**B****efore the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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[]{#__RefHeading___Toc22973953 .anchor}RECOMMENDED DECISION

**Adopted: October 15, 2002 Released: October 16, 2002**

By the Federal-State Joint Board on Universal Service: Commissioners
Abernathy, Copps and Consumer Advocate Gregg issuing separate
statements; Commissioners Martin and Dunleavy approving in part,
dissenting in part, and issuing separate statements; Commissioner Rowe
dissenting and issuing a statement.

**TABLE OF CONTENTS**

Paragraph

RECOMMENDED DECISION [1](#__RefHeading___Toc22973953)

I. INTRODUCTION [2](#introduction)

II\. BACKGROUND [2](#background)

III\. DiSCUSSION [7](#discussion)

A. Sufficiency [7](#sufficiency)

A. Use of Costs Rather Than Rates to Determine Non-Rural High-Cost
Support
[9](#use-of-costs-rather-than-rates-to-determine-non-rural-high-cost-support)

B. Use of Statewide Averaging to Reflect Appropriate Federal and State
Roles in Achieving Rate Comparability
[11](#use-of-statewide-averaging-to-reflect-appropriate-federal-and-state-roles-in-achieving-rate-comparability)

C. Benchmark [13](#benchmark)

D. Reasonable Comparability and State Inducements
[20](#reasonable-comparability-and-state-inducements)

IV\. ReCOMmending clause [28](#recommending-clause)

A. Cost-Based Support [1](#cost-based-support)

B. Rates-Based Support [14](#rates-based-support)

C. Transport Issue [21](#transport-issue)

**APPENDIX A** (State Cost Cluster Analysis)

**APPENDIX B** (Parties Filing Initial Comments)

**APPENDIX C (**Parties Filing Reply Comments)

# INTRODUCTION

1.  In this Recommended Decision, the Federal-State Joint Board on
    Universal Service (Joint Board) provides its recommendations on
    issues from the *Ninth Report and Order* that were remanded to the
    Commission by the United States Court of Appeals for the Tenth
    Circuit.[^1] The *Ninth Report and Order* established a federal
    high-cost universal service support mechanism for non-rural carriers
    based on forward-looking economic costs. Consistent with the court's
    decision, the Joint Board recommends that the Commission modify the
    non-rural high-cost support mechanism implemented in the *Ninth
    Report and Order* by adopting additional measures to induce states
    to ensure reasonable comparability of urban and rural rates. We also
    recommend that the Commission implement a supplementary rate review
    as a check on whether non-rural high-cost support continues to
    provide sufficient support to enable the states to maintain
    reasonably comparable rural and urban rates. In addition, we
    recommend continued use of statewide average costs to determine
    non-rural high-cost support. We believe that these recommendations
    will enable the Commission to satisfy the court's remand and
    continue to fulfill Congress's directive in the Telecommunications
    Act of 1996 to preserve and advance universal service.[^2]

# BACKGROUND

2.  The 1996 Act codified the commitment of the Commission and the state
    regulators to promote universal service in order to help ensure that
    consumers in all regions of the nation have access to affordable,
    quality telecommunications services.[^3] In section 254 of the Act,
    Congress directed the Commission, after consultation with the Joint
    Board, to establish specific, predictable, and sufficient support
    mechanisms to preserve and advance universal service.[^4] In
    addition, in section 254(b), Congress provided a list of principles
    upon which the Commission must base policies for the preservation
    and advancement of universal service.[^5] Among other things,
    section 254(b) states that consumers in rural, insular, and
    high-cost areas should have access to telecommunications services at
    rates that are "reasonably comparable to rates charged for similar
    services in urban areas."[^6]

3.  Based on recommendations from the Joint Board[^7] and building on
    the framework set forth by the Commission in prior orders,[^8] the
    Commission adopted the *Ninth Report and Order* on October 21, 1999,
    establishing a federal high-cost universal service support mechanism
    for non-rural carriers based on forward-looking economic costs.[^9]
    With the *Ninth Report and Order*, the Commission sought to "adopt a
    new specific and predictable forward-looking mechanism that will
    provide sufficient support to enable affordable, reasonably
    comparable intrastate rates for customers served by non-rural
    carriers."[^10]

4.  The forward-looking mechanism implemented in the *Ninth Report and
    Order* determines the amount of federal support to be provided to
    non-rural carriers in each state by comparing the statewide average
    cost per line for non-rural carriers, as estimated by the
    Commission's cost model, to a nationwide cost benchmark.[^11] The
    Commission adopted the Joint Board's recommendation to use costs as
    a proxy for rates in assessing its responsibilities to enable the
    reasonable comparability of rates.[^12] The Commission concluded
    that comparing costs in different states, rather than rates, would
    allow the federal mechanism to provide sufficient support to enable
    reasonably comparable rates without having to evaluate the myriad
    state policy choices that affect those rates.[^13] The Commission
    stated that "if federal support is available to cover costs that
    substantially exceed the national average, no state should face
    rates that are significantly higher than those elsewhere."[^14]

5.  The Commission determined that, for purposes of determining
    non-rural support, the statewide averaging approach was most
    consistent with the federal role of providing support for intrastate
    universal service to enable the states to ensure reasonable
    comparability of rates.[^15] The Commission acknowledged that states
    set intrastate rates and, therefore, hold the responsibility of
    ensuring reasonable comparability of rates within their
    borders.[^16] The federal mechanism operates by transferring funds
    among jurisdictions and has the effect of shifting money from
    relatively low-cost states to relatively high-cost states.[^17] No
    state with forward-looking costs greater than the national benchmark
    would be forced to keep rates reasonably comparable without the
    benefit of federal support.[^18]

6.  The non-rural mechanism provides support for the percentage of the
    costs per line allocated to the intrastate jurisdiction that exceed
    a national average cost benchmark of 135%.[^19] The Commission
    concluded in the *Ninth Report and Order* that a benchmark of 135%
    of the national average cost balanced various goals under the
    statute, including sufficiency and the need to achieve rate
    comparability.[^20] In addition, the Commission attempted to ensure
    that the fund would be no larger than necessary in order to minimize
    burdens on carriers and consumers contributing to universal service
    mechanisms.[^21]

7.  In its remand of the *Ninth Report and Order*, the court determined
    that the Commission did not adequately explain its decision in
    certain respects.[^22] The court observed that the Commission must
    base its universal service policies on the principles listed in
    section 254(b). In particular, the court found two principles in
    section 254(b) most relevant to the case: the principle that
    consumers in "rural, insular, and high cost areas" should have
    access to services "that are available at rates that are reasonably
    comparable to rates charged for similar services in urban
    areas;"[^23] and the principle that "\[t\]here should be specific,
    predictable and sufficient Federal and State mechanisms to preserve
    and advance universal service."[^24] The court also noted section
    254(e), which states that any federal support for universal service
    "should be explicit and sufficient to achieve the purposes of this
    section."[^25]

8.  The court determined that the Commission did not provide an adequate
    explanation for its decision that the federal high-cost universal
    service support mechanism for non-rural carriers achieved the
    statutory principles codified in section 254 of the Act.[^26]
    Without such an explanation, the court stated that it could not
    review the rationality of the *Ninth Report and Order*.[^27] The
    court explained: "We do not decide the underlying issue of whether
    the funding is in fact sufficient; rather we conclude that the FCC
    has not supported why the funding is sufficient."[^28] The court
    remanded the *Ninth Report and Order* to the Commission to
    "establish an adequate legal and factual basis for the Ninth Order
    and, if necessary, to reconsider the operative mechanism promulgated
    in that Order."[^29] In particular, the court concluded that the
    Commission did not: (1) define adequately the key statutory terms
    "reasonably comparable" and "sufficient"; (2) adequately explain
    setting the funding benchmark at 135% of the national average; (3)
    provide inducements for state universal service mechanisms; or (4)
    explain how this funding mechanism will interact with other
    universal service programs.[^30]

9.  On February 15, 2002, the Commission issued the *Remand Notice*
    seeking comment on the first three issues remanded by the Tenth
    Circuit and referring the record collected in the proceeding to the
    Joint Board for a recommended decision.[^31] In the *Remand Notice*,
    the Commission reserved review of the fourth issue on remand.[^32]
    The Commission stated that a response to the remanded issues
    relating directly to the non-rural mechanism and a critical
    examination of the mechanism should be completed prior to a
    comprehensive review of the rural and non-rural universal service
    support mechanisms.[^33] As a result, the Joint Board
    recommendations outlined in this decision apply to the non-rural
    high-cost universal service support mechanism and do not address the
    rural mechanism.[^34] As the Commission seeks to better coordinate
    and reconcile the rural and non-rural mechanisms, it may find it
    necessary to review or adjust the principles and procedures
    developed herein in response to the Tenth Circuit remand.

# DiSCUSSION

10. Based on examination of the record in this proceeding, the Joint
    Board recommends that the Commission modify the non-rural high-cost
    support mechanism implemented in the *Ninth Report and Order* by
    adopting additional measures that will establish specific
    inducements for states to ensure that rates in all regions of the
    nation are reasonably comparable to rates in urban areas. We also
    recommend that the Commission implement a supplementary rate review
    to assess whether non-rural high-cost support continues to provide
    sufficient support to enable the states to maintain reasonably
    comparable rates. Consistent with the court's decision, our
    recommendations with regard to these additional measures will
    support and complement the Commission's initial decision in the
    *Ninth Report and Order*. Specifically, we recommend a process that
    includes the following: (1) continuing use of a national average
    cost benchmark based on 135% of the national average cost; (2)
    funding 76% of state average costs exceeding the national
    benchmark; (3) establishing a national rate benchmark based on a
    percentage of the national average urban rate; (4) implementing
    state review and certification of rate comparability; and (5)
    providing states the opportunity to demonstrate that further federal
    action is needed because current federal support and state actions
    together are insufficient to yield reasonably comparable rates.

11. The Joint Board's recommendations comprise an integrated approach to
    the complex and interrelated issues referred by the Commission. We
    believe that these recommendations will enable the Commission to
    satisfy the court's remand and continue to fulfill Congress's
    directive to preserve and advance universal service. We note that
    this mechanism calculates support only for non-rural carriers.
    Certain assumptions in this Recommended Decision may not make sense
    for rural carriers. For example, as discussed below, while statewide
    averaging is appropriate in the non-rural mechanism, it may not be
    appropriate for the high-cost mechanism providing support to rural
    carriers.[^35]

## Sufficiency

### Background

12. Section 254(b)(5) of the Act provides that "\[t\]here should be
    specific, predictable and sufficient Federal and State mechanisms to
    preserve and advance universal service."[^36] Section 254(e)
    provides that federal support "should be explicit and sufficient to
    achieve the purposes of section 254\[.\]"[^37] In the *Ninth Report
    and Order*, the Commission stated that the non-rural high-cost
    support mechanism would "provide sufficient support to enable
    reasonably comparable rates."[^38] The Commission also stated that
    the level of support would be "sufficient to 'prevent pressure from
    high costs and the development of competition from causing
    unreasonable increases in rates above current, affordable
    levels.'"[^39]

13. The court found that the Commission did not define the key statutory
    term "sufficient," but simply asserted without explanation that the
    mechanism it chose would be sufficient.[^40] The court declared the
    rationale conclusory and, thus, "inadequate to enable appellate
    review of the sufficiency of the federal mechanism."[^41] The court
    required the Commission on remand to define "sufficient" more
    precisely "in a way that can be reasonably related to the statutory
    principles, and then to assess whether the funding mechanism will be
    sufficient for the principle of making rural and urban rates
    reasonably comparable."[^42]

14. The relationship between "sufficiency" and fund size has been
    addressed by the Joint Board and the Commission in other decisions.
    In the *Second Recommended Decision*, the Joint Board recommended a
    non-rural high-cost support mechanism that would enable rates to
    remain affordable and reasonably comparable, "but that is no larger
    than necessary to satisfy that statutory mandate."[^43] The Joint
    Board stated that the correct fund size would be essential to
    ensuring that all consumers benefit from universal service. Thus,
    the Joint Board recognized that, in implementing a non-rural
    high-cost universal service mechanism, it must be mindful of two
    competing goals: "(1) supporting high-cost areas so that consumers
    there have affordable and reasonably comparable rates; and (2)
    maintaining a support system that does not, by its sheer size,
    overburden consumers across the nation."[^44] The Commission has
    indicated that "sufficiency" requires that universal service support
    not be excessive, citing the United States Court of Appeals for the
    Fifth Circuit's caution that "excessive funding may itself violate
    the sufficiency requirements of the Act."[^45]

### Discussion

15. The Joint Board recommends that, for purposes of non-rural high-cost
    support, sufficiency should be principally defined as enough support
    to enable states to achieve reasonable comparability of rates.
    Sufficiency should be defined based on the relevant statutory goals
    under section 254(b). Thus, the definition of the term may vary
    depending on the underlying purpose of the universal service program
    in question. The principal purpose of the non-rural high-cost
    support mechanism is to provide enough federal support to enable
    states to achieve reasonable comparability of rural and urban rates,
    the principle found in section 254(b)(3). As discussed in more
    detail below, non-rural high-cost support is designed to provide
    high-cost states enough support so that their net average costs are
    reasonably comparable to the national average cost. With reasonably
    comparable net costs, these high-cost states should then have the
    resources to ensure that rural and urban rates within their borders
    are reasonably comparable. The Joint Board recommends below that the
    Commission require states to certify that their rates are reasonably
    comparable or explain why they are not, and provide states the
    opportunity to demonstrate that further federal action is needed
    because current federal support and state action together are
    insufficient to achieve reasonably comparable rates. Accordingly,
    for purposes of non-rural high-cost support, the Joint Board
    recommends that sufficiency be defined as enough support to enable
    states to achieve reasonably comparable rates.

16. The Joint Board also reaffirms that the statutory principle of
    sufficiency means that non-rural high-cost support should be only as
    large as necessary to achieve its statutory goal. Correct fund size
    is essential to ensure that all consumers benefit from universal
    service.

## Use of Costs Rather Than Rates to Determine Non-Rural High-Cost Support 

### Background

17. In the *Second Recommended Decision*, the Joint Board recommended
    that, because rate setting methods and goals may vary across
    jurisdictions, the Commission "use the *cost* of providing all
    supported services, rather than local rates" to determine federal
    high-cost support.[^46] The Joint Board explained that using costs
    as an indicator of a state's ability to maintain reasonable
    comparability of rates was appropriate because states have broad
    discretion to develop local rate designs.[^47] State rate designs
    may reflect a broad array of policy choices that affect local rates,
    including implicit intrastate subsidies, enhanced service and other
    intrastate services.[^48] In the *Seventh Report and Order*, the
    Commission adopted the Joint Board's recommendation to use costs as
    a proxy for rates to perform its responsibility to enable the
    reasonable comparability of rates.[^49]

### Discussion 

18. We explain more fully here why costs rather than rates should
    continue to be the principal basis for determining federal support
    flows among states. Congress adopted section 254 to ensure that, as
    competition develops, there would be explicit support mechanisms in
    place to preserve the fundamental communications policy goal of
    providing universal telephone service in all regions of the nation
    at reasonably comparable rates.[^50] Section 254(b)(3) requires
    reasonably comparable rates.[^51] This would be a relatively easy
    undertaking if the cost of providing telephone service were
    comparable in urban and rural areas. But costs are not comparable.
    The cost of providing telephone service is largely a function of
    population density and distance. Sparsely populated, rural areas
    have longer telephone loops, the most expensive portion of the
    telephone network, and fewer customers to spread the costs among. In
    some rural areas the cost of providing telephone service may be one
    hundred times greater than costs in urban areas.[^52]

19. Although rates generally are related to costs, states may base rates
    on numerous considerations in addition to cost. For example, local
    rates may vary from state to state depending upon each state's local
    rate design policies; whether or not a carrier's rates are set based
    on a price cap approach; the degree to which implicit subsidies may
    remain within local rates; whether a state universal service fund
    exists; and other factors. Attempting to develop cost support levels
    based principally on rates would therefore likely be difficult to
    implement considering the lack of uniformity in local rate design
    practices and could lead to inequitable treatment between states
    with substantially similar costs but different local rate policies.

20. For these reasons, the use of costs rather than rates to determine
    federal support was central to the Commission's decision adopting
    the non-rural high-cost support mechanism in the *Ninth Report and
    Order*.[^53] We agree with the Commission's past decision that cost
    analysis offers advantages over rate analysis for purposes of
    determining federal support levels. Cost analysis enables accurate
    comparison of states for purposes of determining federal support
    levels. The Commission has stated that "\[a\] state facing costs
    substantially in excess of the national average may be unable
    through any reasonable combination of local rate design policy
    choices to achieve rates reasonably comparable to those that prevail
    nationwide."[^54] Examining the underlying costs enables the
    Commission to "evaluate the cost levels that must be supported in
    each state in order to develop reasonably comparable rates."[^55]

21. While the inducements to state action on rates and supplemental rate
    review contained in this recommendation recognize that the ultimate
    test of rate comparability will be the rates customers actually pay
    for service, the use of costs for determining the areas of greatest
    need establishes a firm foundation for the states to fulfill the
    goals of section 254 of the Act. We recommend that the Commission
    continue to use a cost-based approach as the principal means of
    achieving the statutory goal of rate comparability.

## Use of Statewide Averaging to Reflect Appropriate Federal and State Roles in Achieving Rate Comparability 

### Background

22. The non-rural high-cost support mechanism calculates support levels
    for non-rural carriers by comparing the forward-looking costs of
    providing supported services, averaged over the statewide level, to
    the national benchmark. In the *Ninth Report and Order*, after
    consultation with the Joint Board, the Commission concluded that
    statewide averaging would be most consistent with the federal role
    of providing support for intrastate universal service to enable
    reasonable comparability of rates among states.[^56] By averaging
    costs at the statewide level, the federal mechanism compares the
    relative costs of providing supported services in different states.
    It then provides support to carriers in those states with costs that
    exceed 135% of the national average. As the Commission explained in
    the *Ninth Report and Order*, "\[t\]his has the effect of shifting
    money from relatively low-cost states to relatively high-cost states
    . . . \[and\] ensures that no state with costs greater than the
    national benchmark will be forced to keep rates reasonably
    comparable without the benefit of federal support."[^57] Statewide
    averaging assigns to the states the primary responsibility for
    ensuring reasonably comparable rural rates within their borders and
    permits states to use their resources to achieve the goal of
    reasonable comparability within states.[^58]

23. The court stated that it did not object to the Commission's
    comparison of statewide and national averages to achieve the goals
    of the Act.[^59] The court also recognized that the 1996 Act
    "plainly contemplates a partnership between the federal and state
    governments to support universal service." [^60]

### Discussion 

24. The Joint Board recommends that the Commission continue to determine
    high-cost support for non-rural companies by using statewide average
    costs. We believe that this reflects an appropriate division of
    federal and state responsibility for achieving rate comparability
    for non-rural companies. Because the states, not the Commission, set
    intrastate rates, the states have primary responsibility for
    ensuring reasonably comparable rural and urban rates. States tend to
    rely on either implicit or explicit mechanisms to transfer support
    from low-cost lines to high-cost lines within a state.

25. Despite implicit or explicit state support mechanisms, the low-cost
    areas of some states cannot balance their high-cost areas. Although
    such states could, through their own efforts, achieve reasonably
    comparable rates within their own boundaries, those rates would
    still be high relative to the national average because of the
    states' high average costs. The Commission's primary role is to
    identify those states that do not have the resources within their
    borders to support all of their high-cost lines. The non-rural
    high-cost support mechanism achieves this through the comparison of
    statewide average cost to a national cost benchmark. The averaging
    process provides a logical means to assess the relative extent to
    which states can support their high-cost areas by using resources
    from low-cost areas. By shifting funds to states with average costs
    above the national benchmark, the Commission provides federal
    support that is intended to enable high-cost states to set rates
    that are reasonably comparable to all rates across the nation.

26. The Commission explained in the *Ninth Report and Order* that the
    non-rural high-cost support mechanism "has the effect of shifting
    money from relatively low-cost states to relatively high-cost
    states."[^61] The Commission believed that its non-rural support
    mechanism ensured that no state with costs greater than the national
    benchmark would be forced to keep rates reasonably comparable
    without the benefit of federal support. Statewide averaging assigns
    to the states the primary responsibility for ensuring reasonable
    comparability of rates within their borders and permits states to
    use their resources to achieve the goal of reasonable comparability
    within states.[^62] We continue to support these policies.

27. We disagree with the contention of the Rural Utilities Service that
    high-cost customers are being hidden by statewide averaging.[^63]
    The Rural Utilities Service was concerned about the circumstance in
    which some customers have high costs but the state average is not
    high enough to qualify for support. The use of statewide average
    costs reflects what we believe to be an appropriate policy decision
    that in such cases the state has the primary responsibility and
    demonstrated ability to ensure rate comparability. Federal support
    is needed when the state, because of its high average cost, cannot
    solve such a problem without imposing an undue burden on its own
    ratepayers.

28. While statewide averaging is appropriate in the non-rural mechanism,
    it may not be appropriate for the high-cost mechanism providing
    support to rural carriers.[^64] Many rural carriers lack the
    economies of scale and scope of the generally larger non-rural
    carriers, as the Rural Task Force established in documenting
    differences that exist between rural and non-rural companies.[^65]
    The Commission has stated that it intends to ask the Joint Board to
    conduct 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.
    Accordingly, the Joint Board does not address the complex issues
    surrounding high-cost support for rural telephone companies in this
    Recommended Decision. The Joint Board emphasizes that the current
    recommendation is not intended to apply to rural companies. Now that
    the Joint Board has concluded its recommended decision on the issues
    in the court's remand, we look forward to a Commission referral of a
    comprehensive review of the rural and non-rural high-cost support
    mechanisms.

## Benchmark

### Background

29. Before the *Ninth Report and Order*, both rural and non-rural
    carriers were eligible for support under the Commission's high-cost
    loop support mechanism, which provided increasing amounts of
    explicit support based on the amount by which a carrier's loop
    costs, as reflected in its books, exceeded the national
    average.[^66] Beginning with loop costs between 115% and 160% of the
    national average, the high-cost loop support mechanism provided
    carriers with more than 200,000 lines support for 10% of their
    costs, and gradually more support as those costs exceeded 160% of
    the national average. Carriers with fewer than 200,000 lines were
    eligible for greater levels of support. Because it provides
    gradually more support for costs that exceed certain thresholds, or
    steps, above the national average, the high-cost loop support
    mechanism is often referred to as a "step function benchmark."[^67]

30. The current non-rural high-cost support methodology provides support
    for universal-service-related intrastate costs (as determined by the
    model) that exceed 135% of the national average cost per line for
    non-rural carriers. The Commission, following the Joint Board's
    recommendations, developed and implemented this methodology in a
    series of decisions culminating with the *Ninth Report and Order*.
    In the *First Report and Order*, the Commission adopted the Joint
    Board recommendation to use forward-looking economic costs as the
    basis for determining support.[^68] In the *Seventh Report and
    Order*, the Commission concluded that the new support mechanism
    should compare the forward-looking costs of providing supported
    services to a national, cost-based benchmark.[^69] It also adopted
    the Joint Board's recommendation that the new support mechanism
    "should not be significantly larger than the current explicit
    support mechanism."[^70] In the *Ninth Report and Order*, the
    Commission concluded that federal support should be provided for
    universal service related to all intrastate costs above the national
    benchmark, and that the benchmark level should be set at 135%.[^71]

31. The Commission stated several reasons for setting the benchmark
    level at 135%. In the *Second Recommended Decision*, the Joint Board
    recommended a national benchmark in the range between 115 and 150%
    of the national average cost per line.[^72] The Commission reasoned
    that a benchmark of 135% "falls within the range recommended by the
    Joint Board, and ensures that no state will face costs greater than
    135% above the national average cost per line."[^73] The Commission
    also reasoned that a 135% benchmark "is consistent with the
    precedent of the existing support mechanism and the comments we have
    received. The current mechanism begins providing support for costs
    between 115 and 160 percent of the national average cost per line,
    based on carriers' books, and the vast majority of non-rural
    carriers receive all their current support for costs in this range.
    The new national benchmark of 135% is near the midpoint of this
    range\[,\]" and "a reasonable compromise of commenters'
    proposals."[^74] The Commission further stated that "a national
    benchmark of 135% strikes a fair balance between the federal
    mechanism's responsibility to enable reasonable comparability of
    rates among states and the burden placed on below-benchmark states
    (and ratepayers) whose contributions fund the federal support
    mechanism."[^75]

32. The court found that the Commission failed to adequately explain how
    the benchmark of 135% would achieve the goals of the Act.[^76] The
    court found the Commission's justifications in the *Ninth Report and
    Order* insufficient, stating that "\[m\]erely identifying some range
    and then picking a compromise figure is not rational
    decision-making."[^77] The court directed the Commission to address
    relevant data and provide adequate record support and reasoning on
    remand.[^78]

33. Although the court rejected the Commission's justification for the
    benchmark, the court noted that, "if, however, the FCC's 135%
    benchmark actually produced urban and rural rates that were
    reasonably comparable ... we likely would uphold the
    mechanism."[^79] In addition, the court recognized that the
    Commission's determination of a benchmark "will necessarily be
    somewhat arbitrary" and acknowledged that the Commission is entitled
    to deference when drawing a line in the case of a reasoned decision
    based on the record.[^80]

### Discussion

34. Based on examination of the record, the Joint Board continues to
    support the 135% benchmark. As noted above, the court appeared to
    consider the ability to produce reasonably comparable urban and
    rural rates as a key factor in supporting an appropriate cost
    benchmark.[^81] As the court observed, although non-rural high-cost
    support is distributed based on a comparison of national and
    statewide average costs, the benchmark must be ultimately based on
    attainment of the statutory principle of reasonable comparability of
    urban and rural rates.[^82] We have noted that the Joint Board and
    Commission have found in prior rulings that current rates are
    affordable and reasonably comparable.[^83] These findings are
    supported by a recent General Accounting Office (GAO) report.[^84]
    Based on data contained in the *GAO Report*, it appears that six
    years after passage of the Act the national averages of rural,
    suburban and urban rates for residential customers diverge by less
    than two percent.[^85] We believe that the comparability of average
    rural and urban rates supports continued use of the 135% cost
    benchmark. In addition, the Joint Board finds that the current
    benchmark is empirically supported by a cluster analysis and a
    standard deviation analysis. Both of these methods indicate that the
    135% benchmark targets support to states with substantially higher
    average costs than other states, consistent with the purpose of
    non-rural high-cost support.

35. Verizon argues that the 135% benchmark is consistent with
    Congressional intent that federal support be sufficient to maintain
    the range of rates existing at the time the 1996 Act was adopted.
    [^86] We agree with Verizon that one of the goals of the 1996 Act
    was to ensure that rates remain reasonably comparable as competition
    develops.[^87] Congress was concerned that competition would erode
    implicit support and adopted section 254 to preserve and advance
    universal service.[^88] Verizon argues further that rates have not
    changed substantially since 1996, so the range of existing rates, as
    reflected in the *GAO Report*, should be used to determine what is
    reasonably comparable. Because 95% of rates fall within two standard
    deviations of the mean, Verizon argues that rural rates within two
    standard deviations of urban rates should be considered reasonably
    comparable.[^89] Verizon points out that an analysis of the
    Commission's cost model shows that two standard deviations
    translates approximately to a 135% cost benchmark. Thus, Verizon
    argues that rural rates within two standard deviations of urban
    rates should be considered reasonably comparable and that the cost
    benchmark level of 135% is justified because it is nearly equivalent
    to two standard deviations.[^90] As discussed below, we agree.

36. The current benchmark is supported by a standard deviation analysis.
    Standard deviation is a commonly used statistical analysis that
    measures dispersion of data points from the mean of those data
    points. In a normal distribution, data points within two standard
    deviations of the mean will comprise approximately 95% of all data
    points. In other words, use of two standard deviations will identify
    data points that are truly outliers within the sample studied.[^91]
    Verizon points out that both the Commission and state commissions
    have adopted this statistical approach as a standard for determining
    parity or comparability.[^92] As applied to the cost of non-rural
    lines, the measurement of two standard deviations from the national
    average cost results in approximately 132% of the national average
    cost.[^93] Based on this information, the Joint Board concludes that
    the 135% benchmark is a reasonable dividing line separating
    high-cost states from the remainder of average and low-cost states.

37. The Joint Board used a cluster analysis to determine that the states
    receiving non-rural high-cost support under the current 135%
    benchmark are states that have substantially higher average costs
    than other states. Cluster analysis is an analytical technique that
    organizes information around variables so that relatively
    homogeneous groups, or clusters, can be identified. The Joint Board
    used cluster analysis to identify groups of states that had similar
    cost characteristics, thereby warranting different treatment
    regarding universal service support. Specifically, states were
    sorted from lowest- to highest-cost based on statewide average cost
    per loop.[^94] Clusters were identified in this ranking if the
    difference in average costs between states was greater than "cluster
    split differences" ranging from 2.5 to 0.5. [^95] Under this
    analysis, Mississippi was the first to break out into a separate
    cluster, and the second was the District of Columbia. The first
    group of states to break out into a separate rural, high-cost
    cluster included Kentucky, Maine, Alabama, Vermont, Montana, West
    Virginia and Wyoming. The remaining states, ranging from New Jersey
    to Nebraska, formed a separate urban, low-cost cluster. When
    Mississippi and the District of Columbia, the respective high- and
    low-cost "outliers," were combined into the two larger clusters,
    "cluster stability" was achieved for a wide range of numerical
    values from 2.5 to 0.85.[^96] "Cluster stability" means that the
    same clusters are maintained even as the numerical values are
    varied, indicating a strong similarity among members of the cluster
    groups. Because cluster analysis identifies a high-cost, rural
    cluster of states that matches the group of states currently
    receiving support under the non-rural high-cost support mechanism,
    the Joint Board finds that the cluster analysis empirically supports
    the current 135% benchmark.

38. Because the standard deviation analysis and the cluster analysis
    both support 135% as a reasonable benchmark, the Joint Board
    recommends continued use of the 135% benchmark. The court recognized
    that the use of any benchmark may be somewhat arbitrary; however,
    choice of a specific, percentage-based benchmark (as opposed to a
    mathematically calculated benchmark based on two standard deviations
    which may result in a different percentage each year) provides
    certainty to the funding process that carriers and states desire.
    Accordingly, the Joint Board recommends continued use of a 135%
    benchmark The supplemental rate comparability review which we
    recommend will allow the Commission to assess how successfully the
    non-rural high-cost support ensures reasonable comparability of
    rates.

39. Some commenters suggest that, in light of the court's decision, it
    would be more appropriate to use a benchmark based on average urban
    cost, rather than nationwide average cost.[^97] The Joint Board
    recommends that the Commission continue to use a nationwide cost
    benchmark. The national benchmark is intended to ensure that each
    state has a relatively equal ability to achieve reasonable
    comparability of urban and rural rates. We do not agree that an
    urban **cost** benchmark would better satisfy the statutory
    comparison of urban and rural **rates**. Like the current mechanism,
    the urban benchmark substitutes costs for rates. In addition, rather
    than comparing rural and urban costs, it compares statewide average
    costs to nationwide urban costs.[^98]

40. The urban benchmark proposal would require more funding or a higher
    benchmark level because urban average costs are lower than national
    average costs. For example, an urban benchmark of 165% would yield
    roughly the same support amounts as the current 135% national
    benchmark. An urban benchmark of less than 165% would require more
    federal support. The *GAO Report* suggests that more federal support
    is not necessary because urban and rural rates are similar.
    Proponents of the urban benchmark have not explained how additional
    funding produced by an urban benchmark would produce reasonably
    comparable rates, nor have they provided a rational justification
    for setting the benchmark at any particular level.

41. The urban benchmark proposal is premised in part on the argument
    that the current 135% national benchmark cannot enable rate
    comparability because it is equivalent to about 165% of urban
    average cost, near the 70-80% range of variability that the court
    doubted was reasonably comparable. As explained above, however,
    rates do not necessarily equate to costs, so setting a 135% national
    benchmark (or 165% urban benchmark) does not mean intrastate rates
    will vary to the same degree. For the same reason, establishing cost
    support based on an urban benchmark will not ensure that urban and
    rural rates will be reasonably comparable. Because the urban
    benchmark proposal does not improve the operation of the high-cost
    support mechanism, nor address the rate comparability concerns of
    the court, the Joint Board recommends that the current national
    benchmark be retained, supplemented by rate review to ensure
    comparability of urban and rural rates.

42. As discussed above, a "step function" provides gradually more
    support for costs that exceed certain thresholds or "steps" above
    the national average.[^99] BellSouth supports the 135% benchmark,
    but proposes an additional, lower benchmark to provide some support
    to carriers in states with average costs between 100 and 135% of the
    national average cost. BellSouth proposes a step function as a means
    of distributing support more widely among states and, thereby,
    inducing states to ensure reasonable comparability of urban and
    rural rates. As discussed above, the purpose of non-rural high-cost
    support is to provide sufficient support to enable high-cost states
    to develop reasonably comparable rates. Providing additional support
    merely to induce states to ensure rate comparability without
    determining that additional support is necessary may conflict with
    the principle that support should be only as large as necessary.
    Nevertheless, a step function could promote predictability by
    preventing a total loss of federal support if small cost changes
    cause a state's average cost per line to fall below the dollar
    amount of the 135% benchmark in a given year.[^100] We believe that
    use of a step function may have benefits and warrants further
    consideration; however, the Joint Board does not recommend that the
    Commission add a step function to the non-rural high-cost support
    mechanism at this time. In light of the need to respond
    expeditiously to the court's remand, the Joint Board expects to
    address the issue of a step function in its comprehensive review of
    the rural and non-rural support mechanisms.

## Reasonable Comparability and State Inducements 

### Background

43. Section 254(b)(3) states that "\[c\]onsumers in all regions of the
    Nation, including low-income consumers and those in rural, insular,
    and high-cost areas, should have access to telecommunications and
    information services ... at rates that are reasonably comparable to
    rates charged for similar services in urban areas."[^101] In the
    *Seventh Report and Order*, the Commission adopted the Joint Board's
    interpretation of "reasonably comparable" as "a fair range of
    urban/rural rates both within a state's borders, and among states
    nationwide."[^102] Noting that "\[t\]he Joint Board and the
    Commission have concluded that current rate levels are
    affordable\[,\]" the Commission further explained that "we interpret
    the goal of maintaining a 'fair range' of rates to mean that support
    levels must be sufficient to prevent pressure from high costs and
    the development of competition from causing unreasonable increases
    in rates above current, affordable levels."[^103] In the *Ninth
    Report and Order*, the Commission also stated "reasonably comparable
    must mean some reasonable level above the national average
    forward-looking cost per line, i.e., greater than 100% of the
    national average."[^104]

44. The court found the Commission's definition of "reasonably
    comparable" inadequate, and required a more precise definition "that
    reasonably relates to the statutory principles\[.\]"[^105] The court
    stated that the "fair range" definition

    does not help answer the questions that arise about reasonable
    comparability. For example, Vermont and Montana assert that some
    rural rates will be 70-80% higher than urban rates under the FCC's
    funding mechanism. We fail to see how the FCC's definition of
    'reasonably comparable' illuminates this dispute. Does the FCC
    contend, for example, that a 70-80% discrepancy is within a 'fair
    range' of rates? We doubt that the statutory principle of
    'reasonabl\[e\] comparab\[ility\]' can be stretched that far.[^106]

    The court also stated that the Commission's further definitions were
    little more precise than the first and, in any event, were not
    reasonable interpretations of the statutory language: "The Act calls
    for reasonable comparability between rural and urban rates: these
    definitions simply substitute different standards."[^107]

45. The court also required the Commission to develop mechanisms to
    induce state action to ensure reasonable comparability of rural and
    urban rates.[^108] In the *Ninth Report and Order*, the Commission
    adopted the Joint Board's recommendation that it "abstain from
    requiring any state action as a condition for receiving federal
    high-cost service support (other than state
    certifications)\[.\]"[^109] The Commission found it most appropriate
    for states to determine how non-rural high-cost support is used,
    "\[b\]ecause the support . . . is intended to enable the reasonable
    comparability of *intrastate* rates, and states have primary
    jurisdiction over intrastate rates\[.\]"[^110] As a regulatory
    safeguard, the Commission required states that wish to receive
    non-rural high-cost support to certify annually that all such
    support will be used in a manner consistent with section
    254(e).[^111]

46. The court, noting that the Act "plainly contemplates a partnership
    between the federal and state governments to support universal
    service\[,\]" agreed that "it is appropriate---even necessary---for
    the FCC to rely on state action in this area."[^112] The court found
    fault, however, with the Commission's reliance on states to "act on
    their own to preserve and advance universal service\[,\]" without
    inducing states to provide for rate comparability as required by the
    statute.[^113] The certification process did not meet the court's
    concerns because it failed to address rate comparability.[^114] On
    remand, the court held that the Commission must "create some
    inducement---a 'carrot' or a 'stick,' for example, or simply a
    binding cooperative agreement with the states---for the states to
    assist in implementing the goals of universal service."[^115]

47. As stated above, the Joint Board and Commission determined
    previously that current rates generally are affordable,[^116] and
    the Commission interpreted the goal of maintaining a "fair range" of
    rates to mean sufficient support to prevent "unreasonable increases
    in rates above current, affordable levels."[^117] Some commenters
    contend that the *GAO Report* shows that rates remain affordable and
    reasonably comparable.[^118] Among other things, the General
    Accounting Office (GAO) found that there was no statistical
    difference in residential local telephone rates between central
    city, suburban, and rural places.[^119] Other commenters contend
    that the GAO's findings are not meaningful because the rates
    compared are not adjusted to account for the varying factors that
    may be included in rates in different jurisdictions.[^120]

48. The GAO gathered data on basic local telephone rates from state
    commissions for sampled locations throughout all fifty states and
    the District of Columbia.[^121] Within each state, the GAO randomly
    selected places from three broad categories associated with
    population density: central city, suburban (other places within a
    metropolitan statistical area (MSA)), and rural (outside MSA). For
    most states, the GAO chose three places in each of the categories
    (and four or five in larger states). The *GAO Report* provides a
    chart showing the average residential rate as approximately
    \$15.00.[^122]

49. In addition to the *GAO Report*, rate data is available from the
    Commission's own sources. The Commission's Wireline Competition
    Bureau (Bureau) has conducted an annual survey of local telephone
    rates in 95 urban areas for the past 15 years.[^123] The most recent
    survey indicates that the average urban rate paid by residential
    customers for flat-rate touch-tone calling is \$21.84.[^124] Unlike
    the *GAO Report*, the average urban rate in the Bureau's study
    includes federal and state subscriber line charges, and other fees
    which consumers must pay each month in order to receive basic
    telephone service.

### Discussion

50. The Joint Board recommends that the Commission implement a procedure
    that will induce states to achieve reasonably comparable rates and
    enable the Commission to take additional action, if necessary, to
    achieve comparable rates. Specifically, the Joint Board recommends
    the Commission expand the current annual certification process under
    Section 254(e) of the Act to require states to certify that the
    basic service rates in high-cost areas served by eligible
    telecommunications carriers (ETCs) within the state are reasonably
    comparable to a national rate benchmark. For purposes of this state
    certification process, the Joint Board recommends that high-cost
    areas be defined as all wire centers with a line density less than
    540 lines per square mile.[^125] As part of the certification
    process, all states should be required to compare basic service
    rates based on a standard template. The Commission should also
    establish a "safe harbor" whereby a state whose rates are at or
    below a certain rate benchmark may certify that their basic service
    rates in high-cost areas are reasonably comparable without the
    necessity of submitting rate information. However, states would have
    the option of submitting additional data to demonstrate that other
    factors affect the comparability of their rates. If a state's rates
    are more than the rate benchmark, the state could request further
    federal action based on a showing that federal support and state
    actions together were not sufficient to yield reasonably comparable
    basic service rates statewide. Further federal actions could
    include, but are not limited to, additional targeted federal
    support, or actions to modify calling scopes or improve quality of
    service where state commissions have limited jurisdiction. A state
    requesting further federal action must show that it has already
    taken all actions reasonably possible and used all available state
    and federal resources to make basic service rates reasonably
    comparable, but that rates nevertheless fall above the benchmark. A
    state whose basic service rates exceed the rate benchmark and that
    requests further federal action should be required to submit rate
    data in support of its certification, based on a basic service rate
    template. The Joint Board recognizes that it may be appropriate to
    use 135% for the safe harbor rate benchmark, but recommends that the
    Commission further develop the record to establish the appropriate
    rate benchmark for the safe harbor.

51. The Joint Board believes that this expanded certification process
    meets the court requirement to induce state action to achieve rate
    comparability. With any support mechanism, the proof of success must
    be evaluated not only on whether the mechanism as a whole generally
    achieves rate comparability, but also upon the degree and nature of
    any exceptions. The court criticized the Commission for failing to
    adequately reconcile its conclusion that rates were generally
    comparable in light of instances where state rates were reportedly
    high.[^126] Together with federal non-rural high-cost support, the
    expanded certification process will ensure that rates "...in all
    regions of the Nation...are reasonably comparable..." as set forth
    in section 254(b)(3).[^127] The expanded certification process
    encourages states to scrutinize their rates using the basic service
    rate template, to determine whether they are reasonably comparable,
    and if not, to take actions to make them reasonably comparable. When
    state basic service rates are at or below the rate benchmark level,
    then there should be a presumption that rates in that state are
    reasonably comparable to national urban rates. This recommended
    approach affords the states maximum flexibility to determine basic
    service rates. The Commission should accord substantial deference to
    these state certifications.

    i\. Rate Benchmark

52. As an initial matter, the Joint Board recommends that the Commission
    base the rate benchmark on the most recent average urban residential
    rate as shown in the Bureau's *Reference Book,* as modified to
    reflect the most recent changes in subscriber line charges
    (SLC).[^128] The average urban rate can be adjusted annually based
    on data from the Bureau's annual rate survey. The Joint Board
    recognizes that it may be appropriate to use 135% for the safe
    harbor benchmark.[^129] Use of a 135% rate benchmark is consistent
    with the national average cost benchmark of 135%.[^130] The Joint
    Board believes that, since cost-based support is provided to ensure
    statewide average costs do not exceed 135% of the national average,
    most states should be able to maintain average rates below 135% of
    the national average urban rate. Based on the current national
    average urban rate, as adjusted, a 135% rate benchmark would be
    \$30.16 per line per month.[^131] The Joint Board recommends that
    the Commission further develop the record to establish the
    appropriate rate benchmark for the safe harbor.

53. The Joint Board emphasizes that any rate benchmark established is
    meant simply as a "safe harbor" for the purposes of determining rate
    comparability. The Joint Board does not suggest through this
    Recommended Decision that it is appropriate that any rates be
    increased to that level. The Joint Board recognizes and supports the
    role of state commissions in setting rates within each state. The
    Joint Board recommends requiring that states review only residential
    rate information at this time. The Joint Board suggests that it may
    be appropriate to solicit comment as to whether only residential or
    residential and business rates eventually should be reviewed by the
    states.

    ii\. Basic Service Rate Template

54. The Joint Board recommends that the Commission establish a basic
    service rate template for states to use to compare rates. We suggest
    that the basic service rate template should include the items
    contained in the annual rate survey by the Bureau. The Joint Board
    recommends that the template include the following factors: the rate
    for a line with access to the public switched network, federal
    subscriber line charge, state subscriber line charge (if any),
    federal universal fund charge, state universal fund charge (if any),
    local number portability charge, telecommunications relay service
    charge, 911 charges,[^132] federal universal service credits (if
    any), state universal service credits (if any) and the federal
    excise tax.

    iii\. Expanded Rate Certification Process

55. The expanded state certification process would augment the existing
    state certification under section 254(e) of the Act. The existing
    procedure requires states to certify that all ETCs that receive
    federal universal service funding are using the funds to achieve the
    goals of the Act. The new procedure would expand reporting
    requirements to include a discussion of rate comparability. In the
    expanded certification process, states typically would report in one
    of four ways:

```{=html}
<!-- -->
```
a.  Rates within the state fall below the benchmark and are considered
    by the state to be reasonably comparable. No further showing should
    be required.

b.  Rates are not below the benchmark, but may nevertheless be
    considered reasonably comparable. A state could show that due to
    other factors \-- for example, additional services included in the
    basic service rate or the method in which the state has targeted
    existing universal service support \-- the rates above the benchmark
    actually should be presumed reasonably comparable. In the
    alternative, the state could report on actions it intends to take to
    achieve reasonable comparability.

c.  Rates are below the benchmark, but are not reasonably comparable. A
    state may show that even though actual rates are within the safe
    harbor, the price paid for service received results in rates and
    services that are not reasonably comparable. In this case, a state
    could show that existing basic service is lacking in some way. For
    example, the state could show that the local calling area size is
    too small to be considered comparable service, and that toll or
    extended area service charges should be included to produce a
    reasonably comparable rate. In addition to explaining why rates
    within the safe harbor should not be considered reasonably
    comparable, the state must also show the actions it has taken or is
    going to take to remedy the discrepancy, prior to requesting
    additional federal actions to achieve reasonably comparable rates.

d.  Rates are above the benchmark and are not reasonably comparable. A
    state could request federal action based on a showing that current
    combined federal and state actions are insufficient to produce
    reasonably comparable rates. If the state asserts that existing
    federal support and state resources are not sufficient for the state
    to attain reasonably comparable rates, the state should be required
    to show that it has already taken all available steps to remedy the
    situation, but that rates remain above the benchmark. If the state
    can make this showing, the Commission would consider taking further
    action to meet the needs of the state in achieving reasonably
    comparable rates.[^133]

```{=html}
<!-- -->
```
56. The Joint Board recommends that states certifying that their rates
    fall at or below the national rate benchmark and are reasonably
    comparable should not be required to submit any additional rate
    information. Any states requesting additional federal action should
    be afforded great flexibility in making their presentations, but
    should be required to fully explain the basis for their request.
    Factors that should be addressed by any such state would include,
    but not be limited to: rate analysis and a demonstration why the
    state contends that rates are not reasonably comparable; any other
    factors that should be considered in evaluating rates; and a
    demonstration that the state has taken all reasonably possible steps
    to develop maximum support from within the state. The requesting
    state should fully explain how it has used any federal support
    currently received to help achieve comparable rates and whether the
    state has implemented a state universal service fund to support
    rates in high-cost areas of that state. The Joint Board recommends
    the Commission develop exact procedures to be used in filing and
    processing requests for further federal actions. In particular, the
    Joint Board recommends that the Commission establish a time limit
    for consideration of such state requests, to ensure that requests
    will be processed and decided expeditiously.

# ReCOMmending clause

57. For the reasons discussed herein, this Federal-State Joint Board
    pursuant to section 254(a)(1) and section 410(c) of the
    Communications Act of 1934, as amended, 47 U.S.C. §§ 254(a)(1) and
    410(c), recommends that the Commission adopt the proposals describe
    above relating to issues from the *Ninth Report and Order* that were
    remanded to the Commission by the United States Court of Appeals for
    the Tenth Circuit.

    FEDERAL COMMUNICATIONS COMMISSION

    Marlene H. Dortch Secretary

**APPENDIX A**

**STATE COST CLUSTER ANALYSIS**

<table>
<colgroup>
<col style="width: 18%" />
<col style="width: 0%" />
<col style="width: 12%" />
<col style="width: 15%" />
<col style="width: 8%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="2"><strong>STATE</strong></td>
<td><p><strong>State</strong></p>
<p><strong>CPL</strong></p></td>
<td><p><strong>CPL</strong></p>
<p><strong>Difference</strong></p></td>
<td colspan="7"><strong>Cluster Split Differences</strong></td>
</tr>
<tr class="even">
<td></td>
<td colspan="2"></td>
<td></td>
<td><strong>2.50</strong></td>
<td><strong>2.00</strong></td>
<td><strong>1.55</strong></td>
<td><strong>1.50</strong></td>
<td><strong>1.00</strong></td>
<td><strong>0.85</strong></td>
<td><strong>0.50</strong></td>
</tr>
<tr class="odd">
<td colspan="2">Dist. Of Col.</td>
<td>16.0313</td>
<td> </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td> </td>
</tr>
<tr class="even">
<td colspan="2">New Jersey</td>
<td>18.09308</td>
<td>2.061777043</td>
<td></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
</tr>
<tr class="odd">
<td colspan="2">California</td>
<td>18.36228</td>
<td>0.269202909</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Massachusetts</td>
<td>19.18045</td>
<td>0.818170743</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="odd">
<td colspan="2">New York</td>
<td>19.546</td>
<td>0.365544777</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Nevada</td>
<td>19.71822</td>
<td>0.172222482</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Florida</td>
<td>19.86697</td>
<td>0.148755428</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Maryland</td>
<td>19.90223</td>
<td>0.035252677</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Rhode Island</td>
<td>19.99115</td>
<td>0.088927016</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Pennsylvania</td>
<td>20.64201</td>
<td>0.650853312</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="odd">
<td colspan="2">Arizona</td>
<td>20.7334</td>
<td>0.091390437</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Hawaii</td>
<td>20.77071</td>
<td>0.037317385</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Illinois</td>
<td>20.7727</td>
<td>0.001985659</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Utah</td>
<td>21.19423</td>
<td>0.421532696</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Virginia</td>
<td>21.87975</td>
<td>0.685516771</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">Texas</td>
<td>21.90215</td>
<td>0.022404339</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Alaska</td>
<td>22.01712</td>
<td>0.114966706</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Connecticut</td>
<td>22.06188</td>
<td>0.044759922</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Georgia</td>
<td>22.14027</td>
<td>0.078388394</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Minnesota</td>
<td>22.25597</td>
<td>0.11569615</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Washington</td>
<td>22.31244</td>
<td>0.056473756</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Wisconsin</td>
<td>22.71888</td>
<td>0.406439276</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">North Carolina</td>
<td>23.18681</td>
<td>0.467928123</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Colorado</td>
<td>23.35272</td>
<td>0.16591541</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Ohio</td>
<td>23.36297</td>
<td>0.010249713</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Oregon</td>
<td>23.41386</td>
<td>0.050887279</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Michigan</td>
<td>23.50088</td>
<td>0.087019363</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">North Dakota</td>
<td>23.97012</td>
<td>0.469238239</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Indiana</td>
<td>24.18936</td>
<td>0.219238314</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Iowa</td>
<td>24.28756</td>
<td>0.098201185</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Kansas</td>
<td>24.71672</td>
<td>0.42916505</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Puerto Rico</td>
<td>24.88505</td>
<td>0.168325153</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Missouri</td>
<td>25.07276</td>
<td>0.187712385</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">New Hampshire</td>
<td>25.09483</td>
<td>0.022071128</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">New Mexico</td>
<td>25.7026</td>
<td>0.607770941</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">South Carolina</td>
<td>26.05983</td>
<td>0.357227222</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Tennessee</td>
<td>26.37502</td>
<td>0.315191549</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Oklahoma</td>
<td>26.38137</td>
<td>0.006345897</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Louisiana</td>
<td>26.41917</td>
<td>0.037807808</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Idaho</td>
<td>26.9214</td>
<td>0.502222235</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="odd">
<td colspan="2">South Dakota</td>
<td>27.77254</td>
<td>0.851149266</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">Arkansas</td>
<td>27.96557</td>
<td>0.193025237</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Nebraska</td>
<td>28.20475</td>
<td>0.239177138</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Kentucky</td>
<td>29.78325</td>
<td>1.578497802</td>
<td></td>
<td></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
</tr>
<tr class="odd">
<td colspan="2">Maine</td>
<td>30.41798</td>
<td>0.634734615</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">Alabama</td>
<td>31.64293</td>
<td>1.22494751</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
</tr>
<tr class="odd">
<td colspan="2">Vermont</td>
<td>32.37634</td>
<td>0.733413484</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">Montana</td>
<td>32.72822</td>
<td>0.351882006</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">West Virginia</td>
<td>33.43617</td>
<td>0.7079476</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">Wyoming</td>
<td>33.71669</td>
<td>0.2805202</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td colspan="2">Mississippi</td>
<td>37.78217</td>
<td>4.065475787</td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
<td><strong>*</strong></td>
</tr>
<tr class="even">
<td colspan="2">Nat. Average</td>
<td>21.92357</td>
<td colspan="8"></td>
</tr>
<tr class="odd">
<td colspan="2">135% of Avg.</td>
<td>29.59681</td>
<td colspan="8"></td>
</tr>
</tbody>
</table>

Note: The asterisks (\*) indicate which states have a Cost per Loop
(CPL) difference that exceeds the cluster split difference.

**APPENDIX B**

**PARTIES FILING INITIAL COMMENTS**

**[Commenter]{.underline} [Abbreviation]{.underline}**

AT&T Corp. AT&T

Beacon Telecommunications Advisors, LLC Beacon

BellSouth Corporation BellSouth

Competitive Universal Service Coalition CUSC

General Communications, Inc. GCI

Maine Public Service Commission Rural State Commissions

Montana Public Service Commission

and Vermont Public Service Commission

Massachusetts Department of Telecommunications

And Energy MDTE

Missouri Office of the Public Counsel MOPC

National Rural Telecom Association

and Organization for the Promotion and

and Advancement of Small Telecommunications

Companies NRTA and OPASTA

National Telecommunications Cooperative Association NTCA

Ohio Consumers' Counsel, Maryland Office of

People's Counsel, Maine Public Advocate

Office, Texas Office of Public Utility Counsel

And Pennsylvania Office of Consumer Advocate OCC et al.

Qwest Communications International, Inc. Qwest

Rural Iowa Independent Telephone Associaton RIITA

SBC Communications, Inc. SBC

Texas, Public Utility Commission Texas PUC

United States Telecom Association USTA

Verizon telephone companies Verizon

**APPENDIX C**

**PARTIES FILING REPLY COMMENTS**

**[Commenter]{.underline} [Abbreviation]{.underline}**

AT&T Corp. AT&T

Florida Public Service Commission FPSC

GVNW Consulting, Inc. GVNW

Maine Public Service Commission Rural State Commissions

Montana Public Service Commission

and Vermont Public Service Commission

National Telecommunications Cooperative Association NTCA

Ohio Consumers' Counsel, Maryland Office of

People's Counsel, Maine Public Advocate

Office, Texas Office of Public Utility Counsel

And Pennsylvania Office of Consumer Advocate OCC et al.

Qwest Communications International, Inc. Qwest

SBC Communications, Inc. SBC

Sprint Corporation Sprint

Verizon telephone companies Verizon

Wyoming Public Service Commission WPSC

**SEPARATE STATEMENT OF COMMISSIONER KATHLEEN Q. ABERNATHY**

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

I applaud the Joint Board's recommended decision that responds to issues
raised by the remand of the Commission's non-rural mechanism by the
Tenth Circuit in *Qwest Corp. v. FCC*.[^134] Today's recommended
decision responds to the court in several important respects. First, the
Commission provides a more rigorous analysis of the cost data in the
record to establish the cost-based benchmark that triggers support for
non-rural carriers. Utilizing cluster and standard deviation analyses,
the Joint Board concludes that a benchmark set at 135% of national
average cost is the appropriate trigger for federal support. This
conclusion is consistent with the results of a recent General Accounting
Office study that concluded that current rural and urban rates were not
appreciably different under our existing universal service support
structure.[^135] As a result, I do not believe that the case has been
made for radically altering the benchmark. The underlying data and the
ultimate apparent success of our existing structure counsel a more
consistent approach.

Although some have been critical of this data, there is nothing in the
record that recommends a different result. Moreover, basing the
benchmark on an urban average cost would not alone alter the level of
support, but it would create a false sense of urgency around requiring
higher levels of support ― a conclusion unsupported by the statistical
data or the GAO study. Our goal is to provide federal support based on
costs that permit states to set urban and rural rates that are
reasonably comparable. Granting support to high-cost states so that
their net costs more closely resemble the national average is designed
to allow them to set rates close to the national average. In turn, this
process should result in urban and rural rates that are reasonably
comparable. In contrast, a national urban average (a number inherently
lower than the national average) would use federal support to drive
costs down to the lower-than-average urban level without any evidence
that affordability concerns warrant such a step. Our paramount goal in
this proceeding is to ensure reasonably comparable rates ― not to
provide federal support to reduce the overall rate structure. Indeed,
establishing a massive subsidy to drive rates down not only is
unsupported by existing data on affordability but also would threaten to
undermine our ability to provide support to other universal service
programs that also have significant needs.

Second, the Joint Board has responded to the court's charge to create a
state inducement mechanism to ensure that the rates actually paid by
consumers are reasonably comparable. By requiring states to provide a
certification and data about the comparability of urban and rural rates,
the Commission ensures that ultimate rates as engineered by the state
regulators reflect the same equity as the cost analysis and support
provided at the federal level. In the event that state action and
federal cost-based support prove insufficient, we have also created a
mechanism for states to make individualized showings that modification
of the cost benchmark or additional tailored support is warranted.

All members of the Joint Board worked extremely hard to develop this
process to ensure the continued success of the universal service support
mechanism for non-rural carriers. We are all deeply committed to this
goal. I look forward to working with my colleagues at the FCC and the
Commission's staff to review these recommendations and promptly
implement a non-rural support mechanism consistent with the Tenth
Circuit's directives.

**STATEMENT OF**

**COMMISSIONER MICHAEL COPPS**

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

A core principle of the Telecommunications Act of 1996 is that all
Americans should have access to reasonably comparable services at
reasonably comparable rates. Congress was particularly concerned about
consumers in rural, insular, and high-cost areas, whether served by
rural or non-rural carriers.

In this Recommended Decision on a mechanism for high-cost support for
non-rural carriers, the Joint Board recommends the use of statewide
average costs in an initial effort to direct support to high-cost
states. I support this methodology, but only insofar as there is an
effective comparison of rural and urban rates at the end of the process
to ensure that the statutory directive is met.

The Joint Board recommends that the Commission establish a safe harbor
for comparing urban and rural rates, and provide any additional funding
to reach this benchmark. The Joint Board indicates that 135 percent may
be the appropriate benchmark. I do not find adequate evidence in the
record to demonstrate that a rural rate for telephone service that is
135 percent higher than the average urban rate in this country is
necessarily or reasonably comparable. Nevertheless, I support this
Recommended Decision because the Joint Board expressly requests that the
Commission further develop the record to establish the appropriate
benchmark. I look forward to a full record on this issue from a wide
variety of stakeholders when the Commission takes up this proceeding.

Finally, I emphasize that this Recommended Decision applies only to
non-rural carriers serving rural America. The Joint Board has recognized
that the assumptions in this decision such as using statewide average
costs may well not be appropriate for rural carriers. I urge the
Commission and the Joint Board to move forward expeditiously to address
outstanding issues related to the high-cost mechanism for rural carriers
to ensure that sufficient support is provided as required by the
statute.

Congress has been clear -- our duty is to ensure that comparable
technologies are available all across this nation at affordable and
roughly equivalent rates. Each and every citizen of this great country
should have access to the wonders of communications. The statute and the
public interest require no less.

**SEPARATE STATEMENT OF BILLY JACK GREGG,**

**DIRECTOR OF THE CONSUMER ADVOCATE DIVISION,**

**PUBLIC SERVICE COMMISSION OF WEST VIRGINIA**

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

Rates matter. Congress said so in the Telecommunications Act of 1996.
Now, nearly seven years after the passage of the Act, the Joint Board
has taken action to ensure that the real rates that real customers pay
will be the ultimate test of the success of state and federal universal
service policies. Telecommunications customers throughout the nation
will be the beneficiaries of this decision.

In Section 254(b)(3) of the Act, Congress established the federal
universal service principle that "...consumers in all regions of the
Nation, including low-income consumers and those in rural, insular and
high-cost areas, should have access to telecommunications ... **at rates
that are reasonably comparable to rates charged for similar services in
urban areas**." \[Emphasis added.\] Although the wording of the Act is
clear, up until now the Joint Board and FCC have designed universal
service support mechanisms which steadfastly avoided consideration of
the rates consumers actually pay.

The 10^th^ Circuit Court of Appeals rejected the FCC's argument that it
had "...no duty to ensure the reasonable comparability of rural and
urban rates... ."[^136] The Court held that the FCC was "...obligated to
formulate its policies so as to achieve the goal of reasonable
comparability..." and "...then to assess whether its funding mechanism
will be sufficient for the principle of making rural and urban rates
reasonably comparable."[^137]

In response to the Court's remand, the Joint Board has finally added the
critical missing piece to the existing funding mechanism. The procedures
recommended by the majority in this decision will incorporate a rate
review by the states as a part of the certification required under
Section 254(e) of the Act. Such review should induce the states to take
actions to use existing state and federal resources to achieve rates
which are comparable to a national urban standard. If existing resources
are inadequate, the states may request additional federal actions to
enable comparable rates, including supplementary rate support. By
definition, any additional federal funding will be targeted and
sufficient to achieve the statutory goal of comparable rates. This
common sense approach will properly respect the complementary roles of
the federal and state authority in achieving rate comparability, and
fairly balance the interests of high-cost and low-cost states in funding
demonstrated universal service needs.

The universal service principle of rate comparability contained in the
Act means that regardless of the evolution and vicissitudes of the
competitive telecommunications market, the rates that consumers pay for
basic services in the most rural and remote areas of our Nation will
stay within shouting distance of the rates paid by their urban cousins.
As the dynamic forces unleashed by the introduction of competition into
all areas of telecommunications continue to surprise us, universal
service provides a safety net that ensures that all Americans will
benefit from this revolution, even if competitive choices are not
immediately available in any particular area. The procedures we
recommend in this decision will go a long way toward making the
universal service promise contained in the Act a reality, now and in the
future.

**STATEMENT OF**

**COMMISSIONER KEVIN J. MARTIN**

**Approving in Part, Dissenting in Part**

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

I wish to thank all my colleagues on the Federal-State Joint Board for
their hard work and contributions in the effort to reach consensus on
the important issue of establishing a universal service support system
for non-rural carriers. I believe that today's effort, however, falls
short in meeting our obligation to ensure that consumers living in rural
and high cost areas have access to similar telecommunications services
at rates that are reasonably comparable to rates paid by urban
consumers.

Congress gave the Commission a clear mandate: to ensure that consumers
in all regions of the nation have access to services that "...are
reasonably comparable to those services provided in urban areas and that
are available *at rates that are reasonably comparable to rates*
*charged* *for similar services in urban areas* (emphasis added)."[^138]
Congress' direction is also clear regarding the obligation to establish
mechanisms that are "...specific, predictable and sufficient...to
preserve and advance universal service."[^139] In remanding the
Commission's previous attempt to establish a federal-high cost universal
service support mechanism for non-rural carriers, the United States
Court of Appeals for the Tenth Circuit agreed that these fundamental
guiding principles govern Commission action on any policies regarding
universal service support mechanisms.[^140]

Despite this remand, the majority's recommendation essentially reaffirms
the Commission's existing universal service support mechanism for
non-rural carriers. The decision continues to base support on forward
looking costs and creates a sparsely defined second supplemental support
system based on rate comparisons. Today's recommendation falls short in
its response to the court mandate that we define the statutory term
"reasonably comparable" for purposes of the cost-based support mechanism
and fails to demonstrate, with any degree of specificity, how the
proposed secondary mechanism will satisfy the statutory requirement that
universal service support be "specific, predictable and sufficient."

For these and the reasons explained below, I respectfully dissent from
portions of the majority opinion today.[^141]

[Use of Costs as a Surrogate for Rates to Determine Non-Rural High Cost
Support]{.underline}

Section 254(b)(3) of the Communications Act requires that universal
service support mechanism ensure that telecommunications services in all
regions of the nation be provided at reasonably comparable "rates." The
majority, however, recommends continuing the practice of using costs
rather then rates to determine federal support. I am not convinced that
a mechanism based solely on [costs]{.underline} would meet the statutory
mandate requiring a comparison of [rates]{.underline}.

Moreover, I fear that the recommended decision may be either arbitrary
or not fully thought through. If the Joint Board is confident that a
cost-based support system satisfies our statutory obligation to produce
reasonably comparable rates, then why does it propose establishing an
entirely new support mechanism based on rate comparisons? Similarly, if
the Commission were to adopt the Joint Board's recommended "supplemental
rate comparability review," why should it not abandon the cost-based
support mechanism and instead rely solely on the rate-based support
mechanism? If we need the supplemental rate comparison to meet our
statutory obligation, would it not be simpler to have only one mechanism
rather than two? These questions seem to remain unanswered by the
majority.

The majority's rejection of rate-based distribution and support for a
cost-based mechanism is based on two arguments: (i) an analysis of
disparate local rate design practices throughout the nation remains too
difficult a task; and (ii) the use of costs reflects the federal
government's primary obligation to support only those states that "do
not have the resources within their borders to support all of their high
cost lines."[^142] In my view, both of these arguments fail to support
the Joint Board's position.

First, in response to the argument that such an analysis is too
difficult, the majority appears to create just such an analysis in its
"supplemental rate comparability review." The majority also fails to
note or even address the fact that many of the issues and data necessary
to perform a rate-based comparison will be needed in the context of
initiating the proposed catch all "supplemental rate comparability
review." On its face, one well-defined support mechanism based on rate
comparisons would appear to present an equal or lesser administrative
burden for the Commission, the states and carriers compared to the dual
[cost-based and rate-based]{.underline} mechanisms recommended by the
majority today.

The majority's recommendation also contains an inherent presumption that
the federal government's role in establishing a support mechanism is
apparently limited to equalizing cost discrepancies between states but
not equalizing rate discrepancies between rural and urban areas.[^143] I
disagree. The statute is clear. Our job is to ensure that services in
rural and high cost areas are "available at rates that are reasonably
comparable to rates charged for similar services in urban areas."[^144]
The 10^th^ Circuit explicitly rejected the FCC's contention that it had
no duty to ensure the reasonable comparability of rural and urban rates
and stated that we are "obligated to formulate policies so as to achieve
the goal of reasonable comparability..."[^145]

In my view, if the Commission is only going to address discrepancies
between and among states, then there must be a requirement that states
address such discrepancies within their borders. Whether such a
requirement compels rate averaging within states or requires that a
state universal service mechanism be in place, such action must address
differences in cost between rural and urban areas. Yet this decision
fails to require that such inequities between urban and rural rates be
addressed.[^146]

The proposed expanded rate certification mechanism is insufficient.
Under the proposed certification process, states would be permitted to
report rates that are not "reasonably comparable" according to the
benchmark. Such rates could eventually be allowed to meet the
"reasonably comparable" standard if a state demonstrates "additional
services included in the basic service rate" or by outlining "the method
in which the state has targeted existing universal service
support."[^147] In my view, such a certification process is insufficient
without a standard enunciating the allowable discrepancy for intrastate
rates.

[Sufficiency of High-Cost Support under the National Average Cost
Benchmark]{.underline}

Even if costs can be used as a surrogate, I question the majority's
recommendation to use the 135% benchmark to ensure that rural rates are
"reasonably comparable."

In deciding to proceed with a cost-based methodology to ensure
reasonably comparable "rural" and "urban" rates, we should compare
"rural" costs to average "[urban]{.underline}" costs. The Commission
certainly has data readily available to perform this comparison. Under
the Synthesis Cost model, cost data can be produced by density zone or
at the wire center level. Yet, the majority summarily rejects the
concept of an "urban benchmark," setting a benchmark at 135 percent of
[national]{.underline} average cost. In the process, the decision
sidesteps the question of whether the benchmark produces sufficient
support in light of the existing disparity between national average cost
and the lower average urban cost.

As Commissioner Rowe notes, the majority's rejection of the urban
benchmark is "confusing and unpersuasive."[^148] The majority never
tackles the uncomfortable fact that the 135 percent benchmark is too
high because [national]{.underline} average costs are already higher
than urban costs because they include in the national average the very
rural areas at issue. In other words, the high costs associated with
serving rural areas are used twice: once to raise the national average
and again in comparison.

Let me illustrate my concern with a simple example. If half of the
country lived in an urban area with costs of \$10 and the other half of
the country lived in a rural area with costs of \$30, the difference
between the costs of the average urban area and average rural area would
be \$20. But if a national average were taken, including the costs of
the rural areas, the national average cost would be \$20. If support
were then based on the difference between the rural cost (\$30) and 135%
of the [national]{.underline} average (1.35 x \$20=\$27), each rural
resident would have costs of \$27 (\$30-\$3 of support) and each urban
resident would have costs of \$13 (\$10 + \$3 of support). I do not
believe that such a methodology sufficiently addresses the reasonable
comparability of rural and urban costs. The inclusion of rural costs in
the average along with the adoption of a 135% benchmark systematically
underestimates the costs of rural areas.[^149]

Instead, the majority finds fault with the use of an urban benchmark
based on the fact that it "substitutes costs for rates" and "compares
statewide average costs to nationwide urban costs."[^150] The majority's
criticism appears strangely out of place given that its own
recommendation is also based on a cost-based support system. I find it
ironic that the majority can justify its "existing system on the ground
that costs equal rates, and at the same time rejects all changes on the
ground that costs do not equal rates."[^151]

It also rejects the urban benchmark because it would "require more
funding or a higher benchmark level because urban average costs are
lower than national average costs."[^152] I fail to see how the
potential for greater funding levels should prevent us from adopting a
support system that meets our statutory obligation.[^153] Indeed, I fear
that this reasoning reflects an analysis that concluded first that there
would be no additional funding for rural areas and second adopted a
mechanism to assess "reasonable comparability" that achieved that
result. I believe our statutory obligation was to achieve reasonably
comparable urban and rural rates even if that "requires more funding"
than the current system provides.

Nor do I understand how the majority reaches the conclusion that the
urban **cost** benchmark fails to "better satisfy the statutory
comparison of urban and rural **rates**."[^154] I join Commissioner Rowe
in questioning how the majority finds that additional "incremental
support would be ineffective at producing comparable rates, but existing
support passes the test."

In addition, I question the use of forward-looking costs as the basis
for distributing universal service support. Today, rates are set in most
states through the use of actual costs not hypothetical replacement
costs. Forward- looking costs have little, if any, nexus to the
establishment of end user retail rates. Use of these costs for
calculating universal service support results in support being provided
to some areas with low end user rates while certain areas that have high
rates receive insufficient support. In my view, we could better achieve
comparability of rates if we based our universal service support system
on actual rather than forward looking costs.

Finally, the majority cites three studies/analyses in support of its
decision to continue using the 135 percent benchmark. I disagree with
the majority's conclusion that these studies support its decision to
retain the benchmark. First, the majority points to the General
Accounting Office (GAO) study to show that national averages of rural,
suburban and urban rates are affordable and reasonably comparable. The
majority, however, fails to acknowledge serious deficiencies in the GAO
study that fail to support the use of the benchmark for non-rural
carriers.[^155] For example, the GAO study includes data from areas
served by rural carriers, areas that are not relevant to the
establishment of non-rural carrier support system. In addition, GAO's
rate comparison ignores whether rates in different service areas apply
to comparable services. Moreover, [national]{.underline} averages cited
by GAO do not assist the Commission in addressing our core
responsibility of whether rates in certain rural or high cost areas are
comparable to rates in urban areas, or even whether rates vary
significantly from state-to-state. To the contrary, as Commissioner Rowe
points out, GAO's data demonstrates a vast disparity on state rates
(e.g., residential rates at two Wyoming locations exceeding \$40 versus
residential rates in Roaring Springs, Texas of \$7.10).[^156]

I also join Commissioner Rowe's dissent asserting that a standard
deviation analysis fails to justify the current benchmark.[^157] I find
it particularly troubling that the majority arbitrarily raises the
benchmark to 135 percent even in light of its own analysis demonstrating
that 2.0 standard deviation above the national mean results in a 132
percent benchmark. The majority offers no reasoned basis why states
should be denied the additional \$.50 per customer per month of support
that would result by applying the results of the majority's own standard
deviation analysis.

[Supplementary Rate Review]{.underline}

The majority, in today's recommendation, sets forth an additional
supplemental process for rate comparison. It recommends adopting a new
and vaguely defined supplemental mechanism. Rather than provide a
clearly defined mechanism the majority instead offers an ad hoc process
where the specific mechanisms will apparently develop on a case-by-case
basis.[^158] The majority envisions a process where States seeking
additional federal support will be required to provide a "rate
analysis," and will have "great flexibility" in demonstrating that rates
are not reasonably comparable.[^159]

In my view, the majority's "supplementary rate review" is striking
similar to the state-by-state cost study approach the Commission had
originally rejected in order to pursue its flawed nation-wide universal
service cost model approach. Under the recommended state-by-state
approach, each state would have significant latitude to suggest its own
procedures for adjusting rates. Without specific guidelines or a clearly
defined standard, this approach appears to invite the potential for
uneven and potentially discriminatory results.

I am troubled that majority fails to offer any specific guidance on
critical areas of its newly proposed process. The item is silent, for
example, on whether states should alter rates to take into account the
scope of certain local calling areas or differing calling plans. In my
view, without an established standard or guidance for states in this
area, the poorly defined "supplementary rate review" will most likely
provide results, if any, that are highly susceptible to legal challenge.

Finally, Commissioner Rowe is correct in questioning whether the
proposed "supplementary rate review" would "create perverse incentives
for carriers."[^160] One of the reasons the Commission adopted the
forward-looking cost model was because it believed that an embedded-cost
support system promotes inefficient investment that would inhibit
competitive entry. I find it ironic that the majority now seeks to adopt
a rate-based mechanism that inherently relies on local rates which are
typically based on embedded costs.

**SEPARATE STATEMENT OF COMMISSIONER THOMAS J. DUNLEAVY**

**NEW YORK STATE PUBLIC SERVICE COMMISSION**

**Approving In Part and Dissenting In Part**

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

I support this Recommended Decision (RD) to the extent that it confirms
and endorses continued use of the Commission's existing high-cost
support mechanism for non-rural carriers. I agree with the Joint Board's
suggestion that existing rates are affordable and reasonably comparable.
I have seen no evidence that services and rates in "all regions of the
Nation" are not reasonably comparable. In my view, this confirms that
the existing mechanism, in concert with the other available federal
universal service support mechanisms, provides sufficient support to
achieve the purpose for which it is intended. I believe that the
standard deviation and cluster analyses cited in the RD provide
sufficient justification for the retention of both the existing
cost-based mechanism and its cost benchmark of 135% of the national
average forward-looking cost. Further, I agree that requiring states to
certify whether their rates are reasonably comparable responds
adequately, as I read it, to the Tenth Circuit\'s requirement that the
Commission somehow induce states to fulfill their own obligations to
ensure reasonably comparable rates.

I must respectfully dissent, however, from those portions of the RD that
suggest that states should be invited to seek additional "targeted"
support based on a comparison of rates and that a rate benchmark of 135%
of the average urban rate may be appropriate for making that comparison.
It does not appear to me that this suggestion is supported by the
evidence. Because the RD itself concludes that the record for choosing a
rate benchmark must be further developed, it should not suggest that any
particular value might be appropriate.

Having endorsed continued use of the current cost-based mechanism for
calculating non-rural support, the Joint Board then incongruously
suggests that states should be invited to seek supplemental support
based on an analysis of their rates. In so doing, it proposes creation
of two fundamentally different support mechanisms, between which each
recipient state would be invited to choose to use the more lucrative for
itself. The suggestion that such a supplemental support mechanism should
be created implies that the majority questions the sufficiency of its
primary cost-based mechanism. I do not.

As explained in the RD, it is extremely difficult, if not impossible, to
make meaningful rate comparisons among states. The RD hints at some of
the difficulties in paragraph 19, but ignores what, in my view, is
perhaps the largest problem - normalizing rates for the varying local
calling capabilities they may encompass. For this reason, the Joint
Board has now twice concluded that cost analysis, as a proxy for rate
analysis, is the preferred approach and the Commission has so agreed.
Nevertheless, the RD implies that the Commission will indeed be able to
create the necessary rules and algorithms to perform such
normalizations, make such rate comparisons and, most importantly,
determine appropriate amounts of supplemental support. With the greatest
respect and admiration for the skills of the Commission, I do not share
the majority's optimism on this score.

Additionally, I am also concerned that the RD may contemplate comparison
of each wire center\'s rate to a national benchmark rate in order to
calculate the proposed supplemental rate-based support. If so, it seems
to me that it would reverse its own finding that high-cost support
should be calculated based on statewide, not wire center, costs. That
would fundamentally alter the Commission's role in high cost support,
which as both the Joint Board and the Commission have found, is to
effect necessary state-to-state transfers of monies, not transfers
within states.

It appears to me that, in the final analysis, the uncertainty that
surrounds this ill-defined support proposal is its most troubling
attribute. Until the extremely difficult decisions have been made about
how to normalize rates and what criteria to apply in determining
supplemental support, it is impossible to even estimate how much support
it might produce or where that support might go. Potential recipients
cannot even guess how much support they ultimately will receive; payers
can only speculate on how much cost they will be asked to bear.
Consequently, the Commission will be hard pressed, in my view, to
explain to the court how its mechanism will, in fact, produce reasonably
comparable rates.

**SEPARATE STATEMENT OFCOMMISSIONER BOB ROWE,**

**MONTANA PUBLIC SERVICE COMMISSION**

**Dissenting**

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

I respectfully but strongly dissent from this Recommended Decision. The
10^th^ Circuit Court of Appeals required the FCC to demonstrate that the
statutory requirements of section 254 of the Act were met. In order to
do this, the FCC was required to define and recognize in its decision
certain key statutory terms, such as "reasonably comparable" which
animate section 254. The court also directed the Commission either to
explain how the 135 percent benchmark used in the current formula
complies with the established definition of "reasonably comparable" or
to establish a new benchmark that does meet the statutory requirements,
including the requirement of providing sufficient support to allow
states to achieve reasonably comparable rates. The Recommended Decision
fails these tasks.

The Recommended Decision does not demonstrate that the Joint Board has
impartially examined and addressed these questions. The recommended
decision does not even demonstrate that the Joint Board has considered
these issues in a manner that I believe was contemplated by the Court.
Rather, the Recommended Decision embraces a variety of flawed arguments
that purport to justify continuation of the status quo. I am unpersuaded
by these arguments and conclude that if the Recommended Decision were
adopted by the Commission some "nonrural" carriers (more properly large
companies serving high cost areas) would not receive sufficient support,
and rural rates *and services* in some states could not be reasonably
comparable to those in urban areas.

The majority concludes that the statute can be satisfied by two quite
different support systems: continuation of the existing system based on
forward-looking costs; and a second, supplemental, support system based
on rates. For different reasons, I conclude that each is seriously
flawed. Even taken together, they fail to provide sufficient support to
meet the legal requirements of the Act.

## Cost-Based Support

The majority recommends continuing primary reliance on the existing
cost-based support system, and continuation of the current 135 percent
benchmark. That benchmark is a critically important variable in the
support system. The benchmark is now set by rule at 135 percent of the
national average cost produced by the Commission's forward-looking cost
model.[^161] In 2002, that works out to \$29.60 per line per
month.[^162]

This "dollar benchmark" has a simple meaning for nonrural carriers: in
any state where the average unseparated forward-looking cost of
providing service is more than \$29.60, federal support will reduce the
net cost in that state to \$29.60. This is accomplished by a combination
of cost separation policy [^163] and universal service support.[^164]

A dollar benchmark that is too high produces two forms of harm. In the
very highest cost states, too little support is provided. The net costs
of high-cost carriers in those states necessarily remains too high,
above a level reasonably comparable to the net costs of carriers serving
urban areas. Second, states with somewhat lower cost receive no support
whatever, even though their costs are above the level that is reasonably
comparable to costs in urban areas.

The majority offers three justifications for keeping the 135 percent
benchmark: a study by the United States General Accounting Office (GAO),
"cluster analysis," and "standard deviation analysis." In my view, each
of these justifications has fundamental flaws, and none of them support
the majority's conclusion that the 135 percent benchmark should be
retained. Moreover, the Recommended Decision incorrectly rejects
arguments for an "urban benchmark" and overlooks substantial evidence
that the existing benchmark produces insufficient support to nonrural
carriers. Finally, the majority never defines "reasonably comparable" in
reference to cost-based support as is required by the Act and the 10^th^
Circuit's decision.

### *The GAO Study*

The Recommended Decision cites a study of telephone rates conducted by
the GAO. The GAO gathered data from state commissions on local telephone
rates in sampled locations throughout all fifty states and the District
of Columbia.[^165] Within each state, GAO randomly selected locations
from three broad categories associated with population density: central
city, suburban (other places within a metropolitan statistical area,
MSA), and rural (outside MSA). Based on data contained in the GAO study,
the majority finds that "the national average of rural, suburban and
urban rates for residential customers diverge by less than two percent."
While this may be a correct statement, based on their methodology, for
three reasons it fails to support the 135 percent benchmark.

First, the GAO study collected data from all parts of the nation,
including areas served by nonrural carriers and areas served by rural
carriers. The GAO made no attempt to exclude data from areas served by
rural carriers, areas that are not under consideration here.[^166] The
support systems for rural and nonrural carriers are different in
important ways, and data from rural carriers can mask important trends
in the rates of nonrural carriers. A related deficiency is that the GAO
made no effort to determine whether the rates that they measured in
different areas applied to comparable services. Therefore the GAO failed
to control for two significant variables, and its study conclusions
cannot inform the selection of a benchmark for nonrural carriers.

A more fundamental problem is that national averages are at the wrong
geographic scale to inform the benchmark issue. The national average is
defined by low-rate areas as well as high-rate areas. This overlooks the
relevant policy variable, which is state-to-state rate variation. The
question under section 254 is whether rates or costs in one or more
rural, insular or high cost areas are too high in relation to rates or
costs for comparable services in urban areas. National averages are
irrelevant to this question.[^167] It is easy to imagine a situation in
which there is a section 254 problem but national averages are exactly
equal.

The GAO's own data demonstrate that this is not a hypothetical problem
and that rates vary significantly from state to state. According to the
report, residential rates in Roaring Springs, Texas were \$7.10 per
month. By contrast, all of Wyoming and all of Vermont reported
residential rates above \$23. At the extreme, residential rates at two
locations in Wyoming reportedly exceeded \$40. In short, the GAO data
tend to show, if anything, that there are rate differences in the
country that are significant enough to be of concern under section 254.

Finally, the GAO Report itself had several methodological problems. The
sample size used in the study was too small to be statistically valid
for any state. Second, the study overlooked some kinds of local exchange
charges that must be paid by all end users. Third, the study reported
raw rates, and made no correction for calling area size or other quality
of service variables. Finally, in areas where more than one local
calling area is offered, the GAO did not even pick consistent rates. For
example, in Michigan the study reported the local rate as \$49 per
month, but a footnote shows that the most common rate is \$12 The GAO
study was a commendable effort by an agency that has no expertise in the
complexities of local exchange rates. I do not believe that the GAO data
have been shown to be sufficiently accurate and normalized so that they
can support relevant inferences here.

### *Cluster Analysis*

The majority also found that the 135 percent benchmark is empirically
supported by "cluster analysis." This is described as "an analytical
technique that seeks to organize information about variables so that
relatively homogeneous groups, or clusters can be identified." The
underlying data are the statewide average costs produced by the
Commission's forward-looking cost model. Cluster analysis places the
states in rank order of cost and then examines the cost differences
between successive states. Where a significant cost difference exists
from one state to its next neighbor in the list, cluster analysis
considers this a significant fact.

The highest cost state is Mississippi. This year, Mississippi and the
next seven states on the ranked list receive support. The last of these,
Kentucky, has a cost of \$29.78. The very next state on the list, which
receives no support, is Nebraska. It has a cost of \$28.20. The cost
difference between Kentucky and Nebraska is therefore \$1.58. As it
happens, this is an unusually large gap; most other states are separated
from their neighbors by smaller cost differences and thus are more like
their neighbor in the list than are Nebraska and Kentucky.

The majority concludes that cluster analysis shows that the "135 percent
benchmark targets support to states with substantially higher average
costs than other states."[^168] Of course, any benchmark would target
support to the highest cost states. That is nothing more than a design
feature of the support system. Therefore, the majority must be placing
reliance on the *size* of the cost difference between Kentucky and
Nebraska. The \$1.58 gap between Kentucky and Nebraska is therefore the
sole fact underlying the majority's argument.

Cluster analysis does not provide any useful information or guidance in
selecting a specific benchmark. The method used to select the clusters
is arbitrary, and the approach suffers from several deficiencies. Most
basically, it says nothing about whether support is sufficient. While
the analysis does show that states like Kentucky (and higher cost
states) are at least somewhat different from states like Nebraska (and
lower cost states), it says nothing about whether costs in the higher
costs states (or in Nebraska for that matter) are reasonably comparable
to urban areas.

Second, even assuming for the sake of argument that cluster analysis
could have some probative value, the majority has justified a permanent
feature of the support system on transient data. The 135 percent
benchmark is a fixed parameter that is permanently codified in rule. Yet
each year that fixed benchmark is applied to a new set of cost data, and
the individual state costs change significantly over time.[^169] Between
the 2001 and 2002 support years, more than two-thirds of the states saw
their average cost change by \$0.50 or more[^170] and one-third saw
their average cost change by \$1.00 or more.[^171] When data are that
volatile from year to year, the results from any one specific year, such
as 2002, cannot fairly support the selection of a permanent benchmark.

The effect of data volatility is illustrated by applying cluster
analysis to data from other years. In 2001, for example, the cost gap
between Nebraska and Kentucky was even larger than in 2002.[^172]
Cluster analysis would presumably have concluded even more strongly that
Nebraska's lower-cost group and Kentucky's higher-cost group should be
treated differently. However, in 2001, as it happened, neither Kentucky
nor Nebraska received support. If cluster analysis had been applied a
year ago, then, it would have supported *reducing* the 135 percent
benchmark so that Kentucky could get some support.

Third, the cluster analysis does not provide a unique solution at the
135 percent benchmark. Cluster analysis purportedly shows that Kentucky
(and higher cost states) should receive support and that Nebraska (and
lower cost states) should not. However, that result can be achieved by
selecting a benchmark as low as 129 percent and as high as 135.5
percent. The majority does not explain how cluster analysis guided its
selection of 135 percent from this range. This is an important
distinction because the use of a 129 percent benchmark would have
increased support to every state now receiving support by \$1.00 per
line per month.[^173]

In summary, the majority uses cluster analysis to support retention of
the existing 135 percent benchmark even though cluster analysis is
irrelevant to sufficiency, even though the method attributes
inappropriate significance to apparently transient cost differences, and
even though the analysis equally supports the adoption of significantly
different benchmarks.

### *Standard Deviation Analysis*

The majority asserts that the 135 percent benchmark is supported by
"standard deviation analysis" since "an analysis of the Commission's
cost model shows that two standard deviations translates approximately
to a 135 percent cost benchmark."[^174] The majority explains that
standard deviation analysis is a "commonly used statistical analysis"
and that using two standard deviations will "identify data points which
are truly outliers within the sample studied."[^175] I have concluded
that standard deviation analysis does not validate the 135 percent
benchmark.

The most fundamental problem is that the majority would substitute for
the existing statutory standard a new and different standard that is not
even conceptually related to reasonable comparability.[^176] The
standard deviation analysis apparently relies on the premise that only
"outlier" states should receive support. But this measure of who is an
"outlier" is defined by standard deviations. This in turn depends not
only on the magnitude of the cost differences between a high-cost state
and urban areas, but by the cost assigned to every state. The overall
pattern of state costs, rather than the differences between the extremes
defines the outcome. Even where urban costs are low, the presence of
many semi-rural states would raise the national average and could also
increase the standard deviation. Each of these forces would reduce
support for high-cost states. Indeed, it is easy to imagine
circumstances under which *no state* is more than two standard
deviations above the mean, but many have costs that are not by any
reasonable measure comparable to urban costs. The majority has not shown
that, or even discussed whether, the two standards are the same.

The absence of that showing has led to the second flaw with this
approach. Standard deviation analysis actually does produce a benchmark
that is too high to produce sufficient support. To understand why, it is
instructive to consider how far "out" a state must lie in order to be an
"outlier" under the majority's analysis. The majority reports that cases
"within two standard deviations of the mean will comprise approximately
95 percent of all data points." This is accurate under some conditions,
but not here. Here we should be interested in how many *high-cost* cases
exist, not in the total of *high-cost and low-cost* states.[^177] Under
those circumstances, only 2.3 percent of the cases in a normal
distribution fall outside the limit of two standard deviations.[^178]
This is an important finding. If state costs were normally distributed,
standard deviation analysis would suggest that support should be
provided only to states in the 99^th^ and 98^th^ percentiles of cost,
and to some of the states in the 97^th^ percentile.[^179] As a result,
several states fall below two standard deviations and below the 135%
benchmark, but they are left with net costs that are still far above
urban costs. This is solely the result of the fact, based on the cost
patterns of all of the states, that their costs are not high enough to
make them "outliers."[^180]

I know of no basis to conclude that this is a reasonable interpretation
of section 254. Indeed, it is a substitution of a significantly more
restrictive standard. Nothing I am aware of in the legislative history
of the Act suggests that Congress intended universal service support to
be available only to carriers or states in the top three percentiles of
cost. I conclude that standard deviation analysis would improperly
substitute a new and more restrictive standard for the standard
contained in the statute. It is not merely an interpretation of that
statutory standard.

The majority suggests the use of the standard deviation places the 135
percent benchmark on a stronger scientific footing. I do not agree.
Although the analysis cites a statistical variable, there is nothing in
the science and art of statistics that supports this variable as a
yardstick for cost benchmarks.

Standard deviation analysis is certainly useful in some scientific and
public policy applications. Sometimes data will be excluded if they fall
outside a statistical limit such as two or three standard deviations.
The assumption is that these "outlying" measurements were the product of
a measurement error of unknown origin. By excluding the suspect data,
one can expect to increase the reliability of the inferences drawn from
the surviving data. This procedure for excluding data is not only used
in science, but, as the majority notes, it is also used in
telecommunications regulation. For example, it is used to discount
service quality failures that might unjustly lead to penalties unless
they are disregarded. The fact that standard deviation analysis may be
useful in some public policy situations does not establish that it is
useful here. Here the majority apparently conflates "outlying" and
unreliable data with "outlying" high-cost states. Despite the
superficial similarities, I believe the two situations are fundamentally
different, and the analogy is inappropriate. We are clearly not seeking
here to identify any unreliable data in order to discard it. Indeed, the
majority's analysis would not lead to exclusion of any data points. On
the contrary, once the benchmark has been set, the Commission will then
rely on precisely the same cost data for "outlying" states to calculate
and distribute tens of millions of dollars of support.

In what way, then, does standard deviation analysis illuminate the task
before us, which is better to define what Congress meant by "reasonably
comparable?" It appears that the majority believes that we should define
when rates are reasonably comparable using the same standard by which
statisticians eliminate unreliable data. I know of no statistical theory
that suggests this equation.[^181] The tasks are fundamentally
different, and solutions used to solve one kind of problem are not
appropriate to the other. As used, standard deviation analysis does not
add any statistical or scientific validity to the majority's decision
about the appropriate benchmark.

Standard deviation analysis suffers from several additional problems.
The majority's analysis perpetuates one of the errors already identified
by the court. It is based upon the cost characteristics of all states,
not the cost characteristics of urban areas, or even of urban states
(assuming such states could be found). Using standard deviation analysis
based on the national sample once again simply ignores the important
difference between the average costs of urban areas and the average cost
of the country as a whole. Even if one were to accept the validity of
standard deviation analysis for setting the benchmark, at the very least
section 254 requires that analysis to be applied solely to the
statistical cost characteristics of urban areas.

Another problem is that the majority has inexplicably rounded up the
results of its own standard deviation analysis. The record shows that a
point 2.0 standard deviations above the national mean produces a 132
percent benchmark. The majority has not explained why this evidence
supports a benchmark of 135 percent. Raising the benchmark by three
points to 135 percent further constricts eligibility for support. The
support reduction in states receiving support is \$0.50 per line per
month, an amount that is not trivial to a high-cost customer.[^182]

Finally, note my disagreement with two other statements in the
Recommended Decision. I am not aware that the Joint Board has previously
found that rates in all parts of the country are reasonably
comparable.[^183] Also, I do not agree that the major purpose of federal
support is to "ensure that rates remain reasonably comparable as
competition develops.[^184] If rates or costs were not reasonably
comparable on the day the 1996 Act went into effect, that is a problem
under section 254. I believe the Joint Board should state clearly that
the Commission has a responsibility under law to address rate and cost
differences, without regard to their vintage. Section 254 creates a duty
to keep rates and service reasonably comparable regardless of whether
local competition has flourished or languished and regardless of whether
rates have remained static or have been geographically de-averaged in
response to competition.

### *The Urban Benchmark*

The majority definitively rejects the use of an "urban benchmark." I
find the arguments confusing and unpersuasive. Ultimately, the majority
has failed to address the central issue remanded by the court, the
relationship between the dollar benchmark, which represents each state's
post-support net cost, and the typical cost in urban areas. By insisting
upon stating the benchmark as a multiple of national average costs, the
majority seeks unsuccessfully to avoid the fact that, because urban
costs are lower than the national average cost, the benchmark set at 135
percent of the national average is too high.

First, the majority suggests that the distinction between rates and
costs, combined with the Tenth Circuit decision, somehow prohibit us
from increasing cost-based support. The majority states that the "litmus
test for non-rural high-cost support is the reasonable comparability of
urban and rural rates," and that "rates do not necessarily equate to
costs."[^185] Similarly, the majority states that adopting a cost
benchmark that is reasonably comparable to urban cost would be to
"substitute a different standard for the statutory rate
comparison."[^186] I fail to understand this argument, given the
majority's own reliance on a different cost benchmark less favorable to
rural customers.

The majority recommends continued primary reliance on cost-based support
to comply with section 254. If the majority believes that local exchange
rates are the only valid basis for support, then I do not understand why
hundreds of millions of dollars of support should continue to be based
on costs nor why the Recommended Decision offers only a vague and
indefinite process for calculating rates-based support. It seems that
the majority justifies the existing system on the ground that costs
equal rates, and at the same time rejects all change on the ground that
costs do not equal rates. In my view, so long as we continue to place
primary reliance on cost-based support, the statute and the court
decision require that we establish a dollar benchmark that is reasonably
comparable to average urban costs.

Similarly, the majority rejects the conclusion that an "urban **cost**
benchmark would better satisfy the statutory comparison of urban and
rural **rates**." [^187] Underlying this conclusion is the plausible
assumption that explicitly relating the dollar benchmark to the national
urban average cost would produce a lower dollar benchmark and an
increase in support. The majority apparently finds that **incremental**
support would be ineffective at producing comparable rates, but
**existing** support passes the test. I fail to understand why this
might be true.

Once again, the majority reports that "proponents of the urban benchmark
have not explained how additional funding produced by an urban benchmark
would produce reasonably comparable rates."[^188] The explanation is
obvious. Assuming that local rates are based on costs, support based on
a comparable multiple of average urban costs will give each state an
opportunity to set its own rates at an average level that is reasonably
comparable to rates in urban areas of the nation. Other portions of the
majority's opinion precisely describe this relationship.[^189]

The majority criticizes proponents of an urban benchmark for not
providing "a rational justification for setting the benchmark at any
particular level."[^190] This imposes an unreasonable burden on those
proponents, and is in fact a flaw in the majority's own cost-based
approach. As the majority notes (and the court explained) any
determination of a benchmark "will necessarily be somewhat
arbitrary."[^191] A choice obviously needs to be made from within a
reasonable range of benchmarks. But this does not justify putting an
unreasonable burden on the proponents of an urban benchmark. In my view,
they have carried the entire burden that can fairly be assigned to them.
They have shown convincingly that the existing benchmark does not
provide sufficient support to make costs in high cost states reasonably
comparable to national average urban costs. Moreover, the record
**does** contain rational recommendations for a particular level. For
example, three regulatory commissions from rural states recommended that
the benchmark be set at a level no higher than 125 percent of average
urban costs.[^192] Even if the majority believes that this particular
number is too low, that is no reason to leave in place a benchmark that
the record shows is too high.

### *Evidence of Insufficiency*

The preponderance of the credible evidence of record shows that current
federal support, based on the 135 percent benchmark, does not provide
support sufficient to attain reasonably comparable rates or costs
between high-cost rural states and the nation's urban areas. All of this
evidence is based on the cost outputs from the Commission's Synthesis
Cost Model, but different methods have been used to select an "urban"
sample. Despite the different samples, the results are remarkably
consistent.

Most notable was a filing from the Rural Utility Service (RUS), a branch
of the United States Department of Agriculture. The RUS sampled 17
downtown urban areas to determine average urban cost. It determined that
in those urban areas the average "loop cost" was \$390 per line[^193]
and that the national average (urban and rural) "loop cost" was \$672.
Therefore a national average 135 percent benchmark amounts to 1.35 times
\$672 per line, or \$907 per line. RUS reported this to be 233 percent
of the urban "loop cost" of \$390. RUS stated, and I agree, that this
amount is far outside the range of reasonable comparability.

Another approach would be to use the average cost among those companies
that serve solely or primarily urban areas. Unfortunately, however, the
value of this method is severely limited by the small sample available.
Of 96 nonrural companies, only one even arguably meets the test of
serving predominantly an urban area. It is C and P Telephone Company of
Washington D.C., a Verizon affiliate. [^194] The model currently shows
that the average forward-looking cost of providing service in the
District is \$16.03. The current benchmark of \$29.60 is 185 percent of
this estimate of the national urban cost. Once again, this method shows
that the current benchmark is far outside the range of reasonable
comparability.

Yet another model-based approach is to use the density zone feature of
the cost model.[^195] The FCC currently recognizes nine such zones. The
three densest zones have a density of 2,550 lines per square mile or
more. Together, these wire centers comprise 28 percent of all lines and
in my view offer a reasonable set estimate of "urban" areas.[^196] The
weighted average cost in these three density zones is \$16.34. The
current benchmark of \$29.60 is therefore 181 percent of national urban
cost. Once again, this method shows the benchmark is far outside the
range of what might be considered reasonably comparable.

Still another way to measure "urban" cost is to adopt the definitions of
"urban" used by the United States Bureau of the Census. This analysis
also confirms that the Commission is not today providing sufficient
support. The Census Bureau defined urban areas for the 2000 census[^197]
as areas that are contained in either an "urbanized area" [^198] or an
"urban cluster."[^199] Staff from the Joint Board has utilized public
domain data to identify those wire centers that are predominantly
urban.[^200] Ohio data were used because it happened that wire center
boundaries for that state were available in the public domain.[^201] The
resulting estimate of urban average cost is \$18.02. The current
benchmark of \$29.60 is therefore 164 percent of this estimate of
national urban cost. Once again, this method shows that the benchmark is
outside the range of reasonable comparability.

In summary, using a variety of methods, the record reveals that the
existing system supports net cost differences where rural areas have net
costs that are somewhere between 164 percent of urban average cost and
possibly as much as 233 percent of urban average cost. None of this
evidence is consistent with a view or finding that the existing system
is providing sufficient support to make net costs in high-cost states
reasonably comparable to urban areas of the nation. For these reasons, I
conclude that the existing system, based on a benchmark of 135 percent,
does not meet the requirements of the statute.

### *Other Considerations*

Some may be reluctant to use an urban average or decrease the benchmark
because they have limited confidence that some of the states receiving
added support actually need that support. In other words, some may doubt
that the states with high forward-looking cost actually need more
support. Fortunately, several reasonable solutions are available to the
Joint Board that should assuage that concern and allow the Joint Board
to recommend a support mechanism that provides sufficient support to
all.

The first question is the accuracy of the model itself. One might
support the underlying methodology of using forward-looking costs but
might doubt the reliability of costs calculated under the existing cost
model. In the nearly three years since issuance of the last significant
order defining the model,[^202] several potential problems with the
model have been identified,[^203] but the Joint Board has declined to
investigate these matters. Opportunities to make significant
improvements to the model have also been missed.[^204] So long as the
Commission continues to distribute support based on a forward-looking
cost model, it should maintain a staff with expertise on the internal
workings of the model, and it should devote substantial continuing
resources toward improvement of that model. Moreover, the Joint Board
should be actively involved in these activities to test, evaluate and
improve the model. I am very encouraged that Joint Board chair Abernathy
has committed to do this in the future.

The broader question is the propriety of distributing support using
costs that are different from the costs that states use to set rates.
This concern is reasonable, because support and rates are calculated in
most states using quite different costing rules. The Joint Board has
previously recommended, and the Commission has adopted, a system of
support for nonrural carriers that is based on forward-looking costs. As
a result the existing support system provides support to some areas with
apparently low rates, and provides surprisingly little support to some
areas with apparently high rates.

Even if one holds this objection, I do not think it should stand in the
way of providing more support here. One option would be to lower the
benchmark but to deny support increases to carriers unless they also
have above average embedded costs. Since all incumbent carriers still
have an interstate revenue requirement, data on this question is already
available through NECA. Thus embedded costs could be used as a screen to
prevent forward-looking support from increasing increases in places that
are likely to have low rates.

More fundamentally, there may be general dissatisfaction with basing
support on forward-looking costs because they have so little relation to
customer rates. If so, this would justify a general review of the
existing support mechanism. If we are unwilling or unable to conduct
such a fundamental review, however, that is not a reason for us today to
deny sufficient support to high-cost nonrural carriers.

The majority has recommended no increase to cost-based funding for
nonrural carriers. That analysis will comfort those who wish to ensure
that the overall Universal Service fund does not grow as a result of
this proceeding. To place this in context, however, it is important to
understand the small effect this program has on the overall fund size.
High cost fund support for nonrural carriers comprises only 4.3 percent
of the total universal service support mechanisms.[^205] Accordingly,
even if forward-looking support to nonrural carriers were doubled (or if
it were eliminated entirely) there would be only a small effect on the
overall size of the fund.

## Rates-Based Support

The court directed the Commission to explain how its cost-based support
is designed to produce reasonably comparable rates. Instead, the Joint
Board recommends adoption of an entirely new rates-based support
mechanism characterized as a "supplemental rate comparability
review".[^206] The rationale apparently is that even if the cost-based
system does not provide sufficient support, then the availability of a
supplemental proceeding can ensure compliance with the statute. Thus the
Joint Board recommends that compliance with the statute no longer be
measured solely by reference to a known objective formula against which
results can be independently verified. Instead, it recommends today a
new subjective system with rules that will be established on an ad hoc
basis through agency case law and practice. For the reasons explained
below, I conclude that creation of this new supplemental proceeding at
this time does not comply with the Commission's duties under section 254
and with the terms of the court's remand directive.

### *Sufficiency of Cost-Based Support*

Section 254 became law six and one-half years ago. It contained language
suggesting (but alas not requiring) that rates should promptly be made
affordable, and rates and service reasonably comparable. For all those
years the customers of high-cost nonrural carriers have lacked
assurances that their rates and service are reasonably comparable to
urban areas. The court has clearly directed the Commission to explain
the relation between its cost-based support program and the statutes.
Neither the Joint Board nor the Commission has ever found that current
rates in all areas of the country are reasonably comparable to urban
areas. Once again, the Joint Board fails to do so today. The Commission
cannot avoid this statutory responsibility forever.

Today the majority recommends essentially that the Commission go back
and start again, basing sufficiency not on its well-defined (although
deeply flawed) forward-looking cost-based system, but on a new and as
yet undefined rates-based system. Having received a referral on this
issue, I believe the Joint Board now has the obligation either to
explain how cost-based support is sufficient or to change that support.

The recommendation for a supplemental rates-based support system does
not discharge that duty.[^207] It is not an adequate response to tell
customers, six and one-half years after the Act became law, after
adopting a new cost-based support system, and after losing a remand from
the Court of Appeals, that if customers or their service providers want
sufficient support they may file a petition. I doubt such a plan would
have been reasonable even in 1997 when the Commission first selected a
broad direction for its support program.[^208] To make this suggestion
now, however, while making no change at all in the existing cost-based
system, is an affront to those customers. One foreseeable effect will
more years of delay before Section 254 is meaningfully implemented for
customers of large carriers.

I understand the majority to conclude that even if cost-based support is
insufficient, section 254 can be satisfied if there exists a
supplemental rates-based system that uses case-by-case determinations,
and further that this new system need not publish in advance the
rationales, algorithms or calculations that will be used to provide
support. I am greatly concerned that this decision may be applied in the
future to small rural carriers. While these carriers serve a minority of
rural customers nationwide, in most states they serve areas that are
predominantly rural. In many cases they have few or no low-cost
customers upon whom to rely for low averaged rates. Accordingly,
insufficient cost-based support is a problem for relatively few of the
large nonrural carriers, but it can be a matter of great importance for
the customers of small rural companies. Because I believe today's
Recommended Decision supports continuation of insufficient support, I
believe it is a particularly worrisome development for rural carriers
and their rural customers.

### *Burdening the States*

Under the majority's opinion, states must apply for supplemental
support. This unlawfully shifts the federal responsibility to the
states, and it does not ensure that ratepayers in high cost states will
receive sufficient support to achieve comparable urban and rural rates.

Sufficient support will be provided only if the state chooses to seek it
and if the state succeeds in making the required showings. A state might
avoid such an undertaking for a variety of reasons. The proceedings will
require considerable expertise and could be contentious. Many
adjustments to rates are possible, but the parties are not given any
guidance as to what adjustments will be accepted. Litigation costs,
particularly for experts, could be sizeable. While some high cost states
may have the resources and expertise to make the required showings,
others are unlikely to accept this challenge.

The majority may have misunderstood the court's decision regarding
inducements. I read the court's decision to require the FCC to create
inducements for the states to deal with any rate differences that may
exist within their own borders. I do not believe that the court intended
to permit the Commission to deny sufficient federal support to customers
in a state where, for whatever reason, the state commission has elected
not to apply for that support.

### *Appropriate State Roles*

The majority's analysis repeatedly neglects the important difference
between rate variation within a state and rate variation among the
states. It is elementary that a dollar raised by a state universal
service program is not only a dollar available for rate support in that
state, but it is also a dollar that is added to local rates in that same
state. Therefore, while state universal service funds can be highly
effective at reallocating internal burdens within the state's
boundaries, they are powerless to reduce the state's average rates or to
change the state's ranking among other states. Intrastate equity is
within the sphere of what a state can and should accomplish.
State-to-state equity is beyond any state's means and has been
recognized as the proper responsibility only of the Commission.

Ominously, the blurring of this distinction occurs in the section on
inducements. The Recommended Decision discusses the new supplemental
proceeding in the section on inducements, thereby suggesting that there
should be some sort of connection between a state's performance of its
own duties under section 254 and the availability of sufficient federal
support. Indeed, the Recommended Decision says that an applicant should
show it has "taken all actions reasonably possible and used all
available state and federal resources to make basic service rates
reasonably comparable, but that rates nevertheless fall above the
benchmark."[^209] This might be a relatively harmless (although still
facially improper) requirement if all it means is that the state must,
one way or another, keep rates within its borders reasonably uniform.
States have a variety of tools to accomplish this. [^210] On the other
hand, this language may be a warning that only states with substantial
intrastate universal service fund mechanisms need apply. That would be a
clear violation of section 254. A rural state having uniformly high
rates and costs might need substantial federal support yet have no need
for a state universal service fund because its rates are comparable
*within* the state. Section 254 does not require states to establish
universal service funds.[^211] The Commission has no authority to make
the existence of a state universal service fund a condition precedent to
sufficient federal support.

The "safe harbor" language also seems to be similarly confused about the
extent of state duties. Apparently before a state may seek supplemental
support it must first admit that it has anchored outside the newly
announced "safe harbor." Once again this overlooks the difference
between intrastate and state-to-state rate variations. It may even prove
to be a new kind of "Catch-22" for applicants. To apply, the state must
admit that its rates have fallen outside the "safe harbor." This
suggests that the Commission's first inquiry in a supplemental support
proceeding may be an inquisition into whether the state's own universal
service efforts have been adequate.[^212] It remains to be seen how the
Commission will respond to facts showing that the state has no internal
high cost program because its rates are uniformly high.

I believe today's Recommended Decision should confirm earlier statements
from this Joint Board and by the Commission that states are powerless to
remedy state-to-state variations in rates and that this is the chief
object of federal high cost policy. We should remove any suggestion that
we believe that all states outside the "safe harbor" necessarily have
some responsibility for that fact. Also, if there is going to be a
supplemental proceeding, we should clarify that the proceeding has
nothing to do with state inducements.

### *The New Proceeding*

The Recommended Decision provides few details about the new supplemental
proceeding. The majority apparently envisions developing the details
through administrative case law and practice.[^213] States must present
a "rate analysis," but they are also to be given "great flexibility" in
their presentations. [^214] Of primary importance here is the complexity
of obtaining valid comparative rate measurements. As many as 30
different adjustments to raw rate levels may be necessary to make
meaningful rate comparisons. Foreseeable adjustments may fall into five
major groups:

-   Rate for Basic Local Service. Some customers face unavoidable extra
    charges for local exchange service. Other customers have simpler and
    more inclusive rate designs. Also, some customers have the option of
    choosing from a variety of local calling options. A particular
    customer may have a choice, for example, to select a more expensive
    plan that includes more local calls, more calling time or a wider
    calling area.

-   Quality of Service. Differences in service quality may be the result
    of different investment and maintenance decisions.

-   Calling Area Size. Some state calling area policies change the value
    of service to the customer in ways that do not appear in the nominal
    local exchange rate. The size of the local calling area is one
    important variable. Some customers have a large calling area that
    can extend for fifty miles or more. Customers in other areas,
    however, have relatively small calling areas, and they must pay toll
    rates when they make calls to local schools and nearby businesses,
    possibly even to Internet providers. For the latter group, toll
    bills are generally higher and local rates are generally lower. For
    this reason, two customers may have the same local exchange rates
    yet, because they have local calling areas of different sizes,
    comparisons of their local exchange services may not be valid.

-   Intrastate Toll and Access Rates. States differ in the degree to
    which they allocate joint and common costs to toll services. In some
    areas significant joint and common network costs are included in
    toll and access charges, and local exchange rates are low. In other
    states with different policies, local exchange rates would be
    higher, but toll rates would be lower. For this reason, two
    otherwise identical customers may have different local exchange
    rates based solely on state policy regarding the division of common
    costs between local and toll services.

-   State Regulatory Policies. Local exchange rates can in some
    instances reflect state regulatory policies that might be
    inappropriate to include in support calculations. A carrier may, for
    example, be earning an exceptionally high rate of return on its net
    plant investment. Another carrier may be using aggressive
    depreciation techniques for new equipment purchases. There are
    differences that may also be important related to capital structure,
    cost of debt, and interest synchronization.

    Given the stakes, states may, and undoubtedly will, present dozens
    of adjustments in their "rate analyses." No two applicants will
    analyze their rates in the same way. One state may make large
    corrections for its relatively small calling areas. Another may
    emphasize one or another aspect of a rate design that permits
    customer to select from among several calling plans offering
    different kinds of prepaid services.[^215] A third may argue that
    its high intrastate toll and access rates should be considered.

The Commission already has experience with each state defining its own
costs, if not rates; and it justifiably abandoned the experiment. In
1997 the Commission announced that states were encouraged to perform and
file their own state-specific forward-looking cost studies, and that
those studies might later be used to determine a state's support.[^216]
Later, the Commission withdrew this offer, finding that only a uniform
national-wide cost model could make appropriate support calculations.
Individual state models, the Commission held:

> could rely on differing forward-looking cost methodologies, including
> differing assumptions or input data elements that would prevent
> meaningful comparisons of the resulting forward-looking cost
> estimates, and thus would provide a less accurate and consistent
> picture by which we could evaluate the cost levels that must be
> supported . . . .[^217]

The Joint Board here proposes a state-by-state approach with rates that
is quite similar to the long-abandoned state-by-state cost studies. With
each state free to suggest its own procedures for adjusting rates, it
seems that there is a sizeable chance of uneven and even discriminatory
results.

Moreover, a state petitioner may not even have access to the data needed
to prove its case. Suppose a state decides that it should adjust its
local exchange rates to account for unusually small calling areas. Can
it compare its own adjusted data with unadjusted rate data from other
states? If not, how can it get adjusted data for other states?

Today's Recommended Decision offers no guidance about how these issues
will be resolved. Applicants are not told whether they should adjust
rates for local calling area size, or how they should report rates when
customers have choices among calling plans with different calling scopes
or different numbers of included calls. [^218] Who will win supplemental
support? How will such support be calculated? The majority provides no
answer. The Commission will have a very difficult time sorting through
these competing claims and establishing the credibility of its new
system as impartial and objective. Moreover, it will probably take at
least another year before we find out how this new proceeding really
will work.

### *Risks and Incentives*

A new and embryonic proceeding presents new risks and opportunities to
the Commission and to the states. One risk is preferential or
discriminatory treatment. Future Commissions have virtually unlimited
discretion to define "rates" as they choose and then to award support or
to withhold support, there is a substantial risk that they may consider
factors not stated in a written decision. To avoid this kind of risk,
government support programs of all sorts have been operated on a formula
basis and have avoided case-based ad hoc decisions.[^219] Apparently the
majority does not consider preferential or discriminatory treatment a
substantial risk.

I mentioned above that the parties in a supplemental support proceeding
may propose adjustments related to state regulatory policies such as
authorized rates of return, depreciation, capital structure or interest
synchronization. This will involve the Commission in reviewing the
reasonableness of state rate decisions. If the rates actually being
collected reflect a high "authorized rate of return" or high actual
earnings, for example, the Commission may be asked to impute a lower
rate of return. This would require it to substitute its judgment for
that of the state commission. In the extreme, the Commission could find
the proceeding grows essentially into an ersatz intrastate rate case. It
may even be necessary to audit some company records. This would not only
prove harmful to comity with the states, but it could be well beyond the
actual staffing capacity of the Commission.

A new rates-based support system could create perverse incentives for
carriers. When it initially adopted a forward-looking cost model for
support, the Commission expressed concern that an embedded-cost system
would create undesirable incentives for incumbent carriers. If support
were based on embedded cost, the Commission thought that incumbent
carriers would make inefficient investments and have a disincentive to
efficient operations and new competitors would be deterred from
entry.[^220] But now the Joint Board proposes to base support upon the
local rates that are, in most places, based on embedded costs. Once
banished, the problem has now returned. The Commission may have to
choose between initiating company audits or providing support for costs
that are not essential to the services supported by universal service.
Short of audits, nonrural companies may have practically unrestricted
ability to generate support based on any infrastructure investments they
desire and that are recognized by state commissions.

A new rates-based support system also creates a new moral hazard by
establishing perverse incentives for state commissions. Rates-based
support will create an incentive for state commissions to maximize their
support, even if it requires changes to local rate designs. Unless the
method of measuring rates is carefully controlled, states may find
themselves performing major redesigns of local rates. If for example, no
adjustments are allowed for calling area size, states will have an
incentive to increase calling areas. "One-state-one-rate" may become the
motto of high-cost states around the country. Also, if no allowance is
made for toll and access charges, states will have an incentive to
reduce those charges and redesign their rates to increase local exchange
charges.

Finally the new system also presents a potentially issue to those who
are concerned about the total size of the Universal Service Fund. Of
course the entire support program for nonrural carriers amounts to less
than five percent of the total universal service fund. Still, given the
broad uncertainties in how local rates will be measured and how support
will be calculated, the ultimate effect may be a significant increase in
the high cost support for nonrural carriers.

## Transport Issue

Finally, the transport issue has not been addressed here. In its
supported services recommendation the majority promised to take up and
address here the issue of high transport costs. Without support, those
companies with high transport cost will not receive sufficient support
to allow their rates to be comparable with urban areas.

We recently issued a Recommended Decision on supported services. One of
the questions discussed there was federal support for transport costs. I
said at the time that I wanted to examine this issue as soon as possible
because very high unsupported transport costs are the primary barrier to
establishing telephone service in certain remote areas. The majority
ultimately stated that we would analyze the question of whether support
should be modified for transport costs, and that the analysis would
occur here, in the context of the Tenth Circuit remand.[^221] We have
not performed that analysis, and I regret the omission. I continue to
believe that high transport costs must be examined immediately to ensure
compliance with section 254 of the Act.[^222]

[^1]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Ninth Report and Order and Eighteenth Order on
    Reconsideration, 14 FCC Rcd 20432 (1999) (*Ninth Report and Order*)
    *remanded*, *Qwest Corp. v. FCC*, 258 F.3d 1191 (10th Cir. 2001).

[^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 Recommended Decision refer to the
    universal service provisions of the 1996 Act, which are codified at
    47 U.S.C. § 254 of the Act. *See* 47 U.S.C. § 254(b).

[^3]: 47 U.S.C. § 254(b).

[^4]: *Id.* at §§ 254(a), (b)(5), (d), (e). *See also Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45, Notice of
    Proposed Rulemaking and Order Establishing Joint Board, 11 FCC Rcd
    18092 (1996) (*Universal Service NPRM*).

[^5]: 47 U.S.C. § 254(b).

[^6]: *Id.* at § 254(b)(3).

[^7]: *See, e.g.*, *Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Second Recommended Decision, 13 FCC Rcd 24744 (Jt.
    Bd. 1998) (*Second Recommended Decision*).

[^8]: *See, e.g.,* *Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Report and Order, 12 FCC Rcd 8776 (1997), as
    corrected by *Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Erratum, FCC 97-157 (rel. June 4, 1997), *aff'd in
    part, rev'd in part, remanded in part sub nom. Texas Office of
    Public Utility Counsel v. FCC*, 183 F.3d 393 (5^th^ Cir. 1999),
    *petition for stay granted in part* (Sept. 28, 1999), *petitions for
    rehearing and rehearing en banc denied* (Sept. 28, 1999) (*First
    Report and Order*); *Federal-State Joint Board on Universal Service,
    Access Charge Reform*, 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 (1999), *petition for review filed sub nom. Vermont
    Department of Public Service v. FCC*, No. 99-60530 (5^th^ Cir.,
    filed June 23, 1999) (*Seventh Report and Order*).

[^9]: *Ninth Report and Order*, 14 FCC Rcd at 20439, para. 2. Non-rural
    carriers are those that do not meet the following statutory
    definition of a rural telephone company:

    > The term "rural telephone company" means a local exchange carrier
    > operating entity to the extent that such entity\--
    >
    > \(A\) provides common carrier service to any local exchange
    > carrier study area that does not include either-
    >
    > \(i\) any incorporated place of 10,000 inhabitants or more, or any
    > part thereof, based on the most recently available population
    > statistics of the Bureau of the Census; or
    >
    > \(ii\) any territory, incorporated or unincorporated, included in
    > an urbanized area, as defined by the Bureau of the Census as of
    > August 10, 1993;
    >
    > \(B\) provides telephone exchange service, including exchange
    > access, to fewer than 50,000 access lines;
    >
    > \(C\) provides telephone exchange service to any local exchange
    > carrier study area with fewer than 100,000 access lines; or
    >
    > \(D\) has less than 15% of its access lines in communities of more
    > than 50,000 on February 8, 1996.

    47 U.S.C. § 153(37). *See also First Report and Order*, 12 FCC Rcd
    at 8944, para. 310.

[^10]: *Ninth Report and Order*, 14 FCC Rcd at 20451, para. 34.

[^11]: The cost model estimates the forward-looking costs of providing
    supported services for non-rural carriers. The Commission selected
    input values for the model in the *Tenth Report and Order*, and
    found the model provides reasonably accurate cost estimates.
    *Federal-State Joint Board on Universal Service, Forward-Looking
    Mechanism for High Cost Support for Non-Rural LECs*, CC Docket Nos.
    96-45, 97-160, Tenth Report and Order, 14 FCC Rcd 20156 (1999)
    (*Tenth Report and Order*), *affirmed*, *Qwest Corp. v. FCC*, 258
    F.3d 1191 (10th Cir. 2001).

[^12]: *Ninth Report and Order*, 14 FCC Rcd at 20441, para. 15.

[^13]: *Id.* at 20447, para. 25.

[^14]: *Id.*

[^15]: *Id.* at 20457, para. 45.

[^16]: *Id.* at 20458, para. 46.

[^17]: *Id.* at 20457, para. 45.

[^18]: *Id.*

[^19]: *See id.* at 20467, para. 63. The federal high-cost universal
    service support mechanism for non-rural carriers provides support
    for 76% of the costs that are above the national benchmark. The
    forward-looking mechanism calculates support based on 75% of
    forward-looking loop costs and 85% of forward-looking port costs, as
    well as 100% of all other forward-looking costs determined by the
    Commission's forward-looking high-cost model. Based on the
    percentage of forward-looking costs that the intrastate portion of
    each of the items represents, the Commission determined that
    together the items represent 76% of total forward-looking costs.
    *Id.*

[^20]: *Id.* at 20464, para 55.

[^21]: *Id.*

[^22]: *Qwest Corp. v. FCC,* 258 F.3d at 1195.

[^23]: 47 U.S.C. § 254(b)(3).

[^24]: *Id.* at § 254(b)(5).

[^25]: *Id.* at § 254(e).

[^26]: *Qwest*, 258 F.3d at 1202.

[^27]: *Id.* at 1205.

[^28]: *Id.* at 1195.

[^29]: *Id.*

[^30]: *Id.* at 1201.

[^31]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Notice of Proposed Rulemaking and Order, 17 FCC Rcd 2999,
    3010-11, paras. 25-26 (2002) (*Remand Notice*).

[^32]: *See* *id.* at 3010, para. 25.

[^33]: *See* *id.*

[^34]: Currently there are two separate mechanisms that provide
    high-cost universal service support: the forward-looking economic
    cost mechanism for non-rural carriers; and the modified embedded
    cost mechanism for rural carriers. When the Commission determined in
    May 1997 that universal service support should be based on
    forward-looking economic cost, it decided to implement such a
    mechanism first for non-rural carriers. *See First Report and
    Order*, 12 FCC Rcd at 8889, para. 203. 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 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. 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. *See*
    Letter from William R. Gillis, Chair, Rural Task Force, to Magalie
    Roman Salas, FCC, dated September 29, 2000. In May 2001, consistent
    with the Joint Board's recommendation, the Commission modified its
    rules for providing high-cost universal service support to rural
    telephone companies for five years based upon the proposals made by
    the Rural Task Force. *See Federal‑State Joint Board on Universal
    Service, Multi‑Association Group (MAG) Plan for Regulation of
    Interstate Services of Non‑Price Cap Incumbent Local Exchange
    Carriers and Interexchange Carriers*, Fourteenth Report and Order,
    Twenty‑Second Order on Reconsideration, and Further Notice of
    Proposed Rulemaking in CC Docket No. 96‑45, Report and Order in CC
    Docket No. 00‑256, 16 FCC Rcd 11244, 11257, para. 27 (2001) (*Rural
    Task Force Order*).

[^35]: *See infra* para. 28.

[^36]: 47 U.S.C. § 254(b)(5).

[^37]: *Id.* at § 254(e).

[^38]: *Ninth Report and Order*, 14 FCC Rcd at 20464, para. 56.

[^39]: *Id.* at 20446, para. 24 (quoting *Seventh Report and Order*, 14
    FCC Rcd at 8092, para. 30).

[^40]: *Qwest Corp. v. FCC*, 258 F. 3d 1191, 1201(10^th^ Cir. 2001).

[^41]: *Id.* at 1201.

[^42]: *Id.* at 1202.

[^43]: *Second Recommended Decision*, 13 FCC Rcd at 24746, para 3.

[^44]: *Id.*

[^45]: *Rural Task Force Order,* 16 FCC Rcd at 11257, para. 27 (quoting
    *Alenco Communications, Inc. v. FCC*, 201 F.3d 608, 619 (5^th^ Cir.
    2000)).

[^46]: *Second Recommended Decision*, 13 FCC Rcd at 24754, para. 19.

[^47]: *Id.* *See* 47 U.S.C. § 152(b).

[^48]: *Seventh Report and Order*, 14 FCC Rcd at 8092-3, para 32.

[^49]: *See id.* at 8092-3, paras. 32-33.

[^50]: *See* [S. Rep. No.]{.smallcaps} 23, 104^th^ Cong., 1^st^ Sess. 25
    (1995).

[^51]: 47 U.S.C. § 254(b)(3).

[^52]: *See Federal-State Joint Board on Universal Service,
    Multi-Association Group (MAG) Plan for Regulation of Interstate
    Services of Non-Price Cap Incumbent Local Exchange Carriers and
    Interexchange Carriers*, CC Docket No. 00-256, Second Report and
    Order and Further Notice of Proposed Rulemaking, *Federal-State
    Joint Board on Universal Service*, CC Docket 96-45, Fifteenth Report
    and Order, *Access Charge Reform for Incumbent Local Exchange
    Carriers Subject to Rate-of-Return Regulation*, CC Docket 98-77,
    Report and Order, *Prescribing the Authorized Rate of Return from
    Interstate Services of Local Exchange Carriers*, CC Docket 98-166,
    Report and Order, 16 FCC Rcd 19613, 19635-6, para. 45 (2001)(*MAG
    Order*), *recon. pending*. This is based on comparing the
    forward-looking cost estimates of wire centers in the Commission's
    cost model. In a case where the cost in a rural area is one hundred
    times greater than costs in urban areas, rural and urban rates that
    are within 70 to 80% may not seem unreasonable. For example, if the
    urban cost is \$20, the corresponding rural cost that is one hundred
    times greater would be approximately \$2000. An urban rate that
    reflects the urban cost would be approximately \$20 per line, per
    month. The rural rate within 70 to 80% of the urban rate is
    \$34-\$36, rather than \$2000.

[^53]: *See Ninth Report and Order,* 14 FCC Rcd at 20453-4, paras.
    36-38. *See also, e.g.*, Verizon telephone companies (Verizon)
    Comments at 8.

[^54]: *Seventh Report and Order*, 14 FCC Rcd at 8092-3, para. 32.

[^55]: *Id.* at 8092, para. 30. The Commission has previously noted that
    current rates produced under the existing support regime are
    affordable and reasonably comparable. *See id*.

[^56]: *Ninth Report and Order*, 14 FCC Rcd at 20457, para. 45.

[^57]: *Id.*

[^58]: *Id.* at 20458, para 46.

[^59]: *Qwest Corp. v. FCC*, 258 F.3d 1191, 1202 n.9 (10^th^ Cir. 2001).

[^60]: *Id.* at 1203.

[^61]: *Ninth Report and Order*, 14 FCC Rcd at 20457, para. 45.

[^62]: *Id.* at 20458, para 46.

[^63]: *See* Rural Utilities Service *ex parte* Comments.

[^64]: The Commission did not refer to the Joint Board the issue of how
    the non-rural high-cost support mechanism will interact with other
    universal service support programs, including high-cost support for
    rural carriers. *See Remand Notice*, 17 FCC Rcd at 3011, para. 26
    n.93.

[^65]: *See* Letter from William R. Gillis, Rural Task Force, to Magalie
    Roman Salas, Federal Communications Commission, dated September 29,
    2000.

[^66]: *Ninth Report and Order*, 14 FCC Rcd at 20440, para 13. *See* 47
    C.F.R. § 36.601, *et. seq.* In the *Rural Task Force Order*, the
    Commission determined that rural carriers would continue to receive
    support under the high-cost loop support mechanism, as modified
    pursuant to the recommendations of the Rural Task Force and the
    Joint Board, for a period of five years. *See Rural Task Force
    Order*, 16 FCC Rcd at 11246, para. 1.

[^67]: *Ninth Report and Order,* 14 FCC Rcd at 20466, para. 60.

[^68]: *First Report and Order*, 12 FCC Rcd at 8888, para. 199.

[^69]: *Seventh Report and Order*, 14 FCC Rcd at 8107-8, paras. 61-62.

[^70]: *Id.* at 8102, 8112, paras. 48 and 70. ("Given that telephone
    service currently is largely affordable, and any significant
    increase in the size of federal support for local rates appears
    unnecessary, we conclude that we should limit the size of the
    federal mechanism, as recommended by the Joint Board.")

[^71]: *Ninth Report and Order*, 14 FCC Rcd at 20438, para. 10.

[^72]: *Second Recommended Decision*, 13 FCC Rcd at 24761-2, para. 43.

[^73]: *Ninth Report and Order*, 14 FCC Rcd 20463-4, para. 55.

[^74]: *Id*.

[^75]: *Id.* at 20465, para. 58.

[^76]: *Qwest Corp. v. FCC*, 258 F.3d 1191, 1202 (10^th^ Cir. 2001).

[^77]: *Id.* at 1202. The court did not address the Commission's
    reasoning that its choice of 135% benchmark fairly balanced state
    and federal responsibilities under the Act.

[^78]: *Id.* at 1203.

[^79]: *Id.* at 1202.

[^80]: *Id.*

[^81]: *See supra* text accompanying note Error: Reference source not
    found.

[^82]: *Qwest*, 258 F.3d at 1202.

[^83]: *See Seventh Report and Order*, 14 FCC Rcd at 8092, para. 30.

[^84]: United States General Accounting Office, *Telecommunications:
    Federal and State Universal Service Programs and Challenges to
    Funding* (GAO-02-187, Feb. 4, 2002) (*GAO Report*). We will address
    any issues concerning the General Accounting Office study later in
    this recommendation.

[^85]: *See* Letter from W. Scott Randolph, Director -- Regulatory
    Affairs for Verizon Communications, to Marlene H. Dortch, Federal
    Communications Commission, dated June 26, 2002 (Verizon June 26 *ex
    parte*).

[^86]: *See* Letter from W. Scott Randolph, Director -- Regulatory
    Affairs for Verizon Communications, to Marlene H. Dortch, Federal
    Communications Commission, dated August 16, 2002 (Verizon August 16
    *ex parte*).

[^87]: *See* Verizon August 16 *ex parte*. Verizon suggests that there
    is nothing in the statute to indicate that Congress believed there
    was an immediate problem with rate comparability because Congress
    did not direct the states to revise existing rate structures. *Id.*

[^88]: 47 U.S.C. § 254(b). Had Congress determined that rates were not
    reasonably comparable at the time the Act was passed, it would have
    directed the Commission to implement a mechanism to adjust rates
    immediately. Rather, Congress directed the Commission to preserve
    and advance universal service through the principles listed under
    section 254(b). While debating this issue in Congress, Senator
    Pressler noted that: "the need to preserve widely available and
    reasonably priced telephone service is one of the fundamental
    concerns addressed in The Telecommunications Competition and
    Deregulation Act of 1995." 141 [Cong. Rec.]{.smallcaps} S7886
    (1995). Likewise, Senator Dorgan stated that Congress's intent was
    to "make it clear that universal service must be maintained\[,\]"
    141 [Cong. Rec.]{.smallcaps} S7951 (1995), and Representative
    Bonilla stated that "\[i\]t is essential that our rural residents
    continue to have equal and affordable phone service." 141 [Cong.
    Rec.]{.smallcaps} H8497 (1995). *See also* Verizon August 16 *ex
    parte*.

[^89]: *See* Verizon August 16 *ex parte.*

[^90]: *See id.* at 2.

[^91]: The cost data are not normally distributed, because there are
    more low-cost, urban lines than high-cost, rural lines. We are
    interested in providing support to states with more high-cost lines,
    so it is appropriate to use the two standard deviation measurement
    to identify outliers even though this measurement may identify more
    than expected in a normal distribution. The current non-rural
    high-cost support mechanism provides support to eight out of 52
    jurisdictions (50 states, the District of Columbia and Puerto Rico),
    or 15% of the jurisdictions.

[^92]: Verizon August 16 *ex parte* at Appendix A (describing the use of
    two standard deviations as a standard by the New York Public Service
    Commission in Case 97-C-0139 -- Proceeding on Motion of the
    Commission to Review Service Quality Standards for Telephone
    Companies, April 29, 2002, Appendix K, Statistical Methodoligies,
    page 1; the Pennsylvania Public Utility Commission in Joint Petition
    of NEXTLINK Pennsylvania, Inc., RCN Telecommunications Services of
    Pennsylvania, Inc., Hyperion Telecommunications, Inc., ATX
    Telecommunications, Focal Communications Corporation of
    Pennsylvania, Inc., CTSI, Inc., MCI Worldcom, e.Spire
    Communications, and AT&T Communications of Pennsylvania, Inc., for
    an Order Establishing a Formal Investigation of Performance
    Standards, Remedies, and Operations Support Systems Testing fro Bell
    Atlantic-Pennsylvania, Inc., Opinion and Order, P-00991643, Order
    Entered December 31, 1999, page 143; and the Federal Communications
    Commission in PA PUC Metrics Order, Attachment A-3, Calculation of
    Parity and Benchmark Performance, page 1).

[^93]: Letter from W. Scott Randolph, Director -- Regulatory Affairs for
    Verizon Communications, to Marlene H. Dortch, Federal Communications
    Commission, dated July 25, 2002 (Verizon July 25 *ex parte*). Based
    on the proxy model, Verizon calculated the national average at
    \$23.35 and the standard deviation at \$3.74. Adding the national
    average cost (\$23.35) and two standard deviations (\$3.74 x 2 =
    \$7.48), the total is \$30.83 (\$23.35 + \$7.48). \$30.83 is
    approximately 132% of the national average cost of \$23.35. *Id.* at
    8.

[^94]: Once sorted, it was then possible to identify cluster with small
    cost differences among the states within the cluster. Cluster
    analysis accomplishes this by comparing differences between and
    among groups, and choosing the number of groups.

[^95]: The numerical values used to measure the cluster split
    differences were 2.5, 2.0, 1.55, 1.5, 1.0, 0.85, and 0.5.

[^96]: Attached as Appendix A is a spreadsheet illustrating this
    analysis.

[^97]: *See* Maine Public Service Commission, Montana Public Service
    Commission and Vermont Public Service Commission (Rural State
    Commissions) Comments.

[^98]: We also note that, while discussing the use of national and
    statewide averages for the statutory comparison of urban and rural
    rates, the court rejected the "argument that the use of statewide
    and national averages is necessarily inconsistent with § 254."
    *Qwest Corp. v. FCC,* 258 F.3d 1191, 1202 n.9 (10^th^ Cir. 2001).

[^99]: *See supra* para. 29. For example, whereas the non-rural
    high-cost support mechanism supports all intrastate costs above the
    135% national benchmark, carriers with more than 200,000 lines were
    formerly eligible for support for 10% of their costs between 115 and
    160% of the national average and gradually more support for costs
    exceeding 160%. *See* 47 C.F.R. § 36.601 *et seq*.

[^100]: We note that small changes in a state's average cost per line
    could cause complete loss of federal support for certain states
    regardless of the level of the benchmark and regardless of whether a
    step function was adopted. The potential "on/off" nature of support
    in the high-cost support mechanism is a function of the use of a
    benchmark, not of the particular level of the benchmark. To the
    extent that a state's average cost per line is at or near the 135%
    benchmark, however, an additional lower benchmark would prevent the
    state from losing all federal support if its costs go below 135%.

[^101]: 47 U.S.C. § 254(b)(3).

[^102]: *Seventh Report and Order*, 14 FCC Rcd at 8092, para. 30.

[^103]: *Id.*

[^104]: *Ninth Report and Order*, 14 FCC Rcd at 20463, para. 54.

[^105]: *Qwest Corp. v. FCC,* 258 F.3d 1191, 1202 (10^th^ Cir. 2001)*.*

[^106]: *Id.* at 1201.

[^107]: *Id.*

[^108]: *Id.* at 1203-04.

[^109]: *Ninth Report and Order*, 14 FCC Rcd at 20469-70, para. 67.

[^110]: *Id.* at 20482-3, para. 95; *see id.* at 20483, para. 96 ("As
    long as the uses prescribed by the state are consistent with section
    254(e), we believe that the states should have the flexibility to
    decide how carriers use support provided by the federal mechanism.")

[^111]: *Id.* at 20483-4, para. 97; *see* 47 C.F.R. § 54.313(a) (state
    must certify support "will be used only for the provision,
    maintenance, and upgrading of facilities and services for which the
    support is intended.")

[^112]: *Qwest*, 258 F.3d at 1203. The court, therefore, rejected
    Qwest's argument "that the Commission alone must support the full
    costs of universal service." *Id.*

[^113]: *Id.* at 1203-04.

[^114]: *Id.* at 1203 n.10 ("It requires only that the state certify
    that the carrier is eligible to receive the federal funds and that
    the funds are being used for universal service as intended.")

[^115]: *Id.* at 1204.

[^116]: *Seventh Report and Order,* 14 FCC Rcd at 8092, para. 30; *First
    Report and Order*, 12 FCC Rcd at 8780-1, para. 2; *Second
    Recommended Decision*, 13 FCC Rcd at 24746, para. 3*; Federal-State
    Joint Board on Universal Service,* Recommended Decision, 12 FCC Rcd
    87, 154, para. 133 (Jt. Bd. 1996) (*First Recommended Decision*).

[^117]: *Seventh Report and Order,* 14 FCC Rcd at 8092, para. 30.

[^118]: *See GAO Report*; Verizon Comments at 4-6; AT&T Reply Comments
    at 3-4.

[^119]: *See GAO Report* at 15; Verizon Comments at 4; AT&T Reply
    Comments at 3-4.

[^120]: *See* Rural State Commissions Reply Comments at 3-4.

[^121]: For residential and single-line business customers, the GAO
    asked for the unlimited service rate and the message or measured
    service rate with the lowest rate. The rates do not include the
    Federal Subscriber Line Charge; state and local surcharges for items
    such as state universal service funding, 911 service, and taxes; the
    federal excise tax; or long distance fees and associated universal
    service charges and other taxes. Where offered, the GAO used the
    tariff rate for unlimited service. Where unlimited service is not
    available, the GAO calculated a monthly fee for a "representative
    customer" using the message rate. The GAO assumed that a
    "representative customer" makes 100 5-minute calls per month.

[^122]: *GAO Report* at 17*.* Verizon calculated the mean rates based on
    the GAO data as follows: central city, \$14.79; suburb, \$15.00;
    non-MSA, \$14.76. *See* Verizon June 26 *ex parte*.

[^123]: The cities surveyed are those that were included in the Bureau
    of Labor Statistics Consumer Price Index in the first year the
    survey was done.

[^124]: *See Reference Book of Rates, Price Indices, and Household
    Expenditures for Telephone Service* (Industry Analysis and
    Technology Div. July 2002) (*Reference Book*). The most recent
    survey includes data as of October 15, 2001. All 95 cities in the
    sample had flat-rate service available in this survey. The average
    rate includes a monthly charge for flat-rate service (\$14.05),
    federal and state subscriber line charges (\$5.03), additional
    monthly charges for touch-tone service (\$0.06), and taxes, 911 and
    other charges (\$2.70). The average urban rate paid by customers for
    message or measured service is \$15.16. Message or measured service
    was also available in 88 of the 95 cities surveyed. This average
    rate includes a monthly charge for measured/message service
    (\$7.27), federal and state subscriber line charges (\$5.03),
    additional monthly charges for touch-tone service (\$0.06), and
    taxes, 911 and other charges (\$2.81). In prior surveys, flat-rate
    service was not available in all the sampled cities, and therefore
    the Bureau calculated a "representative rate" for each city in order
    to calculate a national average rate for the 95 cities. The
    representative rate was the flat-rate service charge in those areas
    where this type of service is available. If flat-rate service was
    unavailable, the rate for measured/message service was used, along
    with the charges associated with placing 100 5-minute, same-zone,
    business-day calls. The average representative rate for residential
    local service has gone from \$17.70 in 1986 to \$21.84 in 2001.
    *Id.*

[^125]: Wire centers with fewer than 540 lines per square mile are above
    the national average cost, and those with more than 540 lines per
    square mile are below the national average cost, based on current
    data. In addition, the average costs of wire centers with fewer than
    540 lines per square mile vary greatly. In order to assist states in
    making their certifications, we recommend that identification of
    wire centers within each state with fewer than 540 lines per square
    mile be provided by USAC. The Joint Board suggests that the
    Commission specifically solicit comments on whether a different
    definition of rural and high-cost areas may be more appropriate for
    purposes of the state rate review and certification process.

[^126]: Petitioners claimed that some rural **rates** would be 70-80%
    higher than urban **rates** under the Commission's non-rural support
    mechanism. This assertion was based on comparing **cost** data
    generated by the Commission's cost model. By defining urban costs as
    the average cost in wire centers with 50,000 or more lines, or in
    the alternative, 100,000 or more lines, petitioners estimated that
    average rural **costs** are 70-80% above average urban **costs**. As
    noted above, when costs are not averaged, the differences between
    rural and urban costs are much greater, with costs in some rural
    wire centers 100 times (10,000%) above the average cost. *See supra*
    note Error: Reference source not found. Neither petitioners nor any
    other party in the proceeding before the Commission submitted
    **rate** data in support of suggested benchmarks to ensure
    reasonably comparable rates. Because the Commission was
    simultaneously considering the inputs to its cost model while it was
    considering other aspects of the non-rural support mechanism, it
    urged interested parties to formulate their comments using the most
    recent cost model outputs available at that time. *See Ninth Report
    and Order*, 14 FCC Rcd at 20462-3, para. 53.

[^127]: 47 U.S.C. 254(b)(3).

[^128]: *Cost Review Proceeding for Residential and Single-Line Business
    Subscriber Line Charge (SLC) Caps, Access Charge Reform, Price Cap
    performance Review for Local Exchange Carriers*, Order, CC Docket
    Nos. 96-262 and 94-1 (rel. June 5, 2002) (approving increase in cap
    on subscriber line charges from \$5.00 to \$6.00 based on cost
    justification). The average monthly increase in the SLC's charged by
    non-rural companies effective July 1, 2002, was 50¢ per line. As a
    result, the average urban residential rates used in setting the rate
    benchmark should be adjusted upward to \$22.34.

[^129]: *See* Ohio Consumers' Counsel, Maryland Office of People's
    Counsel, Maine Public Advocate Office, Texas Office of Public
    Utility Counsel and Pennsylvania Office of Consumer Advocate Reply
    Comments at 5.

[^130]: The national average urban rate of \$21.84 per line is very
    close to the national average cost per line of \$21.92 produced by
    the Commission's cost model.

[^131]: National average urban rate, adjusted, of \$22.34 X 1.35 = rate
    benchmark of \$30.16. This rate benchmark includes various charges
    in addition to the tariffed rate as set forth above.

[^132]: In states where 911 fees are not established on a statewide
    basis, the state should use a statewide average 911 fee for purposes
    of the standard rate template. Use of a statewide average will
    maintain the proper role of federal support for state, rather than
    local rates, and will reduce the number of separate rates in states
    where 911 fees are set locally.

[^133]: Existing per line cost support is portable to any ETC serving a
    customer in a high-cost wire center in a state receiving non-rural
    support. *See* 47 C.F.R. § 54.307. The exact amount of this
    high-cost support is available for inspection on USAC's website and
    is updated quarterly.

[^134]: 258 F.3d 1191 (10^th^ Cir. 2001).

[^135]: United States General Accounting Office, Telecommunications:
    Federal and State Universal Service Programs and Challenges to
    Funding (GAO-02-187, Feb. 4, 2002) (GAO Report). I also agree with
    the Recommended Decision that, because of the substantial
    differences in rate structures among states, it would not be
    feasible to base the support mechanism on rates alone (as opposed to
    costs) even if the rate survey identified greater disparities.
    Moreover, if states could obtain additional universal service
    support for carriers merely by manipulating their rate structures, I
    believe that would invite abuse and ultimately frustrate the
    objectives set forth in the statute.

[^136]: [Qwest Corp. v. FCC]{.underline}, 258 F.3d 1191 (10^th^ Cir.
    2001) at 1200.

[^137]: [Qwest Corp. v. FCC]{.underline}, 258 F.3d 1191 (10^th^ Cir.
    2001) at 1201-1202.

[^138]: See 47 U.S.C. 254(b)(3).

[^139]: See 47 U.S.C. 254(b)(5).

[^140]: *Federal-State Join Board on Universal Service,* CC Docket No.
    96-45, Ninth Report and Order and Eighteenth Order on
    Reconsideration, 14 FCC Rcd 20432(1999)(*Ninth Report and Order)*
    *remanded*, *Qwest Corp. v. FCC,* 258 F.3d 1191, 1199 (10^th^ Cir.
    2001).

[^141]: In addition to the reasons discussed below, I also agree with
    and join in many of the concerns raised in Commissioner Bob Rowe's
    thorough and thoughtful analysis in his dissent.

[^142]: Recommended Decision at paras. 19-21, 24.

[^143]: Recommended Decision at paras. 25-26. "The Commission's primary
    role is to identify those states that do not have the resources
    within their borders to support all of their high-cost lines.... The
    Commission explained in the *Ninth Report and Order* that the
    non-rural high cost support mechanism "has the effect of shifting
    money from relatively low-cost states to relatively high-cost
    states. The Commission believed that its non-rural support mechanism
    ensured that no state with costs greater than the national benchmark
    would be forced to keep rates reasonably comparable without the
    benefit of federal support....We continue to support these
    policies."

[^144]: 47 U.S.C. 254(3).

[^145]: 258 F.3d at 1200.

[^146]: See *Ninth Report and Order* at 20482-3, para. 95 (The
    Commission found it most appropriate to allow states to determine
    how non-rural cost support is used, "\[b\]ecause the support...is
    intended to enable the reasonable comparability of intrastate rates,
    and states have primary jurisdiction over intrastate rates."; *see*
    id. At 20483, para. 96 ("As long as the uses prescribed by the state
    are consistent with 254(e), we believe that states should have the
    flexibility to decide how carriers use support provided by the
    federal mechanism."). See Recommended Decision at paras. 43-56. Even
    in light of the 10^th^ Circuit remand requiring the Commission to
    consider appropriate state inducements to address reasonably
    comparable rates, the Joint Board fails to consider recommending
    either a state averaging mandate or mandatory state universal
    service mechanism requirement to address discrepancies between costs
    in rural and urban areas.

[^147]: Recommended Decision at para. 55.

[^148]: *See* Commissioner Bob Rowe's Separate Statement at 8.

[^149]: National averages could be used without a benchmark or urban
    averages could be used with a benchmark but the combination of the
    two mechanisms is arbitrary.

[^150]: Recommended Decision at para. 39.

[^151]: *See* Commissioner Bob Rowe's Separate Statement at 8.

[^152]: *Id*. at 40.

[^153]: The United States Department of Agriculture's Rural Utilities
    Service (RUS) recommended adoption of a benchmark tied to the
    national average urban loop cost or another statistical indicator
    more representative of urban costs, not the national average costs.
    RUS notes that 135% of the national average (urban and rural) "loop
    cost" exceed its estimate of urban "loop costs" by 233%.

[^154]: Recommended Decision at 39. (emphasis in original).

[^155]: *See also* Commissioner Rowe's Separate Statement at 2-3.

[^156]: *Id.* at 3.

[^157]: *Id.* at 5-7.

[^158]: *Id. at* 16.

[^159]: Recommended Decision at para. 56.

[^160]: *See* Commissioner Bob Rowe's Separate Statement at 18.

[^161]: 47 C.F.R. § 54.309(a)(3).

[^162]: This is 135 percent of the current national average cost among
    nonrural carriers of \$21.9235.

[^163]: Some of the operating and capital costs of each incumbent local
    telephone company are "separated" to the interstate jurisdiction.
    Revenues to recover these costs come from a variety of sources
    controlled by the Commission.

[^164]: High cost support amounts to 76 percent of the difference
    between the state's average forward-looking cost and \$29.48. The 76
    percent figure was selected as the average separations factor
    nationwide. It was adopted to prevent double-recovery of costs that
    are otherwise recovered through interstate revenues.

[^165]: For residential and single-line business customers, GAO asked
    for the unlimited service rate and the message or measured service
    rate with the lowest rate. The rates do not include the Federal
    Subscriber Line Charge; state and local surcharges for items such as
    state universal service funding, 911 service, and taxes; the federal
    excise tax; or long distance fees and associated universal service
    charges and other taxes. Where offered, GAO used the tariff rate for
    unlimited service. Where unlimited service is not available, GAO
    calculated a monthly fee for a "representative customer" using the
    message rate. GAO assumed that a "representative customer" makes 100
    5-minute calls per month.

[^166]: The GAO did not develop consistent data from state to state. In
    some states rural data was included, but not in other states.

[^167]: The scale problem can be understood more generally with a
    simpler set of facts. Suppose that every state has geographically
    averaged rates. (This much is not far from the truth in many
    states.) Further suppose that in 40 states all customers pay \$5 per
    month and in the other 10 states all customers pay \$50 per month.
    In each state considered separately, the GAO study would show that
    rates for rural and urban areas are equal. Therefore when all states
    are aggregated together, urban and rural averages will also be
    equal. This is true even though rates in some states are ten times
    the rates in most states.

[^168]: Recommended Decision, ¶ 34.

[^169]: Between 2001 and 2002, costs in 18 states declined by more than
    \$1.00 per line per month, and costs in three states declined by
    more than \$2.00.

[^170]: This group comprised 36 of 52 jurisdictions.

[^171]: This group comprised 18 of 52 jurisdictions.

[^172]: The gap in that year was \$2.12.

[^173]: A benchmark of 129 percent is 6 percent lower than 135 percent.
    The support difference for each carrier already receiving support
    would be \$21.93 x 6% x 76% = \$1.00.

[^174]: Recommended Decision, ¶ 35.

[^175]: Recommended Decision, ¶ 36.

[^176]: I note that the court has already rejected earlier efforts to
    redefine the statutory standard.

[^177]: This calls for use of what is normally referred to as a
    "one-tailed" test.

[^178]: In a "z" distribution, the probability of a case falling between
    0 and 2 standard deviations is 0.4772. This means that the
    probability of a case falling above 2 standard deviations is 1 --
    0.5 -- 0.4772 = 0.0228 or 2.28 percent.

[^179]: Since 2.0 standard deviations includes 2.3 percent of a normal
    distribution, only 30% of the states in the 97^th^ percentile would
    be included.

[^180]: Moreover, because the benchmark is too high, even in those
    states that do receive some support, the amount is insufficient.

[^181]: Nor is the majority here using standard deviation analysis to
    test any statistical hypothesis. Scientists sometimes use standard
    deviations to test a hypothesis that a sample of cases is
    statistically different from a larger population. No such hypothesis
    has been stated here, and there is no sample to be tested.

[^182]: At a benchmark of 132 percent of the national average, every
    currently supported customer would receive additional support of
    \$0.50 per customer per month. \$0.50 = (\$21.93 \* (135%-132%) \*
    76%)

[^183]: The majority states that the Joint Board has previously found
    "in prior rulings that current rates are affordable and reasonably
    comparable." Recommended Decision, ¶ 34. The former is a correct
    statement, but not the latter. The majority cites the Commission's
    Seventh Report and Order. That document merely recited an earlier
    finding that rates are affordable. Nothing in the cited paragraph
    establishes that rates are or were reasonably comparable.

[^184]: The majority states that this is "one of the goals" of the Act.
    Recommended Decision, ¶ 35. The majority's own rationale on this
    issue is inconsistent. On one hand the majority apparently supports
    Verizon's argument that rates were reasonably comparable in 1996 and
    that federal support is needed, if at all, primarily for the
    intrastate rate variations that were expected to follow the arrival
    of local competition. ¶ 35. On the other hand, the majority admits
    that there is no need for federal support when rates are de-averaged
    in a low-cost state, since with a sufficient intrastate fund all
    customers in the state can still have reasonably comparable rates
    without federal support. ¶ 26.

[^185]: Recommended Decision, ¶ 41.

[^186]: Recommended Decision, ¶ 39.

[^187]: Recommended Decision, ¶ 39 (emphasis in original).

[^188]: Recommended Decision, ¶ 40.

[^189]: *See*, Recommended Decision, ¶ 25 ("Despite implicit or explicit
    state support mechanisms, the low-cost areas of some states cannot
    balance their high cost areas. Although such states could, through
    their own efforts, achieve reasonably comparable rates within their
    own boundaries, those rates would still be high relative to the
    national average because of the states' high average costs. The
    Commission's primary role is to identify those states that do not
    have the resources within their borders to support all of their
    high-cost lines.").

[^190]: Recommended Decision, ¶ 40.

[^191]: *Qwest Corp. v. FCC*, 258 F.3d 1191, 1202 (10^th^ Cir. 2001);
    Recommended Decision, ¶ 33.

[^192]: Comments of Maine Public Service Commission, Montana Public
    Service Commission, and Vermont Public Service Board at 7. (I do not
    participate in Montana proceedings concerning matters referred to
    the Universal Service Joint Board.)

[^193]: In most discussions of universal service, the standard unit of
    measure it total cost per line per month. The RUS used a different
    yardstick, but one still based upon the Commission's own cost model.

[^194]: Even C&P of D.C. may not be entirely "urban" since some census
    block groups in Northwest Washington are primarily suburban.

[^195]: The Synthesis Model was originally designed with the capability
    of producing costs by density zone or by wire center, as the modeler
    may select.

[^196]: At the lower edge of 2,550 lines per square mile, this amounts
    to approximately one-quarter acre per line. Since many residential
    and business customers have more than one line per occupied
    structure, this means that some areas in this zone have an average
    lot size larger than one-quarter acre. A generous definition of
    "urban" follows from using the higher costs associated with areas
    with large lot sizes.

[^197]: The Census Bureau noted that some agencies are required to that
    some Federal and state agencies are required by law to use Census
    Bureau-defined urban and rural classifications for allocating
    program

    funds, setting program standards, and implementing aspects of their
    programs. Federal Register: March 15, 2002, Volume 67, Number 51,
    Notices, pages 11663-11670.

[^198]: For Census 2000, an urbanized area consists of contiguous,
    densely settled census block groups (BGs) and census blocks that
    meet minimum population density requirements, along with adjacent
    densely settled

    census blocks that together encompass a population of at least
    50,000 people. *Id.* Ohio has 19 urbanized areas. Internet cite:
    http://www.census.gov/geo/www/ua/ua_state_corr.txt.

[^199]: For Census 2000, an urban cluster consists of contiguous,
    densely settled census block groups and census blocks that meet
    minimum population density requirements, along with adjacent densely
    settled census blocks that together encompass a population of at
    least 2,500 people, but fewer than 50,000 people. *Id.* Ohio has 143
    urban clusters. Internet cite:
    http://www.census.gov/geo/www/ua/uc_state_corr.txt.

[^200]: Predominantly urban was defined here as enclosing an area that
    is more than 50% urbanized area or urban cluster.

[^201]: Because Ohio is a sizeable state with both rural and large city
    wire centers, it provides a good sample for urban costs nationally.
    Data for the entire country were available for \$5,000, but the
    Joint Board declined to make this expenditure. For each of 903 wire
    centers in Ohio, staff determined the percentage of the wire
    center's area that is characterized as "urbanized area" by the
    Census. 52 wire centers were then selected which serve areas that
    are at least 50 percent "urbanized areas." Of these, 39 were served
    by nonrural carriers, and therefore average cost data were
    available. The average cost of these 39 wire centers, weighted for
    line size, was \$17.63.

[^202]: The last order establishing significant parameters of the cost
    model was the Tenth order, issued in November of 1999.

[^203]: The Rural Task Force identified a number of areas in which the
    model appeared to produce unreasonable results for rural companies.
    In addition, there are potential problems with use of the model even
    for nonrural companies. For example, the model deploys loop plant
    without regard to natural and manmade barriers such as mountains,
    lakes and highways. Also, the model inputs now include many more
    special access lines than were originally anticipated, largely due
    to the unexpected sale of thousands of DS-1 and DS-3 special access
    circuits. Some of these circuits are sold to competitors, others to
    schools and libraries using subsidies from federal universal service
    funds. We have not investigated whether those circuits are currently
    being assigned to the proper wire centers nor whether the model is
    properly adjusting switch, feeder and distribution plant to
    accommodate these new circuits.

[^204]: More than one year ago FCC staff had developed a redesign of the
    model so that it constructed plant solely along rights of way. That
    modification significantly changed costs in some areas, but had the
    potential to improve the reliability of the model in areas with
    significant topographic limitations. However, all work stopped on
    those modifications when a key FCC staff member left the Commission.

[^205]: FCC, *Universal Service Monitoring Report, CC Docket No. 98-202,
    Summer, 2002,* Table 1.11.

[^206]: Recommended Decision, ¶ 38.

[^207]: This principle may be of significance in the upcoming discussion
    of support for rural carriers. Rural carriers may be very interested
    in the establishment of a precedent that cost-based support need
    not, by itself, be sufficient to allow reasonably comparable rates.

[^208]: I also note that the Commission did not provide support for
    nonrural carriers until 2000 because it felt it necessary to spend
    several years developing its new forward-looking cost model.

[^209]: Recommended Decision, ¶ 50.

[^210]: Most states rely on rate averaging for their nonrural carriers.
    Increasingly, however, states are replacing these systems with
    explicit universal service programs.

[^211]: Section 254 provides that "A State *may* adopt regulations not
    inconsistent with the Commission\'s rules to preserve and advance
    universal service." 47 U.S.C. § 254(f) (emphasis added).

[^212]: Ironically, the requirement that rates fall outside the "safe
    harbor" may actually require states to deaverage rates in order to
    qualify for Federal USF. This would likely have the effect of
    reducing rate comparability in high cost areas, contrary to the
    statute.

[^213]: This can be contrasted with the "safety valve" mechanism adopted
    last year for rural carriers. That mechanism is clearly defined.
    Carriers are able to calculate exactly the amount of support
    available under that mechanism and to verify that the amount
    provided agrees with the Commission's rule.

[^214]: Recommended Decision, ¶ 56.

[^215]: For example, the GAO study noted that customers in Michigan had
    an alternative between one "message rate" calling plan costing
    \$12.01 and another "unlimited basic service" plan costing \$43.95.
    The GAO study used the higher figure. If Michigan were to apply for
    support, it would presumably use that same number.

[^216]: First Order, ¶ 206; Second Order, ¶ 31.

[^217]: Seventh Order, ¶ 52.

[^218]: Commendably, the Recommended Decision does suggest that there
    should be a time limit for such a proceeding. I agree that it is
    important that requests for supplemental support must be processed
    and decided expeditiously. Without such a limit, a proceeding could
    be initiated by a state or carrier, be noticed for comment, and then
    remain undecided for years. For example, the Vermont Public Service
    Board filed a petition for waiver of existing universal service
    rules in September of 1993. The Commission never acted on that
    petition. *In re Waiver of Section 36.631 of the Commission's Rules
    Governing the Universal Service Fund*, Docket No. AAD 93-103, public
    notice issued Oct. 15, 1993, 8 FCC Rcd. 7588.

[^219]: Formula-based federal support is provided to the states across a
    wide range of public policy, including transportation support, farm
    supports, and health care support.

[^220]: Federal-State Joint Board on Universal Service, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776 (1997) (Universal Service
    Order), as corrected by Federal-State Joint Board on Universal
    Service, Errata, CC Docket No. 96-45, FCC 97-157 (rel. June 4, 1997)
    (hereinafter "First Report and Order") ¶ 228.

[^221]: In that Recommendation the majority said:

    The Joint Board recognizes that issues related to the cost of
    transport facilities are important and may be of particular concern
    in rural areas of rural and non-rural companies. Transport may be a
    necessary element of a carriers' provision of services eligible for
    federal universal service support. In some remote communities,
    customers must use the interexchange network to access essential
    community services such as law enforcement, health care, schools and
    libraries. *The extent to which these costs should be supported is
    best addressed in our recommendation on the decision remanded from
    the Tenth Circuit where we will analyze reasonable comparability and
    sufficiency of support. In that proceeding, we will consider the
    level of support necessary* to ensure that all citizens of the
    United States have access to reasonably comparable communications
    services. Recommended Decision FCC 02J-1, ¶ 57 (emphasis added).

[^222]: See, Separate Statement of Bob Rowe, Part VI.