triggered, it may recover more frozen support
     than it would based on its embedded costs.[^328] The potential for
     excess support is increased because the rural growth factor
     includes annual rural line growth, so that its application to
     individual lines receiving frozen support would result in double
     counting of line growth.[^329]

128. We are further concerned that the Rural Task Force's proposal would
     require us to implement complex and administratively burdensome
     regulations. For example, we would have to impose a new reporting
     requirement on rural carriers to implement the proposal that frozen
     per-line support be calculated based on cost and line count data
     for the 12 months prior to the quarter in which the competitive
     carrier initiates service.[^330] Despite the fact that their
     support would be frozen, rural carriers would have to continue
     filing annual cost data, because the proposal that frozen support
     be subject to the cap would require comparison of a carrier's total
     frozen per-line support to its total capped support based on
     embedded costs.[^331]

129. Furthermore, new administrative requirements and procedures would
     be necessary to implement the Rural Task Force's proposal to allow
     incumbent rural carriers to request increased support to recover
     the costs of catastrophic events affecting their ability to provide
     supported services.[^332] To verify the need and eligibility for
     increased support under this proposal, and to address the concerns
     of the Joint Board and others that such support could be used as a
     substitute for insurance or other sources of funding,[^333] we
     would have to impose additional reporting requirements on rural
     carriers, and/or adopt potentially cumbersome procedures for state
     certification.[^334] Moreover, to avoid undermining the original
     purpose of fixing support, some procedure would be necessary to
     ensure that a carrier's need for increased per-line support is due
     to a catastrophic event rather than the loss of lines to a
     competitor. These examples illustrate the regulatory burdens and
     difficulties entailed in the Rural Task Force's recommended
     approach.

130. More importantly, freezing support in competitive study areas may
     have the unintended consequence of discouraging investment in rural
     infrastructure, contrary to the fundamental goals of the Rural Task
     Force plan.[^335] A number of commenters argue that carriers in
     competitive study areas will have reduced incentives to invest in
     infrastructure, because they will be unable to obtain additional
     support for such investments once their high-cost loop support is
     frozen.[^336] One commenter states that fixing support could
     interfere with the normal, "cyclical" investment patterns of small
     rural carriers.[^337] In addition, some commenters argue that the
     Rural Task Force's proposal is over-inclusive and would distort
     incentives for competitive entry, because support would be frozen
     regardless of how many subscriber lines a competitive carrier
     serves within a study area, whether it captures or adds lines, or
     whether it serves only a limited geographic portion of the study
     area.[^338] Furthermore, we are concerned that adoption of this
     proposal could hinder competitive entry in rural carrier study
     areas, again contrary to a fundamental goal of the Rural Task Force
     plan.[^339] The Competitive Universal Service Coalition, although
     it does not oppose the proposal, raises concerns that it could
     increase the difficulty for new entrants by creating an additional
     incentive for incumbents to oppose designation of a new eligible
     telecommunications carrier.[^340] Indeed, one carrier recently
     filed comments with the Commission opposing a petition for such
     status, in part, on the ground that the resulting freeze of support
     (assuming the Rural Task Force proposal were adopted) would
     "severely constrain" its ability to upgrade plant and provide
     quality service in the area.[^341]

131. In sum, we conclude that, at this time, the costs of adopting the
     Rural Task Force's proposal to freeze high-cost loop support in
     competitive study areas would significantly outweigh the potential
     benefits. Based on our examination of the present record, we
     believe that the proposed solutions to the problems identified
     above (*e.g.*, an expedited waiver process, a market-share
     threshold requirement, or freezing support only in geographic areas
     served by the competitive carrier) would compound the
     administrative complexity of the Rural Task Force's recommended
     approach without resolving the problems. For example, a simple
     market-share threshold requirement would fail to target study areas
     where the harm sought to be avoided is most likely to occur,
     because it could not distinguish captured from new subscriber
     lines.[^342] Similarly, freezing support only in limited portions
     of a study area would complicate the administration of a frozen
     support provision without reducing the likelihood of such
     harm.[^343] We conclude, therefore, that adoption of this proposal
     is not warranted.

132. We intend, however, to closely monitor the impact of competitive
     entry in rural carrier study areas to ensure that the fund remains
     specific, predictable, and sufficient consistent with section 254.
     We note that the quarterly reporting requirements we adopt below
     for rural incumbent carriers serving study areas in which a
     competitive eligible telecommunications carrier has been designated
     will enable us to closely monitor any excessive fund growth that
     may result from incumbent line loss to a competitive eligible
     telecommunications carrier.[^344]

133. *[Frequency of Reporting and Lag in Support]{.underline}*. As
     stated above, the Rural Task Force also raised concerns about
     frequency of reporting and the interval between the provision of
     service and receipt of support in competitive study areas.[^345]
     With regard to frequency of reporting, the Rural Task Force
     observed that the number of lines served by carriers in competitive
     study areas "may change in a dynamic manner."[^346] Rural carriers
     and their competitors currently are required to file line count
     data annually, and may file quarterly updates on a voluntary
     basis.[^347] Quarterly updates are required in non-rural carrier
     study areas.[^348] Under the current rules, if an incumbent rural
     carrier does not update its line count data but its competitor
     does, the competitor's more recent data may include lines captured
     from the incumbent since the incumbent's last filing. Thus the
     incumbent may continue to receive support for the year based on an
     overstated number of lines.

134. To prevent an overpayment of support, and to address the Rural Task
     Force's concerns, we will require the filing of line count data on
     a regular quarterly basis upon competitive entry in rural carrier
     study areas. By synchronizing such data, this requirement will
     ensure that only one carrier receives support for each line
     served.[^349] In addition, it should allow closer monitoring of the
     impact of competitive entry, because it will reveal any loss or
     gain of subscriber lines by competing carriers on a
     quarter-to-quarter basis. We believe that this requirement will not
     significantly increase reporting burdens for the affected carriers
     because, although they will be required to report data more
     frequently, the data will be limited to changes in the number of
     lines that they served during a quarter. We emphasize that this
     requirement will not apply in rural carrier study areas in which an
     eligible telecommunications carrier has not been designated.[^350]

135. We agree with the Rural Task Force's general recommendation that
     the interval between the provision of service and receipt of
     universal service support should be as short as possible.[^351] The
     Commission previously concluded that portability of support
     facilitates the entry of competition in areas served by rural
     carriers.[^352] Because support represents an important source of
     funds for the operation of an exchange with high loop costs, the
     interval between the reporting of costs and receipt of support
     based on those costs may discourage competitive entry.
     Nevertheless, some interval is necessary for administrative
     reasons.[^353] To ensure that the interval between the submission
     of data and receipt of support is as short as possible in rural
     carrier study areas, we clarify that competitive eligible
     telecommunications carriers may submit initial line count data and
     receive support on a regular quarterly basis under section
     54.307(c) of the Commission's rules.[^354]

136. The Rural Task Force also recommended that support in competitive
     study areas be distributed based on line count data for "the
     average of the quarter (*i.e.*, beginning of quarter plus end of
     quarter divided by two)."[^355] This recommendation appears to hold
     promise as a means of promoting the distribution of support on an
     equitable, non-discriminatory, and competitively neutral basis. As
     proposed, however, the Rural Task Force's recommended approach
     would impose additional reporting requirements, as carriers
     currently are required to report only line count data as of the end
     of the relevant reporting period.[^356] The present record lacks
     evidence on the administrative burden that such requirements would
     impose, if any, or on whether alternative measures might avoid the
     need for such requirements. Moreover, we believe that any such
     measure should be applicable to all carriers, including those
     serving non-rural study areas. Therefore, we intend to address the
     Rural Task Force's proposal at a later date.

## Disaggregation and Targeting of Support

### Background

137. Under the existing embedded cost mechanism, federal universal
     service high-cost support for rural carriers is averaged across all
     lines served by a carrier within its study area. Thus, support on a
     per-line basis is the same throughout a study area even though the
     costs of serving customers in that study area likely vary. As a
     result, support in low-cost areas of the study area may exceed the
     cost of serving those areas while support in high-cost areas may be
     insufficient to offset the higher cost of serving those areas.
     Recognizing that support is portable, the Rural Task Force contends
     that this may create uneconomic incentives for competitive
     entry.[^357] The Rural Task Force stated in its recommendation that
     the current distribution method must be modified to be consistent
     with the Act and the principle of competitive neutrality.[^358]

138. As part of its proposal to reform the federal universal service
     support mechanism for rural carriers, the Rural Task Force proposed
     that rural carriers be permitted to depart from study area
     averaging and instead disaggregate and target per-line high-cost
     universal service support, including high-cost loop support, LTS,
     and LSS, into geographic areas below the study area level.[^359] By
     doing so, per-line support would not be the same throughout a study
     area but would vary to reflect the cost of providing service in a
     particular geographic area within the study area. The Rural Task
     Force concluded that the disaggregation and targeting of support is
     necessary to eliminate the economic distortions that may result
     from the delivery of support on a uniform per-line basis under the
     current mechanism thereby reducing the possibility for arbitrage of
     universal service support resulting in shortfalls or windfalls to
     either incumbent carriers or competitive eligible
     telecommunications carriers. At the same time, however, the Rural
     Task Force stated that rural carriers need flexibility in the
     manner in which support is disaggregated and targeted in light of
     the widely varying characteristics and operating environments of
     rural carriers. Recognizing that a disaggregation and targeting
     system must meet the unique regulatory and competitive environments
     in each state, the Rural Task Force recommended a disaggregation
     system consisting of three paths. Carriers would be required to
     elect one of these paths within 270 days of the effective date of
     the order implementing rural high-cost reform.[^360]

139. Path One would allow a carrier to certify to the state commission,
     or other appropriate regulatory authority, that it does not want to
     disaggregate support. The carrier's election of this path would
     become effective upon filing of the certification and remain in
     place for at least four years unless (1) the state commission or
     other appropriate regulatory authority requires, on its own motion
     or upon petition by an interested party, the disaggregation of
     support, or grants eligible telecommunications carrier status below
     the study area level; (2) there is a change in state or federal
     laws or regulations; or (3) there is a change in ownership. If any
     of these events occur, the carrier would be permitted to target
     support under one of the other two paths.

140. Path Two would be available to carriers that want state commission
     review and approval of a disaggregation plan.[^361] A carrier that
     chooses this path, which places no constraints on the
     disaggregation plan, would file a disaggregation plan with the
     state commission, or other appropriate regulatory authority. The
     Rural Task Force contemplates that the regulatory authority would
     hold workshops, hearings, or other appropriate administrative
     proceedings in which interested parties may participate, and that
     the regulatory authority would issue an order, which would set out
     the targeting method, a description of the zones, and a per-line
     support amount for each category of support in each zone. The Rural
     Task Force proposed that the disaggregation plan, once approved,
     would be effective until the regulatory authority approves a new
     plan, but would remain subject to change or challenge at any time.

141. Path Three would permit carriers to self-certify a method of
     disaggregation with the state commission or other appropriate
     regulatory authority. The Rural Task Force proposed that carriers
     certify that the disaggregation plan complies with certain
     requirements. First, carriers must certify that support would be
     disaggregated to the wire center level or into no more than two
     cost zones per wire center. A different level of disaggregation
     would be permitted only if a state commission, previously
     determined that a different level of disaggregation is
     appropriate.[^362] Second, if the appropriate regulatory authority
     has previously adopted a method of disaggregation, the carrier must
     certify that its plan uses the rationale previously adopted. Third,
     the carrier must certify that the plan uses a rationale for
     disaggregating support that is reasonably related to the cost of
     providing service for each cost zone within each disaggregated
     category of support (high-cost loop support, LSS and LTS). Fourth,
     if the plan uses a benchmark to determine support amounts, the
     benchmark must be generally consistent with how the total study
     area level of support is derived to compare the disaggregated costs
     for determining support for each cost zone. The certification
     filing must describe the rationale used, including the methods and
     data, and a discussion of how the plan complies with the
     self-certification guidelines.[^363] If the plan uses a benchmark,
     the filing must explain what the benchmark is and how it was
     determined. The plan must show the per-line amount of support for
     each category of support in each zone.

142. The Rural Task Force proposed that a carrier's election of Path
     Three would become effective upon filing of the certification and
     remain in place for at least four years unless (1) the state
     commission or other appropriate regulatory authority requires, on
     its own motion or upon petition by an interested party, the
     disaggregation of support, or grants eligible telecommunications
     carrier status below the study area level; (2) there is a change in
     state or federal laws or regulations; or (3) there is a change in
     ownership.[^364] At any time while in effect, the plan would be
     subject to complaint by interested parties before the appropriate
     regulatory authority on the grounds that the plan does not comply
     with the certification requirements proposed by the Rural Task
     Force. To the extent a plan is challenged, the Rural Task Force
     proposed that the relevant regulatory administrative procedures
     (including burden of proof allocation and availability of
     discovery) would apply to such complaints.

143. With regard to all three paths, the Rural Task Force also
     recommended that certain general requirements apply to each
     disaggregation plan.[^365] First, the Rural Task Force recommended
     that relative per-line support relationships between disaggregation
     zones for each disaggregated category of support remain fixed over
     time (except as changes are allowed by the Path descriptions) and
     that such relationships be made publicly available. Second, the
     Rural Task Force recommended that, until a competitive eligible
     telecommunications carrier is certified in a study area, monthly
     payments to an incumbent carrier be made using current procedures
     based on total annual amounts for a study area divided by twelve.
     Third, when a competitive eligible telecommunications carrier is
     certified for a study area, per-line amounts to determine the
     competitive eligible telecommunications carrier's support should
     then be based on the incumbent carrier's then-current total support
     levels, lines, and disaggregated support relationships. Fourth, the
     Rural Task Force recommended that support per-line for each
     category of support for each disaggregation zone be determined such
     that the relative support relationships between zones would be
     maintained and that the product of all of the incumbent's lines for
     each cost zone multiplied by the per-line support for those zones
     would sum to the incumbent's total level of support. Fifth, the
     Rural Task Force recommended that per-line support amounts for each
     zone should be recalculated whenever the incumbent's total annual
     support amount changed using the changed support amounts and lines
     at that point in time. The Rural Task Force also recommended that
     the incumbent carrier's study area support available in total for a
     study area under the disaggregation method equal the total support
     available without disaggregation.

144. Finally, the Rural Task Force recognized that state commissions
     have the authority to determine whether more than one eligible
     telecommunications carrier should be designated in an area served
     by a rural carrier.[^366] The Rural Task Force also recognized
     that, under section 214(e)(5) of the Act and the Commission's
     rules, carriers must seek approval from the Commission and the
     States, after taking into account recommendations of the
     Joint-Board, to change an eligible telecommunication carriers
     "service area" to a geographic area other than a rural carrier's
     study area.[^367] The Rural Task Force recommended that the level
     of disaggregation of support be considered in determining whether
     to certify new eligible telecommunications carriers for a service
     area other than a rural carrier's entire study area.[^368]

### Discussion

145. We find that the Rural Task Force's disaggregation and targeting
     proposal achieves a reasonable balance between rural carriers'
     needs for flexibility and the Commission's goal of encouraging
     competitive entry. As discussed below, we agree with the Rural Task
     Force and the commenters that, as a general matter, support should
     be disaggregated and targeted below the study area level. At the
     same time, we agree with the Rural Task Force that, given the
     significant differences among rural carriers and the varying
     competitive environments among the states, there should be
     flexibility in the manner in which support is disaggregated and
     targeted for rural carriers. Accordingly, subject to certain
     modifications discussed below, we adopt generally the three paths
     for the disaggregation and targeting of high-cost universal service
     support proposed by the Rural Task Force. We also adopt the general
     requirements that the Rural Task Force proposed for all
     disaggregation plans.

146. We agree with the Rural Task Force and commenters that the
     provision of uniform support throughout the study area of a rural
     carrier may create uneconomic incentives for competitive entry and
     could result in support not being used for the purpose for which it
     was intended, in contravention of section 254(e).[^369] Because
     support is averaged across all lines served by a carrier within its
     study area under the existing mechanism, the per-line support
     available throughout the study area is the same even though the
     costs throughout the study area may vary widely. As a result,
     artificial barriers to competitive entry in the highest-cost areas
     and artificial entry incentives in relatively low-cost portions of
     a rural carrier's study area are created. For example, support
     would be available to a competitor that serves only the low-cost
     urban lines, regardless of whether the support exceeds the cost of
     any of the lines. We conclude therefore that, as a general matter,
     support should be disaggregated and targeted below the study area
     level so that support will be distributed in a manner that ensures
     that the per-line level of support is more closely associated with
     the cost of providing service.[^370]

147. While we recognize the benefits of disaggregating and targeting
     support, we also agree with the Rural Task Force's recommendation
     that there should be flexibility in the manner in which support is
     disaggregated and targeted for rural carriers. The Rural Task
     Force's multi-path system is premised on the proposition that,
     because of the diverse characteristics among rural carriers, there
     is not an adequate "one size fits all" approach that is workable
     for disaggregating support for rural carriers.[^371] As discussed
     above, there are over 1300 study areas served by companies defined
     as rural carriers.[^372] The population of rural carriers reflects
     diverse operating characteristics and operating environments. We
     find that providing rural carriers flexibility in the methods of
     disaggregation and targeting is a reasonable approach to address
     the significant diversity among such carriers. By providing
     carriers such flexibility, a carrier may better match the
     disaggregation and targeting methodology to its costs and
     geographic characteristics and the competitive and regulatory
     environment in the state in which it operates.

148. Similarly, we recognize that in some specific instances, as
     described below, the factors that militate in favor of
     disaggregation may not be present. We find that requiring the
     disaggregation and targeting of support in these instances would
     serve no rational economic purpose. We conclude that the multi-path
     system proposed by the Rural Task Force addresses the distinct
     needs of rural carriers and, therefore, we adopt the three paths
     recommended by the Rural Task Force for the disaggregation and
     targeting of support by rural carriers, subject to certain
     modifications discussed in greater detail below. We direct carriers
     to choose within 270 days of the effective date of the rules
     adopted in this Order one of these three paths. [^373] Carriers
     failing to do so will not be permitted to disaggregate and target
     support unless ordered to do so by a state commission or other
     appropriate regulatory authority either on its own motion or in
     response to a request of an interested party.

149. First, we adopt with modifications Path One, which provides that a
     carrier may choose not to disaggregate. Path One is intended to
     address those instances where a carrier determines that, given the
     demographics, cost characteristics, and location of its service
     territory, and the lack of a realistic prospect of competition,
     disaggregation is not economically rational.[^374] For example, a
     carrier may serve only a few lines or a very small study area with
     little geographic variability. We find that permitting such a
     carrier not to disaggregate support is appropriate.[^375] We
     recognize commenters' concerns that a carrier may choose not to
     disaggregate and target support for anti-competitive reasons.[^376]
     We find, however, that because a state nonetheless may require
     disaggregation, either on its own motion or that of an interested
     party, sufficient safeguards are in place to ensure that if
     disaggregation and targeting of support is warranted, the carrier
     will be required to do so. Indeed, if a state receives a request to
     require a carrier to disaggregate and target support under any of
     the paths adopted herein, we expect that it will be guided in
     making a determination on the request by our view that support
     should generally be disaggregated and targeted in a manner that the
     per-line level of support is more closely aligned with the cost of
     providing service.

150. We find, however, that it is necessary to modify Path One in order
     to minimize the risk of gaming and to ensure a competitive entrant
     certainty with regard to the level of available per-line support.
     As proposed by the Rural Task Force, a carrier would have the
     option to change to a different path if a competitor is granted
     eligible telecommunications carrier status below the study area
     level, a change in state or federal regulations occurs, or a change
     in ownership occurs. We are concerned that permitting a carrier to
     disaggregate after election of Path One under these circumstances
     presents the opportunity for gamesmanship and undermines the
     certainty necessary to encourage a competitive eligible
     telecommunications carrier to enter a market.[^377] Accordingly, we
     find that once an incumbent elects not to disaggregate under Path
     One, it shall remain in effect until a state commission or
     appropriate regulatory authority requires, on its own motion, or
     upon petition by an interested party, including the affected
     incumbent, a change to a different disaggregation and targeting
     methodology. We conclude that, by permitting a carrier to change
     from this path only upon the approval of a state commission or
     appropriate regulatory authority, a competitive eligible
     telecommunications carrier is provided sufficient certainty with
     regard to the level of available per-line support. Moreover, we
     believe that because a carrier's ability to change to a different
     disaggregation methodology after it elects Path One is constrained,
     a carrier is less likely to elect Path One for anti-competitive
     reasons.

151. Second, we adopt Path Two, which provides that a carrier may
     disaggregate based on a plan that has been approved by the
     appropriate regulatory authority. Because there are no constraints
     on disaggregation and targeting proposals under Path Two, a carrier
     could disaggregate and target support to multiple levels below a
     wire center, a disaggregation and targeting method can be tailored
     with precision, subject to state approval, to the cost and
     geographic characteristics of the carrier and the competitive and
     regulatory environment in which it operates.[^378] Thus, this path
     provides the utmost flexibility in the development of a
     disaggregation plan, but at the same time provides for regulatory
     approval to ensure that the methodology implemented is
     competitively neutral.

152. Third, we adopt the Path Three self-certification process that
     permits carriers to choose (1) a disaggregation plan of up to two
     cost zones per wire center, or (2) a disaggregation plan that
     complies with a prior regulatory determination. We find that
     permitting carriers to self-certify its disaggregation and
     targeting plan to the state reduces the administrative burdens on
     carriers and states, and facilitates the rapid implementation of
     disaggregation and targeting plans. We believe that the
     certification requirements proposed by the Rural Task Force will
     ensure that the disaggregation plans are cost-based and consistent
     with the principles of competitive neutrality. For example, a
     carrier must provide the state and USAC with a description of the
     rationale used to disaggregate support, including the methods, and
     data, and a discussion of how the plan complies with the
     self-certification guidelines.[^379] In addition, if the plan uses
     a benchmark, it must be generally consistent with how the total
     study area level of support for each category of costs (high-cost
     loop support, LSS, and LTS) is derived, to enable a competitor to
     compare the disaggregated costs used to determine support for each
     zone. [^380] Moreover, the plan must show a per-line amount of
     support for each element in each disaggregation zone. We find that,
     given these requirements, the self-certification process strikes a
     reasonable balance between providing flexibility and ensuring that
     support is disaggregated in a competitively neutral manner.

153. We disagree with those commenters that assert that permitting
     carriers to self-certify to a disaggregation plan creates too great
     an opportunity for the incumbent carrier to manipulate the
     disaggregation and targeting of support in an anti-competitive
     manner.[^381] We note that the states will play a significant role
     in the disaggregation and targeting of support. Under the plan we
     adopt here, a self-certified plan is subject to complaint by
     interested parties before the appropriate regulatory authority on
     the grounds that it does not comply with the self-certification
     requirements, which we believe ensure that the disaggregation plan
     will not be anti-competitive. Moreover, the state or appropriate
     regulatory authority may require on its own motion at any time the
     disaggregation of support in a different manner. We believe that
     state oversight in the administration of the disaggregation scheme
     will safeguard against the anti-competitive manipulation of the
     disaggregation and targeting of support.

154. To further ensure that Path Three is employed in a pro-competitive
     manner, however, we find that additional regulatory oversight of
     any proposed changes to the disaggregation plan is necessary. As
     proposed by the Rural Task Force, a carrier has the option to
     change to a different path and alter its existing disaggregation
     plan if a competitor is granted eligible telecommunications carrier
     status below the study area level, a change in state or federal
     regulations occurs, or a change in ownership occurs. As discussed
     above with regard to Path One, we are concerned that permitting a
     carrier this latitude may invite gaming by incumbent carriers and
     undermines the certainty necessary to encourage a competitive
     eligible telecommunications carrier to enter a market. Accordingly,
     we find that, once an incumbent elects a disaggregation plan under
     Path Three, the plan shall remain in effect until a state
     commission or appropriate regulatory authority requires, on its own
     motion, or upon petition by an interested party, including the
     affected incumbent, a change to a different disaggregation and
     targeting methodology. We conclude that by permitting a carrier to
     change from this path only upon the approval of a state commission
     or appropriate regulatory authority, a competitive eligible
     telecommunications carrier is provided greater certainty as to the
     level of available per-line support. Moreover, we believe that
     because a carrier's ability to move to a different path is
     constrained, a carrier is less likely to elect this path for
     anti-competitive reasons.

155. As discussed above with regard to Paths One and Three, by requiring
     a rural carrier to retain its disaggregation plan unless the state
     commission approves any changes to the plan, the disaggregation
     rules adopted in this Order will provide both rural carriers and
     competitive eligible telecommunications carriers greater certainty
     as to the level of available per-line support in the study area or
     disaggregation zone. We are concerned that permitting incumbent
     carriers to modify the disaggregation plans they have elected
     during the five year period may, in certain instances, undermine
     the universal service goals of specific and predictable support and
     allow carriers to engage in anti-competitive behavior. We are
     confident that state commissions, when considering modification
     requests, will safeguard against anti-competitive manipulation of
     the disaggregation and targeting of support that could occur with
     such requests.

156. We are also mindful that in a few limited instances, a competitive
     carrier may have, prior to the effective date of the disaggregation
     rules adopted in this Order, entered the service area of a rural
     incumbent local exchange carrier and been designated as an eligible
     telecommunications carrier for purposes of receiving high-cost
     support.[^382] In such instances, we believe that permitting the
     incumbent carrier to self-certify to a disaggregation plan may
     result in the anti-competitive targeting of support. Accordingly,
     for those study areas in which a competitive carrier has been
     designated as an eligible telecommunications carrier prior to the
     effective date of these rules, an incumbent carrier may elect a
     disaggregation plan under Path Three only to the extent that it is
     self-certifying a disaggregation and targeting plan that has
     already been approved by the state. In all other instances in which
     a competitive eligible telecommunications carrier has been
     designated prior to the effective date of these rules, the
     incumbent carrier must seek prior state approval of its
     disaggregation and targeting plan under Path Two. We believe this
     approach will prevent the anti-competitive targeting of support.

157. We disagree with commenters that argue that carriers
     self-certifying under Path Three should be permitted to
     disaggregate to three or more zones below the wire center
     level.[^383] We believe that permitting carriers to disaggregate
     and target support to more than two zones below the wire center
     level without prior regulatory approval would provide too great an
     opportunity to disaggregate support in an anti-competitive manner.
     If allowed to disaggregate and target support to more than two
     zones, a carrier would have greater opportunity to target excessive
     support to areas in which competition is not likely to occur and
     inadequate support to areas likely to be served by competitors. For
     example, if permitted to disaggregate and target to three zones, a
     carrier could develop a zone that matches a wireless competitive
     eligible telecommunications carrier's footprint within a state and
     deliver little or no support to that zone.

158. By contrast, if a carrier is permitted to disaggregate and target
     to a maximum of two zones below the wire center level, there is
     greater incentive for the carrier to target support based only on
     the cost differentials between zones. For example, a rural
     carrier's wire center typically serves a small town and the
     surrounding agricultural areas. The cost of serving the town is
     significantly lower than the cost of serving the agricultural areas
     because of differences in population density and the distances of
     customers from the wire center. It is reasonable to expect that if
     two zones are developed, they would reflect the cost differences
     between serving the town and serving the agricultural areas
     respectively. If a carrier were to develop two zones in a manner
     that did not reflect these cost differences, the per-line support
     amount would not be related to the relative cost of serving the
     customer. This would result in the delivery of excessive support to
     one zone and thereby create an artificial incentive for a
     competitive carrier to enter in order to receive support in excess
     of its cost to serve the customer. Such a result is contrary to the
     incumbent carrier's interest. Given this outcome, we believe that
     less regulatory oversight is warranted as an initial matter with
     regard to developing two zones below the wire center level in
     contrast to three zones.

159. For this same reason, we reject the MAG proposal that carriers be
     permitted to disaggregate and target support up to three zones per
     wire center by filing these zones and the associated per-line
     support with the Commission, relevant state regulators and federal
     regulatory authorities, and USAC.[^384] We note however, that,
     although carriers are precluded from self-certifying disaggregation
     plans for more than two zones below the wire center level, there
     are no such limitations on plans that may be approved by a state
     commission or other appropriate regulatory authority under Path
     Two. We disagree that Path Two does not represent a realistic
     option for disaggregating support to a level greater than two zones
     because the process would be a "lengthy and expensive one" and
     carriers would be faced with the process of having to repeat the
     process at any time due to fact that a plan approved under Path Two
     is "subject to change or challenge at any time." [^385] While we
     acknowledge that a carrier may bear a heavier burden than under
     Path Three, we believe Path Two appropriately balances such burden
     with the greater need for scrutiny required of a plan that
     disaggregates support at a level greater than two zones below the
     wire center. Moreover, we note that Path Two, and the
     disaggregation and targeting scheme proposed by the Rural Task
     Force in general, as a consensus reflects the balancing of such
     concerns by rural carriers and competitive carries.

160. We agree with the Rural Task Force that certain general
     requirements should govern carriers' disaggregation plans and adopt
     those proposed by the Rural Task Force. We require that an
     incumbent carrier's study area support in total for a study area
     from the disaggregated method employed equal the total support
     available in the study area on a non-disaggregated basis. We also
     require that relative per-line support relationships between
     disaggregation zones for each disaggregated category of support
     remain fixed over time (except as changes are allowed by the Path
     descriptions described above) and that such relationships be made
     publicly available.[^386] Once a competitive eligible
     telecommunications carrier is designated in a rural study area,
     per-line amounts to determine the competitive eligible
     telecommunications carrier's support should be based on the
     incumbent carrier's total support levels, lines, and disaggregated
     support relationships. We further require that the per-line support
     for each category of support in each disaggregation zone be
     determined such that the relative support relationships between
     zones will be maintained and that the product of all of the
     incumbent's lines for each cost zone multiplied by the per-line
     support for those zones when added together equal the sum of the
     incumbent's total level of support. Prior to the certification of a
     competitive eligible telecommunications carrier in a study area,
     monthly support payments to the incumbent carrier should be made
     based on the total annual amount of support for the study area
     divided by twelve. Finally, we require that per-line support
     amounts for each zone be recalculated whenever an incumbent's total
     annual support changes using the changed support amounts and lines
     at that point in time.

161. We find that these general requirements will ensure that the
     disaggregation and targeting of support is accomplished in a manner
     that is consistent with the universal service principles of
     specificity, predictability, and competitive neutrality.[^387] By
     requiring that carriers make publicly available the per-line level
     of support for lines served in a particular zone and the basis for
     the disaggregation method, the distribution of disaggregated
     support will remain specific and predictable. Similarly, because
     support is portable among all eligible telecommunications carriers
     and disaggregated in a manner that ensures that support levels
     remain constant on a relative basis between zones regardless of the
     disaggregation and targeting path chosen, the distribution of
     support is competitively neutral. We expect the states will apply
     these general requirements to the approval and oversight of
     disaggregation and targeting plans implemented pursuant to this
     Order.[^388]

162. We also recognize, as did the Rural Task Force and several
     commenters, that the integrity and flow of information to
     competitors is central to ensuring that support is distributed in a
     competitively neutral manner.[^389] We find that in order to ensure
     portability and predictability in the delivery of support, rural
     incumbent local exchange carriers must submit to USAC maps in which
     the boundaries of the designated disaggregation zones of support
     are clearly specified, which USAC will make available for public
     inspection by competitors and other interested parties. We require
     that, when submitting information in support of self-certification,
     an incumbent carrier must provide USAC with publicly available
     information that allows competitors to verify and reproduce the
     algorithm used to determine zone support levels. As discussed
     above, the carrier also must demonstrate that the underlying
     rationale is reasonably related to the cost of providing service
     for each cost zone within each disaggregated category. Similarly,
     we require carriers electing Path One to submit to USAC a copy of
     the certification to the state commission or appropriate regulatory
     authority certifying that it will not disaggregate and target
     support. Carriers selecting Path Two must submit a copy to USAC of
     the order approving the disaggregation plan submitted by the
     carrier to the state commission or appropriate regulatory and a
     copy of the disaggregation plan approved by the state commission or
     appropriate regulatory authority.

163. We decline to adopt WorldCom's proposal that we should not permit
     disaggregation of rural carrier universal service high-cost support
     until work on rural carrier specific inputs to the forward-looking
     model has been completed. According to WorldCom, the Commission
     recognized in the *First Report and Order* that "the onl*y*
     reasonable approach to disaggregation is to use a forward-looking
     cost model to allocate support among zones."[^390] Contrary to
     WorldCom's contention, the Commission, while endorsing the use of a
     forward-looking mechanism to determine high-cost support for rural
     carriers in the future, simply recognized that once in place "such
     a mechanism could target support by calculating costs over a
     smaller geographic area than study areas currently used."[^391] The
     Commission did not find that the use of a forward-looking mechanism
     is the only reasonable approach to disaggregation nor did the
     Commission address the issue of the appropriate methodology for the
     disaggregation of support during the period prior to the
     implementation of a forward-looking mechanism for rural
     carriers.[^392]

164. We also reject the proposal to require disaggregation consistent
     with unbundled network element (UNE) zones in order not to
     discourage competition in some rural zones while artificially
     stimulating competition in others through universal service support
     windfalls.[^393] As an initial matter, we note that a rural carrier
     is not required to provide UNEs until it has received a request to
     provide them and the state commission determines that the request
     is not unduly economically burdensome, is technologically feasible,
     and is consistent with section 254 of the Act.[^394] Thus, as a
     general matter, rural carriers would not necessarily establish
     unbundled network element rates or zones. Moreover, as discussed
     above, the flexibility inherent in the Rural Task Force's proposal
     allows for the disaggregation and targeting of support to levels
     which may be more geographically deaveraged than a UNE zone level
     thus delivering a per-line level of support more closely associated
     with the cost of providing service.[^395]

165. Finally, we note that the Rural Task Force recommended that the
     level of disaggregation of support be considered in determining
     whether to certify new eligible telecommunications carriers for a
     service area other than the entire study area of rural carrier
     study area. We believe that the level of disaggregation of support
     should be considered in determining whether to certify new eligible
     telecommunications carriers for a service area other than a rural
     carrier's entire study area to ensure that competitive neutrality
     is maintained between incumbent carriers and competitive eligible
     telecommunications carriers.

## Duration of the Rural Task Force Plan

### Background

166. The Rural Task Force urged that its recommendation be implemented
     immediately and remain in place over a five-year period.[^396] In
     support of this proposal, the Rural Task Force argued that "it is
     unrealistic to expect any universal service mechanism to provide a
     stable, predictable and workable funding source for a period longer
     than five years."[^397]

167. The Joint Board did not state a position on the overall duration of
     the Rural Task Force's plan, but urged the Commission to refer to
     the Joint Board, no later than January 1, 2002, a proceeding to
     consider implementation of an appropriate high-cost mechanism for
     rural telephone companies after the expiration of the Rural Task
     Force's plan.[^398] According to the Joint Board, this proposed
     timing would permit the Joint Board and the Commission to consider
     the appropriate rural mechanism to succeed the Rural Task Force's
     recommendation and devote sufficient time to the task prior to the
     termination of that plan. The Joint Board noted that the Commission
     and the Joint Board already are committed to reviewing the
     operation of the high-cost support mechanism for non-rural carriers
     on or before January 1, 2003.[^399] The Joint Board also
     recommended eventual 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. The Joint Board urged the Commission to 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 companies serving the highest cost
     areas and that recognizes the significant distinctions among rural
     carriers and between rural and non-rural carriers.

### Discussion

168. We agree with the Rural Task Force that a modified version of the
     current high-cost loop support mechanism under Part 36 of the
     Commission's rules should remain in place for no more than five
     years. Although the modifications we adopt are transitional in
     nature, we believe that providing rural telephone companies with a
     predictable level of universal service support during a five-year
     period will create a stable environment that will enable rural
     telephone companies to continue providing supported services at
     affordable rates to rural America. We therefore disagree with those
     commenters that claim the Rural Task Force's proposals will not
     provide stability to rural carriers.[^400] We find that the Rural
     Task Force's proposed framework, with the modifications discussed
     herein, shall remain in place for five years. We would expect the
     Commission to consult with the Joint Board before allowing the plan
     to remain in effect longer than five years.

169. As we have stated, the duration of this interim plan is five years.
     In order to ensure that we have adequate time to consider, in
     consultation with the Joint Board, how these complex support issues
     should be addressed after five years, we intend to refer these
     issues to the Joint Board no later than January 1, 2002. [^401] We
     agree with the Joint Board that this proposed timing will permit
     the Joint Board and the Commission to consider the appropriate
     rural mechanism to succeed the plan we are adopting pursuant to the
     Rural Task Force's recommendation and to devote sufficient time to
     the task prior to the termination of that plan.

170. Consistent with the Joint Board's recommendations and in the
     context of the Joint Board's consideration of an appropriate
     high-cost mechanism for rural telephone companies, we anticipate
     conducting a 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. We will 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. In addition, we would include in that
     comprehensive review consideration of general issues related to
     excessive fund growth and competitive neutrality.

171. In developing a long-term universal service plan that better
     targets support to the highest cost rural areas, we intend to
     consider all options, including the use of forward-looking costs,
     to determine appropriate support levels for both rural and
     non-rural carriers. Although we find that distinct rural and
     non-rural mechanisms are appropriate at this time for the reasons
     discussed above, we are not convinced that this is a viable
     long-term solution. As we approach this task in the future, we will
     consider what plan best effectuates the mandates and goals of
     section 254 that supported services be provided at affordable and
     reasonably comparable rates to all Americans.

172. Although we recognize that the Act includes special provisions for
     markets served by rural telephone companies, we emphasize that
     these provisions do not require separate rural and non-rural
     universal service support mechanisms. [^402] Several commenters
     argue that support should not be dependent upon the ownership
     characteristics of the carrier that happens to serve rural
     customers because section 254 requires comparable rates in rural
     *areas*. [^403] The Maine and Vermont Commission emphasize that for
     every rural customer served by a rural telephone company, there are
     four rural customers served by a non-rural company.[^404] These are
     important issues that we should consider further in the future.

173. We agree with the Rural Task Force that its empirical analysis
     showed that there are considerable differences between rural and
     non-rural carriers and significant variations among rural carriers.
     At the same time, we observe that some of the data seem to show
     that some rural companies may be more similar to non-rural
     companies that to smaller rural companies.[^405] We anticipate that
     our comprehensive review of the high-cost support mechanisms for
     rural and non-rural carriers as a whole will include an examination
     of our current classification of companies as rural or non-rural
     for purposes of receiving universal service support. In this
     regard, we believe that the information the Rural Task Force
     provided in *White Paper 2: The Rural Difference* will be valuable.

174. The Rural Task Force concluded that, in light of the differences
     between rural and non-rural carriers, a distinct rural mechanism is
     appropriate and recommended against use of the Commission's
     forward-looking high-cost mechanism for non-rural carriers to
     calculate support for rural carriers. Although we agree with the
     Rural Task Force that a distinct rural mechanism is appropriate at
     this time, we believe that there may be significant problems
     inherent in indefinitely maintaining separate mechanisms based on
     different economic principles.

175. The Commission previously determined that support based on
     forward-looking cost is sufficient for the provision of the
     supported services and sends the correct signals for entry,
     investment, and innovation.[^406] Many commenters representing the
     interests of rural telephone companies argue that the Rural Task
     Force's analysis conclusively demonstrates that the forward-looking
     cost mechanism should not be used to determine rural company
     support and that only an embedded cost mechanism will provide
     sufficient support for rural carriers.[^407] We disagree.[^408]
     While the Rural Task Force demonstrated the inappropriateness of
     using input values designed for non-rural carriers to determine
     support for rural carriers, we do not find that its analysis
     justifies a reversal of the Commission's position with respect to
     the use of forward-looking cost as a general matter.[^409]

176. As some commenters point out, the Rural Task Force's analysis of
     the forward-looking mechanism was based on the results of running
     the existing high-cost universal service model for rural companies
     using non-rural inputs.[^410] Because it found significant
     differences in comparing these results with actual company data,
     the Rural Task Force found that the model was not an appropriate
     tool for determining forward-looking costs of rural carriers. If
     inputs based on rural carrier data had been used, however, many of
     these differences could have been eliminated.[^411] Other
     differences identified by the Rural Task Force with respect to
     individual companies are generally the discrepancies one would
     expect when inputs designed for non-rural companies are used for an
     analysis of rural costs.[^412]

177. In addition, the Rural Task Force acknowledged that the primary
     reason for the decrease in its estimated total support amounts for
     rural carriers is due to the statewide cost-averaging and
     nationwide benchmark employed in the non-rural mechanism to
     determine funding levels for non-rural carriers.[^413] Indeed, the
     Rural Task Force's analysis in *White Paper 4* demonstrates how
     changing the area over which costs are averaged and changing the
     nationwide benchmark dramatically change support amounts.[^414]
     That is, averaging and benchmarks have more impact on determining
     support levels than the cost estimates produced by the model. The
     Commission has long recognized that the mechanism used to determine
     forward-looking cost for rural carriers may differ from that used
     for non-rural carriers.[^415] For instance, one could design a
     forward-looking mechanism for rural carriers that uses different
     benchmarks and averaging conventions.

178. We leave these issues for another day. Although we conclude that
     the Rural Task Force's analysis has not demonstrated that a
     forward-looking mechanism could never appropriately be used to
     estimate rural costs, we do not have sufficient information to do
     so at this time. Even those commenters who urge the Commission to
     move to forward-looking cost for rural carriers recognize that the
     Commission would need additional time to develop suitable rural
     input values.[^416] Because the Commission has not developed rural
     inputs and it is not possible to determine forward-looking costs
     for rural carriers at this time, we find that rural carriers should
     continue to receive support based upon their embedded costs while
     the five-year plan adopted in this Order is in place.

## Identification of Service Locations 

### Background

179. All telecommunications carriers, including commercial mobile radio
     service (CMRS) carriers that provide supported services, regardless
     of the technology used, may be eligible to receive federal
     universal service support if they satisfy section 214(e)(1) of the
     Act.[^417] Because such support is portable, a competitive eligible
     telecommunications carrier receives the same per-line high-cost
     support as an incumbent local exchange carrier for lines that it
     captures from the incumbent local exchange carrier, as well as for
     any "new" lines that the competitive eligible telecommunications
     carrier serves in the high-cost areas of the incumbent local
     exchange carrier.[^418]

180. Consistent with its recommendation that high-cost support be
     disaggregated and targeted below the study area level, the Rural
     Task Force recommended that a wireless mobile carrier providing
     service in an area served by a rural carrier use the customer's
     residential or business location as the basis for determining in
     which disaggregation zone a customer is located for purposes of
     targeting universal service support.[^419] In making this
     recommendation, the Rural Task Force recognized that the use of any
     location address could allow arbitrage of the universal service
     support system. The Rural Task Force further recommended that the
     Commission establish a reasonable method for determining the
     customer location for mobile wireless customers. Finally, the Rural
     Task Force advocated that the Commission, or other appropriate
     regulatory authority, retain authority to prevent the misuse of
     mobile wireless customer locations and ensure that universal
     service support is being used in accordance with section 254(e).

### Discussion

181. We adopt the Rural Task Force's recommendation that a wireless
     mobile carrier use a customer's location as the basis for
     determining in which disaggregation zone a customer is located for
     purposes of receiving high-cost universal service support for
     service provided to that customer. To that end, we find that a
     customer's billing address is a reasonable surrogate to identify a
     mobile wireless customer's location for the purpose of identifying
     a corresponding disaggregation zone and thus the appropriate
     per-line support level for service provided to the mobile wireless
     customer. We also clarify that this approach is applicable to
     competitive eligible telecommunications carriers providing mobile
     wireless service not only in a rural carrier's service area, but
     also in the service area of a non-rural carrier.

182. We recognize, as did the Rural Task Force and commenters, that,
     because mobile wireless carriers do not provide service at a fixed
     location, there is a question as to how to relate a mobile wireless
     carrier to a disaggregation zone for purposes of determining how
     much support a carrier is entitled to for serving that
     customer.[^420] We find that a mobile wireless customer's billing
     address is a reasonable surrogate for the customer's location.
     Unlike wireline carriers or fixed wireless carriers,[^421] who out
     of necessity must have a provisioning database to determine the
     point of service for their customers, mobile wireless carriers do
     not need such a database because a customer's point of use varies.
     Therefore, while some mobile wireless carriers may have databases
     that are similar to provisioning databases, most will have billing
     address databases. Thus, adoption of customer's billing address as
     a surrogate for service location eliminates the need for many
     mobile wireless carriers to create a new database for purposes of
     universal service funding. We note in this regard that in the
     *Local Competition and Broadband Reporting Report and Order*, we
     allow mobile wireless carriers who submit zip code data to use
     customer billing address as a surrogate for customer location
     because it is the most administratively easy solution to
     determining a customer's primary place of use.[^422] Although we
     acknowledge that there may be several possible solutions to this
     problem,[^423] we find that this approach is reasonable and the
     most administratively simple solution to this problem.[^424]

183. We, therefore, decline to use the residential or primary business
     location as a surrogate because, as noted above, not all mobile
     wireless carriers have databases capable of making such a
     determination. Further, we decline to use the system adopted by
     Congress in the Mobile Telecommunications Sourcing Act.[^425] The
     Mobile Telecommunications Sourcing Act requires a designated
     database provider[^426] or the states to develop an electronic
     database for determining the situs of customers' "place of primary
     use"[^427] for purposes of state and local taxation.[^428] Under
     this law, states or their designees will be required to establish
     an electronic database for making a determination on which
     municipality has taxing authority over the revenues generated by
     the customer.[^429] In the event that such a database is not
     available, the carrier may take advantage of a safe harbor
     provision under which it certifies that it has "expended reasonable
     resources to implement and maintain an appropriately detailed
     electronic database of street address assignment to the taxing
     jurisdiction."[^430] We note that the Mobile Telecommunications
     Sourcing Act's database provision does not require the states to
     establish such databases until some time after August 2001.[^431]
     We therefore decline to impose such a requirement at this time. To
     do so would unnecessarily increase the administrative burden on
     mobile wireless carriers.

184. In reaching this determination, we acknowledge, as did the Rural
     Task Force, that the use of a customer's location address could
     allow arbitrage of the universal service support mechanism.[^432]
     If a carrier were to engage in arbitrage, *e.g.*, misuse a
     customer's billing address by 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, we will
     take appropriate enforcement action.[^433] We will continue to
     monitor the reasonableness of using a customer's billing address as
     the surrogate for a mobile wireless customer's location in a
     disaggregation zone for universal service purposes. As more mobile
     wireless carriers are designated as eligible to receive support, we
     may revisit this approach in the future.

185. Finally, consistent with our decision here, we also conclude that a
     competitive eligible telecommunications carrier providing mobile
     wireless service should use a customer's billing address for
     purposes of determining the appropriate amount of support for
     providing service to a customer in the service area of a non-rural
     incumbent local exchange carrier. In the *Ninth Report and Order*,
     the Commission adopted a targeting methodology for the delivery of
     high-cost support for non-rural carriers in which support is
     targeted to high-cost wire centers.[^434] The Personal
     Communications Industry Association (PCIA) requests that the
     Commission clarify how to determine which wire center should be
     used to determine the amount of support for any particular wireless
     customer.[^435] PCIA contends that a customer's address is the most
     accurate surrogate for the incumbent's wire center and therefore
     support for mobile wireless customers should be based on the wire
     center associated with the customer's address.[^436] We grant
     PCIA's request for clarification of the Commission's decision in
     the *Ninth Report and Order* to the extent it seeks clarification
     on the limited issue of assigning mobile wireless customers to the
     incumbent local exchange carrier's wire center. [^437] We clarify
     that a mobile wireless customer's billing address is a reasonable
     surrogate for the customer's address for assigning the customer's
     location to a wire-center in a non-rural carrier's study area to
     target universal service support.[^438]

## State Certification Under Section 254(e)

### Background

186. Under section 254(e) of the Act, carriers must use universal
     service support "only for the provision, maintenance and upgrading
     of facilities and services for which the support is
     intended."[^439] In the *Ninth Report and Order*, the Commission
     concluded that because the support provided to non-rural carriers
     is intended to enable the reasonable comparability of intrastate
     rates, and states have primary jurisdiction over intrastate rates,
     it is most appropriate for states to determine whether support is
     used consistent with section 254(e).[^440] Accordingly, the
     Commission adopted, as a regulatory safeguard, rules requiring
     states seeking federal universal service high-cost support for
     non-rural carriers within their territory to file annually a
     certification with the Commission and USAC. The certification must
     state that all federal high-cost funds flowing to non-rural
     carriers in that state and/or competitive eligible
     telecommunications carriers seeking high-cost support in the
     service area of a non-rural carrier in that state, will be used in
     a manner consistent with section 254(e).[^441] Absent such
     certification, a carrier cannot receive support.[^442]

187. In its recommendation, the Rural Task Force recognized the need for
     accountability in the administration of the high-cost support
     mechanism for rural carriers.[^443] The Rural Task Force found that
     existing procedures used by NECA, USAC, the Commission, and state
     commissions reasonably promote such accountability. The Rural Task
     Force recommended that the Commission delegate to the states
     responsibility for oversight of section 254(e) in a manner similar
     to that used for non-rural carriers.[^444]

### Discussion

188. We conclude that states should be required to file annual
     certifications with the Commission to ensure that carriers use
     universal service support "only for the provision, maintenance and
     upgrading of facilities and services for which the support is
     intended" consistent with section 254(e). We conclude that the
     mandate in section 254(e) applies to *all* carriers, rural and
     non-rural, that are designated as eligible to receive support under
     section 214(e) of the Act.[^445] As we concluded with regard to
     non-rural carriers, the federal high-cost support that is provided
     to rural carriers is intended to enable the reasonable
     comparability of intrastate rates, and states have jurisdiction
     over intrastate rates. Given that states generally have primary
     authority over carriers' intrastate activities, we 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(e). Accordingly, we will require states
     that wish to receive federal universal service high-cost support
     for rural carriers within their boundaries to file a certification
     with the Commission and USAC stating that all federal high-cost
     funds flowing to rural carriers in that state will be used in a
     manner consistent with section 254(e).[^446] Absent such
     certification, carriers will not receive such support.

189. We recognize that some state commissions may have only limited
     regulatory oversight to ensure that federal support is reflected in
     intrastate rates. In the case of non-rural carriers, we concluded
     that states nonetheless may certify to the Commission that a
     non-rural carrier in the state had accounted to the state
     commission for its receipt of federal support, and that such
     support will be used "only for the provision, maintenance and
     upgrading of facilities and services for which the support is
     intended."[^447] We determined that, in states in which the state
     commission has limited jurisdiction over such carriers, the state
     need not initiate the certification process itself.[^448] Instead,
     non-rural local exchange carriers, and competitive eligible
     telecommunications carriers serving lines in the service area of
     the non-rural local exchange carriers, may formulate plans to
     ensure compliance with section 254(e), and present those plans to
     the state, so that the state may make the appropriate certification
     to the Commission.[^449] We conclude that this approach is equally
     appropriate here with regard to rural carriers and competitive
     eligible telecommunications carriers serving lines in the service
     area of a rural local exchange carrier. Absent the filing of such
     certification, carriers will not receive federal universal service
     support.

190. We also recognize that, in limited instances, certain carriers may
     not be subject to the jurisdiction of a state (*e.g.*, certain
     tribally-owned carriers). In such instances, there is no state
     regulatory authority to ensure compliance with section 254(e). We
     conclude that, in these limited instances, a carrier shall certify
     directly to the Commission that federal high-cost support will be
     used in a manner consistent with section 254(e). The certification
     must be filed in the form of a sworn affidavit executed by a
     corporate officer attesting to the use of the support only for the
     provision, maintenance, and upgrading of facilities and services
     for which the support is intended pursuant to section 254(e) of the
     1996 Act. A copy of this letter must also be submitted to USAC.
     Absent such a certification, carriers will not receive federal
     universal service support.

191. The certification requirement we adopt is applicable to all rural
     carriers and competitive eligible telecommunications carriers
     seeking high-cost support in the service area of a rural local
     exchange carrier. States, or carriers not subject to the
     jurisdiction of a state, shall file this certification annually. If
     filed by the state, the certification shall be applicable to all
     rural carriers and competitive eligible telecommunications carriers
     seeking high-cost support in the service area of a rural local
     exchange carrier that the state certifies as eligible to receive
     federal high-cost during that annual period.[^450] The
     certification may be filed in the form of a letter from the
     appropriate state regulatory authority, or authorized corporate
     officer where the state lacks jurisdiction, and shall be filed with
     the Commission and USAC. A state may file a supplemental
     certification for carriers that were not eligible for support at
     the time the state filed its initial certification. In the event
     that a state determines that a carrier has not complied with
     section 254(e), the state shall have the authority to revoke
     certification. In addition, because states are responsible for
     filing section 254(e) certifications with the Commission,
     challenges to the propriety of the certifications, or revocation of
     the certifications, should be brought at the state level.

192. Under our existing rules, USAC submits to the Commission estimated
     universal service support requirements, including high-cost
     support, two months prior to the beginning of each quarter.[^451]
     Thus, for the first quarter of 2002, USAC will submit estimated
     universal service support requirements on or before November
     1, 2001. In order for USAC to submit an accurate estimate of the
     level of high-cost and local switching support, it will need to
     know which carriers have been certified pursuant to the section
     254(e)-certification process. To allow USAC sufficient time to
     process section 254(e) certifications and estimate the level of
     high-cost support, we conclude that certifications should be filed
     one month before USAC's quarterly filing is due, that is on
     October 1. In the event that a certification is filed untimely, the
     carriers subject to that certification will not be eligible for
     support until the quarter for which USAC's subsequent filing is
     due. For example, if a state files a section 254(e) certification
     after October 1, 2001, but on or before January 1, 2002, the
     carrier would not be eligible for support until the second quarter
     of 2002.[^452] In the event that a state revokes a certification,
     the state must notify USAC and the Commission within 30 days of the
     revocation.

193. In adopting this certification scheme, we recognize that rural
     carriers are receiving federal high-cost support under our existing
     rules and may be entitled to additional levels of federal high-cost
     support under our revisions to these rules, which will be effective
     July 1, 2001. We will not, however, require certifications for the
     last two quarters of 2001. Rather, we will require certifications
     to be submitted initially on October 1, 2001 for the first full
     year of implementation, January 1, 2002 -- December 31, 2002. We
     acknowledge that, as a result, we will not have certifications for
     support distributed for the last two quarters of 2001. We believe
     that permitting the continued delivery of support during these two
     quarters without certification will ease the transition to the
     revised mechanism for states, carriers, and USAC, and ensure that
     the benefits accruing from its adoption are realized as quickly as
     possible. We note that we have the authority to take enforcement
     action against a carrier if we should determine that support is
     being used in a manner inconsistent with section 254(e).[^453] We
     believe that this enforcement power will afford sufficient
     protection against abuse during this limited period of transition.

194. Finally, we reconsider, on our own motion, the existing rule
     requiring state certification of the use of universal service
     support by non-rural incumbent local exchange carriers and eligible
     telecommunications carriers serving lines in the service area of a
     non-rural incumbent local exchange carrier adopted in the *Ninth
     Report and Order*.[^454] In its current form, the rule does not
     recognize that in limited instances, certain carriers may not be
     subject to the jurisdiction of a state. As a result, the rule does
     not provide a mechanism by which such a carrier's use of support
     can be certified as consistent with section 254(e). Consistent with
     our determination with regard to rural carriers and eligible
     telecommunications carriers serving lines in the service area of a
     rural incumbent local exchange carrier, we conclude that in these
     limited instances, a carrier shall certify directly to the
     Commission that federal high-cost support will be used in a manner
     consistent with section 254(e). The certification must be filed in
     the form of a sworn affidavit executed by a corporate officer
     attesting to the use of the support only for the provision,
     maintenance and upgrading of facilities and services for which the
     support is intended pursuant to section 254(e) of the Act. A copy
     of this letter must also be submitted to USAC. Absent such a
     certification, carriers will not receive support.[^455]

## Advanced Services

### Background

195. Section 254(c) of the Act defines universal service as an "evolving
     level of telecommunications services that the Commission shall
     establish periodically\[.\]"[^456] In 1997, based on consideration
     of the definitional criteria set forth in section 254(c) and the
     Joint Board's recommendations, the Commission designated nine
     "core" services that are eligible for universal service support:
     single-party service; voice grade access to the public switched
     telephone network; Dual Tone Multifrequency signaling or its
     functional equivalent; access to emergency services; access to
     operator services; access to interexchange service; access to
     directory assistance; and toll limitation services for qualifying
     low-income consumers.[^457]

196. The 1996 Act addresses advanced telecommunications and information
     services in sections 254(b) and 706. Section 254(b) establishes the
     universal service principles that access to such services should be
     provided in all regions of the Nation, and should be reasonably
     comparable in rural, insular, and high-cost areas to the access in
     urban areas.[^458] Section 706 directs the Commission and the
     states to utilize various regulatory methods to "encourage
     deployment on a reasonable and timely basis of advanced
     telecommunications capability to all Americans\[.\]"[^459]

197. The Rural Task Force recommended that the Joint Board review the
     definition of services that are supported by the federal universal
     service mechanisms.[^460] It also recommended that the list of
     supported services "should evolve to include access to information
     services at a rate that is reasonably comparable to that provided
     in urban areas."[^461]

198. In addition, the Rural Task Force stated that its recommendation to
     continue distributing support to rural carriers based on their
     embedded costs "inherently provides incentives for the
     infrastructure investments necessary for providing access to
     advanced services."[^462] It recommended the adoption of a "no
     barriers to advanced services" policy for rural carriers, which it
     indicated would be comparable to that applied in connection with
     the forward-looking high-cost mechanism for non-rural
     carriers.[^463] 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
     advanced services."[^464]

### Discussion

199. The definition of universal service under section 254(c) of the Act
     is a matter currently pending before the Joint Board. The
     Commission asked the Joint Board to review the list of supported
     services and, if warranted, recommend modifications.[^465] Among
     other things, the Commission asked the Joint Board to consider the
     record on requests to redefine voice grade access to ensure
     reasonable comparability of dial-up Internet access in urban and
     rural areas.[^466] In accordance with section 254(c), the
     Commission will consider whether any modifications to the list of
     supported services are warranted after the Joint Board completes
     its review.[^467]

200. We agree with the Rural Task Force that our universal service
     policies should not inadvertently create barriers to the provision
     of access to advanced services, and believe that our current
     universal service system does not create such barriers.[^468]
     Initially, we emphasize that section 254(b) states that access to
     advanced services "should" be provided, and the Fifth Circuit has
     held that section 254(b) establishes "principles that the FCC
     should consider in developing its policies" rather than specific
     statutory commands.[^469] As the Rural Task Force recognized, the
     Commission's existing high-cost loop support mechanism for rural
     carriers "inherently provides incentives for the infrastructure
     investments necessary for providing access to advanced
     services."[^470]

201. Contrary to the arguments of some commenters, use of support to
     invest in infrastructure capable of providing access to advanced
     services does not violate section 254(e), which mandates that
     support be used "only for the provision, maintenance, and upgrading
     of facilities and services for which the support is
     intended."[^471] 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. High-cost loop support is available to
     rural carriers "to maintain existing facilities and make prudent
     facility upgrades\[.\]"[^472] Thus, although the high-cost loop
     support mechanism does not support the provision of advanced
     services, our policies do not impede the deployment of modern plant
     capable of providing access to advanced services. Rural carriers
     may consider both their present and future needs in determining
     what plant to deploy, knowing that prudent investment will be
     eligible for support.[^473] The measures that we adopt in this
     Order will increase incentives for carriers to modernize their
     plant by increasing the total amount of high-cost loop support
     available under the cap.

202. As we move forward in the future, we will consider ways to ensure
     that we do not create regulatory barriers to the deployment of
     advanced services. The principal thrust of the "no barriers"
     proposal appears to be that the Commission should require carriers
     to deploy plant capable of providing access to advanced services,
     and encourage them to replace plant that cannot provide such
     access.[^474] Moreover, we believe any specific policies we adopt
     in this area should apply uniformly to all local exchange carriers,
     rather than as part of a transitional high-cost support mechanism
     for rural carriers.[^475] Therefore, we believe that the "no
     barriers" policy as specifically proposed by the Rural Task Force
     should be considered further in connection with our comprehensive
     review of the high-cost loop support mechanisms for rural and
     non-rural carriers. In accordance with our mandate under section
     706, we will continue to examine whether deployment of advanced
     telecommunications capability to all Americans is progressing in a
     reasonable and timely manner, and to consider means by which we can
     stimulate the further deployment of access to advanced
     services.[^476]

## Interstate Access Universal Service Support for Rate-of-Return Carriers

### Background

203. The Rural Task Force recommended a number of principles for the
     Commission to apply in addressing the issue of implicit support for
     high loop costs within the interstate access rates of
     rate-of-return carriers (typically rural carriers).[^477] The
     Commission has taken various measures to reform the access rate
     structure of price cap carriers.[^478] According to the Rural Task
     Force, rate disparity between price cap and rate-of-return carriers
     results from both access rate structure differences and cost
     differences, and may create significant pressures on interexchange
     carriers to geographically deaverage toll rates, contrary to the
     requirements of section 254(g) of the Act.[^479] To reform the
     access rate structure of rate-of-return carriers, the Rural Task
     Force recommended that the Commission determine the amount of
     implicit support within their access rates by calculating the
     difference between their current access rates and "the appropriate
     unit prices of interstate access\[,\]" and then replacing this
     amount with a new, uncapped support mechanism.[^480] The purpose of
     the new interstate access support mechanism would be similar to
     that of the mechanism adopted in the *Interstate Access Support
     Order* for price cap carriers.[^481]

204. The Rural Task Force did not recommend a specific method for
     determining the "appropriate unit prices of interstate access." The
     Rural Task Force further recommended, among other things, that the
     new support mechanism be funded by collections from all providers
     of interstate telecommunications services, that support be subject
     to geographic deaveraging and targeted to high-cost areas, and that
     support be portable and available to all eligible
     telecommunications carriers on an equitable, non-discriminatory,
     and competitively neutral basis.

205. The Joint Board concurred with the Rural Task Force that the
     Commission should consider creating an explicit universal service
     support mechanism to replace support that may be implicit within
     the access rates of rate-of-return carriers, but acknowledged that
     access charge issues "are interstate in nature and, therefore, are
     properly before the Commission."[^482] The Joint Board stated,
     however, that the MAG plan now before the Commission "raises issues
     beyond interstate access reform, and proposes universal service
     policy and procedural changes, including rate comparability under
     section 254(b)(3) and the overall size of the universal service
     mechanisms."[^483] It therefore encouraged the Commission "to
     ensure the Joint Board remains actively involved in review of those
     aspects of the MAG plan that relate to universal service."[^484]

### Discussion

206. We find the Rural Task Force's recommended principles for access
     reform to be reasonable and generally consistent with prior
     Commission actions to reform the access rate structure of price cap
     carriers. More specifically, these principles are generally
     consistent with our prior actions to identify implicit support in
     interstate access charges and to replace such implicit support with
     explicit universal service support available to all eligible
     telecommunications carriers on an equitable, non-discriminatory,
     and competitively neutral basis.[^485] As the Joint Board
     recognized, the Commission currently is considering access reform
     issues in a separate proceeding concerning the MAG plan.[^486] We
     recognize the importance of completing access reform for
     rate-of-return carriers, and intend to act expeditiously to resolve
     issues raised in the MAG proceeding.[^487] Our consideration of
     these issues in the MAG proceeding will be informed by the Rural
     Task Force's recommended principles, which we will incorporate into
     that docket, as well as by the comments filed in this proceeding
     and the MAG proceeding concerning those principles.[^488] As we
     stated previously in the *MAG NPRM*, we intend to keep the Joint
     Board actively involved in review of those aspects of the MAG plan
     that relate to universal service.[^489]

207. We reject AT&T's argument that "\[t\]he Commission must immediately
     address access reform for rural carriers as part of the \[Rural
     Task Force\] plan."[^490] In contrast to the Rural Task Force's
     specific recommendations regarding reform of high-cost loop support
     under Part 36 of the Commission's rules, its recommendations
     regarding access reform consisted of general principles, which it
     recognized do not resolve fundamental questions that remain
     controversial.[^491] We agree with NRTA, OPASTCO, USTA, and others
     that "\[a\]ccess charge reform issues would be more appropriately
     addressed in the MAG Plan proceeding\[.\]"[^492] Likewise, we
     reject suggestions that we defer action on the Rural Task Force
     plan.[^493] As discussed above, the Rural Task Force plan
     represents a consensus of competing views developed over the course
     of several years and endorsed by a Joint Board Recommended
     Decision. The MAG plan was first submitted to the Commission on
     October 20, 2000, and requires further consideration to resolve
     issues raised by commenters.[^494] Accordingly, although we are
     considering the issues raised in both proceedings simultaneously,
     we conclude that the MAG plan's pendency before the Commission does
     not warrant delay in implementation of the Rural Task Force
     plan.[^495]

# FURTHER NOTICE OF PROPOSED RULEMAKING

## Background

208. As discussed in greater detail in the attached Order,[^496] we
     decline at this time to adopt the Rural Task Force's proposal to
     freeze high-cost loop support on a per-line basis in rural carrier
     study areas where a competitive eligible telecommunications carrier
     initiates service. The purpose of the proposal was to prevent
     excessive growth in the universal service fund as a result of the
     entrance of competitive eligible telecommunications carriers in
     rural carrier study areas over the life of the five-year plan we
     adopt here. As discussed above in section IV.C.3, support provided
     to competitive eligible telecommunications carriers is not subject
     to the overall cap on the high-cost loop fund. During the five-year
     period, excessive growth in the fund is thus possible if incumbent
     carriers lose many lines to competitive eligible telecommunications
     carriers, or if competitive eligible telecommunications carriers
     add a significant number of lines. The first scenario raises
     particular fund growth concerns because as 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.

209. We base our decision not to adopt the Rural Task Force's proposal
     at this time on several concerns. First, the proposal may be of
     limited benefit in serving its intended purpose and may, in some
     instances, contribute to fund growth by freezing support at higher
     levels than would be warranted in the future. Second, the
     likelihood of a competitive eligible telecommunications carrier
     capturing a substantial percentage of lines from the incumbent
     during the five-year period is speculative. Third, the indexed cap
     on the high-cost loop fund will operate as a check on excessive
     fund growth to a certain extent. Fourth, we are concerned that the
     proposal may have the unintended consequence of discouraging
     efficient investment in rural infrastructure. Fifth, the proposal
     may hinder the competitive entry in rural study areas by creating
     an additional incentive for incumbents to oppose the designation of
     eligible telecommunications carriers in rural study areas. Finally,
     we are concerned that the proposal would require complex and
     administratively burdensome regulations to implement.

## Issues for Comment

210. Although we decline, at this time, to adopt the Rural Task Force's
     proposal to freeze per-line support in rural carrier study areas in
     which a competitive eligible telecommunications carrier is
     providing service, we recognize that excessive fund growth may
     occur during this five-year plan. We note that the indexed cap on
     high-cost loop support would not check this growth fully, because
     support received by competitive carriers currently is not included
     within the cap. To develop the record on this issue more fully, we
     invite interested parties to propose possible alternative measures
     that may be appropriate to address this issue. We also invite
     commenters to address the likelihood that such measures may be
     necessary to prevent excessive fund growth during the five-year
     period.

211. One possible approach suggested by commenters would be to freeze
     support only when a competitive carrier serves a specific
     percentage of the total lines within a study area.[^497] Under this
     approach, the Commission would adopt a threshold percentage of
     lines lost for triggering the freeze. As discussed above, however,
     a simple threshold requirement would fail to target study areas
     where the excessive fund growth is most likely to occur, because it
     could not distinguish captured from new subscriber lines.[^498]
     With regard to any proposal to freeze support, commenters should
     address whether support should be frozen for the study area, the
     competitor's service area, or the incumbent's specific
     disaggregation zone. We also invite commenters to propose other
     alternatives. Commenters should address the administrative
     feasibility of any such proposals, and whether they are consistent
     with the principles of encouraging investment in rural
     infrastructure and promoting competitive entry.[^499]

212. Although we are not convinced of the likelihood of excessive fund
     growth due to competitive entry in high-cost areas during the life
     of this five-year plan, we intend to resolve the issues raised in
     this Further Notice expeditiously after we have developed the
     record more fully. In the meantime, as discussed above, we intend
     to closely monitor the impact of competitive entry in rural carrier
     study areas to ensure that excessive fund growth does not occur,
     consistent with our obligation in section 254 to maintain a
     specific, predictable, and sufficient universal service fund.[^500]

# PROCEDURAL MATTERS

## Final Regulatory Flexibility Analysis

213. As required by the Regulatory Flexibility Act (RFA),[^501] an
     Initial Regulatory Flexibility Analysis (IRFA) was incorporated in
     the *Further Notice*.[^502] The Commission sought written public
     comment on the proposals in the *Further Notice*, including comment
     on the IRFA. This present Final Regulatory Flexibility Analysis
     (FRFA) conforms to the RFA.[^503]

### Need for, and Objectives of, the Order 

214. The 1996 Act requires the Commission to consult with the Joint
     Board in implementing section 254, which establishes a number of
     principles for the preservation and advancement of universal
     service in a competitive telecommunications environment.[^504] The
     Commission initiated this proceeding to consider the Recommended
     Decision of the Joint Board regarding a rural universal service
     plan developed by the Rural Task Force. In this Order, consistent
     with the recommendation of the Joint Board, we adopt interim rules
     for determining high-cost universal service support for rural
     telephone companies based upon the modified embedded cost mechanism
     proposed by the Rural Task Force. These rules should benefit all
     rural carriers because they will result in predictable levels of
     support so that rural carriers can continue to provide affordable
     service in rural America, while ensuring that consumers in all
     regions of the Nation, including rural areas, have access to
     affordable and quality telecommunications services.

215. In this Order, we take the following actions in response to the
     Rural Task Force's recommended reforms to the rural high-cost loop
     support mechanism and the proposals made by the MAG relating to
     these rules. First, we adopt the Rural Task Force's recommendation
     to re-base the high-cost loop support fund for rural telephone
     companies and retain an indexed cap on the fund. Second, we adopt a
     rural growth factor that allows growth in the high-cost loop
     support fund based on the annual increases in the Gross Domestic
     Product-Chained Price Index (GDP-CPI) and growth in the total
     number of working loops of rural carriers. Third, we adopt a
     modified version of the Rural Task Force's proposal as it relates
     to corporate operations expense. We revise the corporate operations
     expense limitation calculation so that the dollar values in the
     formula are re-based and indexed by the GDP-CPI. We also raise the
     minimum cap for those carriers with 6,000 or fewer loops. In the
     revised corporate operations expense formula, we allow these
     carriers to receive support for corporate operations expenses of up
     to \$600,000 or amounts derived from the revised corporate
     operations expense formula, whichever is greater. Fourth, we adopt
     a modified version of the Rural Task Force's proposed safety net
     additive so that if certain criteria are met, a carrier may receive
     support for its incremental expense adjustment associated with new
     investment. Fifth, while we retain section 54.305 of the
     Commission's rules which provides that a carrier acquiring
     exchanges from an unaffiliated carrier shall receive the same
     per-line levels of high-cost support for which the acquired
     exchanges were eligible prior to their transfer, we also modify the
     rule to provide safety valve support for additional investment made
     in the acquired exchanges. Sixth, we adopt, with certain
     modifications, the three paths for the disaggregation and targeting
     of high-cost universal service support proposed by the Rural Task
     Force. We also adopt the general requirements that the Rural Task
     Force proposed for all disaggregation plans. Seventh, we adopt the
     Rural Task Force's proposed framework, with the above noted
     modifications, and it shall remain in place for five years.
     Finally, we conclude that states should file annual certifications
     with the Commission to ensure that rural carriers and competitive
     eligible telecommunications carriers providing service in the
     service area of a rural local exchange carrier use universal
     service support "only for the provision, maintenance and upgrading
     of facilities and services for which the support is intended"
     consistent with section 254(e) of the Act.

216. In this Order, the Commission also addresses certain issues raised
     in the MAG proceeding. Specifically, we find that the MAG proposal
     to remove the indexed cap entirely and to eliminate the limits on
     corporate operations expenses is unwarranted. We also decide
     against the MAG proposal to the extent that it recommends
     elimination of section 54.305 entirely. Finally, we disagree with
     the MAG proposal to allow rural carriers to disaggregate universal
     service support up to three zones per wire center. We find the
     Rural Task Force's recommended principles for access reform to be
     reasonable and generally consistent with prior Commission actions
     to reform the access rate structure of price cap carriers. These
     principles will aid our consideration of access charge reform
     issues in the pending MAG proceeding.

217. We find that the interim rules strike a fair and reasonable balance
     among the principles and goals enumerated in section 254 of the
     Communications Act of 1934, as amended by the Telecommunications
     Act of 1996. Specifically, as the Commission continues to develop a
     long-term coordinated universal service plan, this interim plan
     will provide predictable levels of support so that rural carriers
     can make prudent investments in rural America.

### Summary of Significant Issues Raised by Public Comments In Response to the IRFA 

218. No comments were submitted in response to the IRFA, nor did
     commenters address the potential impact of these interim rules on
     small business. The Commission, however, did consider the burden
     that certain provisions contained in the Order may have on smaller
     carriers and sought to minimize that burden. For example, as the
     Commission states in this Order, to reduce the need for small
     carriers to seek a waiver under the corporate operations expense
     rules,[^505] we raise the minimum cap on allowable corporate
     operations expenses supported by universal service to \$600,000 or
     amounts derived from the revised corporate operations expense
     formulas, whichever is greater.[^506] This eliminates the burden
     and expense associated with the waiver process for those carriers.

### Description and Estimate of the Number of Small Entities to Which the Notice will Apply 

219. 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 proposed rules adopted herein.[^507] The RFA
     generally defines the term \"small entity\" as having the same
     meaning as the terms \"small business,\" \"small organization,\"
     and \"small governmental jurisdiction.\"[^508] In addition, the
     term \"small business\" has the same meaning as the term \"small
     business concern\" under the Small Business Act.[^509] 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).[^510]

220. We have included small incumbent local exchange carriers in this
     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 dominant in its field of
     operation.\"[^511] 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.[^512] We have therefore included small
     incumbent carriers in this RFA analysis, although we emphasize that
     this RFA action has no effect on the Commission's analyses and
     determinations in other, non-RFA contexts.

221. *Local Exchange Carriers*. Neither the Commission nor the SBA has
     developed a definition for small providers of local exchange
     services. The closest applicable definition under the SBA rules is
     for telephone communications companies other than radiotelephone
     (wireless) companies.[^513] According to the most recent *Trends in
     Telephone Service* report, 1,335 incumbent carriers reported that
     they were engaged in the provision of local exchange
     services.[^514] We do not have data specifying the number of these
     carriers that are either dominant in their field of operations, are
     not independently owned and operated, or have more than 1,500
     employees, and thus are unable at this time to estimate with
     greater precision the number of local exchange carriers that would
     qualify as small business concerns under the SBA\'s definition. Of
     the 1,335 incumbent carriers, 13 entities are price cap carriers
     that are not subject to these rules. Consequently, we estimate that
     fewer than 1,322 providers of local exchange service are small
     entities or small incumbent local exchange carriers that may be
     affected.

222. *Competitive Access Providers*. Neither the Commission nor the SBA
     has developed a definition of small entities specifically
     applicable to competitive access services providers (CAPs). The
     closest applicable definition under the SBA rules is for telephone
     communications companies other than radiotelephone (wireless)
     companies.[^515] According to the most recent *Trends in Telephone
     Service* data, 349 CAPs/competitive local exchange carriers and 60
     other local exchange carriers reported that they were engaged in
     the provision of competitive local exchange services.[^516] We do
     not have data specifying the number of these carriers that are not
     independently owned and operated, or have more than 1,500
     employees, and thus are unable at this time to estimate with
     greater precision the number of CAPs that would qualify as small
     business concerns under the SBA\'s definition. Consequently, we
     estimate that there are less than 349 small entity CAPs and 60
     other local exchange carriers that may be affected.

223. *Cellular Licensees*. Neither the Commission nor the SBA has
     developed a definition of small entities applicable to cellular
     licensees. Therefore, the applicable definition of small entity is
     the definition under the SBA rules applicable to radiotelephone
     (wireless) companies. This provides that a small entity is a
     radiotelephone company employing no more than 1,500 persons.[^517]
     According to the Bureau of the Census, only twelve radiotelephone
     firms from a total of 1,178 such firms which operated during 1992
     had 1,000 or more employees.[^518] Therefore, even if all twelve of
     these firms were cellular telephone companies, nearly all cellular
     carriers were small businesses under the SBA\'s definition. In
     addition, we note that there are 1,758 cellular licenses; however,
     a cellular licensee may own several licenses. In addition,
     according to the most recent *Trends Report* data, 806 carriers
     reported that they were engaged in the provision of either cellular
     service or Personal Communications Service (PCS) services, which
     are placed together in the data.[^519] We do not have data
     specifying the number of these carriers that are not independently
     owned and operated or have more than 1,500 employees, and thus are
     unable at this time to estimate with greater precision the number
     of cellular service carriers that would qualify as small business
     concerns under the SBA\'s definition. Consequently, we estimate
     that there are fewer than 808 small cellular service carriers that
     may be affected.

224. *Broadband Personal Communications Service (PCS).* The broadband
     PCS spectrum is divided into six frequency blocks 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 less than \$40 million in
     the three previous calendar years.[^520] For Block F, an additional
     classification for \"very small business\" was added and is defined
     as an entity that, together with their affiliates, has average
     gross revenues of not more than \$15 million for the preceding
     three calendar years.[^521] These regulations defining \"small
     entity\'\' in the context of broadband PCS auctions have been
     approved by the SBA.[^522] 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.[^523] Based on this information,
     we conclude that the number of small broadband PCS licensees will
     include the 90 winning C Block bidders and the 93 qualifying
     bidders in the D, E, and F blocks, for a total of 183 small entity
     PCS providers as defined by the SBA and the Commission\'s auction
     rules.

225. *Rural Radiotelephone Service.* The Commission has not adopted a
     definition of small entity specific to the Rural Radiotelephone
     Service.[^524] A significant subset of the Rural Radiotelephone
     Service is the Basic Exchange Telephone Radio Systems
     (BETRS).[^525] We will use the SBA\'s definition applicable to
     radiotelephone companies, *i.e.*, an entity employing no more than
     1,500 persons.[^526] There are approximately 1,000 licensees in the
     Rural Radiotelephone Service, and we estimate that almost all of
     them qualify as small entities under the SBA\'s definition.

226. *Specialized Mobile Radio (SMR).* The Commission awards bidding
     credits in auctions for geographic area 800 MHz and 900 MHz SMR
     licenses to firms that had revenues of no more than \$15 million in
     each of the three previous calendar years.[^527] In the context of
     both the 800 MHz and 900 MHz SMR, a definition of \"small entity\"
     has been approved by the SBA.

227. These fees 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 purposes of
     this FRFA, that all of the remaining existing extended
     implementation authorizations are held by small entities, as that
     term is defined by the SBA.

228. For geographic area licenses in the 900 MHz SMR band, there are 60
     who qualified as small entities. For the 800 MHz SMRs, 38 are small
     or very small entities.

229. *Fixed Microwave Services.* Microwave services include common
     carrier,[^528] private‑operational fixed,[^529] and broadcast
     auxiliary radio services.[^530] At present, there are approximately
     22,015 common carrier fixed licensees and 61,670 private
     operational‑fixed licensees and broadcast auxiliary radio licensees
     in the microwave services. The Commission has not yet defined a
     small business with respect to microwave services. For purposes of
     this FRFA, we utilize the SBA\'s definition applicable to
     radiotelephone companies \-- *i.e.*, an entity with no more than
     1,500 persons.[^531] We estimate, for this purpose, that all of the
     Fixed Microwave licensees (excluding broadcast auxiliary licensees)
     would qualify as small entities under the SBA definition for
     radiotelephone companies.

230. *39 GHz Licensees*. Neither the Commission nor the SBA has
     developed a definition of small entities applicable to 39 GHz
     licensees. Therefore, the applicable definition of small entity is
     the definition under the SBA rules applicable to radiotelephone
     (wireless) companies. This provides that a small entity is a
     radiotelephone company employing no more than 1,500 persons.[^532]
     For purposes of the 39 GHz license auction, the Commission defined
     "small entity" as an entity that has average gross revenues of less
     than \$40 million in the three previous calendar years, and \"very
     small entity\" as an entity that has average gross revenues of not
     more that \$15 million for the preceding three calendar years. The
     Commission has granted licenses to 29 service providers in the 39
     GHz service. We do not have data specifying the number of these
     carriers that are not independently owned and operated or have more
     than 1,500 employees, and thus are unable at this time to estimate
     with greater precision the number of 39 GHz licensees that would
     qualify as small business concerns under the SBA\'s definition.
     Consequently, we estimate that there are no more than 29 39 GHz
     small business providers that may be affected.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements 

231. In the Order, we adopt the Rural Task Force's proposal that rural
     carriers be given a choice of three different options for
     disaggregating and targeting per-line universal service high-cost
     support, including high-cost loop support, Long Term Support (LTS),
     and Local Switching Support (LSS). Rural carriers are required to
     choose one of the paths detailed below within 270 days of the
     effective date of the new rules through submission to the state
     commissions. Rural carriers not subject to the jurisdiction of the
     state are required to make such submissions to the Commission.
     Rural carriers that elect to disaggregate and target per-line
     support under either Path Two or Three are required to report loops
     at the cost-zone level, which is a modification of the current
     requirement that carriers report loops at the study-area level.
     This change will require only minor increases in a carrier's
     reporting burdens, and predominantly only in the first year that
     the carrier revises its method of reporting. Path 1 is available to
     rural carriers that do not want to target high-cost support. Path
     Two is available to rural carriers that want state commission
     review and approval of a disaggregation plan. Path Three is
     available to rural carriers interested in self-certifying a method
     for disaggregating universal service support into a maximum of two
     cost zones per wire center.[^533] Only a disaggregation plan filed
     under Path Three requires additional reporting requirements to the
     Commission. Under Path Three, a carrier must use a rationale that
     is reasonably related to the cost of providing service for each
     cost zone within each disaggregation category (high-cost loop
     support, LSS, and LTS). We estimate that the annual burden hours in
     the first year would be 60 hours. We estimate subsequent annual
     burden hours at 8 hours. We believe the burden associated with this
     reporting requirement is appropriately balanced with the benefits
     reporting rural carriers will receive.

232. The Commission also adopted the Rural Task Force's proposal to
     extend the section 254(e) certification process to rural
     carriers.[^534] Under this process, state regulatory commissions
     provide the Commission with annual certifications indicating that
     the rural carriers in their states receiving federal universal
     service support will use the support "only for the provision,
     maintenance, and upgrading of facilities and services for which the
     support is intended."[^535] Carriers not subject to the
     jurisdiction of the state must submit a sworn affidavit to the
     Commission stating that they will use support "only for the
     provision, maintenance, and upgrading of facilities and services
     for which the support is intended." This reporting requirement will
     provide states and carriers with access to federal universal
     service support in a way that ensures the integrity of the
     universal service fund. We estimate that the annual burden hours
     associated with the section 254(e) certification process would be
     12 hours per carrier. This is a nominal burden on rural carriers
     and is balanced against the high degree of federal universal
     service benefits rural carriers would receive.

233. Finally, the Commission adopted a modification to an existing
     reporting requirement regarding working loops. Under the current
     rules, rural carriers are required to submit, on an annual basis,
     the number of working loops it has for each study area it
     serves.[^536] In this Order, we modify this reporting requirement
     to require that once a competitor enters a rural carriers study
     area, working loops are required to be reported on a quarterly
     basis.[^537] The Commission determined that this was necessary to
     prevent the overpayment of support to incumbent rural carriers,
     which occurs under the current rule because competitors have an
     incentive to update quarterly, while the incumbent has an incentive
     to only update annually.[^538]

### Steps Taken To Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered 

234. The RFA requires an agency to describe any significant 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, or any
     part thereof, for small entities.[^539]

235. The Order adopted herein is the result of an analysis of a number
     of options for distributing federal universal service support to
     rural carriers. Throughout the Order, it is evident that the
     Commission took great strides in balancing the burdens associated
     with modification of the existing embedded cost mechanism and the
     benefits these modifications confer on rural carriers and
     competitive eligible telecommunications carriers. In this regard,
     it is important to note that we make these modifications with only
     minimal reporting requirements.

236. Among the significant alternatives, we considered whether
     modification of the corporate operations expense cap would minimize
     the burden and expense associated with seeking a waiver for smaller
     carriers. In this Order, we decide to raise the existing cap for
     carriers with 6,000 or fewer working loops so they can receive
     support for up to \$600,000 or amounts derived from the revised
     corporate operations expense formula adopted herein, whichever is
     greater.[^540] We thus decrease the need of smaller carriers to
     request a waiver. In addition, we adopt a modified version of the
     safety net additive mechanism proposed by the Rural Task Force. We
     conclude that a modification to the safety net additive is
     warranted because as proposed, the mechanism potentially allowed
     for the recovery of more than 100 percent of incremental
     costs.[^541] We also consider alternative measurements of
     "meaningful investment" for purposes of calculating safety valve
     support. We conclude that the alternatives considered would, in
     some instances, deny the recovery of such meaningful investments.

237. [Report to Congress]{.underline}: The Commission will send a copy
     of the Order, including this FRFA, in a report to be sent to
     Congress pursuant to the Congressional Review Act.[^542] In
     addition, the Commission will send a copy of the Order, including
     the FRFA, to the Chief Counsel for Advocacy of the SBA. A copy of
     the Order and FRFA (or summaries thereof) will also be published in
     the Federal Register.[^543]

## Paperwork Reduction Act

238. As required by the Paperwork Reduction Act of 1995, the *Further
     Notice* invited the general public and the Office of Management and
     Budget (OMB) to comment on the proposed modifications contained in
     the Notice. In this Report and Order, we adopt with certain
     modifications the proposals contained in the *Further Notice*.

239. As described above, the rules we adopt in this Order reflect our
     efforts to balance the needs of rural carriers, while minimizing
     the burden on those entities that must comply with our reporting
     requirements. The information we request should not require
     significant additional resources as they are a modification of
     current reporting requirements. Additionally, by freezing the
     national average loop cost at \$240, we eliminate the need for
     non-rural carriers to file loop cost data on a quarterly basis,
     thus alleviating those carriers of an administrative burden.[^544]

240. The action contained herein has been analyzed with respect to the
     Paperwork Reduction Act of 1995 and found to impose new or modified
     reporting and recordkeeping requirements or burdens on the public.
     Implementation of these new or modified reporting and recordkeeping
     requirements will be subject to approval by the Office of
     Management and Budget (OMB) as prescribed by the Act, and will go
     into effect upon announcement in the Federal Register of OMB
     approval.

## Effective Date of Final Rules

241. We conclude that the amendments to our rules adopted herein shall
     be effective upon publication in the Federal Register. The final
     rules must take effect prior to 30 days after their publication in
     the Federal Register in order for NECA to be able to implement the
     necessary changes to the high-cost loop support mechanism by July
     1, 2001. Accordingly, pursuant to the Administrative Procedure Act,
     we find good cause to depart from the general requirement that
     final rules take effect not less than 30 days after their
     publication in the Federal Register.

## Initial Regulatory Flexibility Analysis

242. As required by the Regulatory Flexibility Act (RFA),[^545] the
     Commission has prepared this Initial Regulatory Flexibility
     Analysis (IRFA) of the possible significant economic impact on
     small entities by the policies and rules proposed in this *Further
     Notice of Proposed Rulemaking*.[^546] 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 G. The Commission will send a copy
     of the Notice, including this IRFA, to the Chief Counsel for
     Advocacy of the SBA.[^547] In addition, the Notice and IRFA (or
     summaries thereof) will be published in the Federal Register.[^548]

### Need for and Objectives of the Proposed Rules

243. In the Order accompanying this *Further Notice of Proposed
     Rulemaking*, we modify the rural high-cost mechanism. While we
     declined to adopt the Rural Task Force's proposal to freeze
     per-line support in rural carrier study areas in which a
     competitive eligible telecommunications carrier is providing
     service, we recognized that excessive fund growth may occur during
     the five-year duration of the interim plan. We noted that the
     indexed cap on high-cost loop support would not check this growth
     fully, because support received by competitive carriers is not
     included within the cap.[^549] To develop the record on this issue
     more fully, we issue this *Further Notice of Proposed Rulemaking*
     and invite interested parties to propose possible alternative
     measures that may be appropriate to address this issue.[^550] We
     also invite commenters to address the likelihood that such measures
     may be necessary to prevent excessive fund growth during the
     five-year period.

244. Although we are not convinced of the likelihood of excessive fund
     growth due to competitive entry in high-cost areas during the life
     of this five-year plan, we intend to resolve the issues raised in
     this *Further Notice of Proposed Rulemaking* expeditiously after we
     have developed the record more fully.

### Legal Basis

245. The legal basis as proposed for this *Further Notice of Proposed
     Rulemaking* is contained in sections 4(i), 4(j), 201-205, 254, and
     403 of the Communications Act of 1934 (as amended by the
     Telecommunications Act of 1996), 47 U.S.C. §§ 4(i), 4(j), 201-205,
     254, 403.

### Description and Estimate of Small Entities to Which Rules Will Apply

246. 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 proposed rules adopted herein.[^551] The RFA
     generally defines the term \"small entity\" as having the same
     meaning as the terms \"small business,\" \"small organization,\"
     and \"small governmental jurisdiction.\"[^552] In addition, the
     term \"small business\" has the same meaning as the term \"small
     business concern\" under the Small Business Act.[^553] 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).[^554]

247. We have included small incumbent local exchange carriers in this
     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 dominant in its field of
     operation.\"[^555] 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.[^556] We have therefore included small
     incumbent carriers in this RFA analysis, although we emphasize that
     this RFA action has no effect on the Commission's analyses and
     determinations in other, non-RFA contexts.

248. *Local Exchange Carriers*. Neither the Commission nor the SBA has
     developed a definition for small providers of local exchange
     services. The closest applicable definition under the SBA rules is
     for telephone communications companies other than radiotelephone
     (wireless) companies.[^557] According to the most recent *Trends
     Report* data, 1,335 incumbent carriers reported that they were
     engaged in the provision of local exchange services.[^558] We do
     not have data specifying the number of these carriers that are
     either dominant in their field of operations, are not independently
     owned and operated, or have more than 1,500 employees, and thus are
     unable at this time to estimate with greater precision the number
     of local exchange carriers that would qualify as small business
     concerns under the SBA\'s definition. Of the 1,335 incumbent
     carriers, 13 entities are price cap carriers that are not subject
     to these rules. Consequently, we estimate that fewer than 1,322
     providers of local exchange service are small entities or small
     incumbent local exchange carriers that may be affected.

249. *Competitive Access Providers*. Neither the Commission nor the SBA
     has developed a definition of small entities specifically
     applicable to competitive access services providers (CAPs). The
     closest applicable definition under the SBA rules is for telephone
     communications companies other than radiotelephone (wireless)
     companies.[^559] According to the most recent *Trends Report* data,
     349 CAPs/competitive local exchange carriers and 60 other local
     exchange carriers reported that they were engaged in the provision
     of competitive local exchange services.[^560] We do not have data
     specifying the number of these carriers that are not independently
     owned and operated, or have more than 1,500 employees, and thus are
     unable at this time to estimate with greater precision the number
     of CAPs that would qualify as small business concerns under the
     SBA\'s definition. Consequently, we estimate that there are less
     than 349 small entity CAPs and 60 other local exchange carriers
     that may be affected.

250. *Cellular Licensees*. Neither the Commission nor the SBA has
     developed a definition of small entities applicable to cellular
     licensees. Therefore, the applicable definition of small entity is
     the definition under the SBA rules applicable to radiotelephone
     (wireless) companies. This provides that a small entity is a
     radiotelephone company employing no more than 1,500 persons.[^561]
     According to the Bureau of the Census, only twelve radiotelephone
     firms from a total of 1,178 such firms which operated during 1992
     had 1,000 or more employees.[^562] Therefore, even if all twelve of
     these firms were cellular telephone companies, nearly all cellular
     carriers were small businesses under the SBA\'s definition. In
     addition, we note that there are 1,758 cellular licenses; however,
     a cellular licensee may own several licenses. In addition,
     according to the most recent *Telecommunications Industry Revenue*
     data, 806 carriers reported that they were engaged in the provision
     of either cellular service or Personal Communications Service (PCS)
     services, which are placed together in the data.[^563] We do not
     have data specifying the number of these carriers that are not
     independently owned and operated or have more than 1,500 employees,
     and thus are unable at this time to estimate with greater precision
     the number of cellular service carriers that would qualify as small
     business concerns under the SBA\'s definition. Consequently, we
     estimate that there are fewer than 808 small cellular service
     carriers that may be affected.

251. *Broadband Personal Communications Service (PCS).* The broadband
     PCS spectrum is divided into six frequency blocks 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 less than \$40 million in
     the three previous calendar years.[^564] For Block F, an additional
     classification for \"very small business\" was added and is defined
     as an entity that, together with their affiliates, has average
     gross revenues of not more than \$15 million for the preceding
     three calendar years.[^565] These regulations defining \"small
     entity\'\' in the context of broadband PCS auctions have been
     approved by the SBA.[^566] 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.[^567] Based on this information,
     we conclude that the number of small broadband PCS licensees will
     include the 90 winning C Block bidders and the 93 qualifying
     bidders in the D, E, and F blocks, for a total of 183 small entity
     PCS providers as defined by the SBA and the Commission\'s auction
     rules.

252. *Rural Radiotelephone Service.* The Commission has not adopted a
     definition of small entity specific to the Rural Radiotelephone
     Service.[^568] A significant subset of the Rural Radiotelephone
     Service is the Basic Exchange Telephone Radio Systems
     (BETRS).[^569] We will use the SBA\'s definition applicable to
     radiotelephone companies, *i.e.*, an entity employing no more than
     1,500 persons.[^570] There are approximately 1,000 licensees in the
     Rural Radiotelephone Service, and we estimate that almost all of
     them qualify as small entities under the SBA\'s definition.

253. *Specialized Mobile Radio (SMR).* The Commission awards bidding
     credits in auctions for geographic area 800 MHz and 900 MHz SMR
     licenses to firms that had revenues of no more than \$15 million in
     each of the three previous calendar years.[^571] In the context of
     both the 800 MHz and 900 MHz SMR, a definition of \"small entity\"
     has been approved by the SBA.

254. These fees 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 purposes of
     this FRFA, that all of the remaining existing extended
     implementation authorizations are held by small entities, as that
     term is defined by the SBA.

255. For geographic area licenses in the 900 MHz SMR band, there are 60
     who qualified as small entities. For the 800 MHz SMR\'s, 38 are
     small or very small entities.

256. *Fixed Microwave Services.* Microwave services include common
     carrier,[^572] private‑operational fixed,[^573] and broadcast
     auxiliary radio services.[^574] At present, there are approximately
     22,015 common carrier fixed licensees and 61,670 private
     operational‑fixed licensees and broadcast auxiliary radio licensees
     in the microwave services. The Commission has not yet defined a
     small business with respect to microwave services. For purposes of
     this IRFA, we utilize the SBA\'s definition applicable to
     radiotelephone companies \-- *i.e.*, an entity with no more than
     1,500 persons.[^575] We estimate, for this purpose, that all of the
     Fixed Microwave licensees (excluding broadcast auxiliary licensees)
     would qualify as small entities under the SBA definition for
     radiotelephone companies.

257. *39 GHz Licensees*. Neither the Commission nor the SBA has
     developed a definition of small entities applicable to 39 GHz
     licensees. Therefore, the applicable definition of small entity is
     the definition under the SBA rules applicable to radiotelephone
     (wireless) companies. This provides that a small entity is a
     radiotelephone company employing no more than 1,500 persons.[^576]
     For purposes of the 39 GHz license auction, the Commission defined
     "small entity" as an entity that has average gross revenues of less
     than \$40 million in the three previous calendar years, and \"very
     small entity\" as an entity that has average gross revenues of not
     more that \$15 million for the preceding three calendar years.. The
     Commission has granted licenses to 29 service providers in the 39
     GHz service. We do not have data specifying the number of these
     carriers that are not independently owned and operated or have more
     than 1,500 employees, and thus are unable at this time to estimate
     with greater precision the number of 39 GHz licensees that would
     qualify as small business concerns under the SBA\'s definition.
     Consequently, we estimate that there are no more than 29 39 GHz
     small business providers that may be affected.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

258. In the Order accompanying this *Further Notice of Proposed
     Rulemaking*, the Commission revised the reporting frequency of line
     count data in study areas where competitive entry has occurred.
     Prior to the Order's adoption, rural carriers were required to
     submit line count data annually.[^577] The Commission determined
     that the more frequent reporting requirement was necessary to
     ensure that only one carrier receives support for each line served
     and to monitor the concerns expressed by the Rural Task Force with
     regard to the potential impact of competitive entry in rural
     carrier study areas.[^578] The line count data submitted by
     carriers on a quarterly basis under the Order should be sufficient
     for the Commission to implement any change it may adopt pursuant to
     this *Further Notice of Proposed Rulemaking*; however, the issues
     of frequency of reporting and timing of submission may need to be
     revisited for implementation purposes.

### Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered

259. The RFA requires an agency to describe any significant 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, or any
     part thereof, for small entities.[^579]

260. Here, we have declined at this time to freeze per-line support in
     rural carriers' study areas in which a competitive eligible
     telecommunications carrier is providing service. Had we adopted the
     alternative of the freeze, we would, we believe, have also needed
     to adopt, *e.g.,* complex and administratively burdensome
     implementing regulations. By seeking additional comments on this
     issue, including comment from small entities regarding significant
     alternatives, we hope to identify alternatives that would include
     simpler reporting or other compliance requirements. Thus, the
     *Further Notice of Proposed Rulemaking* under consideration herein
     seeks to determine possible alternative measures that may be
     appropriate to address the issue of excessive fund growth that may
     result from competitive entry in rural study areas.[^580] We invite
     comment on how any alternatives proposed would be likely to affect
     small businesses.

### Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules.

261. None.

## Initial Paperwork Reduction Act of 1995 Analysis

262. This *Further Notice of Proposed Rulemaking* contains either a
     proposed or modified information collection. 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 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 this Notice; OMB comments are
     due 60 days from the date of publication of this 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.

## Ex Parte

263. This is a non-restricted notice and comment rulemaking proceeding.
     *Ex parte* presentations are permitted, except during the Sunshine
     Agenda period, provided they are disclosed as provided in the
     Commission's rules.[^581]

## Comment Filing Procedures

264. Pursuant to sections 1.415 and 1.419 of the Commission\'s rules, 47
     C.F.R. §§ 1.415, 1.419, interested parties may file comments 30
     days or fewer from publication in the Federal Register, and reply
     comments 60 days or fewer from publication in the Federal Register.
     Comments may be filed using the Commission\'s Electronic Comment
     Filing System (ECFS) or by filing paper copies.[^582]

265. Comments filed through the ECFS can be sent as an electronic file
     via the Internet to \<http://www.fcc.gov/e-file/ecfs.html\>.
     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 referenced
     in the caption. In completing the transmittal screen, commenters
     should include their full name, 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 \<your e-mail address.\" A sample form
     and directions will be sent in reply.

266. 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
     appear in the caption of this proceeding, commenters must submit
     two additional copies for each additional docket or rulemaking
     number. All filings must be sent to the Commission\'s Secretary,
     Magalie Roman Salas, Office of the Secretary, Federal
     Communications Commission, 445 12th Street, S.W., Washington, D.C.
     20554.

267. Parties who choose to file by paper should also submit their
     comments on diskette. These diskettes should be submitted to:
     Sheryl Todd, Accounting Policy Division, 445 12th Street, S.W.,
     Washington, D.C. 20554. Such a submission should be on a 3.5-inch
     diskette formatted in an IBM compatible format using Word or
     compatible software. The diskette should be accompanied by a cover
     letter and should be submitted in \"read only\" mode. The diskette
     should be clearly labeled with the commenter\'s name, proceeding
     (including the docket number, in this case CC Docket No. 96-45,
     type of pleading (comment or reply comment), date of submission,
     and the name of the electronic file on the diskette. The label
     should also include the following phrase \"Disk Copy - Not an
     Original.\" Each diskette should contain only one party\'s
     pleadings, preferably in a single electronic file. In addition,
     commenters must send diskette copies to the Commission\'s copy
     contractor, International Transcription Service, Inc., 1231 20th
     Street, N.W., Washington, D.C. 20037.

268. Written comments by the public on the proposed and/or modified
     information collections are due on or before thirty days after the
     date of publication in the Federal Register. Written comments must
     be submitted by the Office of Management and Budget (OMB) on the
     proposed and/or modified information collections on or before 60
     days after date of publication in the Federal Register. In addition
     to filing comments with the Secretary, a copy of any comments on
     the information collections contained herein should be submitted to
     Judy Boley, Federal Communications Commission, Room 1-C804, 445
     12th Street, S.W., Washington, DC 20554, or via the Internet to
     jboley@fcc.gov and to Edward Springer, OMB Desk Officer, 10236
     NEOB, 725 - 17th Street, N.W., Washington, D.C. 20503.

# ORDERING CLAUSES

269. Accordingly, IT IS ORDERED that, pursuant to the authority
     contained in sections 1-4, 201-205, 214, 218-220, 254, 303(r), 403,
     405, and 410 of the Communications Act of 1934, as amended, 47
     U.S.C. §§ 151-154, 201-205, 214, 218-220, 254, 303(r), 403, 405,
     and 410, this Fourteenth Report and Order and Twenty-Second Order
     on Reconsideration in CC Docket No. 96-45, and Report and Order in
     CC Docket No. 00-256 IS ADOPTED.

270. IT IS FURTHER ORDERED that Part 36 of the Commission's rules, 47
     C.F.R. Part 36, IS AMENDED as set forth in Appendix A hereto,
     effective immediately upon publication in the Federal Register.

271. IT IS FURTHER ORDERED that Part 54 of the Commission's rules, 47
     C.F.R. Part 54, IS AMENDED as set forth in Appendix A hereto,
     effective immediately upon publication in the Federal Register.

272. IT IS FURTHER ORDERED that the Commission's Consumer Information
     Bureau, Reference Information Center, SHALL SEND a copy of this
     Order, including the Final Regulatory Flexibility Analysis, to the
     Chief Counsel for Advocacy of the Small Business Administration.

273. Accordingly, IT IS ORDERED that, pursuant to the authority
     contained in sections 4(i), 4(j), 201-205, 254, and 403 of the
     Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i),
     154(j), 201-205, 254, and 403, this Further Notice of Proposed
     Rulemaking in CC Docket No. 96-45 IS ADOPTED.

274. IT IS FURTHER ORDERED that the Commission\'s Consumer Information
     Bureau, Reference Information Center, SHALL SEND a copy of this
     Further Notice of Proposed Rulemaking in CC Docket No. 96-45,
     including the Initial Regulatory Flexibility Analysis, to the Chief
     Counsel for Advocacy of the Small Business Administration.

275. IT IS FURTHER ORDERED that the provisions in this Order SHALL BE
     EFFECTIVE immediately upon publication in the Federal Register.
     Pursuant to 5 U.S.C. § 553(d)(3), we find good cause exists to have
     the rules take effect immediately upon publication in the Federal
     Register. The final rules must take effect prior to 30 days after
     their publication in the Federal Register in order for NECA to be
     able to implement the necessary changes to the high-cost loop
     support mechanism by July 1, 2001. The collections of information
     contained within are contingent upon approval by the Office of
     Management and Budget.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Magalie Roman Salas
>
> Secretary

**APPENDIX A -- FINAL RULES**

Part 36 and Part 54 of Title 47 of the Code of Federal Regulations are
amended as follows:

**PART 36 -- JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES
FOR SEPARTING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES, EXPENSES,
TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES**

**Subpart F -- Universal Service Fund**

1\. Section 36.601 is amended as follows.

**§ 36.601 General**

(a)-(b) \* \* \* \[unchanged\]

\(c\) Until June 30, 2001, \* \* \*

2\. Sections 36.602, 36.603, 36.604, and 36.605 are added to subpart F
to read as follows:

**§ 36.602 Calculation of non-rural carrier portion of nationwide loop
cost expense adjustment.**

Effective July 1, 2001, for purposes of determining non-rural carrier
interim hold-harmless support, pursuant to § 54.311 of this chapter, the
annual amount of the total nationwide loop cost expense adjustment
calculated pursuant to this subpart F shall not exceed the amount of the
total loop cost expense adjustment for the immediately preceding
calendar year, increased by a rate equal to the rate of increase in the
total number of working loops during the calendar year preceding the
July 31st filing. The total loop cost expense adjustment shall consist
of the loop cost expense adjustments, including amounts calculated
pursuant to § 36.612(a) and § 36.631. The rate of increase in total
working loops shall be based upon the difference between the number of
total working loops on December 31 of the calendar year preceding the
July 31st filing and the number of total working loops on December 31 of
the second calendar year preceding that filing, both determined by the
company\'s submissions pursuant to § 36.611. Non-rural incumbent local
exchange carriers and eligible telecommunications carriers serving lines
in the service area of non-rural incumbent local exchange carriers shall
only receive support pursuant to this subpart F to the extent that they
qualify pursuant to § 54.311 of this chapter for interim hold-harmless
support. Support amounts calculated pursuant to this subpart F but not
received due to the phase down of interim hold-harmless support or the
receipt of forward-looking support pursuant to § 54.311 of this chapter
shall not be redistributed to other carriers.

**§ 36.603 Calculation of rural incumbent local exchange carrier portion
of nationwide loop cost expense adjustment.**

\(a\) Effective July 1, 2001, the rural incumbent local exchange carrier
portion of the annual nationwide loop cost expense adjustment will be
recomputed by the fund administrator as if the indexed cap calculated
pursuant to § 36.601(c) and the corporate operations expense limitation
calculated pursuant to § 36.621 had not been in effect for the calendar
year 2000. For the period July 1, 2001, to December 31, 2001, the
annualized amount of the rural incumbent local exchange carrier portion
of the nationwide loop cost expense adjustment calculated pursuant to
this subpart F shall not exceed the non-capped amount of the total rural
incumbent local exchange carrier loop cost expense adjustment for the
calendar year 2000, multiplied times one plus the Rural Growth Factor
calculated pursuant to § 36.604. Beginning January 1, 2002, the annual
amount of the rural incumbent local exchange carrier portion of the
nationwide loop cost expense adjustment calculated pursuant to this
subpart F shall not exceed the amount of the total rural incumbent local
exchange carrier loop cost expense adjustment for the immediately
preceding calendar year, multiplied times one plus the Rural Growth
Factor calculated pursuant to § 36.604.

\(b\) The annual rural incumbent local exchange carrier portion of the
nationwide loop cost expense adjustment shall be reduced to reflect the
transfer of rural incumbent local exchange carrier access lines that are
eligible for expense adjustments pursuant to § 36.631. The reduction
shall equal the amount of the § 36.631 expense adjustment available to
the transferred access lines at the time of the transfer and shall be
effective in the next calendar quarter after the access lines are
transferred.

\(c\) Safety net additive support calculated pursuant to § 36.605, and
transferred high-cost support and safety valve support calculated
pursuant to § 54.305 of this chapter shall not be included in the rural
incumbent local exchange carrier portion of the annual nationwide loop
cost expense adjustment.

**§ 36.604 Calculation of the rural growth factor.**

The Rural Growth Factor (RGF) is equal to the sum of the annual
percentage change in the United States Department of Commerce's Gross
Domestic Product -- Chained Price Index (GPD-CPI) plus the percentage
change in the total number of rural incumbent local exchange carrier
working loops during the calendar year preceding the July 31^st^ filing
submitted pursuant to § 36.611. The percentage change in total rural
incumbent local exchange carrier working loops shall be based upon the
difference between the total number of rural incumbent local exchange
carrier working loops on December 31 of the calendar year preceding the
July 31^st^ filing and the total number of rural incumbent local
exchange carrier working loops on December 31 of the second calendar
year preceding that filing, both determined by the company\'s
submissions pursuant to § 36.611. Loops acquired by rural incumbent
local exchange carriers shall not be included in the RGF calculation.

**§ 36.605 Calculation of safety net additive.**

(a) "*Safety net additive support.*" A rural incumbent local exchange
    carrier shall receive safety net additive support if it satisfies
    the conditions set forth in subsection (c). Safety net additive
    support is support available to rural telephone companies, as
    conditioned in subsection (c), in addition to support calculated
    pursuant to § 36.631 of this subpart. Safety net additive support
    shall not be available to rural telephone companies for exchange(s)
    that are subject to § 54.305 of this chapter.

(b) *Calculation of safety net additive support:* Safety net additive
    support is equal to the amount of capped support calculated pursuant
    to this subpart F in the qualifying year minus the amount of support
    in the year prior to qualifying for support subtracted from the
    difference between the uncapped expense adjustment for the study
    area in the qualifying year minus the uncapped expense adjustment in
    the year prior to qualifying for support as shown in the following
    equation: Safety net additive support = (Uncapped support in the
    qualifying year -- Uncapped support in the base year) -- (Capped
    support in the qualifying year -- Amount of support received in the
    base year).

(c) *Operation of safety net additive support*:

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(1) In any year in which the total carrier loop cost expense adjustment
    is limited by the provisions of § 36.603 a rural incumbent local
    exchange carrier shall receive safety net additive support as
    calculated in subsection (b), if in any study area, the rural
    incumbent local exchange carrier realizes growth in end of period
    Telecommunications Plant in Service (TPIS), as prescribed in §
    32.2001, on a per loop basis, of at least 14 percent more than the
    study area's TPIS per loop investment at the end of the prior
    period.

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```
(2) If subsection (c)(1) is met, the rural incumbent local exchange
    carrier must notify the Administrator; failure to properly notify
    the Administrator of eligibility shall result in disqualification of
    that study area for safety net additive, requiring the rural
    incumbent local exchange carrier to again meet the eligibility
    requirements in subsection (c)(1) for that study area in a
    subsequent period.

(3) Upon completion of verification by the Administrator that the study
    area meets the criterion stated above in paragraphs (a), (b), (c) of
    this section, the Administrator shall:

> \(i\) pay to any qualifying rural telephone company, safety net
> additive support for the qualifying study area in accordance with the
> calculation set forth in subsection (b); and
>
> (ii)continue to pay safety net additive support for the succeeding
> four years. Support in the four succeeding years shall be the lesser
> of:

(A)the amount of support paid in the qualifying year; or

> (B)the amount of support based on recalculation of support pursuant to
> paragraph (b) above.

3\. Section 36.611 is amended by revising the first paragraph of
introductory text to read as follows:

**§ 36.611 Submission of information to the National Exchange Carrier
Association (NECA).**

In order to allow determination of the study areas and wire centers that
are entitled to an expense adjustment pursuant to § 36.631, each
incumbent local exchange carrier (LEC) must provide the National
Exchange Carrier Association (NECA) (established pursuant to Part 69 of
this Chapter) with the information listed below for each study area in
which such incumbent LEC operates, with the exception of the information
listed in subsection (h), which must be provided for each study area
and, if applicable, for each wire center, as defined in Part 54 of this
Chapter, and each disaggregation zone as established pursuant to §
54.315 of this chapter. This information is to be filed with NECA by
July 31^st^ of each year. The information provided pursuant to
subsection (h) must be updated pursuant to § 36.612. Rural telephone
companies that acquired exchanges subsequent to May 7, 1997, and
incorporated those acquired exchanges into existing study areas shall
separately provide the information required by paragraphs (a) through
(h) of this section for both the acquired and existing exchanges.

4\. Section 36.612 is amended by revising paragraph (a) to read as
follows:

**§ 36.612 Updating information submitted to the National Exchange
Carrier Association.**

\(a\) Any rural telephone company, as that term is defined in § 51.5 of
this chapter, may update the information submitted to the National
Exchange Carrier Association (NECA) on July 31^st^ pursuant to § 36.611
(a) through (h) one or more times annually on a rolling year basis
according to the schedule, except that rural telephone companies in
service areas where an eligible telecommunications carrier has initiated
service and has reported line count data pursuant to § 54.307(c) of this
chapter must update the information submitted to NECA on July 31^st^
pursuant to § 36.611(h) according to the schedule. Every non-rural
telephone company must update the information submitted to NECA on July
31^st^ pursuant to § 36.611 (h) according to the schedule.

5\. Section 36.621 is amended by revising the last sentence of paragraph
(a)(4) introductory text, paragraph (a)(4)(i), the first sentence of
paragraph (a)(4)(ii), and paragraphs (a)(4)(ii)(A) through (C), and
adding paragraph (a)(4)(ii)(D) to read as follows:

**§ 36.621 Study area total unseparated loop cost.**

\(a\) \* \* \*

\(4\) \* \* \* Total Corporate Operations Expense, for purposes of

calculating universal service support payments beginning July 1, 2001,
shall be limited to the lesser of:

\(i\) The actual average monthly per-loop Corporate Operations Expense;
or

\(ii\) A monthly per-loop amount computed according to paragraphs
(a)(4)(ii)(A), (a)(4)(ii)(B), (a)(4)(ii)(C), and (a)(4)(ii)(D) of this
section. \* \* \*

\(A\) For study areas with 6,000 or fewer working loops the amount
monthly per

working loop shall be \$33.30853 - (.00246 x the number of working
loops),

or, \$50,000 ÷ the number of working loops, whichever is greater;

\(B\) for study areas with more than 6,000 but fewer than 18,006

working loops, the monthly amount per working loop shall be \$3.83195 +

(88,429.20 ÷ the number of working loops); and

\(C\) for study areas with 18,006 or more working loops, the monthly
amount

per working loop shall be \$8.74472.

\(D\) Beginning January 1, 2002, the monthly per-loop amount computed
according to paragraphs

(a)(4)(ii)(A), (a)(4)(ii)(B), and (a)(4)(ii)(C) of this section shall be
adjusted each year to reflect the annual percentage change in the United
States Department of Commerce's Gross Domestic Product-Chained Price
Index (GDP-CPI).

6\. Section 36.622 is amended by adding a sentence at the end of
paragraph (a) as follows:

**§ 36.622 National and study area average unseparated loop costs.**

\(a\) \* \* \* Effective July 1, 2001, the national average unseparated
loop cost for purposes of calculating expense adjustments for rural
incumbent local exchange carriers, as that term is defined in § 54.5 of
this chapter, is frozen at \$240.00.

7\. Section 54.5 is amended by adding the following definition:

**PART 54 \-- UNIVERSAL SERVICE**

**Subpart A -- General Information**

**§ 54.5 Terms and definitions.**

*Rural Incumbent Local Exchange Carrier*. "Rural incumbent local
exchange carrier" is a carrier that meets the definitions of "rural
telephone company" and "incumbent local exchange carrier," as those
terms are defined in § 51.5 of this chapter.

8\. Amend section 54.305 by adding '(a)' at the beginning of the first
sentence of the current § 54.305 and by adding paragraphs (b), (c), (d),
(e), and (f) to read as follows:

**Subpart D -- Universal Service Support for High Cost Areas**

§ 54.305 Sale or transfer of exchanges.

\(b\) Transferred exchanges in study areas operated by rural telephone
companies that are subject to the limitations on the transfer of
high-cost universal service support in paragraph (a) of this section may
be eligible for a safety valve loop cost expense adjustment based on the
difference between a rural incumbent local exchange carrier's index year
expense adjustment and subsequent year expense adjustments for the
acquired exchanges. Safety valve loop cost expense adjustments shall
only be available to rural incumbent local exchange carriers that, in
the absence of restrictions on the transfer of high-cost support in §
54.305(a), would qualify for high-cost loop support for acquired
exchanges under § 36.631 of this chapter.

\(c\) The index year expense adjustment for acquired exchange(s) shall
be equal to the rural incumbent local exchange carrier's high-cost loop
cost expense adjustment for acquired exchanges calculated at the end of
the company's first year operating the acquired exchange(s). The index
year expense adjustment for the acquired exchange(s) shall be
established through cost data submitted in accordance with § 36.611 and
§ 36.612 and shall be calculated in accordance with § 36.631 of this
chapter. For carriers establishing an index year for acquired exchanges
pursuant to § 36.611, the index year for the acquired exchange(s) shall
commence at the beginning of the next calendar year after the transfer
of said exchanges. For carriers establishing an index year for acquired
exchanges pursuant to § 36.612, the index year for the acquired
exchange(s) shall commence at the beginning of the next calendar quarter
after the transfer of said exchanges. The index year expense adjustment
for rural telephone companies that have operated exchanges subject to
this section for more than a full year on the effective date of this
subsection shall be based on loop cost data submitted in accordance with
§ 36.612 for the year ending on the nearest calendar quarter following
the effective date of this subsection. At the end of each subsequent
year, a loop cost expense adjustment for the acquired exchanges will be
calculated pursuant to § 36.631 and will be compared to the index year
expense adjustment. A rural incumbent local exchange carrier's
subsequent year expense adjustments shall end on the same calendar
quarter as its index year expense adjustment. If acquired exchanges are
incorporated into an existing rural incumbent local exchange carrier
study area, the rural incumbent local exchange carrier shall exclude
costs associated with the acquired exchanges from the costs associated
with its pre-acquisition study area in its universal service data
submissions filed in accordance with § 36.611 and § 36.612. Such
excluded costs shall be used to calculate the rural incumbent local
exchange carrier's safety valve loop cost expense adjustment.

\(d\) Up to fifty (50) percent of any positive difference between the
subsequent year loop cost expense adjustment and the index year expense
adjustment will be designated as the study area's safety valve loop cost
expense adjustment and will be available in addition to the amounts
available to the study area under § 54.305. In no event shall a study
area's safety valve loop cost expense adjustment exceed the difference
between the carrier's uncapped study area loop cost expense adjustment
calculated pursuant to § 36.631 and transferred support amounts
available to the acquired exchange(s) under paragraph (a) of this
section. Safety valve support shall not transfer with acquired
exchanges.

\(e\) The sum of the safety valve loop cost expense adjustment for all
eligible study areas operated by rural telephone companies shall not
exceed five (5) percent of the total rural incumbent local exchange
carrier portion of the annual nationwide loop cost expense adjustment
calculated pursuant to § 36.603. The five (5) percent cap on the safety
valve mechanism shall be based on the lesser of the rural incumbent
local exchange carrier portion of the annual nationwide loop cost
expense adjustment calculated pursuant to § 36.603 or the sum of rural
incumbent local exchange carrier expense adjustments calculated pursuant
to § 36.631. The percentage multiplier used to derive study area safety
valve loop cost expense adjustments for rural telephone companies shall
be the lesser of fifty (50) percent or a percentage calculated to
produce the maximum total safety valve loop cost expense adjustment for
all eligible study areas pursuant to this paragraph. The safety valve
loop cost expense adjustment of an individual rural incumbent local
exchange carrier also may be further reduced as described is subsection
(d).

\(f\) Once an acquisition is complete, the acquiring rural incumbent
local exchange carrier shall provide written notice to the Administrator
that it has acquired access lines that may be eligible for safety valve
support. Rural telephone companies also shall provide written notice to
the Administrator of when their index year has been established for
purposes of calculating the safety valve loop cost expense adjustment.

9\. Amend § 54.307 by revising paragraph (a)(1), by revising the second
sentence in paragraph (b) and adding a sentence at the end of paragraph
(b), and by revising the first sentence in paragraph (c) to read as
follows:

**§ 54.307 Support to a competitive eligible telecommunications
carrier.**

\(a\) \* \* \*

\(1\) A competitive eligible telecommunications carrier serving loops in
the service area of a rural incumbent local exchange carrier, as that
term is defined in § 54.5 of this chapter, shall receive support for
each line it serves in a particular service area based on the support
the incumbent LEC would receive for each such line, disaggregated by
cost zone if disaggregation zones have been established within the
service area pursuant to § 54.315 of this subpart. A competitive
eligible telecommunications carrier serving loops in the service area of
a non-rural incumbent local exchange carrier shall receive support for
each line it serves in a particular wire center based on the support the
incumbent LEC would receive for each such line.

\(b\) \* \* \* For a competitive eligible telecommunications carrier
serving loops in the service area of a rural incumbent local exchange
carrier, as that term is defined in § 54.5 of this chapter, the carrier
must report the number of working loops it serves in the service area
disaggregated by cost zone if disaggregation zones have been established
within the service area pursuant to § 54.315 of this subpart. \* \* \*
Competitive eligible telecommunications carriers providing mobile
wireless service in an incumbent LEC's service area shall use the
customer's billing address for purposes of identifying the service
location of a mobile wireless customer in a service area.

\(c\) A competitive eligible telecommunications carrier must submit the
data required pursuant to paragraph (b) of this section according to the
schedule. \* \* \*

10\. Section 54.313 is renamed "State certification of support for
non-rural carriers" and amended by creating a new subsection (b),
revising and re-designating subsection (c), and re-designating current
subsection (c) as subsection (d):

**§ 54.313 State certification of support for non-rural carriers.**

(b) *Carriers Not Subject to State Jurisdiction*. A non-rural incumbent
    local exchange carrier not subject to the jurisdiction of a state or
    an eligible telecommunications carrier not subject to the
    jurisdiction of a state serving lines in the service area of a
    non-rural incumbent local exchange carrier that desires to receive
    support pursuant to §§ 54.309 and/or 54.311 of this subpart must
    file an annual certification with the Administrator and the
    Commission stating that all federal high-cost support provided to
    such carriers will be used only for the provision, maintenance, and
    upgrading of facilities and services for which the support is
    intended. Support provided pursuant to §§ 54.309 and/or 54.311 of
    this subpart shall only be provided to the extent that the carrier
    has filed the requisite certification pursuant to this section.

(c) *Certification Format*. A certification pursuant to this section may
    be filed in the form of a letter from the appropriate regulatory
    authority for the State, and must be filed with both the Office of
    the Secretary of the Commission clearly referencing CC Docket No.
    96-45, and with the Administrator of the high-cost universal service
    support mechanism, on or before the deadlines set forth below in
    subsection (d). If provided by the appropriate regulatory authority
    for the state, the annual certification must identify which carriers
    in the State are eligible to receive federal support during the
    applicable 12-month period, and must certify that those carriers
    will only use support for the provision, maintenance, and upgrading
    of facilities and services for which support is intended. A State
    may file a supplemental certification for carriers not subject to
    the State's annual certification. All certificates filed by a State
    pursuant to this section shall become part of the public record
    maintained by the Commission. Non-rural incumbent local exchange
    carriers not subject to the jurisdiction of a state or eligible
    telecommunications carrier not subject to the jurisdiction of a
    state serving lines in the service area of a non-rural incumbent
    local exchange carrier, shall file a sworn affidavit executed by a
    corporate officer attesting to the use of the support for the
    provision, maintenance, and upgrading of facilities and services for
    which support is intended. The affidavit must be filed with both the
    Office of the Secretary of the Commission clearly referencing CC
    Docket No. 96-45, and with the Administrator of the high-cost
    universal service support mechanism, on or before the deadlines set
    forth below in subsection (d). All affidavits filed pursuant to this
    section shall become part of the public record maintained by the
    Commission.

11\. Section 54.314 is added to subpart D as follows:

§ 54.314. State certification of support for rural carriers.

(a) *State Certification*. States that desire rural incumbent local
    exchange carriers and/or eligible telecommunications carriers
    serving lines in the service area of a rural incumbent local
    exchange carrier within their jurisdiction to receive support
    pursuant to §§ 54.301, 54.305, and/or 54.307 of this part and/or
    part 36, subpart F of this chapter must file an annual certification
    with the Administrator and the Commission stating that all federal
    high-cost support provided to such carriers within that State will
    be used only for the provision, maintenance, and upgrading of
    facilities and services for which the support is intended. Support
    provided pursuant to §§ 54.301, 54.305, and/or 54.307 of this
    subpart and/or part 36, subpart F of this chapter shall only be
    provided to the extent that the State has filed the requisite
    certification pursuant to this section.

(b) *Carriers Not Subject to State Jurisdiction*. A rural incumbent
    local exchange carrier not subject to the jurisdiction of a state or
    an eligible telecommunications carrier not subject to the
    jurisdiction of a state serving lines in the service area of a rural
    incumbent local exchange carrier that desires to receive support
    pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart and/or
    part 36, subpart F of this chapter shall file an annual
    certification with the Administrator and the Commission stating that
    all federal high-cost support provided to such carriers will be used
    only for the provision, maintenance, and upgrading of facilities and
    services for which the support is intended. Support provided
    pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart and/or
    part 36, subpart F of this chapter shall only be provided to the
    extent that the carrier has filed the requisite certification
    pursuant to this section.

(c) *Certification Format*. A certification pursuant to this section may
    be filed in the form of a letter from the appropriate regulatory
    authority for the State, and shall be filed with both the Office of
    the Secretary of the Commission clearly referencing CC Docket No.
    96-45, and with the Administrator of the high-cost universal service
    support mechanism, on or before the deadlines set forth below in
    subsection (d). If provided by the appropriate regulatory authority
    for the state, the annual certification must identify which carriers
    in the State are eligible to receive federal support during the
    applicable 12-month period, and must certify that those carriers
    will only use support for the provision, maintenance, and upgrading
    of facilities and services for which support is intended. A State
    may file a supplemental certification for carriers not subject to
    the State's annual certification. All certificates filed by a State
    pursuant to this section shall become part of the public record
    maintained by the Commission. Rural incumbent local exchange
    carriers not subject to the jurisdiction of a state or eligible
    telecommunications carriers not subject to the jurisdiction of a
    state serving lines in the service area of a rural incumbent local
    exchange carrier, shall file a sworn affidavit executed by a
    corporate officer attesting to the use of the support for the
    provision, maintenance, and upgrading of facilities and services for
    which support is intended. The affidavit must be filed with both the
    Office of the Secretary of the Commission clearly referencing CC
    Docket No. 96-45, and with the Administrator of the high-cost
    universal service support mechanism, on or before the deadlines set
    forth below in subsection (d). All affidavits filed pursuant to this
    section shall become part of the public record maintained by the
    Commission.

(d) *Filing Deadlines*. Upon the filing of the certification described
    in subsection (c), support shall be provided pursuant to the
    following schedule:

```{=html}
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```
(1) *Certifications filed on or before October 1.* Carriers for which
    certifications are filed on or before October 1 shall receive
    support pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart
    and/or part 36, subpart F of this chapter, in the first, second,
    third, and fourth quarters of the succeeding year*.*

(2) *Certifications filed on or before January 1.* Carriers for which
    certifications are filed on or before January 1 shall receive
    support pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart
    and/or part 36, subpart F of this chapter, in the second, third, and
    fourth quarters of that year. Such carriers shall not receive
    support pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart
    and/or part 36, subpart F of this chapter in the first quarter of
    that year*.*

(3) *Certifications filed on or before April 1.* Carriers for which
    certifications are filed on or before April 1 shall receive support
    pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart and/or
    part 36, subpart F of this chapter, in the third and fourth quarters
    of that year*.* Such carriers shall not receive support pursuant to
    §§ 54.301, 54.305, and/or 54.307 of this subpart and/or part 36,
    subpart F of this chapter in the first and second quarters of that
    year*.*

(4) *Certifications filed on or before July 1.* Carriers for which
    certifications are filed on or before July 1 shall receive support
    pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart and/or
    part 36, subpart F of this chapter, in the fourth quarter of that
    year*.* Such carriers shall not receive support pursuant to §§
    54.301, 54.305, and/or 54.307 of this subpart and/or part 36,
    subpart F of this chapter in the first, second, or third quarters of
    that year*.*

(5) *Certifications filed after July 1.* Carriers for which
    certifications are filed after July 1 shall not receive support
    pursuant to §§ 54.301, 54.305, and/or 54.307 of this subpart and/or
    part 36, subpart F of this chapter, in that year.

12\. Section 54.315 is added to subpart D as follows:

§ 54.315 Disaggregation and targeting of support by rural incumbent
local exchange carriers.

\(a\) Within 270 days of the effective date of this rule, all rural
incumbent local exchange carriers for which high-cost universal service
support pursuant to §§ 54.301, 54.303, and/or 54.305 of this subpart
and/or part 36, subpart F of this chapter is available must select a
disaggregation path as described in subsections (b), (c), or (d) below.
In study areas in which a competitive carrier has been designated as a
competitive eligible telecommunications carrier prior to the effective
date of this rule, the rural incumbent local exchange carrier may only
disaggregate support pursuant to subsection (b), (c), or (d)(1)(iii). A
rural incumbent local exchange carrier failing to select a
disaggregation path as described in subsections (b), (c), or (d) within
270 days of the effective date of this rule will not be permitted to
disaggregate and target federal high-cost support unless ordered to do
so by the state commission as that term is defined in § 54.5 of this
part.

(b) *Path 1: Carriers Not Disaggregating and Targeting High-Cost
    Support:*

```{=html}
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```
(1) A carrier may certify to the state commission that it will not
    disaggregate and target high-cost universal service support.

(2) A carrier's election of this path becomes effective upon
    certification by the carrier to the state commission.

(3) This path shall remain in place for such carrier for at least four
    years from the date of certification to the state commission except
    as provided in subsection (b)(4) below.

(4) A state commission may require, on its own motion, upon petition by
    an interested party, or upon petition by the rural incumbent local
    exchange carrier, the disaggregation and targeting of support under
    subsections (c) or (d).

(5) A carrier not subject to the jurisdiction of a state, *e.g.*,
    certain tribally owned carriers, may select Path 1, but must certify
    to the Federal Communications Commission as described in paragraphs
    (b)(1) through (4) of this section.

\(c\) *Path 2: Carriers Seeking Prior Regulatory Approval for the
Disaggregation and Targeting of Support.*

(1) A carrier electing to disaggregate and target support under this
    subsection must file a disaggregation and targeting plan with the
    state commission.

(2) Under this subsection a carrier may propose any method of
    disaggregation and targeting of support consistent with the general
    requirements detailed in subsection (e) of this provision.

(3) A disaggregation and targeting plan under this subsection becomes
    effective upon approval by the state commission.

(4) A carrier shall disaggregate and target support under this path for
    at least four years from the date of approval by the state
    commission except as provided in subsection (c)(5) below.

(5) A state commission may require, on its own motion, upon petition by
    an interested party, or upon petition by the rural incumbent local
    exchange carrier, the disaggregation and targeting of support in a
    different manner.

(6) A carrier not subject to the jurisdiction of a state, *e.g.*,
    certain tribally owned carriers, may select Path 2, but must seek
    approval from the Federal Communications Commission as described in
    paragraphs (c)(1) through (5) of this section.

\(d\) *Path 3: Self-Certification of the Disaggregation and Targeting of
Support.*

(1) A carrier may file a disaggregation and targeting plan with the
    state commission along with a statement certifying each of the
    following:

> \(i\) it has disaggregated support to the wire center level; or
>
> \(ii\) it has disaggregated support into no more than two cost zones
> per wire center; or
>
> \(iii\) that the carrier's disaggregation plan complies with a prior
> regulatory determination made by the state commission.

(2) Any disaggregation plan submitted pursuant to this subsection must
    meet the following requirements:

> \(i\) The plan must be supported by a description of the rationale
> used, including the methods and data relied upon to develop the
> disaggregation zones, and a discussion of how the plan complies with
> the requirements of this subsection (c)(2). Such filing must provide
> information sufficient for interested parties to make a meaningful
> analysis of how the carrier derived its disaggregation plan.
>
> \(ii\) The plan must be reasonably related to the cost of providing
> service for each disaggregation zone within each disaggregated
> category of support.
>
> \(iii\) The plan must clearly specify the per-line level of support
> for each category of high-cost universal service support provided
> pursuant to §§ 54.301, 54.303, and/or 54.305 of this subpart and/or
> part 36, subpart F of this chapter in each disaggregation zone.
>
> \(iv\) If the plan uses a benchmark, the carrier must provide detailed
> information explaining what the benchmark is and how it was
> determined. The benchmark must be generally consistent with how the
> total study area level of support for each category of costs is
> derived to enable a competitive eligible telecommunications carrier to
> compare the disaggregated costs used to determine support for each
> cost zone.

(3) A carrier's election of this path becomes effective upon
    certification by the carrier to the state commission.

(4) A carrier shall disaggregate and target support under this path for
    at least four years from the date of certification to the state
    commission except as provided in subsection (d)(5) below.

(5) A state commission may require, on its own motion, upon petition by
    an interested party, or upon petition by the rural incumbent local
    exchange carrier, modification to the disaggregation and targeting
    of support selected under this path.

(6) A carrier not subject to the jurisdiction of a state, *e.g.*,
    certain tribally owned carriers, may select Path 3, but must certify
    to the Federal Communications Commission as described in paragraphs
    (d)(1) through (5) of this section.

```{=html}
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```
(e) *Additional Procedures Governing the Operation of Path 2 and Path
    3*:

> Disaggregation and targeting plan adopted under subsections (c) or (d)
> shall be subject to the following general requirements:
>
> \(1\) Support available to the rural incumbent local exchange
> carrier's study area under its disaggregation plan shall equal the
> total support available to the study area without disaggregation.
>
> \(2\) The ratio of per-line support between disaggregation zones for
> each disaggregated category of support shall remain fixed over time,
> except as changes are allowed pursuant to subsection (c) and (d)
> above.
>
> \(3\) The ratio of per-line support shall be publicly available.
>
> \(4\) Per-line support amounts for each disaggregation zone shall be
> recalculated whenever the rural incumbent local exchange carrier's
> total annual support amount changes using the changed support amount
> and lines at that point in time.
>
> \(5\) Per-line support for each category of support in each
> disaggregation zone shall be determined such that the ratio of support
> between disaggregation zones is maintained and that the product of all
> of the rural incumbent local exchange carrier's lines for each
> disaggregation zone multiplied by the per-line support for those zones
> when added together equals the sum of the rural incumbent local
> exchange carrier's total support.
>
> \(6\) Until a competitive eligible telecommunications carrier is
> certified in a study area, monthly payments to the rural incumbent
> local exchange carrier will be made based on total annual amounts for
> its study area divided by 12.
>
> \(7\) When a competitive eligible telecommunications carrier is
> certified in a study area, per-line amounts used to determine the
> competitive eligible telecommunications carrier's disaggregated
> support shall be based on the rural incumbent local exchange carrier's
> then-current total support levels, lines, and disaggregated support
> relationships.

(f) *Submission of Information to the Administrator:*

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```
(1) A rural incumbent local exchange carrier certifying under
    subsection (b) that it will not disaggregate and target high-cost
    universal service support shall submit to the Administrator a copy
    of the certification submitted to the state commission, or the
    Federal Communications Commission, when not subject to state
    jurisdiction.

(2) A rural incumbent local exchange carrier electing to disaggregate
    and target support under subsection (c) shall submit to the
    Administrator a copy of the order approving the disaggregation and
    targeting plan submitted by the carrier to the state commission, or
    the Federal Communications Commission, when not subject to state
    jurisdiction, and a copy of the disaggregation and targeting plan
    approved by the state commission or the Federal Communications
    Commission.

(3) A rural incumbent local exchange carrier electing to disaggregate
    and target support under subsection (d) shall submit to the
    Administrator a copy of the self-certification plan including the
    information submitted to the state commission pursuant to (d)(2)(i)
    and (d)(2)(iv) or the Federal Communications Commission.

(4) A rural incumbent local exchange carrier electing to disaggregate
    and target support under subsection (c) or (d) must submit to the
    Administrator maps which precisely identify the boundaries of the
    designated disaggregation zones of support within the carrier's
    study area.

**APPENDIX B**

PARTIES FILING COMMENTS AND REPLY COMMENTS

+-----------------------------------+-----------------------------------+
| Comments:                         |                                   |
+-----------------------------------+-----------------------------------+
| [Commenters]{.underline}          | [Abbreviation]{.underline}        |
+-----------------------------------+-----------------------------------+
| Ad Hoc Telecommunications User    |                                   |
| Committee                         |                                   |
+-----------------------------------+-----------------------------------+
| Alaska Rural Coalition            |                                   |
+-----------------------------------+-----------------------------------+
| Alaska Telephone Association      | Alaska Tel. Assn.                 |
+-----------------------------------+-----------------------------------+
| AT&T Corp.                        | AT&T                              |
+-----------------------------------+-----------------------------------+
| Arizona Local Exchange Carriers   | Arizona LEC Assn.                 |
| Association                       |                                   |
+-----------------------------------+-----------------------------------+
| CenturyTel, Inc.                  | CenturyTel                        |
+-----------------------------------+-----------------------------------+
| Competitive Universal Service     | CUSC                              |
| Coalition                         |                                   |
+-----------------------------------+-----------------------------------+
| Evans Telephone Co. Small Rural   | Evans Tel. Co., et al.            |
| LECs                              |                                   |
|                                   |                                   |
| Humboldt Telephone Co.            |                                   |
|                                   |                                   |
| Kerman Telephone Co.              |                                   |
|                                   |                                   |
| Oregon-Idaho Utilities, Inc.      |                                   |
|                                   |                                   |
| Pine Tree Telephone & Telegraph   |                                   |
| Co.                               |                                   |
|                                   |                                   |
| Pinnacles Telephone co.           |                                   |
|                                   |                                   |
| The Ponderosa Telephone Co.       |                                   |
|                                   |                                   |
| The Siskiyou Telephone Co.        |                                   |
|                                   |                                   |
| The Volcano Telephone Co.         |                                   |
|                                   |                                   |
| War Telephone Co.                 |                                   |
+-----------------------------------+-----------------------------------+
| Florida Public Service Commission | Florida Commission                |
+-----------------------------------+-----------------------------------+
| Fred Williamson & Associates,     | Fred Williamson & Assoc.          |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| General Communications, Inc.      |                                   |
+-----------------------------------+-----------------------------------+
| GVNW Consulting, Inc.             | GVNW Consulting                   |
+-----------------------------------+-----------------------------------+
| Illinois Commerce Commission      | Illinois Commission               |
+-----------------------------------+-----------------------------------+
| Innovative Telephone              |                                   |
+-----------------------------------+-----------------------------------+
| Interstate Telcom Group           |                                   |
+-----------------------------------+-----------------------------------+
| John Staurulakis, Inc.            |                                   |
+-----------------------------------+-----------------------------------+
| Maine Public Utilities Commission | Maine and Vermont Commissions     |
| and Vermont Public Service Board  |                                   |
+-----------------------------------+-----------------------------------+
| National Exchange Carrier         | NECA                              |
| Association, Inc.                 |                                   |
+-----------------------------------+-----------------------------------+
| National Rural Telecom            | NRTA, OPASTCO, & USTA             |
| Association, Organization for the |                                   |
| Promotion and Advancement of      |                                   |
| Small Telecommunications          |                                   |
| Companies, and the United States  |                                   |
| Telecom Association               |                                   |
+-----------------------------------+-----------------------------------+
| National Telephone Cooperative    | NTCA                              |
| Association                       |                                   |
+-----------------------------------+-----------------------------------+
| New York State Dept. of Public    | NYDPS                             |
| Service                           |                                   |
+-----------------------------------+-----------------------------------+
| Public Service Commission of the  | Virgin Islands Commission         |
| U.S. Virgin Islands               |                                   |
+-----------------------------------+-----------------------------------+
| People of the State of California | California Commission             |
| and California Public Utilities   |                                   |
| Commission (filing jointly)       |                                   |
+-----------------------------------+-----------------------------------+
| Public Utility Commission of      | Texas Commission                  |
| Texas                             |                                   |
+-----------------------------------+-----------------------------------+
| Rural Independent Competitive     |                                   |
| Alliance                          |                                   |
+-----------------------------------+-----------------------------------+
| Rural Leadership Coalition        |                                   |
+-----------------------------------+-----------------------------------+
| Rural Task Force                  |                                   |
+-----------------------------------+-----------------------------------+
| Rural Utilities Service           | RUS                               |
+-----------------------------------+-----------------------------------+
| Sprint Corporation                | Sprint                            |
+-----------------------------------+-----------------------------------+
| South Dakota Independent          |                                   |
| Telephone Coalition               |                                   |
+-----------------------------------+-----------------------------------+
| Telecom Consulting Associates     |                                   |
+-----------------------------------+-----------------------------------+
| Townes Telecommunications, Inc.   | Townes Telecommunications         |
+-----------------------------------+-----------------------------------+
| Universal Service Administrative  | USAC                              |
| Company                           |                                   |
+-----------------------------------+-----------------------------------+
| Verizon Telephone Companies       | Verizon                           |
+-----------------------------------+-----------------------------------+
| Western Alliance                  |                                   |
+-----------------------------------+-----------------------------------+
| Wisconsin Public Service          | Wisconsin Commission              |
| Commission                        |                                   |
+-----------------------------------+-----------------------------------+
| Wyoming Public Service Commission | Wyoming Commission                |
+-----------------------------------+-----------------------------------+
| Reply Comments:                   |                                   |
+-----------------------------------+-----------------------------------+
| [Commenter]{.underline}           | Abbreviation                      |
+-----------------------------------+-----------------------------------+
| Ad Hoc Telecommunications Users   |                                   |
| Committee                         |                                   |
+-----------------------------------+-----------------------------------+
| Alaska Rural Coalition            |                                   |
+-----------------------------------+-----------------------------------+
| Alliance of Incumbent Rural       |                                   |
| Independent Telephone Companies   |                                   |
+-----------------------------------+-----------------------------------+
| AT&T Corp.                        | AT&T                              |
+-----------------------------------+-----------------------------------+
| CenturyTel, Inc.                  | CenturyTel                        |
+-----------------------------------+-----------------------------------+
| GVNW Consulting, Inc.             |                                   |
+-----------------------------------+-----------------------------------+
| Illinois Commerce Commission      | Illinois Commission               |
+-----------------------------------+-----------------------------------+
| Innovative Telephone              |                                   |
+-----------------------------------+-----------------------------------+
| Iowa Telecommunications, Inc.     | Iowa Telecommunications           |
+-----------------------------------+-----------------------------------+
| McLean & Brown                    |                                   |
+-----------------------------------+-----------------------------------+
| National Exchange Carrier         | NECA                              |
| Association                       |                                   |
+-----------------------------------+-----------------------------------+
| National Rural Telecom            | NRTA, OPASTCO, & USTA             |
| Association, Organization for the |                                   |
| Promotion and Advancement of      |                                   |
| Small Telecommunications          |                                   |
| Companies, and the United States  |                                   |
| Telecom Association               |                                   |
+-----------------------------------+-----------------------------------+
| New York State Department of      | NYDPS                             |
| Public Services                   |                                   |
+-----------------------------------+-----------------------------------+
| Roseville Telephone Company       | Roseville Tel. Co.                |
+-----------------------------------+-----------------------------------+
| Rural Task Force                  |                                   |
+-----------------------------------+-----------------------------------+
| Southwestern Bell Telephone       | SBC                               |
| Company                           |                                   |
+-----------------------------------+-----------------------------------+
| Sprint Corporation                | Sprint                            |
+-----------------------------------+-----------------------------------+
| Telecom Consulting Associates     |                                   |
+-----------------------------------+-----------------------------------+

**APPENDIX C**

**PARTIES FILING COMMENTS**

**IN MAG PROCEEDING (CC DOCKET NO. 00-256)**

+-----------------------------------+-----------------------------------+
| Comments:                         |                                   |
+-----------------------------------+-----------------------------------+
| [Commenter]{.underline}           | [Abbreviation]{.underline}        |
+-----------------------------------+-----------------------------------+
| Ad Hoc Telecommunications Users   |                                   |
| Committee                         |                                   |
+-----------------------------------+-----------------------------------+
| Alabama Rural Local Exchange      | Alabama Rural LECs                |
| Carriers                          |                                   |
+-----------------------------------+-----------------------------------+
| Alaska Rural Coalition            |                                   |
+-----------------------------------+-----------------------------------+
| Alaska Telephone Association      | Alaska Tel. Assn.                 |
+-----------------------------------+-----------------------------------+
| Arizona Local Exchange Carriers   | Arizona LEC Assn.                 |
| Association                       |                                   |
+-----------------------------------+-----------------------------------+
| Association of Communications     |                                   |
| Enterprises                       |                                   |
+-----------------------------------+-----------------------------------+
| AT&T Corp.                        | AT&T                              |
+-----------------------------------+-----------------------------------+
| BellSouth Corporation and         | BellSouth                         |
| BellSouth Telecommunications,     |                                   |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| People of the State of California | California Commission             |
| and California Public Utilities   |                                   |
| Commission (filing jointly)       |                                   |
+-----------------------------------+-----------------------------------+
| Competitive Universal Service     |                                   |
| Coalition                         |                                   |
+-----------------------------------+-----------------------------------+
| Evans Telephone Co. Small Rural   | Evans Tel. Co., et. al            |
| LECs                              |                                   |
|                                   |                                   |
| Humboldt Telephone Co.            |                                   |
|                                   |                                   |
| Kerman Telephone Co.              |                                   |
|                                   |                                   |
| Oregon-Idaho Utilities, Inc.      |                                   |
|                                   |                                   |
| Pine Tree Telephone & Telegraph   |                                   |
| Co.                               |                                   |
|                                   |                                   |
| Pinnacles Telephone co.           |                                   |
|                                   |                                   |
| The Ponderosa Telephone Co.       |                                   |
|                                   |                                   |
| The Siskiyou Telephone Co.        |                                   |
|                                   |                                   |
| The Volcano Telephone Co.         |                                   |
|                                   |                                   |
| War Telephone Co.                 |                                   |
+-----------------------------------+-----------------------------------+
| Florida Public Service Commission | Florida Commission                |
+-----------------------------------+-----------------------------------+
| Fred Williamson & Associates,     | Fred Williamson & Assoc.          |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| General Communications, Inc.      |                                   |
+-----------------------------------+-----------------------------------+
| General Services Administration   | GSA                               |
+-----------------------------------+-----------------------------------+
| Global Crossing North America,    | Global Crossing                   |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| GVNW Consulting, Inc.             | GVNW Consulting                   |
+-----------------------------------+-----------------------------------+
| Illinois Commerce Commission      | Illinois Commission               |
+-----------------------------------+-----------------------------------+
| Independent Telephone &           |                                   |
| Telecommunications Alliance       |                                   |
+-----------------------------------+-----------------------------------+
| ICORE, Inc.                       |                                   |
+-----------------------------------+-----------------------------------+
| Innovative Telephone              |                                   |
+-----------------------------------+-----------------------------------+
| Interstate Telcom Group           |                                   |
+-----------------------------------+-----------------------------------+
| ITCs, Inc.                        |                                   |
+-----------------------------------+-----------------------------------+
| John Staurulakis, Inc.            |                                   |
+-----------------------------------+-----------------------------------+
| Multi-Association Group           |                                   |
+-----------------------------------+-----------------------------------+
| Missouri Public Service           | Missouri Commission               |
| Commission                        |                                   |
+-----------------------------------+-----------------------------------+
| New York State Dept. of Public    | NYDPS                             |
| Service                           |                                   |
+-----------------------------------+-----------------------------------+
| National Association of State     | NASUCA                            |
| Utility Consumer Advocates        |                                   |
+-----------------------------------+-----------------------------------+
| Ohio Telecommunications Industry  |                                   |
| Association                       |                                   |
+-----------------------------------+-----------------------------------+
| Plains Rural Independent          |                                   |
| Companies                         |                                   |
+-----------------------------------+-----------------------------------+
| Public Service Commission of the  | Missouri Commission               |
| State of Missouri                 |                                   |
+-----------------------------------+-----------------------------------+
| Public Service Commission of      | Wisconsin Commission              |
| Wisconsin                         |                                   |
+-----------------------------------+-----------------------------------+
| Public Utility Commission of      | Texas Commission                  |
| Texas                             |                                   |
+-----------------------------------+-----------------------------------+
| Qwest Communications              | Qwest                             |
| International Inc.                |                                   |
+-----------------------------------+-----------------------------------+
| Rate-of-Return Coalition          |                                   |
+-----------------------------------+-----------------------------------+
| Regulatory Commission of Alaska   | Alaska Commission                 |
+-----------------------------------+-----------------------------------+
| Roseville Telephone Company       | Roseville Tel. Co.                |
+-----------------------------------+-----------------------------------+
| Rural Independent Competitive     |                                   |
| Alliance                          |                                   |
+-----------------------------------+-----------------------------------+
| Small Company Members of the      |                                   |
| Telephone Association of New      |                                   |
| England                           |                                   |
+-----------------------------------+-----------------------------------+
| Sprint Corporation                | Sprint                            |
+-----------------------------------+-----------------------------------+
| Telecom Consulting Associates,    |                                   |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| TDS Telecommunications            | TDS                               |
| Corporation                       |                                   |
+-----------------------------------+-----------------------------------+
| Townes Telecommunications, Inc.   |                                   |
+-----------------------------------+-----------------------------------+
| Western Alliance                  |                                   |
+-----------------------------------+-----------------------------------+
| WorldCom, Inc.                    | WorldCom                          |
+-----------------------------------+-----------------------------------+
| **Reply Comments:**               |                                   |
+-----------------------------------+-----------------------------------+
| [Commenter]{.underline}           | [Abbreviation]{.underline}        |
+-----------------------------------+-----------------------------------+
| Ad Hoc Telecommunications Users   |                                   |
| Committee                         |                                   |
+-----------------------------------+-----------------------------------+
| Alaska Rural Coalition            |                                   |
+-----------------------------------+-----------------------------------+
| Alliance of Incumbent Rural       |                                   |
| Independent Telephone Companies   |                                   |
+-----------------------------------+-----------------------------------+
| AT&T Corp.                        | AT&T                              |
+-----------------------------------+-----------------------------------+
| Dunkirk and Fredonia Telephone    | Dunkirk and Fredonia Tel. Co.     |
| Company                           |                                   |
+-----------------------------------+-----------------------------------+
| Excel Communications, Inc.        | Excel                             |
+-----------------------------------+-----------------------------------+
| General Service Administration    | GSA                               |
+-----------------------------------+-----------------------------------+
| GVNW Consulting, Inc.             | GVNW Consulting                   |
+-----------------------------------+-----------------------------------+
| Indiana Utility Regulatory        | Indiana Commission                |
| Commission                        |                                   |
+-----------------------------------+-----------------------------------+
| Innovative Telephone              |                                   |
+-----------------------------------+-----------------------------------+
| Interstate Telcom Group           |                                   |
+-----------------------------------+-----------------------------------+
| Iowa Utilities Board              |                                   |
+-----------------------------------+-----------------------------------+
| John Staurulakis, Inc.            |                                   |
+-----------------------------------+-----------------------------------+
| Minnesota Independent Coalition   |                                   |
+-----------------------------------+-----------------------------------+
| Multi-Association Group           | MAG                               |
+-----------------------------------+-----------------------------------+
| Plains Rural Independent          |                                   |
| Companies                         |                                   |
+-----------------------------------+-----------------------------------+
| Puerto Rico Telephone Company,    | Puerto Rico Tel. Co.              |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| Rate-of-Return Coalition          |                                   |
+-----------------------------------+-----------------------------------+
| Regulatory Commission of Alaska   | Alaska Commission                 |
+-----------------------------------+-----------------------------------+
| Ronan Telephone Company           | Ronan Tel. Co.                    |
+-----------------------------------+-----------------------------------+
| Ronan Telephone Consumer Advisory |                                   |
| Committee                         |                                   |
+-----------------------------------+-----------------------------------+
| Roseville Telephone Company       | Roseville Tel. Co.                |
+-----------------------------------+-----------------------------------+
| Rural Independent Competitive     |                                   |
| Alliance                          |                                   |
+-----------------------------------+-----------------------------------+
| State of Alaska                   | Alaska                            |
+-----------------------------------+-----------------------------------+
| State of Hawaii                   | Hawaii                            |
+-----------------------------------+-----------------------------------+
| Summit Telephone and Telegraph    | Summit Tel. Co.                   |
| Company of Alaska, Inc.           |                                   |
+-----------------------------------+-----------------------------------+
| Telcom Consulting Associates,     |                                   |
| Inc.                              |                                   |
+-----------------------------------+-----------------------------------+
| TDS Telecommunications            | TDS                               |
| Corporation                       |                                   |
+-----------------------------------+-----------------------------------+
| Verizon Telephone Companies       | Verizon                           |
+-----------------------------------+-----------------------------------+
| Western Alliance                  |                                   |
+-----------------------------------+-----------------------------------+
| WorldCom, Inc.                    | WorldCom                          |
+-----------------------------------+-----------------------------------+
| Wyoming Public Service Commission | Wyoming Commission                |
+-----------------------------------+-----------------------------------+

![](media/image1.wmf)

**SEPARATE STATEMENT OF CHAIRMAN MICHAEL K. POWELL**

*Re: Fourteenth Report and Order and Twenty-Second Order on
Reconsideration, Federal-State Joint Board on Universal Service and
Multi-Association Group (MAG) Plan for Regulation of Interstate Services
of Non-Price Cap Incumbent Local Exchange Carriers and Interexchange
Carriers (CC Dkt. Nos. 96-45, 00-256).*

I am pleased to support this Order because, today, the Commission
finally takes action to fill in the third piece of the four-part
universal service puzzle: high-cost loop support for rural carriers. The
Commission filled in the first piece of this difficult puzzle in 1999
when it reformed high-cost loop support for non-rural carriers based on
a forward-looking cost model. We moved the second piece of the puzzle
into place in 2000 with the adoption of access reform and interstate
access support for price cap carriers in the CALLS Order. Today's action
on the third piece of the puzzle, rural high-cost loop support - and the
pending proceeding on the puzzle's fourth piece, rural access reform -
are two of the most important actions the Commission will take this
year. Viewed as a whole, this comprehensive package of access and
universal service reforms will ensure that consumers in all areas of the
country, especially those living in high-cost rural areas, have access
to telecommunications services at affordable rates.

A number of innovative rural carriers have begun to meet the challenge
of ensuring that their customers benefit from the same twenty-first
century telephone infrastructure that other Americans are starting to
enjoy. Many others, however, have been less able to meet this challenge.
In particular, in many cases, the costs of serving far-flung customers
has outstripped rural carriers' financial resources. This has, in some
cases, hindered these carriers from making much-needed improvements and
upgrades to their networks to provide basic supported services.

With this Order, we adjust rural high-cost loop support to address a
facet of this pressing problem. The increases to rural high-cost loop
support will begin relatively modestly (roughly \$126 million total
support for Year 1) and then ramp up to a total price tag over the five
year term of the plan of over \$1 billion. Together with our other
existing universal service programs, our total support for rural
carriers during this five year period is projected to be well over \$9
billion - before we address rural access reform.

Although I vigorously support the Commission taking this important
action, I acknowledge that there are limitations to this plan. As the
Order emphasizes, this is an interim five-year plan, reflecting the fact
that we have more work to do in this area. Specifically, I believe it is
important that we develop a permanent support mechanism, based on
forward-looking costs or another appropriate measure of costs, by which
we can ensure that the rural high-cost loop fund grows no larger than is
truly necessary to accomplish its purpose. As I have stated repeatedly,
we must guard against allowing universal service programs to grow too
large, lest we collect so much from carriers that they are hindered in
their ability to compete and bring consumers new and better products and
services.

If we could address this concern and adopt a permanent solution today, I
would be the first to support it. But these issues are exceedingly
complex and will take more time to develop. At the same time, further
delay is not an option in my view. The Commission has taken simply too
long to address rural carrier issues in its implementation of the Act's
universal service requirements.

I would re-emphasize that this is only one piece of the puzzle for rural
carriers. The Bureau intends to prepare a formal recommendation
regarding rural access reform, including consideration of the "MAG
proposal" within the next few months. It will be one of my top
priorities to make significant progress on rural access reform as soon
as logistically possible.

In closing, I would like to extend my deepest gratitude to my state
colleagues and staff, as well as my fellow commissioners and staff, for
their invaluable contributions to this reform effort. The Rural Task
Force and the Joint Board on Universal Service are especially commended
for their insight and vigor in developing this interim support
mechanism.

**Separate Statement of Commissioner Susan Ness**

*Re: Federal-State Joint Board on Universal Service,* CC Docket No.
96-45

Today we complete another major chapter in our effort to preserve and
advance universal service, one of the fundamental pillars of the
Telecommunications Act of 1996. Section 254 of the Act requires us to
ensure that all Americans have access to telecommunications services at
affordable and reasonably comparable rates. Congress recognized that we
need to pay special attention to the needs of (1) low-income consumers,
(2) those living in rural, insular, and high-cost areas, and (3)
schools, libraries, and rural health care providers.

We have made steady and significant progress in each of these areas. For
low-income consumers, we augmented our Lifeline and Link-Up programs to
increase the level of federal support and ensure that support is
available to the urban and rural poor in every state. For schools,
libraries, and rural health care providers, we have successfully
implemented the bold vision in the 1996 Act to deliver the tools of the
Information Age through discounts on telecommunications and information
services.

And for consumers in high-cost areas, we have taken steps to establish
universal service support mechanisms that are explicit and sustainable
in a competitive market. We previously reformed the high-cost mechanisms
for non-rural carriers, and they are making the transition to a support
mechanism based on forward-looking costs. Today, we address high-cost
reform for rural carriers by adopting a mechanism that works for rural
America.

When the FCC undertook its review of the high-cost universal service
mechanism following passage of the 1996 Act, we recognized the unique
challenges facing rural carriers and did not adopt one-size-fits-all
policies that might have impeded rather than supported the provision of
affordable service by rural carriers. Instead, working with rural
carriers and their associations, the Joint Board convened a Rural Task
Force comprised of experts representing a wide range of companies,
consumer advocates, and government officials to examine the cost
structures and circumstances of rural carriers.

In October, after intensive research and deliberations, the Rural Task
Force unanimously recommended a high-cost mechanism for rural carriers
that takes into account not only the significant differences *between*
rural and non-rural carriers, but also the vastly different cost
structures *among* rural carriers. As is the case with any consensus
proposal, the framework may not be exactly what any one entity would
want. Nevertheless, the plan represents a solid compromise that balances
competing interests. I support this order because it will provide the
stability necessary for rural carriers to plan for the future and
undertake critical investment to benefit rural consumers.

As we celebrate completion of this phase of high-cost reform, however,
we note that much remains to be done.

First, we have not yet completed efforts to identify and make explicit
the subsidies embedded in rural carriers' access charges. Reforming
high-cost mechanisms without addressing access charges is like clapping
with one hand. I urge the Commission to make access charge reform and
resolution of the other issues raised by the Multi-Association Group a
top priority. For many rural carriers, access charges comprise well over
half of their revenue stream. It is not easy for rural carriers to plan
for the future and invest in their communities when there is uncertainty
about this portion of their revenue base.

Second, even as the Commission works to complete action to reform the
federal universal service mechanisms, we must remember that keeping
telephone service affordable and accessible is a shared federal and
state responsibility. I commend the states that have implemented
measures to address rate comparability within their borders and urge
other states to undertake such initiatives. State commissions also have
a critical role to play in ensuring that subsidies implicit in
intrastate rates are made explicit.

Third, we must remain mindful that universal service is an evolving
concept that merits our continuing attention. For low-income consumers,
we must ensure that those for whom Lifeline and Link-Up are intended
know about and have access to these programs. For schools and libraries,
we must determine why some communities, including ones in rural and
high-poverty areas, are not taking advantage of E-Rate discounts to hook
up their classrooms and libraries to the Internet. We should also seek
to build on our success with the E-Rate to find ways to leverage for the
entire community -- especially in remote areas \-- the technological
resources made available to schools and libraries.

For high-cost areas, our continuing challenge is to ensure that
consumers have access to reasonably comparable services at reasonably
comparable prices through a high-cost mechanism that is economically
rational and competitively neutral. Today, we take an important step by
adopting a framework for rural carriers. We must now focus our attention
on further steps, including in the near future, a review of the services
that are supported by universal service and an examination of ways to
facilitate the deployment of advanced services to all Americans in a
reasonable and timely manner. As we proceed on these and other measures,
I urge the Commission to continue working together with our state
colleagues -- and with the Joint Board in particular \-- to ensure that
specific, predictable, and sufficient mechanisms remain in place.

As a final matter, I would like to acknowledge the many people who have
demonstrated through hard work their commitment to preserving and
advancing universal service for all Americans.

I commend the Rural Task Force for its unwavering efforts for rural
consumers. I especially want to thank the chair of the Task Force, Bill
Gillis, who worked tirelessly to fashion a consensus.

I would also like to thank the Joint Board and its staff for their
dedication to ensuring that all Americans have access to affordable,
quality telecommunications services. Together, we have worked hard to
forge a federal-state partnership to promote the goals of universal
service.

Finally, I would like to thank the Common Carrier Bureau, and in
particular, the Accounting Policy Division. Bureau staff members have
spent countless hours working through complex issues. They are indeed
public servants of the highest caliber.

[^1]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Recommended Decision, FCC 00J-4 (Jt. Bd. rel. Dec. 22,
    2000) (*Recommended Decision*); Letter from William R. Gillis,
    Chair, Rural Task Force, to Magalie Roman Salas, FCC, dated
    September 29, 2000 (Rural Task Force Recommendation or
    Recommendation). We also address proposals related to intrastate
    high-cost support made by the Multi-Association Group (MAG). The MAG
    plan is a comprehensive proposal for interstate access charge and
    universal service reform for non-price cap or rate-of-return
    carriers submitted to the Commission by four associations that
    represent rural carriers. *See Multi-Association Group (MAG) Plan
    for Regulation of Interstate Services of Non-Price Cap Incumbent
    Local Exchange Carriers and Interexchange Carriers,* CC Docket No.
    00-256, *Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, *Access Charge Reform for Incumbent Local Exchange
    Carriers Subject to Rate-of-Return Regulation*, CC Docket No. 98-77,
    *Prescribing the Authorized Rate of Return for Interstate Services
    of Local Exchange Carriers*, CC Docket No. 98-166, Notice of
    Proposed Rulemaking, 16 FCC Rcd 460 (2001) (*MAG NPRM*).

[^2]: Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
    (1996) (1996 Act). The 1996 Act amended the Communications Act of
    1934. 47 U.S.C. §§ 151, *et seq*. (Communications Act or Act).
    References to section 254 in this Order refer to the universal
    service provisions of the 1996 Act, which are codified at 47 U.S.C.
    § 254 of the Act.

[^3]: In this Order, the terms "rural carrier" and "rural incumbent
    local exchange carrier" refer to incumbent local exchange carriers
    that meet the definition of a rural telephone company set forth in
    section 153(37) of the Act. 47 U.S.C. § 153(37). Under this
    definition, rural telephone companies are local exchange carriers
    that either serve study areas with fewer than 100,000 access lines
    or meet one of three additional criteria. We note that,
    "\[a\]lthough the Commission uses the rural telephone company
    definition to distinguish between rural and non-rural carriers for
    purposes of calculating universal service support, there is no
    statutory requirement that it do so." *Federal-State Joint Board on
    Universal Service*, CC Docket No. 96-45, *Forward-Looking Mechanism
    for High Cost Support for Non-Rural LECs*, CC Docket No. 97-160,
    Tenth Report and Order, 14 FCC Rcd 20156, 20358 para. 458 (1999)
    (*Tenth Report and Order*).

[^4]: 47 U.S.C. § 254.

[^5]: Consistent with the will of Congress, we have taken numerous steps
    over the last four years to carry out these statutory directives and
    goals. Reforming the patchwork system of largely implicit universal
    subsidies that existed prior to the 1996 Act has not been an easy
    task. We have proceeded carefully in stages to provide interested
    stakeholders with an opportunity to express their competing views on
    how to resolve these vexing public policy issues. *Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45, Report and
    Order, 12 FCC Rcd 8776 (1997) (*First Report and Order*) (subsequent
    history omitted).

[^6]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Ninth Report and Order and Eighteenth Order on
    Reconsideration, 14 FCC Rcd 20432, 20439 (1999) (*Ninth Report and
    Order*), *pets. for review pending* *sub nom*., *Qwest Corp. v.
    FCC*, 10^th^ Cir. No. 99-9546 and consolidated cases (1999).

[^7]: *First Report and Order*, 12 FCC Rcd at 8899 para. 224, 8936 para.
    294.

[^8]: *Id*. at 8937-45 paras. 297-313.

[^9]: *Id*. at 8935 para. 293.

[^10]: *See id*. at 8917 para. 253.

[^11]: *See Federal-State Joint Board on Universal Service Announces the
    Creation of a Rural Task Force*, CC Docket No. 96-45, Public Notice,
    12 FCC Rcd 15752 (Jt. Bd. 1997) (*Rural Task Force 1997 Public
    Notice*); *Federal-State Joint Board on Universal Service Announces
    Rural Task Force Members*, CC Docket No. 96-45, Public Notice, FCC
    98J-1 (Jt. Bd. 1998) (*Rural Task Force 1998 Public Notice*).

[^12]: *See* Rural Task Force Recommendation. The Joint Board had
    requested the Rural Task Force's recommendations no later than nine
    months after the implementation of the forward-looking high-cost
    mechanism for non-rural carriers, which became effective on January
    1, 2000. *See Rural Task Force 1997 Public Notice*. As explained
    *infra*, the Joint Board established the Rural Task Force for the
    purpose of making recommendations to the Joint Board regarding an
    appropriate forward-looking high-cost support mechanism for rural
    carriers. After receiving the Rural Task Force's recommendation, the
    Joint Board recommended that we base modifications to the high-cost
    support mechanism for rural carriers on the Rural Task Force
    recommendation. We will, for ease, refer to the Rural Task Force's
    recommendation interchangeably with the Joint Board's
    recommendation.

[^13]: *See* Rural Task Force Recommendation at 17-19; *Recommended
    Decision* at para. 13.

[^14]: Rural Task Force Recommendation at 4.

[^15]: On January 12, 2001, the Commission sought comment on the Joint
    Board's Recommended Decision. *See Federal-State Joint Board on
    Universal Service*, CC Docket No. 96-45, Further Notice of Proposed
    Rulemaking, FCC 01-8 (rel. Jan. 12, 2001) (*Further Notice*).

[^16]: *See* *Ninth* *Report and Order*, 14 FCC Rcd at 20439 para. 12.

[^17]: *See id.* at 20441 para. 15 ("In contrast to explicit support,
    some state rate designs and, to a lesser extent, the federal
    interstate access charge system, have provided implicit high-cost
    support flowing from (1) urban areas to rural areas; (2) business
    customers to residential customers; (3) vertical services to basic
    service; and/or (4) long distance service to local service").

[^18]: The term "embedded costs" refers to a carrier's historic costs,
    as reflected in its books. A study area is a geographic segment of a
    carrier\'s telephone operations, generally corresponding to its
    entire service territory within a state. The Commission froze all
    study area boundaries effective November 15, 1984. *See* 47 C.F.R.
    Part 36, Appendix---Glossary.

[^19]: *See* 47 C.F.R. §§ 36.601, *et. seq.*; *First Report and
    Order,*12 FCC Rcd at 8891-92 paras. 209-11. We define a loop as "the
    connection between the telephone company's central office and the
    customer's premises\[,\]" and loop cost as the fixed cost of this
    connection. *First Report and Order*, 12 FCC Rcd at 8891 nn.523,
    525. The term "unseparated" refers to the jurisdictional separations
    process which divides between the state and federal jurisdictions
    the costs of those portions of carriers' telephone plant that are
    used for intrastate and interstate services. High-cost loop support
    provides support only for the portion of a carrier's total costs
    allocated to the intrastate jurisdiction. Specifically, carriers
    with 200,000 or fewer working loops receive support equal to 65
    percent of the portion of their unseparated loop costs greater than
    115 percent but less than or equal to 150 percent of the national
    average, and 75 percent of the portion of their unseparated loop
    costs greater than 150 percent. For carriers with over 200,000
    working loops, the formula is similar, but with reduced levels of
    support. For example, a carrier with over 200,000 loops reaches the
    75 percent support level only for costs that exceed 250 percent of
    the national average. The national average is calculated based on
    the loop costs of both rural and non-rural carriers.

[^20]: *See* 47 C.F.R. Part 36, Subpart F; *First Report and Order*, 12
    FCC Rcd at 8929-30 paras. 281-82.

[^21]: LTS provides support for the interstate loop costs of
    rate-of-return carriers (typically small, rural carriers) that
    participate in the National Exchange Carrier Association (NECA)
    common line pool, and LSS (formerly DEM Weighting) is available to
    support a portion of the switching costs of carriers with 50,000 or
    fewer lines. 47 C.F.R. §§ 36.125(b), 54.301, 54.303. The Commission
    removed LTS and LSS from the interstate access charge system in
    1998. The LTS and LSS support programs now are funded from
    collections from all providers of interstate telecommunications
    services made on an equitable and non-discriminatory basis. *See
    generally Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Fourth Order on Reconsideration, *Access Charge Reform,
    Price Cap Performance Review for Local Exchange Carriers, Transport
    Rate Structure and Pricing, End User Common Line Charge*, CC Docket
    Nos. 96-262, 94-1, 91-213, 95-72, Report and Order, 13 FCC Rcd 5318,
    5343-45 paras. 40-41, 5352-54 paras. 56-58 (1998) (*Fourth Order on
    Reconsideration*); *see also Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Thirteenth Report and Order and
    Further Notice of Proposed Rulemaking, FCC 00-428 at paras. 6-9
    (rel. Dec. 8, 2000).

[^22]: *See* Federal Universal Service Support Mechanisms Fund Size
    Projections and Contribution Base For the Third Quarter 2001,
    Appendix HC 2 (Universal Service Administrative Company, May 2,
    2001).

[^23]: 47 U.S.C. § 254(b)(3).

[^24]: *Id*. § 254(b)(5).

[^25]: *First Report and Order*, 12 FCC Rcd at 8801-03 paras. 46-51;
    *see* 47 U.S.C. § 254(b)(7).

[^26]: *First Report and Order*, 12 FCC Rcd at 8803 para. 52. The 1996
    Act also requires the Commission to consult with the Joint Board in
    implementing section 254. *See* 47 U.S.C. § 254(a).

[^27]: *First Report and Order*, 12 FCC Rcd at 8803 para 54.

[^28]: *Id.* at 8780-81 paras. 1-3.

[^29]: *See id.* at 8899-901 paras. 224-229.

[^30]: *See id.* at 8936 para. 294.

[^31]: *See Ninth Report and Order*, 14 FCC Rcd at 20439 para. 11.

[^32]: *First Report and Order*, 12 FCC Rcd at 8936 para. 294.

[^33]: *Id*. at 8917 para. 252-53; *see also id.* at 8936 para. 294.

[^34]: *Id*. at 8917 para. 253; *see also id.* at 8918 para. 255;
    *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Second Recommended Decision, 13 FCC Rcd 24744, 24758 para. 30
    (Jt. Bd. 1998).

[^35]: *See Rural Task Force 1998 Public Notice*; Rural Task Force
    Recommendation. As stated above, the Joint Board had requested the
    Rural Task Force's recommendations no later than nine months after
    the implementation of the forward-looking high-cost mechanism for
    non-rural carriers, which became effective on January 1, 2000. *See
    Rural Task Force 1997 Public Notice*.

[^36]: *See* Rural Task Force Recommendation at Appendix B.

[^37]: *See id.* at 6. The six Rural Task Force white papers are
    available on the Rural Task Force's web site at
    \<http://www.wutc.wa.gov/rtf\>.

[^38]: *See* Rural Task Force Recommendation at 6 ("This approach is
    pragmatic, and it is intended to deliver to the Joint Board a
    package of recommendations with the potential of being implemented
    promptly and without legal challenge from affected parties.").

[^39]: *See id.* at 20. The Rural Task Force emphasized that its
    Recommendation applies only to rural, insular, and high-cost areas
    served by *rural carriers*, and not to areas served by non-rural
    carriers. *See* *id.* at 18.

[^40]: *Id.* at 24-25, 27-29. The corporate operations expense
    limitation limits the amount of such expenses that a rural carrier
    may recover through high-cost loop support. *See* 47 C.F.R. § Part
    36, Subpart F; *First Report and Order*, 12 FCC Rcd at 8930-32
    paras. 283-85.

[^41]: Rural Task Force Recommendation at 27.

[^42]: *Id.* at 29-30; *see* 47 C.F.R. § 54.305 (limiting universal
    service support for acquired exchanges to the per-line support
    received by the seller).

[^43]: Rural Task Force Recommendation at 25-27.

[^44]: *Id.* at 25, 26, 28.

[^45]: *Id.* at Appendix D.

[^46]: *Id.* at 33-36.

[^47]: *Id.* at 22-23, 30-32. As indicated above, the Commission is now
    considering the comprehensive MAG proposal for interstate access
    charge and universal service reform for rate-of-return carriers.
    *See supra* n.Error: Reference source not found; *see also infra*
    paras. 202-205.

[^48]: Rural Task Force Recommendation at 32-33; *see* 47 C.F.R. §
    54.313; *Ninth Report and Order*, 14 FCC Rcd at 20481-88 paras.
    93-110. Section 254(e) provides that carriers shall use universal
    service support "only for the provision, maintenance, and upgrading
    of facilities and services for which the support is intended." 47
    U.S.C. § 254(e).

[^49]: Rural Task Force Recommendation at 38-39.

[^50]: *Federal-State Joint Board on Universal Service To Hold En Banc
    Hearing November 13, 2000 on the Rural Task Force Recommendation for
    Universal Service Reform for Rural Carriers*, CC Docket No. 96-45,
    Public Notice, 15 FCC Rcd 22149 (Jt. Bd. 2000). The *en banc*
    hearing took place at the National Association of Regulatory Utility
    Commissioners conference in San Diego, California, where the Joint
    Board heard testimony from a diverse group of participants including
    rural and non-rural local exchange carriers, contributors to the
    federal universal service support mechanisms, consumer groups, and
    state and federal regulators.

[^51]: Rural Task Force Recommendation at para. 13.

[^52]: *See id.* at para. 11. Specifically, the Joint Board stated that
    the Rural Task Force plan seeks to encourage competitors to enter
    high-cost areas by proposing a flexible system for disaggregating
    support to establish the portable per-line support amount available
    to all eligible telecommunications carriers. *Id.*

[^53]: *Id.*

[^54]: *Id.* at para. 12.

[^55]: *Id.* at para. 10.

[^56]: *Id.* at para. 14.

[^57]: *See id.* at paras. 15-19.

[^58]: *Id.* at para. 20.

[^59]: *Id.* at para. 21.

[^60]: *See infra* discussion at section IV.D.

[^61]: *See* Ad Hoc Telecommunications User Committee Comments at 9-10;
    California Commission Comments at 3.

[^62]: *See,* *e.g.*, WorldCom Comments at 3; Ad Hoc Telecommunications
    User Committee Reply Comments at 5-6.

[^63]: *See, e.g.,* Alaska Tel. Assn. Comments at 2-3; NECA Reply
    Comments at 1-2.

[^64]: *See, e.g.,* Interstate Telecom Group Comments at 6; NTCA
    Comments at 3.

[^65]: *See, e.g.,* NYDPS at 4-5; WorldCom Comments at 2; Ad Hoc
    Telecommunications User Committee Reply Comments at 12-13. Some
    commenters also argue that support based on embedded costs may
    include costs associated with advanced services and other services
    that are not included in the Commission's definition of universal
    service. *See, e.g.,* California Commission Comments at 6; Illinois
    Commission Comments at 5; WorldCom Comments at 3.

[^66]: We note that the Maine and Vermont Commissions offer anecdotal
    evidence that specific carriers receive too little and/or too much
    support. *See* Maine and Vermont Commissions Comments at 6, 9, 13.
    As discussed below, their arguments are geared primarily towards
    better harmonization of the high-cost support mechanisms for rural
    and non-rural carriers, and the Commission will consider their
    arguments in the context of its comprehensive review of the rural
    and non-rural high-cost support mechanisms.

[^67]: *Texas Office of Public Utility Counsel v. FCC*, 183 F.3d 393,
    425-26 (5^th^ Cir. 1999); *Alenco Communications, Inc. v. FCC*, 201
    F.3d 608, 620 (5^th^ Cir. 2000).

[^68]: *Alenco Communications, Inc. v. FCC*, 201 F.3d at 619
    ("\[P\]etitioners' sufficiency challenge fundamentally misses the
    goal of the Act. The 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.
    Competition necessarily brings the risk that some telephone service
    providers will be unable to compete. The Act only promises universal
    service, and that is a goal that requires sufficient funding of
    *customers*, not *providers*.")

[^69]: *Id.* ("Because universal service is funded by a general pool
    subsidized by all telecommunications providers -- and thus
    indirectly by customers -- excess subsidization in some cases may
    detract from universal service by causing rates unnecessarily to
    rise, thereby pricing some consumers out of the market.").

[^70]: *Texas Office of Public Utility Counsel v. FCC*, 183 F.3d at 412;
    *Alenco Communications, Inc. v. FCC*, 201 F.3d at 620.

[^71]: *First Report and Order*, 12 FCC Rcd at 8939 para. 300. The
    Commission agreed with the state members of the Joint Board that
    "rural carriers may require a greater amount of support than fixed
    support mechanisms would provide, ... \[i\]n order to maintain
    existing facilities and make prudent facility upgrades until such
    time as . . . forward-looking support mechanisms are in place."
    *Id.*

[^72]: *See* Letter from William R. Gillis, Chair, Rural Task Force, to
    Magalie Roman Salas, FCC, dated November 10, 2000, at Attachment 2;
    *Recommended Decision* at para. 11 & n.32.

[^73]: The contribution factor for the second quarter of 2001 was
    approximately 6.88 percent. *See Proposed Second Quarter 2001
    Universal Service Contribution Factor*, CC Docket No. 96-45, Public
    Notice, DA 01-614 (rel. Mar. 9, 2001). Future changes in the overall
    amount of federal universal service support and changes in the
    contribution revenue base may impact these projections. For example,
    the Commission recently sought comment on proposals to streamline
    and reform the manner in which the Commission assesses contributions
    to the federal universal service mechanisms. *See Federal-State
    Joint Board on Universal Service, 1998 Biennial Regulatory Review --
    Streamlined Contributor Reporting Requirements Associated with
    Administration of Telecommunications Relay Service, North American
    Numbering Plan, Local Number Portability, and Universal Service
    Support Mechanisms, Telecommunications Services for Individuals with
    Hearing and Speech Disabilities, and the Americans With Disabilities
    Act of 1990, Administration of the North American Numbering Plan and
    North American Numbering Plan Cost Recovery Contribution Factor and
    Fund Size, Number Resource Optimization, Telephone Number
    Portability*, CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200,
    95-116, Notice of Proposed Rulemaking, FCC 01-145 (rel. May 7,
    2001).

[^74]: *See, e.g.,* California Commission Comments at 5; Florida
    Commission Comments at 4; Illinois Commission Comments at 13; NYDPS
    Comments at 4; Texas Commission Comments at 1, 2.

[^75]: *Ninth Report and Order* at 20453-54 para. 38.

[^76]: By averaging costs at the statewide level, the federal mechanism
    compares the relative costs of providing supported services in
    different states. The mechanism provides support to carriers in
    those states with average costs that exceed the national average
    cost benchmark.

[^77]: *Ninth Report and Order,* 14 FCC Rcd at 20453-54 para 38.

[^78]: *Id*. at 20453-54 para 45 n.136.

[^79]: *See Amendment of Part 36 of the Commission's Rules and
    Establishment of a Joint Board*, CC Docket No. 80-286, Report and
    Order, 9 FCC Rcd 303 (1993) (*Fund Cap Order*); *see also Amendment
    of Part 36 of the Commission's Rules and Establishment of a Joint
    Board*, CC Docket No. 80-286, Report and Order, 11 FCC Rcd 2538
    (1996); *Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Report and Order, 11 FCC Rcd 7920 (1996) (*Fund Cap
    Extension Order*).

[^80]: *See* 47 C.F.R. § 36.601(c). *See supra* para. 13 describing the
    operation of the high-cost loop support mechanism.

[^81]: *See Fund Cap Order*, 9 FCC Rcd at 305 paras. 17-20.

[^82]: *See id.* at 306 para. 22.

[^83]: *See id.* at 305 paras. 18-19.

[^84]: *See First Report and Order*, 12 FCC Rcd at 8940 para. 302,
    *Fourth Order on Reconsideration*, 13 FCC Rcd at 5340 para. 34.

[^85]: *First Report and Order*, 12 FCC Rcd at 8940 para. 302.

[^86]: *Id.*

[^87]: *Id.*

[^88]: *See* *Fourth Order on Reconsideration,* 13 FCC Rcd at 5343 para.
    39.

[^89]: *Id.* at 5341-42 para. 36. *See also* 47 U.S.C. § 254(d)
    (requiring "\[e\]very telecommunications carrier that provides
    interstate services \[to\] contribute, on an equitable and
    nondiscriminatory basis, to the specific, predictable, and
    sufficient mechanisms established by the Commission to preserve and
    advance universal service").

[^90]: *See* Rural Task Force Recommendation at 24. According to the
    Rural Task Force, re-basing will result in an initial \$118.5
    million increase in the high-cost loop support fund, representing
    \$83.9 million from removing the overall cap on high-cost loop
    support and \$34.6 million from removing the corporate operations
    expense limitation, used when calculating high-cost loop support.
    *See id.* at 20-21. The corporate operations expense limitation is
    discussed in greater detail in section IV.B.3. *infra*.

[^91]: *See* Rural Task Force Recommendation at 24-25.

[^92]: *Id.* at 27.

[^93]: *Id.*; *see infra* discussion at paras. 77-90.

[^94]: Rural Task Force Recommendation at 30. The Rural Task Force's
    example of a "safety valve" mechanism for transferred exchanges
    includes a proposal to exclude loops transferred to rural telephone
    companies from the rural growth factor calculation. *Id.* at
    Appendix D. *See infra* discussion at paras. 91-119.

[^95]: Rural Task Force Recommendation at 25; *see infra* discussion at
    paras. 97-119.

[^96]: *Recommended Decision* at para. 11.

[^97]: *See id.* at para. 13.

[^98]: *See* 47 U.S.C. § 254.

[^99]: *See* 47 U.S.C. § 254(b)(3), (5). In addition to the universal
    service principles specified in the 1996 Act, Congress directed that
    the Joint Board and the Commission be guided by such other
    principles as they determine to be consistent with the Act, and
    necessary and appropriate for the protection of the public interest,
    convenience, and necessity. 47 U.S.C. § 254(b)(7). As recommended by
    the Joint Board, the Commission adopted competitive neutrality as an
    additional principle for universal service. *See First Report and
    Order*, 12 FCC Rcd at 8801-02 paras. 46-48, 8932-34 paras. 286-90.

[^100]: *See* 47 U.S.C. § 254(b)(4), (d).

[^101]: *See* Rural Task Force Recommendation at Appendix D; *see also
    infra* discussion at para. 53.

[^102]: *See* Rural Task Force Recommendation at 24; *see also, e.g.,*
    Arizona LEC Assn. Comments at 2; AT&T Comments at 12; CUSC Comments
    App. A at 22; GVNW Consulting Comments at 3; NECA Comments at 7;
    NTCA Comments at 3-4; Virgin Islands Commission Comments at 6;
    Sprint Comments at 1-2; Western Alliance Comments at 11; WorldCom
    Reply Comments at 8.

[^103]: *See infra* discussion at paras. 48-53.

[^104]: The Rural Task Force was made up of individuals representing
    rural carriers, competitive local exchange carriers, interexchange
    carriers, wireless providers, consumers advocates, and state and
    federal interests.

[^105]: *See* *MAG NPRM*, 16 FCC Rcd at 464 para. 11; Arizona LEC Assn.
    Comments at 2; Interstate Telecom Group Comments at 6; John
    Staurulaukis, Inc. Comments at 6-8; NECA Comments at 5-7; NRTA,
    OPASTCO, & USTA Reply Comments at 5; NTCA Comments at 3-4; Western
    Alliance Comments at 11; *see* *also* Alabama Rural LECs Comments in
    CC Docket No. 00-256 at 2; MAG Reply Comments in CC Docket No.
    00-256 at 14-15; Rate-of-Return Coalition Comments in CC Docket No.
    00-256 at 6-7; Summit Tel. Co. Comments in CC Docket No. 00-256 at
    3; Telecom Consulting Associates Comments in CC Docket No. 00-256 at
    6; Wisconsin Commission Comments in CC Docket No. 00-256 at 6-7.

[^106]: *See* California Commission Comments at 8; Florida Commission
    Comments at 4; Illinois Commission Comments at 4-7; NYDPS Comments
    at 4; Texas Commission Comments at 3; Qwest Reply Comments at 3;
    WorldCom Comments at 3; *see* *also* AT&T Comments in CC Docket No.
    00-256 at 9; CUSC Comments in CC Docket No. 00-256 at 18-19; Global
    Crossing Comments in CC Docket No. 00-256 at 11-12; Illinois
    Commission Comments in CC Docket No. 00-256 at 11; WorldCom Comments
    in CC Docket No. 00-256 at 16-17.

[^107]: *See, e.g.,* Arizona LEC Assn. Comments at 2; AT&T Comments at
    12; CUSC Comments App. A at 22; GVNW Consulting Comments at 3; NECA
    Comments at 7; NTCA Comments at 3-4; Virgin Islands Commission
    Comments at 6; Sprint Comments at 1-2; Western Alliance Comments at
    11; WorldCom Reply Comments at 8.

[^108]: *See First Report and Order*, 12 FCC Rcd at 8939 para. 300
    (rejecting a proposal to base support, on a going-forward basis, on
    costs reported in 1995).

[^109]: *See First Report and Order*, 12 FCC Rcd at 8940 para. 302;
    *Fund Cap Order*, 9 FCC Rcd at 305 para. 17; *Fund Cap Extension
    Order*, 11 FCC Rcd at 7923-24 paras. 7-9.

[^110]: *See supra* at para. 31.

[^111]: *See* Rural Task Force Recommendation at 20-21. The Rural Task
    Force also notes that the removal of corporate operations expense
    limitation would increase the fund for rural carriers by \$34.6
    million.

[^112]: *See supra* at para. 35.

[^113]: *See supra* paras. 26-28.

[^114]: *See* *Joint Board Recommended Decision* at para. 12.

[^115]: *See* Rural Task Force Recommendation at 30.

[^116]: *See infra* discussion at para. 79.

[^117]: *See infra* discussion at paras. 107-109.

[^118]: Assume, for example, that a total of 10 rural carrier lines
    receive \$1 per line or a total of \$10 in high-cost loop support.
    If one line is sold to a non-rural carrier, then the remaining nine
    lines would be eligible for approximately \$1.11 per line in
    high-cost loop support, representing an 11 percent increase in
    per-line support. If, however, there is a corresponding \$1
    reduction in the total amount of available high-cost loop support to
    reflect the sale of one line to a non-rural carrier, then the
    remaining lines would not receive increased per-line support.

[^119]: *See First Report and Order*, 12 FCC Rcd at 8940 para. 302.

[^120]: *See* *supra* n.Error: Reference source not found.

[^121]: *See, e.g.,* Interstate Telecom Group Comments at 6; John
    Staurulaukis, Inc. Comments at 6-7; NRTA, OPASTCO, & USTA Comments
    at 5-7.

[^122]: *See infra* discussion at paras. 77-90.

[^123]: *See infra* discussion at paras. 91-119.

[^124]: *See* *Fourth Order on Reconsideration,* 13 FCC Rcd at 5343
    para. 39. As the Commission concluded in the *First Report and
    Order*, excessive growth in high-cost loop support may make the
    transition to other support mechanisms more difficult for rural
    carriers, especially if those support mechanisms provide
    significantly different levels of support. *See First Report and
    Order*, 12 FCC Rcd at 8940 para. 302.

[^125]: *See supra* discussion at para. 42.

[^126]: Rural Task Force Recommendation at 27.

[^127]: Section 254(c)(2) provides that "\[t\]he Joint Board may, from
    time to time, recommend to the Commission modifications in the
    definition of the services that are supported by Federal universal
    service support mechanisms." 47 U.S.C. § 254(c)(2).

[^128]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Order, 15 FCC Rcd 25257 (rel. Dec. 21, 2000) (*Referral
    Order*).

[^129]: *Id.* at para. 3.

[^130]: *See* Rural Task Force Recommendation at 25.

[^131]: For example, the annual rate of growth in the total number of
    rural and non-rural working loops nationwide, which was 2.86 percent
    in 1999, is considerably less than the annual rate of growth in the
    total number of rural working loops nationwide, which was 4.26
    percent in 1999. *See* NECA Universal Service Fund 2000 Submission
    of 1999 Study Results, filed October 1, 2000; NECA Universal Service
    Fund 1999 Submission of 1998 Study Results, filed October 1, 1999.

[^132]: *See, e.g.*, California Commission Comments at 9; SBC Reply
    Comments at 6.

[^133]: *See supra* discussion at para. 41.

[^134]: *See* Ad Hoc Telecommunications User Committee Comments at 17;
    Texas Commission Comments at 4; *but see* Innovative Telephone Reply
    Comments at 5-7.

[^135]: For example, the weighted average unseparated per-line loop cost
    for rural carriers increased by an average of approximately one
    percent per year from 1995 to 1999, while the GDP price index
    increased by 1.75 percent per year during that same period. *See
    supra* discussion at para. 41; AT&T Comments in CC Docket No. 00-256
    at Table 1. Moreover, AT&T states that average growth in the common
    line revenue requirement from 1995-1999 was 5.99 percent per year,
    while average annual growth in the GDP price index plus access lines
    was 7.19 percent during that same period. *Id.*

[^136]: *See, e.g.,* Ad Hoc Telecommunications User Committee Comments
    at 17 (proposing that the Commission use the productivity factor
    currently applied to price cap LEC rates).

[^137]: *See* 47 U.S.C. § 254(b)(5).

[^138]: *See* Rural Task Force Recommendation at Appendix D.

[^139]: *See supra* para. 45.

[^140]: *See First Report and Order*, 12 FCC Rcd at 8940 para. 302.

[^141]: *See infra* discussion at para. 125.

[^142]: *See* Rural Task Force Recommendation at 24.

[^143]: *See* 47 C.F.R. §§ 36.601-36.631.

[^144]: *See* 47 C.F.R. § 36.622.

[^145]: *See* Rural Task Force Recommendation at 24; *see also* NTCA
    Comments at 4; Verizon Comments at 3; Sprint Reply Comments at 3;
    *but see* Texas Commission Comments at 4.

[^146]: *See* 47 U.S.C. §§ 254(b)(5), (e).

[^147]: *See* 47 U.S.C. § 254(b)(5).

[^148]: *See* 47 U.S.C. § 254(b)(3).

[^149]: *See* NECA Universal Service Fund 1997 Submission of 1996 Study
    Results, filed October 1, 1997; NECA Universal Service Fund 2000
    Submission of 1999 Study Results, filed October 1, 2000.

[^150]: *See* 47 U.S.C. § 254(b)(5).

[^151]: 47 C.F.R. § 36.622. The Rural Task Force did not propose to
    change this aspect of section 36.622 of the Commission's rules.

[^152]: *See infra* paras. 167-177.

[^153]: *See* 47 C.F.R. § 36.612.

[^154]: *See* 47 C.F.R. § 36.611.

[^155]: *See* 47 C.F.R. §§ 36.621, 36.622.

[^156]: *See* Verizon Comments at 1, 3; Sprint Reply Comments at 2-3.

[^157]: Corporate operations expenses include all of the expenses listed
    in sections 32.6710 through 32.6712 and sections 32.6720 through
    32.6728 of the Commission\'s rules. 47 C.F.R. §§ 32.6710‑32.6712; 47
    C.F.R. §§ 32.6720‑32.6728. Those categories of expenses include:
    executive; planning; general; administrative; accounting; finance;
    external relations; human resources; information management; legal;
    procurement; research and development; and other general and
    administrative expenses. *Id.*

[^158]: *First Report and Order*, 12 FCC Rcd at 8930‑32 paras. 283-85,
    8942 para. 307.

[^159]: *See id.* at 8930‑31 para. 283.

[^160]: *Id.* at 8931 para. 283.

[^161]: *Id*.

[^162]: *See Federal-State Joint Board on Universal Service*, CC Docket
    96-45, Order on Reconsideration, 12 FCC Rcd 10102-10105 paras. 17-24
    (1997) (*First Reconsideration Order*); *Fourth Order on
    Reconsideration*, 13 FCC Rcd at 5376-77 paras. 94-95.

[^163]: *First Reconsideration Order*, 12 FCC Rcd at 10103 para. 19.
    Under the original formula, carriers with very few lines may have
    been unable to recover portions of corporate operations expense that
    do not vary with the number of lines, because allowable corporate
    operations expenses were determined by a factor that is multiplied
    by the number of lines. *Id.* The Commission also modified the
    formula to ensure that the cap on allowable corporate operations
    expense does not decrease as the number of lines increases. *Id.;
    see also Fourth Order on Reconsideration*, 13 FCC Rcd at 5377 para.
    96.

[^164]: *See id.* at 5376-77 paras. 94-95.

[^165]: *See id.* at 5369-70 para. 87 & nn.230-231, 5374-76 paras.
    92-93.

[^166]: *See id.* at 5374 para. 92.

[^167]: *See id.* at 5374 para. 92. Under the Commission's Part 36
    rules, carriers with 200,000 or fewer working loops recover 65
    percent of loop costs that exceed 115 percent of the national
    average loop cost and 75 percent of loop costs that exceed 150
    percent of the national average. Thus, prior to adoption of the
    corporate operations expense limitation, carriers with 200,000 or
    fewer working loops could recover a substantial portion of their
    operation expenses from the federal universal service support
    mechanism. *See* 47 C.F.R. § 36.631. By comparison, for example, a
    carrier with more than 200,000 working loops recovers 10 percent of
    loop costs that exceed 115 percent of the national average loop
    cost, 30 percent of loop costs that exceed 160 percent of the
    national average, 60 percent of loop costs that exceed 200 percent
    of the national average, and 75 percent of loop costs that exceed
    250 percent of the national average. *See* 47 C.F.R. § 36.631.

[^168]: *Fourth Order on Reconsideration*, 13 FCC Rcd at 5374 para. 92.
    The Commission recognized, however, that certain carriers, such as
    those serving Alaska or insular territories, may have unusually high
    corporate operations expenses, and invited such carriers to file for
    a waiver "to demonstrate the necessity of these expenses for the
    provision of the supported services.\" *Id.*

[^169]: *See id.* at 5376-77 paras. 94-95. The minimum cap under the
    previous formula was \$114,071. *Id.* In no event may a carrier
    include in the expense adjustment calculation more than its actual
    corporate operations expenses. *See* 47 C.F.R. § 36.621(a)(4).

[^170]: *See Fourth Order on Reconsideration*, 13 FCC Rcd at 5374 para.
    92.

[^171]: As discussed above, the Rural Task Force also recommended that
    the Commission re-base the indexed cap on the high-cost loop support
    fund as if both the indexed cap and the corporate operations expense
    limitation had not been in effect for the calendar year 2000. The
    Rural Task Force estimated that re-basing the fund would result in a
    \$118.5 million increase in high-cost loop support, representing
    \$83.9 million from removing the overall cap on high-cost loop
    support and \$34.6 million from removing the corporate operations
    expense limitation. Rural Task Force Recommendation at 24. Note that
    removing the corporate operations expenses limitation without also
    removing the overall cap would not increase total support, but would
    only redistribute support among carriers.

[^172]: This is based on information provided by NECA. *See* Rural Task
    Force Recommendation at 27 n.53.

[^173]: *Id*. at 28 n.55.

[^174]: *Id*.

[^175]: *Id*. at 29.

[^176]: *Id.*

[^177]: *Id*.

[^178]: *Recommended Decision* at para. 12.

[^179]: *See id.* at para. 14.

[^180]: 47 C.F.R. §36.621(a)(4).

[^181]: *See, e.g., MAG NPRM*, 16 FCC Rcd at 464 para. 11; Wisconsin
    Commission Comments at 7. Most commenters who oppose caps do not
    specifically discuss the corporate operations expense limitation,
    but argue generally against any caps or limitations on high-cost
    loop support. *See, e.g.,* John Staurulaukis, Inc. Comments at 6;
    NTCA Comments at 3.

[^182]: *See,e.g.,* California Commission Comments at 10. Most
    commenters who oppose increases in support for rural carriers do not
    specifically discuss the corporate operations expense limitation,
    but argue generally against re-basing the high-cost loop fund. *See,
    e.g.,* Ad Hoc Telecommunications User Committee Comments at 15-16;
    NYDPS Comments at 3-5. AT&T points out that any increased support
    that results from revising the corporate operations expense
    limitation is subject to the new indexed cap on the high-cost loop
    fund. *See* AT&T Comments at 12.

[^183]: *See* Rural Task Force Recommendation at 27 n.53.

[^184]: *See* *id.* at 28.

[^185]: Using publicly available data, Commission staff compared growth
    in corporate operations expenses from 1997 to 1999. Weighted by 1997
    loops, the annual growth rate was 0.10 percent. Weighted by 1999
    loops, the annual growth rate declined by 0.39 percent. The source
    of the data is the NECA Universal Service Fund 2000 Submission of
    1999 Study Results, filed October 29, 2000. This data set includes
    data for the years 1995 to 1999. The sample included 773 rural cost
    companies. For each of the 773 companies staff listed: USF Loops,
    Account #6710 -- Executive and planning expense; Account #6720 --
    General and administrative expense; and their sum, which is total
    corporate operations expense. From these factors staff calculated
    the monthly cost per loop for 1997 and 1999 for each of the 773
    companies. For each of the companies, staff calculated the increase
    of 1999 expenses over 1997 expenses. This increase for each company
    was weighted by both the 1997 loops and the 1999 loops and two
    weighted averages were calculated as follows: using 1997 loops:
    1.001009221 -- 1 = .001009221 or 0.10 percent; using 1999 loops:
    .99612603 -- 1 = -.00387397 or --0.38 percent.

[^186]: *See* Rural Task Force Recommendation at 26.

[^187]: *See id.* at 28 & n.55.

[^188]: *See supra* n.Error: Reference source not found.

[^189]: *See* Rural Task Force Recommendation at 28-29. The Rural Task
    Force noted that one Alaska carrier received a waiver, but only for
    one year.

[^190]: *See supra* para. 62.

[^191]: *See* 47 C.F.R. § 36.621.

[^192]: *See Fourth Order on Reconsideration*, 13 FCC Rcd at 5374 para.
    92.

[^193]: *See* Texas Commission Comments at 4 (suggesting that the
    Commission consider raising the corporate operations cap for very
    small rural carriers "rather than eliminating the limitation in its
    entirety").

[^194]: We clarify that the Commission's rules do not preclude a
    multi-year waiver*. See* California Commission Comments at 11
    ("California supports a change to the waiver process that would
    allow a multi-year waiver if a petitioner supports the need for a
    waiver for more than one year."). The Rural Task Force stated that
    the waiver process "has yielded petitioners only a one-year waiver"
    and cited an example in which this was the case. Rural Task Force
    Recommendation at 28 & n.55. The Commission's rules do not require a
    carrier to seek a waiver every year if a waiver is granted for a
    longer period of time.

[^195]: *See Joint Board Recommended Decision* at para. 19; *see also*
    Rural Task Force Recommendation at 27.

[^196]: Rural Task Force Recommendation at 27. In years when the cap is
    not triggered, rural carriers would receive support in an amount
    that would cover the added expense associated with the new
    investment, and thus it is unnecessary to provide safety net
    additive support in those years.

[^197]: TPIS is an accounting category used by the Commission and
    carriers to classify certain elements of their operation. TPIS
    includes, for example, the carrier's cable and wire facilities,
    poles, central office switching facilities, public telephone
    terminal equipment, and customer premises wiring. It also includes
    general support facilities such as buildings, office equipment, and
    general purpose computers. 47 C.F.R. §32.2001.

[^198]: Rural Task Force Recommendation at 27. The Rural Task Force
    stated in its recommendation that the 14 percent figure represents
    an estimate of two times the average rural growth factor in recent
    years.

[^199]: *Id*. The "qualifying year" is the first year in which the study
    area meets the criterion for receiving support.

[^200]: *Id*. Safety net additive support would only be available in
    years in which the cap is triggered because, in years when the cap
    is not triggered, carriers would already receive 100 percent of
    their expense adjustment.

[^201]: *See* *Further Notice* at para. 7.

[^202]: *See Joint Board Recommended Decision* at para. 19; *see also*
    Rural Task Force Recommendation at 27; AT&T Comments at 15; NRTA,
    OPASTCO, & USTA Comments at 6; Texas Commission Comments at 5;
    Telecom Consulting Associates Comments at 11.

[^203]: *Alternative Mechanisms for Sizing a Universal Service Fund for
    Rural Telephone Companies: Rural Task Force White Paper 3* (Aug.
    2000) (visited May 2, 2001) \<http:www.wutc.wa.gov/rtf\> at 29
    (*White Paper 3*).

[^204]: *Id*. at 29.

[^205]: *Id*. at n.10.

[^206]: *White Paper* *3* at 29.

[^207]: The expense adjustment calculated pursuant to section 36.621 of
    our rules is the amount of high-cost loop support a carrier is
    eligible to receive. This support amount is based on a carrier's
    unseparated loop costs in relation to the national average loop
    cost. See *infra* n.Error: Reference source not found.

[^208]: *But cf*. Maine and Vermont Commissions Comments at 11 (arguing
    that we should "restrict the trigger for the safety net by excluding
    loop costs.").

[^209]: 47 C.F.R. §36.621. These categories include investment in cable
    and wire facilities that are "subscriber of common lines that are
    jointly used for local exchange service and exchange access for
    state and interstate interexchange services" and exchange line
    circuits. 47 C.F.R. § 36.154 (a); 36.126 (b)(1)(iii).

[^210]: 47 C.F.R. §36.611.

[^211]: 47 C.F.R. §§ 36.621, 36.622, 36.631.

[^212]: CUSC Comments at 8 (asserting that carriers would have an
    incentive to defer investment only to later make large investments
    to qualify for support). *See also* California Commission Comments
    at 9.

[^213]: *See* NTCA Comments at 17; SDITC Comments at 6; Telecom
    Consulting Associates Comments at 11.

[^214]: As discussed *infra*, section 254(e) of the Act requires that
    all carriers, rural and non-rural, that are certified as eligible
    telecommunications carriers use universal service support only for
    the "provision, maintenance, and upgrading of facilities and
    services for which the support is intended." *See infra* section
    IV.G; 47 U.S.C. § 254(e) As discussed in section IV.G of this Order,
    we have adopted a provision that requires the states to certify that
    the eligible telecommunications carriers operating within their
    jurisdiction will use universal service funds in a manner that is
    consistent with 254(e). *See infra* section IV.G.

[^215]: *See* 47 C.F.R. § 36.631.

[^216]: *See* Rural Task Force Recommendation at 27.

[^217]: 47 C.F.R. § 36.631.

[^218]: *See* Maine and Vermont Commissions Comments at 10-11 (Arguing
    that the mechanism as proposed by the Rural Task Force produces
    "support in excess of 100 percent of incremental cost").

[^219]: Safety net additive support = (Uncapped support in the
    qualifying year -- Uncapped support in the base year) -- (Capped
    support in the qualifying year -- Actual support in the base year).
    *See* 47 C.F.R. § 36.631.

[^220]: *See First Report and Order*, 12 FCC Rcd at 8801-02 paras.
    46-48, 8932-34 paras. 286-90.

[^221]: For example, assume that a qualifying carrier's uncapped expense
    adjustment in the base year is \$1000 and capped support is \$930.
    Further assume that in the qualifying year the carrier's uncapped
    expense adjustment is \$1200 and capped support is \$1164. The
    resulting amount of support would be a negative \$34 ((1200 -- 1000)
    -- (1164 -- 930) or (200) -- (234)).

[^222]: 47 C.F.R. §§ 36.611; 36.612. Rural carriers are required to make
    annual cost study submissions, whereas, quarterly updates are
    voluntary unless a competitor enters one of their disaggregation
    zones. *See infra* n.Error: Reference source not found.

[^223]: Once a carrier misses the filing requirement, it would need to
    make the requisite 14 percent TPIS investment in a subsequent year
    for the study area to again be eligible.

[^224]: *But cf*. California Commission Comments at 9; CUSC Comments at
    8.

[^225]: Consistent with the 254(e) certification requirements we adopt
    today, state commissions shall certify that a carrier\'s use of
    safety net support is consistent with section 254(e). *See infra*
    para. 187.

[^226]: 47 C.F.R. § 54.305.

[^227]: *See First Report and Order,* 12 FCC Rcd at 8942-43 para. 308.

[^228]: *Id.*

[^229]: *See supra* description of non-rural high-cost support mechanism
    at para. **15**.

[^230]: *See First Report and Order*, 12 FCC Rcd at 8942-43 para. 308.

[^231]: *See* 47 C.F.R. § 54.309.

[^232]: In the event that support provided to a non-rural carrier in a
    given state is less under the forward-looking methodology, the
    carrier is eligible for interim hold-harmless support, which is
    equal to the amount of support for which the non-rural carrier would
    have been eligible under the Commission's existing high-cost support
    mechanism. *See* 47 C.F.R. § 54.311. The Commission recently adopted
    the recommendations of the Joint Board for phasing down the interim
    hold-harmless support for non-rural carriers. *See Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45, Thirteenth
    Report and Order and Further Notice of Proposed Rulemaking, FCC
    00-428 (rel. Dec. 8, 2000). The Commission adopted measures to phase
    down interim hold-harmless support, excluding LTS, through \$1.00
    reductions in average monthly, per-line support beginning January 1,
    2001, and every year thereafter until there is no more interim
    hold-harmless support. *Id.* at para. 1. The Commission also adopted
    the Joint Board's recommendation not to phase down interim
    hold-harmless support for eligible exchanges transferred to rural
    carriers until the Commission reexamines section 54.305 or until
    rural high-cost reform is complete. *Id.* at para. 21. Interim
    hold-harmless support for exchanges transferred to non-rural carrier
    will be phased down over the same time period as the seller's
    support would have been phased down. *Id.* at para. 22. The
    Commission also sought comment on whether to continue applying
    section 54.305 to transfers of telephone exchanges between non-rural
    carriers following phase-down. *Id.* at paras. 23-24.

[^233]: *See supra* discussion at n.Error: Reference source not found.

[^234]: *See supra* discussion at n.Error: Reference source not found.

[^235]: *See* Rural Task Force Recommendation at 29-30.

[^236]: *See* *id.*

[^237]: *Id.*

[^238]: *Id.*

[^239]: *See id.* at 29.

[^240]: *See id.*; *see also supra* discussion at para. 45.

[^241]: *See* Rural Task Force Recommendation at Appendix D.

[^242]: *See* Rural Task Force Comments at 6-7.

[^243]: *See* Rural Task Force Recommendation at Appendix D-1.

[^244]: *See* 47 C.F.R. § 36.631.

[^245]: *See* Rural Task Force Recommendation at Appendix D*.*

[^246]: *See id.*

[^247]: *See* *id.*

[^248]: *See id.*

[^249]: *See* *Joint Board Recommended Decision* at para. 16.

[^250]: *See id.*

[^251]: *See id.* at para. 16 n.47. As currently proposed, the index
    year expense adjustment is the study area's high-cost loop support
    expense adjustment calculated at the end of the acquiring company's
    first year of operations.

[^252]: *Id.*

[^253]: *See* *id.* at para. 16. *See, e.g.,* Alaska Rural Coalition
    Reply Comments at 2-3; Innovative Telephone Comments 24; Interstate
    Telecom Group Comments at 9.

[^254]: *See First Report and Order,* 12 FCC Rcd at 8942-43 para. 308.

[^255]: *See, e.g.,* Ad Hoc Telecommunications User Committee Reply
    Comments at 16-17; WorldCom Reply Comments at 9-10. *See also,
    e.g.,* ASCENT Comments in CC Docket No. 00-256 at 6; AT&T Comments
    in CC Docket No. 00-256 at 18-19; California Commission Comments in
    CC Docket No. 00-256 at 25-26; CUSC Comments in CC Docket No. 00-256
    at 19; Florida Comments in CC Docket No. 00-256 at 5; WorldCom
    Comments in CC Docket No. 00-256 at 17-18.

[^256]: *See, e.g.,* CenturyTel Comments at 3-8; GVNW Consulting
    Comments at 1-2; Innovative Telephone Comments at 24; NECA Comments
    at 9; Texas Commission Comments at 6; SDITC Comments at 7-8; Sprint
    Comments at 4; Telecom Consulting Associates Comments at 12; Western
    Alliance Comments at 8.

[^257]: *See, e.g.,* Ad Hoc Telecommunications User Committee Reply
    Comments at 16-17; California Commission Comments at 13; WorldCom
    Reply Comments at 9-10; *See* *also* AT&T Comments in CC Docket No.
    00-256 at 18-19; California Commission Comments in CC Docket No.
    00-256 at 25; WorldCom Comments in CC Docket No. 00-256 at 17-18.

[^258]: *See* MAG Comments in CC Docket No. 00-256 at 29-30; *see also*
    Letter of William F. Maher, Jr. to Magalie Roman Salas, FCC, dated
    November 21, 2000 ("The plan is intended to propose the deletion of
    current section 54.305 . . . from the Commission's rules."). *See
    also, e.g.,* CenturyTel Comments at 5; Fred Williamson & Assoc.
    Comments at 11; GVNW Consulting Comments at 1; Iowa Telecom Reply
    Comments at 2-3; NECA Comments at 9; NRTA, OPASTCO, & USTA Comments
    at 4; NTCA Comments at 4-5; Telecom Consulting Associates Comments
    at 12; *see also* Alaska Rural Coalition Comments in CC Docket No.
    00-256 at 3-4; Innovative Telephone Comments in CC Docket No. 00-256
    at 11-13; MAG Comments in CC Docket No. 00-256 at 29-30; Summit Tel.
    Co. Comments in CC Docket No. 00-256 at 3; Wisconsin Commission
    Comments in CC Docket No. 00-256 at 4-5.

[^259]: As discussed in section IV.C.1.b, we agree that exchanges
    transferred to rural telephone companies should be excluded from the
    rural incumbent local exchange carrier portion of the high-cost loop
    fund and from the rural growth factor. *See supra* discussion at
    paras. 45, 53.

[^260]: *See infra* discussion at para. 110.

[^261]: *See infra* discussion at para. 113.

[^262]: *See infra* discussion at paras. 114-115. We note that the
    Competitive Universal Service Coalition (CUSC) requests that the
    Commission clarify that exchange sales or transfers to smaller
    incumbent LECs will not affect preexisting designations of
    competitive eligible telecommunications carriers. *See* CUSC
    Comments App. A at 17-18. In particular, CUSC requests that the
    Commission clarify that existing competitive eligible
    telecommunications carriers should not be required to return to the
    designating commission for a public interest finding or serve
    additional areas if the exchanges they serve are sold to a carrier
    that satisfies the definition of "rural telephone company." *See
    id.* Because this issue does not directly relate to the
    implementation of the safety valve mechanism or any other aspect of
    the Rural Task Force Recommendation, we do not address it in this
    order.

[^263]: *See* Rural Task Force Recommendation at Appendix D.

[^264]: *See* 47 C.F.R. §§ 36.611, 36.612.

[^265]: *See* 47 C.F.R. § 36.611.

[^266]: *See* 47 C.F.R. § 36.612.

[^267]: *See* 47 C.F.R. § 36.631.

[^268]: *Id.*

[^269]: *See supra* discussion at paras. 55 to 59. We note, however,
    that if the sum of the actual high-cost loop support nationwide
    exceeds the indexed cap on the high-cost loop support fund, NECA
    increases the amount of the national average loop cost in order to
    ensure that the total amount of high-cost loop support disbursed
    does not exceed the indexed cap. *See supra* para. 58.

[^270]: *See supra* discussion at para. 95.

[^271]: *See* 47 U.S.C. § 254(d).

[^272]: *See Joint Board Recommended Decision* at para. 16 n.47.

[^273]: *See* CenturyTel Comments at 5-7; Interstate Telecom Group
    Comments at 11; NECA Comments at 9; NTCA Comments at 7-9.

[^274]: Even though non-rural carriers currently receive high-cost
    support based on forward-looking economic costs, non-rural carriers
    are required to report their study area average costs to NECA on an
    annual and quarterly basis in accordance with sections 36.611 and
    36.612 of our rules. *See* 47 C.F.R. §§ 36.611, 36.612. Such costs
    are used in determining the national average loop cost. *See* 47
    C.F.R. §§ 36.621, 36.622.

[^275]: *See* 47 C.F.R. §§ 36.611, 36.612.

[^276]: Because the benchmark or index year expense adjustment used in
    determining safety valve support is based on the carrier's own
    costs, a carrier potentially could qualify for safety valve support
    without also qualifying for high-cost loop support.

[^277]: *See* 47 C.F.R. § 36.631.

[^278]: *See First Report and Order*, 12 FCC Rcd at 8942-43 para. 308.

[^279]: *See supra* discussion at paras. 79-84, 99-101.

[^280]: *See infra* discussion at para. 113.

[^281]: *See* Rural Task Force Recommendation at Appendix D. We note
    that the five percent cap was included in the Rural Task Force's
    example of a safety valve mechanism for illustrative purposes only.
    *See* Rural Task Force Comments at 6.

[^282]: *See* *Fourth Order on Reconsideration,* 13 FCC Rcd at 5343
    para. 39.

[^283]: The five percent cap on safety valve support will grow as the
    indexed cap on the high-cost loop fund grows by the rural growth
    factor, discussed *supra* at paras. 48-53.

[^284]: *See* 47 U.S.C. § 254(b)(5).

[^285]: *See* Letter from William R. Gillis, Chair, Rural Task Force, to
    Magalie Roman Salas, FCC, dated November 10, 2000, at Attachment 2.
    This estimate assumes that the indexed cap on the high-cost loop
    fund will be triggered in 2006. To the extent that rural carriers
    are eligible for less high-cost loop support than is available from
    the indexed cap, the amount of available safety valve support would
    be based on the lesser amount.

[^286]: *See* NTCA Comments at 9-10; SDITC Comments at 8; *but see*
    California Commission Comments at 13.

[^287]: *See Joint Board Recommended Decision* at para. 16*.*

[^288]: *See* AT&T Comments at 13; CUSC Comments at 5; Innovative
    Telephone Comments at 25; NECA Comments at 9; Western Alliance
    Comments at 7-8.

[^289]: In contrast, under section 36.622 of our rules, if the sum of
    loop costs nationwide exceeds the indexed cap on the high-cost
    support fund, certain carriers with above average loop costs would
    not receive high-cost loop support. *See supra* discussion at para.
    31. The national average loop cost would be increased in order to
    ensure that the total amount of high-cost loop support disbursed
    does not exceed the indexed cap.

[^290]: *See* 47 C.F.R. § 36 Appendix-Glossary (defining \"study
    area\").

[^291]: *See* *MTS and WATS Market Structure, Amendment of Part 67 of
    the Commission\'s Rules and Establishment of a Joint Board*, CC
    Docket Nos. 78-72, 80-286, Recommended Decision and Order, 49 Fed.
    Reg. 48325 (1984) (*1984 Joint Board Recommended Decision*);
    Decision and Order, 50 Fed. Reg. 939 (1985) (*Order Adopting
    Recommendation*); *see also* *Amendment of Part 36 of the
    Commission\'s Rules and Establishment of a Joint Board*, CC Docket
    No. 80-286, Notice of Proposed Rulemaking, 5 FCC Rcd 5974 (1990).

[^292]: *See* 47 C.F.R. § 51.5.

[^293]: We also note that in the absence of section 54.305 of our rules,
    the isolation of higher-cost exchanges into a separate study area
    would enable an acquiring carrier to take advantage of the high-cost
    loop support mechanism by reporting average loop costs in the
    higher-cost study area further above the national average loop cost
    than would be possible if the exchanges remained consolidated in a
    single study area with lower-cost exchanges. *See* 47 C.F.R. §§
    36.631, 54.305. In the absence of 54.305, the isolation of
    higher-cost exchanges into a separate study area also would enable
    an acquiring carrier to gain an unfair advantage under local
    switching support, which permits carriers operating in study areas
    with less than 50,000 access lines to assign a greater portion of
    local switching costs to the interstate jurisdiction. *See* 47
    C.F.R. §§ 54.301, 54.305.

[^294]: *See 1984 Joint Board Recommended Decision*, 49 Fed. Reg. 48325
    at para. 66; *Order Adopting Recommendation*, 50 Fed. Reg. 939 at
    para. 1.

[^295]: *See, e.g., Petition for Waivers Filed by Columbine Telephone
    Company, Inc., Silver Star Telephone Company, Inc., and U S WEST
    Communications, Inc., Concerning Section 61.41(c)(2) and 69.3(e)(11)
    and the Definition of "Study Area" Contained in the Part 36
    Appendix-Glossary of the Commission's Rules*, AAD 96-169, Memorandum
    Opinion and Order, 12 FCC Rcd 3622, 3627-28 para. 12 (Acc. Aud. Div.
    1997) (*Columbine Telephone Company*); *US West Communications, Inc.
    and Nemont Cooperative, Inc., Project Telephone Company, and Valley
    Telecommunications, Inc., Joint Petition for Waiver of the
    Definition of "Study Area" contained in Part 36, Appendix-Glossary
    of the Commission's Rules and Petition for Waiver of Sections
    61.41(c) and 69.3(e)(11) of the Commission's Rules*, AAD 93-87,
    Memorandum Opinion and Order, 9 FCC Rcd 721, 723 paras. 14-15 (Com.
    Car. Bur. 1994).

[^296]: *See, e.g., Columbine Telephone Company*, 12 FCC Rcd at 3628
    para. 12.

[^297]: *See MAG NPRM*, 16 FCC Rcd at 464 para. 12.

[^298]: *See* ASCENT Comments in CC Docket No. 00-256 at 6; WorldCom
    Comments in CC Docket No. 00-256 at 17-18.

[^299]: *See Joint Board Recommended Decision* at para. 16.

[^300]: *See, e.g.,* CUSC Comments at 6; NECA Comments at 10.

[^301]: *See* Rural Task Force Recommendation at 29-30.

[^302]: *See supra* discussion at para. 106.

[^303]: *See First Report and Order*, 12 FCC Rcd at 8801-02 paras.
    46-48, 8932-34 paras. 286-90.

[^304]: *See* 47 C.F.R. § 54.307; *see also First Report and Order*, 12
    FCC Rcd at 8932, para. 287.

[^305]: *See Joint Board Recommended Decision* at para. 16.

[^306]: *See infra* discussion at para. 129.

[^307]: *See, e.g., ATEAC, Inc., Alaska Telephone Company, Arctic Slope
    Telephone Association Cooperative, Inc., Interior Telephone Company,
    Inc., Mukluk Telephone Company, Inc., and United-KUC, Inc., Petition
    for Waiver of the Definition of "Study Area" Contained in Part 36,
    Appendix-Glossary of the Commission's Rules*, DA 01-101, at para. 8
    (Acc. Pol. Div. rel. Jan. 17, 2001).

[^308]: Consistent with the 254(e) certification requirements we adopt
    today, state commissions shall certify that a carrier\'s use of
    safety valve support is consistent with section 254(e). *See infra*
    para. 187.

[^309]: *See* 47 C.F.R. § 36.631.

[^310]: *See, e.g.,* CenturyTel Comments at 6; Iowa Telecom Reply
    Comments at 4; NTCA Comments at 6; *but see* WorldCom Reply Comments
    at 12.

[^311]: *See supra* discussion at paras. 99-105.

[^312]: Rural Task Force Recommendation at 25-26. This proposal does not
    apply to LTS, LSS, or other forms of federal universal service
    support. *Id.*

[^313]: *See infra* para. 125.

[^314]: *Recommended Decision* at para. 17.

[^315]: *Id.*

[^316]: Rural Task Force Recommendation at 38; *see Competition and
    Universal Service: Rural Task Force White Paper 5* (Sept. 2000)
    (visited May 2, 2001) \<http://www.wutc.wa.go/rtf\> at 21-22 (*White
    Paper* *5*).

[^317]: Rural Task Force Recommendation at 38.

[^318]: *Id.* ("continuing support for the \[incumbent\] for a whole
    period when it is not serving the customer for the whole period,
    coupled with the failure to compensate the \[competitor\] for the
    portion of the period that it is providing service may constitute a
    barrier to entry for the \[competitor\]"). Under the current rules,
    carriers report lines served as of the end of the relevant reporting
    period. *See* 47 C.F.R. §§ 36.612, 54.307.

[^319]: *See infra* paras. 209-211.

[^320]: To facilitate such monitoring and prevent overpayment of
    support, as well as to address Rural Task Force concerns about
    frequency of reporting, we also adopt a requirement that eligible
    telecommunications carriers in competitive study areas file updated
    line counts on a regular quarterly basis. *See infra* paras.
    132-133.

[^321]: *See* Rural Task Force Comments at 7-8; *see also* AT&T Comments
    at 14-15; NTCA Comments at 11, 13-14; John Staurulaukis, Inc.
    Comments at 9-10; Telecom Consulting Associates Comments at 6. The
    Rural Task Force Recommendation did not explain the purpose of its
    proposal to freeze high-cost loop support in the Recommendation. The
    Rural Task Force addressed the purpose in its Comments, however, and
    discussed related issues in its *White Paper* *5*, which was
    incorporated by reference into the Recommendation. *See White Paper*
    *5* at 19, 21, n.35.

[^322]: *See id.* We express no opinion on the issue of stranded costs,
    regarding which the Rural Task Force did not reach agreement. *See*
    Rural Task Force Recommendation at 39. As stated below, few
    competitive carriers currently receive high-cost loop support for
    service to rural carrier study areas, and there is no evidence in
    the record before us projecting specific levels of competitive entry
    in the future. *See infra* n.Error: Reference source not found.

[^323]: *See* 47 C.F.R. §§ 36.601, *et. seq.*

[^324]: *See White Paper* *5* at 21, n.35 ("For example, . . . if an
    ILEC served 1,000 lines and received \$1,000 in monthly universal
    service support, this would equate to \$1 of support per line. This
    amount would be available to any CETC that captured a line from the
    ILEC. If the ILEC lost 500 lines to competitors, but the ILEC's
    support based on embedded costs still amounted to \$1,000 per month,
    the per line support available to the ILEC and CETC would double to
    \$2 per line to the ILEC and CETC."). Under the Commission's
    portability rules, a competitive carrier receives the same support
    for each line served that the incumbent carrier would receive, based
    on the incumbent's embedded costs. 47 C.F.R. § 54.307. Two
    commenters argue that these rules should be modified to provide
    support to competitive carriers based on their own costs. *See* NTCA
    Comments at 12, Fred Williamson & Assoc. Comments at 6-7. The
    Commission previously rejected this argument, and we decline to
    reconsider it at this time. *See First Report and Order*, 12 FCC Rcd
    at 8944-45 paras. 311-13.

[^325]: *See* John Staurulaukis, Inc. Comments at 9-10 (proposing a
    threshold requirement that a competitive carrier serve five or ten
    percent of the total lines within a study area ); Telecom Consulting
    Associates Comments at 7-8 (proposing ten percent threshold); Townes
    Telecommunications Comments at 3 (proposing threshold of ten percent
    or more).

[^326]: *See* Rural Task Force Recommendation at 38 ("the competitive
    inroad of the \[competitive eligible telecommunications carrier\]
    usually begins with a slow ramp-up as customers are signed on for
    services"). We note that a total of six competitive carriers
    nationwide currently receive high-cost loop support for service to
    both rural carrier and non-rural carrier study areas. *See* Federal
    Universal Service Support Mechanisms Fund Size Projections and
    Contribution Base For the Second Quarter 2001, Appendix HC 1
    (Universal Service Administrative Company, Feb. 6, 2001). There is
    no evidence in the record before us projecting specific levels of
    competitive entry in the future.

[^327]: *See* 47 C.F.R. § 54.307; *see also* Rural Task Force Comments
    at 7-8 (Rural Task Force plan guards against excessive fund growth
    as a result of increasing competition in part by recommending
    retention of the cap).

[^328]: Under the Rural Task Force proposal, if the cap is triggered, an
    incumbent rural carrier would receive no more total frozen per-line
    support than it would have received under the cap, and its
    competitor's per-line support would be limited accordingly. *See*
    Rural Task Force Recommendation at 26; Rural Task Force Comments at
    8.

[^329]: *See* Texas Commission Comments at 6. The Rural Task Force
    addresses this issue in its comments, but rather than refuting that
    such double counting would occur, it simply clarifies that the cap
    would constrain the overall growth of frozen per-line support. Rural
    Task Force Comments at 7-8.

[^330]: Currently, rural carriers are only required to file such data
    annually by July 31^st^ for the prior calendar year, and may file
    quarterly updates on September 30^th^, December 30^th^, and March
    30^th^. 47 C.F.R. §§ 36.611, 36.612.

[^331]: *See* Rural Task Force Recommendation at 26; *see also supra*
    para. 59.

[^332]: Under the Rural Task Force proposal, additional support would be
    available to recover the costs of hurricanes, floods, and other
    events that are declared to be natural disasters by Federal or state
    regulatory authorities, and that directly affect the provision of
    supported services within a study area. Rural Task Force
    Recommendation at 26. As a number of commenters point out, this
    provision would merely place rural carriers in the same position as
    they would be if their support were not frozen, for such costs are
    now recoverable from universal service support to the extent that
    they are not covered by insurance. *See* Innovative Telephone
    Comments at 20-21; NRTA, OPASTCO, & USTA Comments at 5; NTCA
    Comments at 14-15; Rural Task Force Comments at 9; Virgin Islands
    Commission Comments at 6.

[^333]: *See Recommended Decision* at para. 17; California Commission
    Comments at 14; CUSC Comments at 7; Florida Commission Comments at
    6-7; Sprint Comments at 2-3.

[^334]: *See* Texas Commission Comments at 7 ("state regulators should
    participate in the decision on whether the carrier should receive
    additional funding as a result of catastrophic events").

[^335]: *See Recommended Decision* at para. 11 (Rural Task Force sought
    to provide rural carriers with "stability . . . for planning their
    investments over the next several years" and "increased incentives
    to invest in new infrastructure and technologies.").

[^336]: *See* Evans Tel. Co., et.al.*.* Comments at 7; Interstate
    Telecom Group Comments at 8; NTCA Comments at 11, 13-14; John
    Staurulaukis, Inc. Comments at 9-10; Telecom Consulting Associates
    Comments at 6-7; Townes Telecommunications Comments at 2-3; *see
    also* Alliance of Incumbent Rural Telephone Companies Reply Comments
    in CC Docket No. 00-256 at 9.

[^337]: Townes Telecommunications Comments at 2-3 ("Unlike larger
    carriers that are continuously upgrading their exchanges on a
    rotating basis, many smaller carriers do not have a continuous
    investment program. Rather, small carriers are more likely to have a
    'cyclical' investment pattern and upgrade the major portion of their
    network on a periodic basis, such as once every fifteen (15)
    years.").

[^338]: *See* Interstate Telecom Group Comments at 8-9; John
    Staurulaukis, Inc. Comments at 9-10; Telecom Consulting Associates
    Comments at 9; Townes Telecommunications Comments at 4; Western
    Alliance Comments at 9-10.

[^339]: *See Recommended Decision* at para. 11 (Rural Task Force
    Recommendation "seeks to encourage competitors to enter high-cost
    areas.").

[^340]: *See* CUSC Comments App. A at 16-17 ("If the Commission adopts
    this recommendation, . . . it should also make perfectly clear that
    \[the freezing of high-cost loop support\] is not a basis for
    denying a competitive entrant's petition for ETC designation.");
    *see* 47 U.S.C. § 214(e)(2), (e)(5).

[^341]: Smith Bagley, Inc. Petitions for Agreement to Redefine the
    Service Areas of Navajo Communications Company, Citizens
    Communications Company of the White Mountains, and Century Tel of
    the Southwest, Inc. on Tribal Lands within the State of Arizona, CC
    Docket No. 96-45, Comments of Table Top Tel. Co., Inc., at 4-5
    (filed Mar. 16, 2001).

[^342]: *See* Rural Task Force *White Paper* *5* at 17 ("Dealing with
    'captured' and 'new' lines may create administrative problems and
    the need to track customers from one \[carrier\] to another").

[^343]: If support were frozen in a limited portion of a study area and
    the incumbent carrier lost a significant number of lines there,
    per-line support levels would escalate even more quickly in the
    remainder of the study area, because embedded costs are calculated
    on a study-area basis. *See generally* 47 C.F.R. § Part 36.

[^344]: *See infra* paras. 132-133.

[^345]: Rural Task Force Recommendation at 38.

[^346]: *Id.*

[^347]: 47 C.F.R. §§ 36.612, 54.307.

[^348]: *Id.*

[^349]: *See Ninth Report and Order*, 14 FCC Rcd at 20480-81 para. 92
    (mandating quarterly reporting for carriers serving non-rural study
    areas "\[t\]o ensure that \[universal service support is\] based on
    data from the same reporting periods, and to ensure equitable,
    non-discriminatory, and competitively neutral treatment of incumbent
    LECs and competitive eligible telecommunications carriers").

[^350]: For purposes of this requirement, "competitive" will mean that a
    competitive eligible telecommunications carrier has initiated
    service within the study area and has reported line count data to
    the Administrator pursuant to section 54.307(c) of the Commission's
    rules. 47 C.F.R. § 54.307(c).

[^351]: Rural Task Force Recommendation at 38.

[^352]: *First Report and Order*, 12 FCC Rcd at 8944.

[^353]: For example, lag between the reporting of data and the payment
    of support is necessary to allow projection of funding requirements
    and collection of contributions based on such data. *See Ninth
    Report and Order*, 14 FCC Rcd at 20485 para. 100. In addition, an
    interval between the initiation of service and receipt of support by
    a competitive carrier is necessary to synchronize the filing
    schedules of incumbents and competitors, thereby ensuring equal,
    non-discriminatory, and competitively neutral treatment of all
    carriers. 47 C.F.R. §§ 36.612, 54.307; *see Ninth Report and Order*,
    14 FCC Rcd at 20478 para. 87, 20480-81 para. 92.

[^354]: 47 C.F.R. § 54.307; *see Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Twentieth Order on Reconsideration,
    15 FCC Rcd 12070, 12078 para. 18 (2000); CUSC Comments App. A at 12
    (requesting clarification that competitive carriers "have the option
    to make both their initial line count report and subsequent reports
    at least quarterly"). We will amend section 54.307(c) to remove
    reference to an annual July 31^st^ deadline.

[^355]: Rural Task Force Recommendation at 38. Under the current rules,
    carriers report lines served as of the end of the relevant reporting
    period. *See* 47 C.F.R. §§ 36.612, 54.307.

[^356]: *See id.*

[^357]: Under the Commission's portability rules a competitive eligible
    telecommunications carrier receives the same per-line level of
    high-cost support for lines that it captures from an incumbent
    carrier, as well as for any new lines it serves in high-cost areas.
    *See* 47 C.F.R. § 54.307.

[^358]: Rural Task Force Recommendation at 33.

[^359]: *Id.* at 33-36. *See also* *Disaggregation and Targeting of
    Universal Service Support: Rural Task Force White Paper 6* (Sept.
    2000) (visited May 2, 2001) \<http://www.wutc.wa.gov/rtf \> at 4-6
    (*White Paper* 6).

[^360]: Rural Task Force Recommendation at 34-36.

[^361]: *Id.* at 35.

[^362]: *Id.* at 36.

[^363]: The Rural Task Force, however, does not propose that a carrier
    be required to file a complete cost study. *Id.*

[^364]: *Id.* at 35.

[^365]: *Id.* at 34.

[^366]: *Id.*

[^367]: *Id.* at 36.

[^368]: *Id.*

[^369]: *Id.* at 33-34, *White Paper* 6 at 4-5. *See, e.g.,* CUSC
    Comments App. A at 5; Ad Hoc Telecommunications User Committee
    Comments at 23; SDITC Comments at 8-9. *See also Ninth Report and
    Order,* 14 FCC Rcd at 20471 para. 71.

[^370]: This conclusion is consistent with our determination in the
    *Ninth Report and Order* that support for non-rural carriers should
    be targeted to avoid the uneconomic incentives created by the
    delivery of federal support to non-rural carriers on a uniform
    per-line basis. *Ninth Report and Order,* 14 FCC Rcd at 20471 para.
    71, 20472-73 para. 75.

[^371]: Rural Task Force Recommendation at 33-34, *White Paper* 6 at
    6-11.

[^372]: *See supra* at para. 13.

[^373]: In adopting this mechanism we recognize, as did the Rural Task
    Force, that in limited instances certain carriers may not be subject
    to the jurisdiction of a state, *e.g.*, tribally-owned carriers. In
    such limited circumstances, the Commission would be the appropriate
    regulatory authority for the administration of the disaggregation
    and targeting of support by such carriers.

[^374]: *See* Rural Task Force *White Paper* 6 at 10-11.

[^375]: *See* Texas Commission Comments at 7 (recognizing that it may be
    reasonable to allow some small rural carriers to not disaggregate
    and target support under Path One because of their size and cost
    characteristics.) The Texas Commission also encouraged the
    Commission to consider whether "larger rural carriers" should be
    permitted to elect Path One but did not offer additional support for
    its proposition. *Id*.

[^376]: *See,* *e.g.*, CUSC Comments App. A at 7-8.

[^377]: For example, a carrier could choose not to disaggregate then
    subsequently elect to do so under Path Two or Path Three when a
    competitor is granted eligible telecommunications carrier status
    below the carrier's study area level for the purpose of having lower
    per-line support levels established for the competitor's service
    area.

[^378]: Under this path, a carrier could choose among any of the various
    methods of disaggregation, such as use of a proxy model, long-run
    incremental cost studies, or the use of density factors to
    disaggregate support.

[^379]: A complete cost study is not required. *See* Rural Task Force
    Recommendation at 36.

[^380]: We recognize that carriers could choose a benchmark based on
    affordability or averaged rates. *See Wyoming Public Service
    Commission Petition for Waiver of Targeting Requirements Found in
    Section 54.309 and 54.311 of the Commission's Rules*, CC Docket No.
    96-45, DA 01-612 (rel. Mar. 9, 2001). We require carriers to provide
    detailed information explaining what the benchmark is and how it was
    determined.

[^381]: *See,* *e.g.*, CUSC Comments App. A at 7-8; Ad Hoc
    Telecommunications User Committee Comments at 25.

[^382]: *See, e.g.*, Ad Hoc Telecommunications User Committee Comments
    at 24-25.

[^383]: *See,* *e.g.*, SDITC Comments at 10; Texas Commission Comments
    at 7; M&B Reply Comments at 8.

[^384]: *See MAG NPRM,* 16 FCC Rcd at 464 para. 11, 495 App. A. Under
    the MAG proposal, support must be allocated in a manner reasonably
    related to the cost of providing service in each cost zone, and the
    plan must remain in effect for at least four years. *See also*
    Plains Rural Independent Companies Comments in CC Docket No. 00-256
    at 14 (supporting the disaggregation of support to three zones);
    *but see* ASCENT Comments in CC Docket No. 00-256 at 6.

[^385]: *See* SDITC Comments at 9-10.

[^386]: For example, assume a study area with support disaggregated into
    two zones A and B each with 100 lines. Total support is \$3000 and
    support is disaggregated such that zone A receives \$10 per line and
    zone B receives \$20 per line. Thus, relative per line support is
    \$20/\$10 per line. Because per-line support relationships are to be
    fixed, zone B always receives twice as much support as zone A. If
    support were to decrease to \$2700 for the study area, zone A
    support would decrease to \$9 per line and zone B support would
    decrease to \$18 per line.

[^387]: *See* 47 U.S.C § 254(b)(5); *First Report and Order*, 12 FCC Rcd
    8801-03 paras. 46-51.

[^388]: If a competitive eligible telecommunications carrier or other
    party believes that a state approved disaggregation plan is
    inconsistent with these general requirements, or the specific
    requirements enumerated under each of the various paths, it may file
    a petition for declaratory ruling, rulemaking, or other appropriate
    action with the Commission.

[^389]: *See, e.g.,* CUSC Comments App. A at 10.

[^390]: WorldCom Comments Attachment at 9 (citing the *First Report and
    Order*, at para. (s*ic)* 293).

[^391]: *First Report and Order*, 12 FCC Rcd at 8935-36 para 293.

[^392]: As WorldCom concedes, "\[t\]he Commission found in the \[*First
    Report and Order*\], that the ability to target support to smaller
    areas is one of the benefits of a forward-looking economic cost
    methodology." WorldCom Comments Attachment at 9 n.19.

[^393]: *See* California Commission Comments at 14.

[^394]: *See* 47 U.S.C. § 251(f).

[^395]: *See* 47 C.F.R. § 54.307(a)(2).

[^396]: *See* Rural Task Force Recommendation at 15.

[^397]: *Id.*

[^398]: *See Joint Board Recommended Decision* at para. 21.

[^399]: *See id.* (citing *Federal-State Joint Board on Universal
    Service, Access Charge Reform*, CC Docket Nos. 96-45, 96-262,
    Seventh Report & Order and Thirteenth Order on Reconsideration in CC
    Docket No. 96-45, Fourth Report & Order in CC Docket No. 96-262, and
    Further Notice of Proposed Rulemaking, 14 FCC Rcd 8077, 8123 para.
    94 (1999)).

[^400]: *See, e.g.,* Texas Commission Comments at 3.

[^401]: *See Joint Board Recommended Decision* at para. 21.

[^402]: *See Tenth Report and Order*, 14 FCC Rcd at 20243 para. 200.
    *See also* Ad Hoc Telecommunications User Committee Comments at 13
    ("The 1996 Act makes no distinction between rural and non-rural
    carriers when establishing the universal service guidelines. The
    1996 Act requires no disparate treatment of rural and non-rural
    carriers when it directs the Commission to establish 'explicit and
    sufficient' support for universal service or when it specifies which
    carriers must contribute to the fund.")(citations omitted); Maine
    and Vermont Commissions Comments at 4 n.2 ("\[T\]he term \[rural
    carrier\] was not used in Section 254, and its use in the context of
    universal service actually obscures the objectives of Section 254,
    to make rates affordable and comparable for customers in all *rural
    areas*.").

[^403]: *See*, *e.g.,* Ad Hoc Telecommunications User Committee Comments
    at 13 (urging the Commission "to recognize that rural, high cost
    areas are defined by their unique characteristics and not by the
    size of the companies that serve them, and to reject any universal
    service policies for rural and non-rural carriers alike, that do not
    reflect or incorporate this concept"); Maine and Vermont Commissions
    Comments at 4 n.2 (arguing that "any system based upon the
    classification of companies will necessarily be both under-inclusive
    and over-inclusive of the intended beneficiary class, namely rural
    high-cost customers"); *see also* Florida Commission Comments at 5
    ("The amount of funding should not necessarily depend on the size of
    the serving carrier.")

[^404]: Maine and Vermont Commissions Comments at 4 n.1. Maine and
    Vermont Commissions urge the Commission to produce greater alignment
    between the rural and non-rural support mechanisms, focus support on
    rural carriers that have high overall costs, not merely high loop
    costs, and consider permitting non-rural companies to divide their
    study areas into rural and non-rural areas. *Id.* at 7.

[^405]: For example, the Rural Task Force reports that the average
    density is only 13 persons per square mile for areas served by rural
    carriers compared with 105 persons per square mile in areas served
    by non-rural carriers. At the same time, the average population
    density varies dramatically among rural carriers. Rural carriers in
    Alaska and Wyoming serve populations of 0.58 and 1.25 persons per
    square mile, respectively, while those in some states serve
    populations of over 100 persons per square mile. That is, some rural
    carriers serve areas with approximately the same density as the
    non-rural average. *See* Rural Task Force Recommendation at 11-12.
    Similarly, the Rural Task Force reports that average total plant
    investment per line ranges from \$3,000 for rural carriers with the
    largest study areas to over \$10,000 for rural carriers with the
    smallest study areas. The range of values for total plant investment
    per loop for rural carriers (\$1,400 to \$40,500) is far greater
    than the range for non-rural carriers (\$1,570 to \$4,350). That is,
    the largest rural carriers have an average total plant investment
    per line (\$3,000) that is lower than that of some non-rural
    carriers (\$4,350). *See* Rural Task Force Recommendation at 13.

[^406]: *First Report and Order*, 12 FCC Rcd at 8899 paras. 224-25. In
    rejecting arguments for basing support on a carrier's embedded cost,
    the Commission agreed with the Joint Board that "to the extent that
    it differs from forward-looking economic cost, embedded cost\[s\]
    provide the wrong signals to potential entrants and existing
    carriers. . . . \[W\]hen embedded costs are above forward-looking
    costs, support of embedded costs would direct carriers to make
    inefficient investments that may not be financially viable when
    there is competitive entry. . . . \[I\]f embedded cost is below
    forward-looking economic cost, support based on embedded costs,
    would erect an entry barrier to new competitors, because revenue per
    customer and support, together would be less than the
    forward-looking economic cost of providing supported services."
    *Id*. at 8901 para. 228.

[^407]: *See, e.g.,* NRTA, OPASTCO, & USTA Reply Comments at 3; GVNW
    Consulting Reply Comments at 4.

[^408]: *See Texas Office of Public Utility Counsel v. FCC*, 183 F.3d at
    412; *Alenco Communications, Inc. v. FCC*, 201 F.3d at 619.

[^409]: The Rural Task Force proposed modifications to the current
    embedded cost system, rather than attempting to modify the
    Commission's forward-looking cost mechanism that currently is used
    to determine non-rural support. *See* Rural Task Force
    Recommendation at 17-19; *Recommended Decision* at para. 13. *See
    also* Ad Hoc Telecommunications User Committee Comments at 9-10
    ("The RTF simply did not fulfill its mandate to evaluate whether or
    not the 'FLEC mechanism for rural carriers should have different
    platform design features or input values than the mechanism adopted
    for non-rural carriers.")(quoting Public Notice creating Rural Task
    Force); California Commission Comments at 3 ("The RTF, however,
    gives no consideration to modifying or improving the FCC's Synthesis
    Model for rural carrier purposes prior to concluding that universal
    service support should be based on embedded costs.").

[^410]: *See* Ad Hoc Telecommunications User Committee Comments at 9-10;
    WorldCom Comments at 2 ("Without exception, the issues the RTF
    discusses in its analysis of the Commission's synthesis model merely
    reflect input questions, not problems with the model structure
    itself.").

[^411]: For example, the Rural Task Force said "model lines differed
    significantly from actual lines served." Rural Task Force
    Recommendation at 17; *see also* GVNW Consulting Reply Comments at
    4. This is not surprising because the Rural Task Force did not use
    current line count data as input values. Instead, the Rural Task
    Force used the line count data developed by AT&T's consultant for
    use in the industry-sponsored HAI model, which had been trued up to
    1996 ARMIS line counts. Updating line counts on a regular basis is
    an important aspect of estimating costs in the non-rural mechanism.
    When the non-rural mechanism was adopted, the non-rural line counts
    were updated to reflect 1998 ARMIS line counts. *See Tenth Report
    and Order*, 14 FCC Rcd at 20186 para. 61. Line count input values
    for the non-rural mechanism were updated last year to reflect
    year-end 1999 line counts filed by the carriers pursuant to Part 36
    of the Commission's rules. *Federal-State Joint Board on Universal
    Service*, CC Docket 96-45, Order, DA 00-2729 (rel. Dec. 8, 2000).

[^412]: For instance, the Rural Task Force said that model results for
    the type of plant varied from actual plant constructed. Rural Task
    Force Recommendation at 18; *see also* GVNW Consulting Reply
    Comments at 4. This is not surprising because the non-rural model
    currently uses nationwide plant mix values when developing the
    non-rural mechanism. Although the Commission sought comment on
    proposals to use company-specific or state-specific plant mix
    values, it found that there was no reasonable alternative to
    nationwide values at the time. *See Tenth Report and Order*, 14 FCC
    Rcd at 20257 para. 233. The Rural Task Force also said that the
    model underestimates wire center area. Rural Task Force
    Recommendation at 18; *see also* GVNW Consulting Reply Comments at
    5. The wire center area reported by the model is the sum of the
    distribution areas. Model results report only the area within the
    wire center that is served. If, as it appears, the Rural Task
    Force's definition of area includes the entire area within a wire
    center, served and unserved, where the unserved can be lakes,
    mountains and deserts, then the Rural Task Force's area will always
    be greater than the model reported area. The Rural Task Force also
    said that the model underestimates switching investment. Rural Task
    Force Recommendation at 18; *see also* GVNW Consulting Reply
    Comments at 5. It is generally accepted that forward-looking switch
    costs are less than embedded switch costs. This conclusion is
    incorporated in the model switch estimation procedures through a
    negative trend coefficient. Thus, it can be claimed that the model
    underestimates switching investment by relying on the fact that
    embedded costs are greater than the forward-looking costs. Second,
    model switching investment is dependent on the number of lines
    connected to the switch. If the Rural Task Force had used current
    lines to estimate the model switch investment then that investment
    would have been higher. The Rural Task Force also said that the
    model results for general support investment varies widely from
    actual data. Rural Task Force Recommendation at 18; *see also* GVNW
    Consulting Reply Comments at 5. Model general support investment for
    rural companies was based on the average relationship between
    non-rural general support investment and forward looking network
    investment. Applying the average relationship to particular rural
    companies should generate results that have as many over-estimations
    as under-estimations. Thus, the results for rural companies simply
    and accurately reflect an input based on an average relationship.
    When rural carrier specific information becomes available this
    problem should be significantly mitigated. The Rural Task Force also
    said that the model underestimates network operations and corporate
    operations expenses. Rural Task Force Recommendation at 18; *see
    also* GVNW Consulting Reply Comments at 5. Model network operations
    and corporate operations expenses include only those related to
    universal service. Non-universal service expenses related to toll
    services, special access lines and mergers and acquisition have been
    removed from the total network and corporate operations expenses.
    Therefore, model expenses are and should be less than actual
    expenses. Comparing model expenses to actual expenses is
    inconsistent with the design and purpose of the universal service
    modeling process.

[^413]: *See* Rural Task Force Recommendation at 19.

[^414]: For example, if support were averaged at the study area level,
    rather than at the state level, the total amount of support to rural
    and non-rural carriers would double the amount available under the
    current embedded cost mechanism. *A Review of the FCC's Non-Rural
    Universal Service Fund Method and the Synthesis Model for Rural
    Telephone Companies: Rural Task Force White Paper 4* (Sept. 2000)
    (visited May 2, 2001) \<http://www.wutc.wa.gov/rtf\> at 18 (*White
    Paper* *4*). If the benchmark were 115 percent of the nationwide
    average forward-looking cost instead of 135 percent, the total
    amount of support for rural and non-rural carriers would remain
    approximately the same as under the current mechanism. *White Paper*
    *4* at 17.

[^415]: The Joint Board and the Commission "\[did\] not anticipate that
    all carriers will begin to receive universal service support in
    rural, insular, and high-cost areas based on forward-looking
    economic cost at the same time or even in an identical manner."
    *First Report and Order*, 12 FCC Rcd 8889 para. 203.

[^416]: *See, e.g.,* WorldCom Comments at 3; Ad Hoc Telecommunications
    User Committee Reply Comments at 5-6.

[^417]: *See* 47 U.S.C. 254(e)(1); *First Report and Order*, 12 FCC Rcd
    at 8858 para. 145; *Seventh Report and Order and Thirteenth Order on
    Reconsideration*, 14 FCC Rcd at 8113 para. 72.

[^418]: *See Ninth Report and Order*, 14 FCC Rcd at 20480 para. 90.

[^419]: Rural Task Force Recommendation at 38.

[^420]: *See* *id.* at 38; *White Paper* *5* at 21. *See also* CUSC
    Comments App. A at 15-16; John Staurulaukis, Inc. Comments at 16;
    Fred Williamson & Assoc. Comments at 9.

[^421]: Fixed wireless carriers, like wireline carriers, provision their
    services to a fixed point of use.

[^422]: *In the Matter of Local Competition and Broadband Reporting*, CC
    Docket No. 99-301, Report and Order, 15 FCC Rcd. 7717, 7785 (rel.
    Mar. 30, 2000).

[^423]: *See* John Staurulaukis, Inc. Comments at 16. *Cf*. Fred
    Williamson & Assoc. Comments at 9.

[^424]: *See* John Staurulaukis, Inc. Comments at 16 ("\[u\]se of the
    billing address is the most administratively tractable solution for
    the problem of defining a "fixed address" for service using a mobile
    station." ). *Cf*. CUSC Comments App. A at 15-16.

[^425]: CUSC Comments App. A at 15-16. *See also* 4 U.S.C. §§ 116-124.

[^426]: Defined as "a corporation, association, or other entity
    representing all the political subdivisions of a State that is: (A)
    responsible for providing an electronic database as prescribed in
    section 119(a) if the State has not provided such electronic
    database; and (B) approved by municipal and county associations or
    leagues of the State whose responsibility it would otherwise be to
    provide such database prescribed by sections 116 through 126 of this
    Title." 4 U.S.C. § 124 (3)(A), (B).

[^427]: Defined as "the street address representative of where the
    customer's use of the mobile telecommunications service primarily
    occurs." 4 U.S.C. § 124 (8).

[^428]: 4 U.S.C. § 117.

[^429]: 4 U.S.C. § 119.

[^430]: 4 U.S.C. § 120.

[^431]: 47 U.S.C. §§ 116, 119 (this provision is "applicable only to
    customer bills issued after the first day of the first month
    beginning more than two years after July 28, 2000").

[^432]: *See* Rural Task Force Recommendation at 38-39.

[^433]: *See Seventh Report and Order*, 14 FCC Rcd at 8115-16 para. 78.
    States or other parties may petition the Commission, under section
    208 of the Act, if they believe a carrier has misapplied its
    high-cost support, and may also fully avail themselves of the
    Commission's formal complaint procedures to bring any alleged
    misapplication of high-cost support before the Commission. *See also
    Ninth Report and Order*, 14 FCC Rcd at 20488 para. 110.

[^434]: *See id.* at 20470-73 paras. 70-76.

[^435]: *See* Petition for Reconsideration and/or Clarification of the
    Personal Communications Industry Association (PCIA Petition), CC
    Docket No. 96-45 at 4-5.

[^436]: We note that PCIA's petition, in requesting that support for
    mobile wireless carriers be based on "the wire center associated
    with the *customer's address*," does not provide additional guidance
    on the issue of what the customer's address is for mobile wireless
    carriers. PCIA Petition at 4 (emphasis added).

[^437]: We note that on reply PCIA states no party opposed its
    recommended approach. *See* Reply Comments of the Personal
    Communications Industry Association, CC Docket No. 96-45 at 2.

[^438]: PCIA states that a wireless carrier does not necessarily know
    the address of a prepay customer, and therefore, it may not be
    possible to determine support for these customers based on address.
    *See* PCIA Petition at 4 n.6. In this Order we do not resolve the
    issue of how to assign prepaid mobile wireless customers when the
    carrier does not have customer billing address information. We will
    review this issue on a case-by-case basis.

[^439]: 47 U.S.C. § 254(e).

[^440]: *Ninth Report and Order*, 14 FCC Rcd at 20482 para. 95. The
    Commission noted that as long as the uses prescribed by the state
    are consistent with section 254(e), the states should have the
    flexibility to decide how carriers use the support provided by the
    federal mechanism. *Id*. at 20483 para. 96.

[^441]: *Id.* at 20483 para. 97. To ensure that carriers receiving
    *interstate* access universal service support will use that support
    in a manner consistent with section 254(e), the Commission adopted a
    certification scheme requiring carriers seeking such support to file
    a certification with the Commission stating that the carrier will
    use its support only for the provision, maintenance, and upgrading
    of facilities and service for which the support is intended. *See
    Access Charge Reform, Price Cap Performance Review for Local
    Exchange Carriers*, CC Docket Nos. 96-262 and 94-1, Sixth Report and
    Order, *Low-Volume Long-Distance Users*, CC Docket No. 99-249,
    Report and Order, *Federal-State Joint Board on Universal Service*,
    CC Docket No. 96-45, Eleventh Report and Order, 15 FCC Rcd 12962,
    13062 para. 232 (*Interstate Access Support Order*), *pets. for
    review pending, Texas Office of Public Util. Counsel et al. v. FCC*,
    5^th^ Cir. No. 00-60434 (and consolidated cases) (2000). *See* 47
    C.F.R. § 54.809.

[^442]: *Ninth Report and Order*, 14 FCC Rcd at 20484 para. 98. *See* 47
    C.F.R. § 54.313(a).

[^443]: Rural Task Force Recommendation at 33.

[^444]: *Id.*

[^445]: *See* 47 U.S.C. § 254(e).

[^446]: As explained above, three federal universal service mechanisms
    provide high-cost support for rural carriers. These include
    high-cost loop support, LSS and LTS. *See* *supra* para. 13.
    High-cost loop support provides support for a portion of a carrier's
    total cost allocated to the intrastate jurisdiction. Similarly, LSS
    is available to support the intrastate switching costs of carriers
    with 50,000 or fewer lines. By contrast, LTS supports interstate
    allocated loop costs of non-price cap carriers (typically small,
    rural carriers) that participate in the NECA common line pool.
    Because the Commission has primary jurisdiction over interstate
    rates, oversight of the use of LTS lies with the Commission. *See
    Interstate Access Support Order*, 15 FCC Rcd at 13062 para. 232. We
    anticipate addressing certification of LTS when we address
    interstate access reform in the MAG proceeding. *See infra* n.Error:
    Reference source not found.

[^447]: *Ninth Report and Order*, 14 FCC Rcd at 20483 para. 97.

[^448]: *Id.*

[^449]: *Id*.

[^450]: The timing and effectiveness of these annual certifications are
    discussed *infra* in para. 191.

[^451]: 47 C.F.R. § 54.709(a)(3). The Commission uses those support
    requirements to establish a contribution factor for the upcoming
    quarter. *See* 47 C.F.R. § 54.709(a). USAC then uses the
    contribution factor to bill carriers and collect the appropriate
    amount of support to fund the universal service programs. *Id*.

[^452]: *See* Appendix A for the relevant rules.

[^453]: *See* *Seventh Report and Order*, 14 FCC Rcd at 8115-16 para.
    78. States or other parties may petition the Commission, under
    section 208 of the Act, if they believe a carrier has misapplied its
    high-cost support, and may also fully avail themselves of the
    Commission's formal complaint procedures to bring any alleged
    misapplication of federal high-cost support before the Commission.
    *See also Ninth Report and Order,* 14 FCC Rcd at 20488 para. 110.

[^454]: *See id.* at 20482-88 paras. 93-110. *See also* 47 C.F.R. §
    54.313. This reconsideration on the Commission's own motion is
    appropriate given the pendency of petitions for reconsideration of
    the Commission's *Ninth Report and Order*. *See Central Florida
    Enterprises v. FCC*, 598 F.2d 37, 48 n.51 (D.C. Cir. 1978), *cert.
    dismissed*, 441 U.S. 957 (1979).

[^455]: *See* Appendix A for the relevant rule.

[^456]: 47 U.S.C. § 254(c)(1).

[^457]: *First Report and Order*, 12 FCC Rcd at 8807-25 paras. 56-87;
    *see* 47 U.S.C. § 254(c)(1).

[^458]: 47 U.S.C. §§ 254(b)(2), (3).

[^459]: Section 706(c) of the 1996 Act, reproduced in the notes under 47
    U.S.C. § 157; *see Inquiry Concerning the Deployment of Advanced
    Telecommunications Capability to all Americans in a Reasonable and
    Timely Fashion, and Possible Steps to Accelerate Such Deployment
    Pursuant to Section 706 of the Telecommunications Act of 1996*, CC
    Docket No. 98-146, Second Report, 15 FCC Rcd 20913 (2000) (*Second
    706 Report*). Section 706 generally defines advanced
    telecommunications capability as "high-speed, switched, broadband
    telecommunications capability that enables users to originate and
    receive high-quality voice, data, graphics, and video
    telecommunications using any technology. In the *Second 706 Report*,
    the Commission defined as "advanced" for section 706 purposes
    services with a transmission speed of at least 200 kilobits per
    second (kbps) in two directions (provider-to-customer and
    customer-to-provider), and as "high-speed" services with a speed of
    at least 200 kbps in one direction. *Section 706 Report*, 15 FCC Rcd
    at 20921 para. 11.

[^460]: Rural Task Force Recommendation at 22. The Rural Task Force
    stated that "\[t\]he provision of access to advanced services . . .
    is separate and distinct from the actual provision of advanced
    services when and if they have been added to the supported services
    defined periodically by the FCC under Section 254(c)." *Id.* We note
    that, contrary to the Rural Task Force's suggestion, inclusion of a
    service on the list of supported services under section 254(c)
    generally means that universal service mechanisms support *access*
    to the service, rather than "the actual provision" of the service."
    *Id.*; *see, e.g., First Report and Order*, 12 FCC Rcd at 8817 para.
    74 ("we support the telecommunications network components necessary
    for access . . . , but not the underlying services themselves").

[^461]: Rural Task Force Recommendation at 23. In 1997, the Commission
    determined that dial-up Internet access should not be supported
    separately from voice grade access "because the record does not
    indicate that a substantial majority of residential customers
    currently subscribe to Internet access by using access links that
    provide higher quality than voice grade access." *First Report and
    Order*, 12 FCC Rcd at 8823 para. 83. In 1999, the Commission's
    Common Carrier Bureau sought comment on requests by the Rural
    Utilities Service (RUS) and three state commissions to redefine
    voice grade access by increasing the minimum frequency range from
    300-3,000 Hertz (Hz) to approximately 200-3,500 Hz. RUS and these
    states expressed concerns that the current definition does not
    ensure that consumers in rural areas using 28.8 kbps modems for
    Internet access can achieve data transmission speeds reasonably
    comparable to those achieved by consumers in urban areas using the
    same modems. *Common Carrier Bureau Seeks Comment on Requests to
    Redefine "Voice Grade Access" for Purposes of Federal Universal
    Service Support*, CC Docket No. 96-45, Public Notice, DA 99-2985
    (rel. Dec. 22, 1999).

[^462]: Rural Task Force Recommendation at 22.

[^463]: *Id.* The forward-looking high-cost support mechanism for
    non-rural carriers provides support for plant that does not impede
    the provision of access to advanced services. *See Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45,
    *Forward-Looking Mechanism for High Cost Support for Non-Rural
    LECs*, CC Docket No. 97-160, Fifth Report and Order, 13 FCC Rcd
    21323, 21351-52 paras. 68-70 (1998).

[^464]: Rural Task Force Recommendation at 22-23.

[^465]: *Referral Order*, 15 FCC Rcd 25257.

[^466]: *Id.* at 25256 para. 3; *see supra* n.Error: Reference source
    not found.

[^467]: *See* 47 U.S.C. § 254(c)(2) ("The Joint Board may, from time to
    time, recommend to the Commission modifications in the definition of
    the services that are supported by Federal universal service support
    mechanisms"); NYDPS Comments at 6; Sprint Comments at 3; Texas
    Commission Comments at 8.

[^468]: *See* Rural Task Force Recommendation at 22; *supra* n.Error:
    Reference source not found.

[^469]: *Texas Office of Public Utility Counsel* *v. FCC*, 183 F.3d at
    421; 47 U.S.C. § 254(b); *cf.* Rural Task Force Recommendation at
    22-23 ("The provision of access to advanced services is required
    under Section 254(b) . . . Sections 254(b)(2) and (3) require access
    to information services that is reasonably comparable to that
    provided in urban areas.").

[^470]: Rural Task Force Recommendation at 22.

[^471]: 47 U.S.C. § 254(e); *see, e.g.*, NYDPS Comments at 5-7.

[^472]: *First Report and Order*, 12 FCC Rcd at 8939 para. 300.

[^473]: *Id.* Of course, carriers who make such investments using
    universal service support also must comply with the mandate that
    support be used "only for the provision, maintenance, and upgrading
    of facilities and services for which the support is intended." 47
    U.S.C. § 254(e).

[^474]: *See* Rural Task Force Recommendation at 22-23. S*ee also Second
    706 Report*, 15 FCC Rcd at 21004 para. 247 ("Because the development
    of the advanced services market remains in a very early stage, . . .
    we believe that there is time for us to examine further the factors
    that affect infrastructure investment and develop policies that will
    ensure access to needed services, but that are not inappropriately
    linked to universal service mechanisms for voice telephony"). We
    note that the Rural Utilities Service makes funding for rural
    carriers contingent on their use of the funds to deploy plant
    capable of providing access to advanced services. *See* 7 C.F.R. §§
    1751.100-1751.106. No commenter addressed the Rural Utilities
    Service's standards or whether they would comport with federal
    high-cost universal service mechanisms.

[^475]: *See* Maine and Vermont Commissions Comments at 4 ("According to
    the Rural Policy Research Institute, for every rural customer served
    by a 'rural telephone company,' there are four rural customers
    served by a non\[-\]rural company").

[^476]: *See Second 706 Report*, 15 FCC Rcd at 21003-14 paras. 244-268.

[^477]: Rural Task Force Recommendation at 31-32. Although most
    rate-of-return carriers are rural carriers, whether a carrier is
    subject to price cap regulation does not turn on whether it meets
    the definition of rural telephone company. *See generally Access
    Charge Reform for Incumbent Local Exchange Carriers Subject to
    Rate-of-Return Regulation*, CC Docket No. 98-77, Notice of Proposed
    Rulemaking, 13 FCC Rcd 14238 (1998); *see also supra* n.Error:
    Reference source not found.

[^478]: *See Interstate Access Support Order*, 15 FCC Rcd at 12962.

[^479]: 47 U.S.C. § 254(g).

[^480]: Rural Task Force Recommendation at 31.

[^481]: *See Interstate Access Support Order*, 15 FCC Rcd at 13043-44
    paras. 195-97.

[^482]: *Recommended Decision* at 10 para. 20.

[^483]: *Id.* As stated above, the MAG plan is an interstate access
    reform and universal service support proposal for rate-of-return
    carriers. *See supra* n.Error: Reference source not found.

[^484]: *Id.* The Joint Board further stated that "\[a\] significant
    number of Joint Board members urge that this involvement include a
    referral to the Joint Board of the universal service issues raised
    by the MAG plan." *Id.*; *see id.* at Concurring Statement of
    Commissioner Laska Schoenfelder and Statement of Public Counsel
    Martha Hogery Concurring in Part and Dissenting in Part.

[^485]: *See supra* n.Error: Reference source not found.

[^486]: The MAG plan includes a proposal similar in some respects to the
    Rural Task Force recommendation to replace support that may be
    implicit within the access rate structure of rate-of-return carriers
    with a new, explicit support mechanism. *See MAG NPRM*, 16 FCC Rcd
    at 463 para. 8, 466 para. 18.

[^487]: We recognize that the Fifth Circuit recently held that, pursuant
    to section 254(e) of the Act, the Commission cannot permit carriers
    to recover their universal service contributions through access
    charges imposed on interexchange carriers. We intend to address this
    matter expeditiously. *See Comsat Corp., et al. v. FCC*, No.
    00-60044 (5^th^ Cir. May 3, 2001); *see also* AT&T comments at
    10-11.

[^488]: *See* Ad Hoc Telecommunications User Committee Comments at
    26-27; Arizona LEC Assn. Comments at 3; AT&T Comments at 4-11;
    California Commission Comments at 3, 7; CUSC Comments at App. A
    25-26; Evans Tel. Co., et.al. Comments at 8; General Communications,
    Inc. Comments at 2-3; John Staurulaukis, Inc. Comments at 17-18;
    Texas Commission Comments at 8; WorldCom Comments at 4.

[^489]: *See MAG NPRM*, 16 FCC Rcd at 466 para. 18 ("we intend to work
    closely with the Joint Board on those aspects of the MAG proposal
    related to interstate access universal service support"); *see also
    id.* at 462 para. 4.

[^490]: AT&T Comments at 8; *see* General Communications, Inc. Comments
    at 2-3; AT&T Reply Comments at 2-6; WorldCom Reply Comments at
    13-14.

[^491]: Rural Task Force Recommendation at 31 ("there is no agreement on
    how much or how to determine the amount of implicit support");
    *compare* AT&T Comments at 8-10 ("AT&T suggests that the Commission
    follow the CALLS model for rural carriers") *with* CUSC Comments at
    App. A 25-26 (Rural Task Force's recommended approach, "like the
    CALLS plan, makes the unfounded assumption that all residual access
    revenues not recovered through the rebalanced access charges
    constitute appropriate universal service subsidies.").

[^492]: NRTA, OPASTCO, & USTA Comments at 3; *see* NTCA Comments at 20.

[^493]: *See* NRTA, OPASTCO, & USTA Comments at 2-3; Fred Williamson &
    Assoc. Comments at 2; *see also* TDS Comments in CC Docket No.
    00-256.

[^494]: *See, e.g.*, Alaska Commission Comments in CC Docket No. 00-256
    at 2 ("Unlike the CALLS plan, the MAG's access charge reform
    proposals have not been tempered by industry consensus. Development
    of an industry consensus would likely result in changes that we
    believe are needed before the plan is approved."); WorldCom Comments
    at 2 ("the MAG plan's strengths are outweighed by obvious
    weaknesses. The Commission should not adopt the MAG plan in its
    current form").

[^495]: Wyoming Commission Comments at 1 (urging the Commission not to
    allow "any unresolved access reform issues to stand in the way of
    timely and necessary federal universal service reform."); *see*
    Alaska Commission Comments in CC Docket No. 00-256 at 2 ("we would
    not like to see approval of the RTF delayed while the considerable
    additional issues in the MAG Plan are debated.").

[^496]: *See supra* discussion at section IV.B.3.

[^497]: *See supra* n.Error: Reference source not found.

[^498]: *See supra* para. 130; Rural Task Force *White Paper* *5* at 17
    ("Dealing with 'captured' and 'new' lines may create administrative
    problems and the need to track customers from one \[carrier\] to
    another").

[^499]: *See supra* paras. 128-130.

[^500]: 47 U.S.C. § 254(b)(5); *see supra* at para. 130.

[^501]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et seq*.,
    has been amended by the Contract with America Advancement Act of
    1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of
    the CWAAA is the Small Business Regulatory Enforcement Fairness Act
    of 1996 (SBREFA).

[^502]: *Further Notice* at 3-9.

[^503]: *See* 5 U.S.C. § 604.

[^504]: 47 U.S.C. § 254.

[^505]: 47 C.F.R. § 36.621(a)(4).

[^506]: *See* *supra* at para. 75.

[^507]: 5 U.S.C. § 603(b)(3).

[^508]: 5 U.S.C. § 601(6).

[^509]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in 15 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.\"

[^510]: 15 U.S.C. § 632.

[^511]: 5 U.S.C. § 601(3).

[^512]: *See* Letter from Jere W. Glover, Chief Counsel for Advocacy,
    SBA, to William E. Kennard, Chairman, FCC, dated 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.\" *See* 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). Since 1996, out of an abundance of caution,
    the Commission has included small incumbent LECs in its regulatory
    flexibility analyses. *See*, *e.g*., *Implementation of the Local
    Competition Provisions of the Telecommunications Act of 1996*, CC
    Docket, 96-98, First Report and Order, 11 FCC Rcd 15499, 16144‑45
    (1996).

[^513]: 13 C.F.R. § 121.201, SIC Code 4813.

[^514]: FCC, Common Carrier Bureau, Industry Analysis Division, *Trends
    in Telephone Service*, Table 16.3 (Dec. 2000) (*Trends Report*).

[^515]: 13 C.F.R. § 121.201, SIC code 4813.

[^516]: *Trends Report*, Table 16.3.

[^517]: 13 C.F.R. § 121.201, SIC code 4812.

[^518]: *1992 Census, Series UC92-S-1*, at Table 5, SIC code 4812.

[^519]: *Trends Report*, Table 16.3.

[^520]: *See Amendment of Parts 20 and 24 of the Commission\'s Rules \--
    Broadband PCS Competitive Bidding and the Commercial Mobile Radio
    Service Spectrum Cap,* WT Docket No. 96-59, Report and Order, FCC
    96-278, paras. 57- 60 (rel. Jun. 24, 1996), 61 Fed. Reg. 33859 (Jul.
    1, 1996); *see also* 47 C.F.R. § 24.720(b).

[^521]: *See Amendment of Parts 20 and 24 of the Commission\'s Rules \--
    Broadband PCS Competitive Bidding and the Commercial Mobile Radio
    Service Spectrum Cap,* WT Docket No. 96-59, Report and Order, FCC
    96-278, para. 60 (1996), 61 Fed. Reg. 33859 (Jul. 1, 1996).

[^522]: *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. 115-117
    (1994).

[^523]: FCC News, *Broadband PCS, D, E and F Block Auction Closes*, No.
    71744 (rel. Jan. 14, 1997).

[^524]: The service is defined in section 22.99 of the Commission\'s
    Rules. 47 C.F.R. § 22.99.

[^525]: BETRS is defined in sections 22.757 and 22.759 of the
    Commission\'s Rules. 47 C.F.R. §§ 22.757, 22.759.

[^526]: 13 C.F.R. § 121.201, SIC code 4812.

[^527]: 47 C.F.R. § 90.814(b)(1).

[^528]: 47 C.F.R. §§ 101, *et seq*. (formerly Part 21 of the
    Commission\'s Rules).

[^529]: Persons eligible under Parts 80 and 90 of the Commission\'s
    rules can use Private Operational-Fixed Microwave services. *See* 47
    C.F.R. Parts 80, 90. Stations in this service are called
    operational-fixed to distinguish them from common carrier and public
    fixed stations. Only the licensee may use the operational-fixed
    station, and only for communications related to the licensee\'s
    commercial, industrial, or safety operations.

[^530]: Auxiliary Microwave Service is governed by Part 74 of the
    Commission\'s rules. *See* 47 C.F.R. Part 74*.* Available to
    licensees of broadcast stations and to broadcast and cable network
    entities, broadcast auxiliary microwave stations are used for
    relaying broadcast television signals from the studio to the
    transmitter, or between two points such as a main studio and an
    auxiliary studio. The service also includes mobile TV pickups, which
    relay signals from a remote location back to the studio.

[^531]: 13 C.F.R. § 121.201, SIC code 4812.

[^532]: 13 C.F.R. § 121.201, SIC code 4812.

[^533]: Alternatively, the self-certified plan may comply with a prior
    regulatory determination that a different level of disaggregation is
    appropriate. Under the Rural Task Force's proposal, rural carriers
    also may disaggregate and target per-line support to cost zones
    within wire centers. In this Order, we deny the MAG's proposal to
    allow rural carriers to disaggregate support to up to three zones.

[^534]: 47 U.S.C. § 254(e).

[^535]: *Id.* In jurisdictions where carriers are not subject to the
    jurisdiction of a state commission or other state regulatory
    authority, the carrier is required to self-certify that it will use
    the support "only for the provision, maintenance, and upgrading of
    facilities and services for which the support is intended." 47
    U.S.C. § 254(e).

[^536]: 47 C.F.R. §§ 36.612, 54.307.

[^537]: *See supra* paras. 133-134.

[^538]: *Id*.

[^539]: 5 U.S.C. § 603(c).

[^540]: *See* *supra* para. 74.

[^541]: *See* *supra* paras. 79-80.

[^542]: *See* 5 U.S.C. § 801(a)(1)(A).

[^543]: *See* 5 U.S.C. § 604(b).

[^544]: *See supra* para. 59.

[^545]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et. seq.*,
    has been amended by the Contract with America Advancement Act of
    1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of
    the CWAAA is the Small Business Regulatory Enforcement Fairness Act
    of 1996 (SBREFA).

[^546]: *See* *generally supra* paras. 207-211.

[^547]: *See* 5 U.S.C. § 603(a).

[^548]: *See id.*

[^549]: *See supra* para. 125.

[^550]: *See supra* paras. 207-211.

[^551]: 5 U.S.C. § 603(b)(3).

[^552]: 5 U.S.C. § 601(6).

[^553]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in 15 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.\"

[^554]: 15 U.S.C. § 632.

[^555]: 5 U.S.C. § 601(3).

[^556]: *See* Letter from Jere W. Glover, Chief Counsel for Advocacy,
    SBA, to William E. Kennard, Chairman, FCC, dated 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.\" *See* 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). Since 1996, out of an abundance of caution,
    the Commission has included small incumbent LECs in its regulatory
    flexibility analyses. *See*, *e.g*., *Implementation of the Local
    Competition Provisions of the Telecommunications Act of 1996*, CC
    Docket, 96-98, First Report and Order, 11 FCC Rcd 15499, 16144‑45
    (1996).

[^557]: 13 C.F.R. § 121.201, SIC Code 4813.

[^558]: *Trends Report*, Table 16.3.

[^559]: 13 C.F.R. § 121.201, SIC code 4813.

[^560]: *Trends Report*, Table 16.3.

[^561]: 13 C.F.R. § 121.201, SIC code 4812.

[^562]: *1992 Census, Series UC92-S-1*, at Table 5, SIC code 4812.

[^563]: *Trends Report*, Table 16.3.

[^564]: *See Amendment of Parts 20 and 24 of the Commission\'s Rules \--
    Broadband PCS Competitive Bidding and the Commercial Mobile Radio
    Service Spectrum Cap,* WT Docket No. 96-59, Report and Order, FCC
    96-278, paras. 57- 60 (rel. Jun. 24, 1996), 61 Fed. Reg. 33859 (Jul.
    1, 1996); *see also* 47 C.F.R. § 24.720(b).

[^565]: *See Amendment of Parts 20 and 24 of the Commission\'s Rules \--
    Broadband PCS Competitive Bidding and the Commercial Mobile Radio
    Service Spectrum Cap,* WT Docket No. 96-59, Report and Order, FCC
    96-278, para. 60 (1996), 61 Fed. Reg. 33859 (Jul. 1, 1996).

[^566]: *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. 115-117
    (1994).

[^567]: FCC News, *Broadband PCS, D, E and F Block Auction Closes*, No.
    71744 (rel. Jan. 14, 1997).

[^568]: The service is defined in section 22.99 of the Commission\'s
    Rules. 47 C.F.R. § 22.99.

[^569]: BETRS is defined in sections 22.757 and 22.759 of the
    Commission\'s Rules. 47 C.F.R. §§ 22.757, 22.759.

[^570]: 13 C.F.R. § 121.201, SIC code 4812.

[^571]: 47 C.F.R. § 90.814(b)(1).

[^572]: 47 C.F.R. §§ 101, *et seq*. (formerly Part 21 of the
    Commission\'s Rules).

[^573]: Persons eligible under Parts 80 and 90 of the Commission\'s
    rules can use Private Operational-Fixed Microwave services. *See* 47
    C.F.R. §§ 80 and 90. Stations in this service are called
    operational-fixed to distinguish them from common carrier and public
    fixed stations. Only the licensee may use the operational-fixed
    station, and only for communications related to the licensee\'s
    commercial, industrial, or safety operations.

[^574]: Auxiliary Microwave Service is governed by Part 74 of the
    Commission\'s rules. *See* 47 C.F.R. § 74*.* Available to licensees
    of broadcast stations and to broadcast and cable network entities,
    broadcast auxiliary microwave stations are used for relaying
    broadcast television signals from the studio to the transmitter, or
    between two points such as a main studio and an auxiliary studio.
    The service also includes mobile TV pickups, which relay signals
    from a remote location back to the studio.

[^575]: 13 C.F.R. § 121.201, SIC code 4812.

[^576]: *Id.*

[^577]: *See* *supra* para. 133.

[^578]: *Id*.

[^579]: 5 U.S.C. § 603(c).

[^580]: *See supra* paras. 209-211.

[^581]: *See generally* 47 C.F.R. §§ 1.1202, 1.1203, 1.1206(a).

[^582]: ^?^ *See* Electronic Filing of Documents in Rulemaking
    Proceedings, 63 Fed. Reg. 24,121 (1998).