Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | CC Docket No. 96-45          |
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**RECOMMENDED DECISION**

**Adopted:** June 28, 2000 **Released:** June 30, 2000

By the Federal-State Joint Board on Universal Service: Commissioner
Furchtgott-Roth approving in part, dissenting in part, and issuing a
statement.

# INTRODUCTION

1.  This Recommended Decision sets forth the recommendations of the
    Federal-State Joint Board on Universal Service (Joint Board) for
    phasing down the interim hold-harmless provision of the new,
    forward-looking high-cost universal service support mechanism for
    non-rural carriers.[^1] In the *Ninth Report and Order*, the
    Commission adopted a new high-cost universal service support
    mechanism for non-rural carriers, based on the estimated
    forward-looking economic costs of providing services eligible for
    support.[^2] The interim hold-harmless provision ensures that the
    amount of high-cost support provided to a non-rural carrier on a
    per-line basis under the new mechanism will be no less than it
    receives under the preexisting high-cost support mechanism. Support
    from the interim hold-harmless provision is based on two preexisting
    support mechanisms: (1) Long-Term Support (LTS);[^3] and (2)
    high-cost loop support under Part 36 of the Commission's rules.[^4]

2.  The Commission emphasized that the interim hold-harmless provision
    is "a *transitional* provision" to protect consumers in high-cost
    areas from rate shock as a result of any sudden, significant
    increases in rates during the shift to forward-looking support.[^5]
    Accordingly, it requested a Joint Board recommendation by July 1,
    2000 as to how interim hold-harmless support can be phased down or
    eliminated without causing undue rate disruption.[^6] On November 3,
    1999, the Joint Board sought comment on schedules and procedures for
    phasing down or eliminating interim hold-harmless support.[^7]

3.  For the reasons discussed below, we recommend that LTS be maintained
    under the current rules until the Commission considers appropriate
    reforms for the LTS program in connection with the pending
    proceedings for high-cost reform for rural carriers and/or
    interstate access charge reform for rate-of-return carriers. We
    further recommend that the Commission phase down the balance of
    interim hold-harmless support, excluding LTS, through \$1.00
    reductions in average monthly, per-line support beginning January 1,
    2001, and every year thereafter. We believe that this recommended
    approach will ensure a prompt, equitable phase-down of interim
    hold-harmless support without undue disruption of consumer rates in
    high-cost areas. Finally, we recommend against phasing down any
    interim hold-harmless support that is transferred to a rural carrier
    when it acquires exchanges from a non-rural carrier. Such
    transferred interim hold-harmless support should be maintained until
    the Commission completes a review of the rule governing the transfer
    of universal service support or until rural high-cost reform is
    complete.

# RECOMMENDATIONS

## Long-Term Support

1.  **Background**

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4.  As stated above, the interim hold-harmless provision includes LTS
    for non-rural carriers under section 54.303 of the Commission's
    rules.[^8] The LTS program ensures reasonable comparability of
    interstate access rates among local exchange carriers (LECs) by
    reducing the carrier common line (CCL) charges of rate-of-return
    LECs that participate in the National Exchange Carrier Association
    (NECA) common line pool.[^9] CCL charges are per-minute charges that
    LECs assess on interexchange carriers (IXCs) to recover a portion of
    their interstate-allocated loop costs.[^10] Formerly, all incumbent
    LECs had to pool such costs to set a uniform, nationwide CCL rate.
    When individual LECs were allowed to leave the NECA pool in 1989,
    departing LECs---predominantly larger, lower-cost carriers---were
    required to pay LTS to prevent the CCL rates of the remaining,
    high-cost LECs from rising significantly above the national
    average.[^11]

5.  In the *First Report and Order*, the Commission concluded that the
    LTS program serves the public interest by facilitating interexchange
    service in high-cost areas, but that modifications were necessary to
    make LTS explicit, portable, and competitively neutral.[^12]
    Therefore, the Commission continued the LTS program, but removed it
    from the access charge system and modified its calculation and
    distribution scheme.[^13] In the *First Report and Order*, the
    Commission anticipated that LTS for non-rural carriers would be
    subsumed in the new, forward-looking support mechanism.[^14] The
    Commission anticipated, however, that rural high-cost reform would
    require a more extended time period, during which the Commission
    sought to maintain the existing LTS program for rural carriers, as
    modified, "to provide rural LECs . . . sufficient time to adjust to
    any changes in universal service support."[^15] The Commission's
    proceeding to reform the high-cost support mechanism for rural
    carriers is pending,[^16] as is the related proceeding to reform the
    interstate access charge system for rate-of-return carriers.[^17]

6.  Rural carriers are the primary recipients of LTS and receive
    approximately \$381 million in annual LTS. Annual LTS for non-rural
    carriers is approximately \$97 million, which is slightly more than
    half of the projected \$184 million in net annual interim
    hold-harmless support.[^18] Only three non-rural carriers receive
    LTS: Roseville Telephone Co. in California; North State Telephone
    Co. in North Carolina; and the Puerto Rico Telephone Co. (Puerto
    Rico), which is projected to receive \$89 million, or over 90
    percent, of the total annual LTS for all three carriers.[^19] Each
    of the seven parties that addressed LTS argues that, regardless of
    how the balance of interim hold-harmless support is handled, LTS for
    non-rural carriers should not be eliminated or phased down at this
    time because it has no substitute in the new, forward-looking
    support mechanism.[^20]

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2.  **Discussion**

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7.  As set forth below, we recommend that LTS be maintained under the
    current rules until the Commission considers appropriate reforms for
    the LTS program in connection with the pending proceedings for rural
    high-cost reform and/or interstate access charge reform for
    rate-of-return carriers. As an initial matter, we recognize that,
    because LTS supports only interstate-allocated loop costs and
    therefore does not directly affect intrastate rates, it is within
    the Commission's jurisdiction to determine whether to phase down or
    eliminate LTS. At the Commission's request, however, we have
    prepared a recommendation on this issue.[^21]

8.  Our recommendation is based principally on two considerations.
    First, unlike the preexisting high-cost loop support mechanism under
    Part 36, LTS for non-rural carriers is not replaced by the new,
    forward-looking high-cost support mechanism.[^22] The Commission
    concluded in the *Ninth Report and Order* that, to properly account
    for the separations rules, the new mechanism should provide support
    only for the percentage of total costs exceeding the national
    benchmark that are allocated to the *intrastate* jurisdiction, not
    for interstate-allocated costs such as those supported by LTS.[^23]
    As a result, the new high-cost mechanism does not replace LTS for
    non-rural carriers, as the Commission originally had anticipated at
    the time of the *First Report and Order*.[^24] Because no substitute
    support mechanism currently exists, we believe that the Commission's
    rationale for phasing down interim hold-harmless support---that it
    is "a *transitional* provision . . . during the shift to the new
    federal support mechanism"[^25]---may not be appropriate to LTS.

9.  Second, we find that phasing down LTS for non-rural carriers will
    have an indirect impact on rural LTS recipients, thereby undermining
    the Commission's objective to maintain the current support
    structure, as modified, for rural LTS recipients.[^26] Because NECA
    pools costs, revenues, and support to calculate an average CCL rate
    for pool participants, if LTS were phased down for the three
    eligible non-rural carriers without a corresponding reduction in
    costs, the CCL rate for all NECA pool participants would increase.
    According to NECA, loss of LTS for non-rural carriers could cause
    the NECA CCL rate to rise by up to 42 percent.[^27] Thus, we are
    concerned about the potential rate impact on rural LTS recipients as
    a result of the phase-down of LTS for non-rural carriers.[^28]

10. In light of these considerations, we recommend that the Commission
    consider the future of LTS to non-rural carriers in conjunction with
    its consideration of the pending proceeding to reform the
    Commission's high-cost support mechanism for rural carriers, and/or
    the related proceeding to reform the interstate access charge system
    for rate-of-return carriers.[^29] In the meantime, the Joint Board
    recommends that the Commission preserve LTS.[^30]

## Phase Down of Interim Hold-Harmless Support

### Background

11. In addition to LTS, the interim hold-harmless provision provides
    per-line support to eligible non-rural carriers based on the
    preexisting high-cost loop support mechanism under Part 36 of the
    Commission's rules.[^31] Under this mechanism, 18 non-rural carriers
    will receive a total of about \$87 million in net annual interim
    hold-harmless support (excluding LTS), based on projections for the
    first quarter of the year 2000.[^32] These projections indicate
    that, on a per-line basis, 12 of the 18 carriers receive average
    monthly support of less than \$1.00, four receive support of less
    than \$2.00, one (GTE North Inc. in Missouri) receives support of
    \$3.26, and one (Puerto Rico) receives support of \$12.06 and
    \$1.86, respectively, for each of its two study areas.[^33] We note
    that interim hold-harmless support recipients and support estimates
    may vary from quarter to quarter, because support is calculated on
    an ongoing, quarterly basis, and in a given quarter carriers may
    qualify to receive either interim hold-harmless support or
    forward-looking support, depending on which is greater.[^34]

12. The commenters are divided roughly into two groups. The first,
    including payor states, interexchange carriers (IXCs), and other net
    contributors to universal service support, favor rapid termination
    of interim hold-harmless support.[^35] Specifically, most of these
    commenters favor termination no later than January 1, 2001, although
    three suggest a phase-down schedule of at least three years for
    Puerto Rico.[^36] The other group, which includes LECs and state
    recipients of interim hold-harmless support, opposes the
    establishment of an elimination date or phase-down schedule at this
    time.[^37] These commenters argue that any such action should await
    Commission reform of the high-cost support system for rural
    carriers, which will not occur before January 1, 2001,[^38] and/or
    comprehensive review of the new, forward-looking support mechanism
    for non-rural carriers, which is scheduled to be completed by
    January 1, 2003.[^39]

### Discussion

13. We recommend that interim hold-harmless support, excluding LTS, be
    phased down beginning January 1, 2001, through annual \$1.00
    reductions in each recipient's average monthly, per-line
    support.[^40] In developing this recommendation, we have considered
    a range of options, from the immediate, across-the-board elimination
    of interim hold-harmless support advocated by some commenters, to
    the "wait-and-see" approach advocated by others. We believe that our
    recommended approach is the best means of ensuring a prompt,
    equitable phase-down of interim hold-harmless support without
    causing undue rate disruption. As discussed below, this approach
    would promptly phase out interim hold-harmless support for the
    majority of carriers currently receiving less than \$1.00
    per-line/per-month, while permitting a gradual withdrawal of support
    from those receiving higher amounts of interim hold-harmless
    support. We also recommend that the Commission reexamine the
    phase-down schedule in conjunction with its comprehensive review of
    the new, forward-looking support mechansim, which is to be completed
    by January 1, 2003,[^41] at which time only two carriers are
    projected to be receiving interim hold-harmless support, and the
    Commission will have more information on the impact of our
    recommended phase-down approach on rates in the remaining carriers'
    study areas.[^42]

14. A number of commenters favor across-the-board termination of interim
    hold-harmless support as of January 1, 2001, arguing generally that
    the Commission intended the interim hold-harmless provision to be
    transitional only, that interim hold-harmless support is burdensome
    and inequitable to net contributors to universal service support,
    and that in most cases the loss of interim hold-harmless support
    would not cause rate shock.[^43] We agree that in most cases a
    sweeping approach would be unlikely to cause rate shock, as the
    majority of interim hold-harmless support recipients currently
    receive average monthly, per-line support of less than \$1.00. We
    recommend a more tailored approach, however, because it will allow a
    gradual withdrawal of support from carriers receiving higher amounts
    of per-line support, thereby avoiding significant, sudden rate
    increases in the areas served by such carriers.[^44] Nevertheless,
    we believe that our recommendation is responsive to these
    commenters' concerns. During the year 2001, and based on first
    quarter year 2000 support estimates, our recommended approach would
    phase out interim hold-harmless support for 13 of the 18 current
    recipients and save approximately \$47 million in annual interim
    hold-harmless support.[^45] In the following year, our approach
    would phase out interim hold-harmless support for four more
    recipients.[^46] Interim hold-harmless support for GTE North Inc. in
    Missouri would be phased out in the fourth year, leaving only one
    Puerto Rico study area as a recipient of interim hold-harmless
    support.[^47]

15. We disagree with commenters who argue that interim hold-harmless
    support should be preserved at its current level pending rural
    high-cost reform, which will not occur before January 1, 2001,
    and/or comprehensive review of the new, forward-looking high-cost
    support mechanism, which is to be completed by January 1, 2003.[^48]
    The Commission's purpose in adopting the interim hold-harmless
    provision was to ensure a nondisruptive transition to the new,
    forward-looking support mechanism for non-rural carriers, not to
    postpone or avoid the need for a transition.[^49] We anticipate that
    the states can adapt their rate designs to the new, forward-looking
    support mechanism for non-rural carriers without waiting for rural
    high-cost reform. In this regard, we note that none of the states
    for which interim hold-harmless support will be phased down maintain
    otherwise in their comments to the Joint Board. We also observe
    that, under the gradual phase-down approach that we recommend, no
    carrier's average monthly, per-line support will be reduced by more
    than \$1.00 per year, so that no state will be faced with
    significant, sudden reductions in federal support to an individual
    study area.

#### Mechanics of Phase-Down

16. The support amounts for which interim hold-harmless recipients
    qualify may vary from quarter to quarter, because interim
    hold-harmless support is calculated on an ongoing, quarterly
    basis.[^50] To ensure that the phase-down conforms with this
    quarterly schedule, the Joint Board recommends that the applicable
    annual reductions be subtracted from the interim hold-harmless
    support that a carrier otherwise would be eligible to receive on an
    ongoing, quarterly basis. Under this approach, a carrier may
    continue to be eligible for interim hold-harmless support during a
    particular year even if it does not qualify for such support in a
    given quarter. For example, if during the year 2001 a carrier
    otherwise would be eligible for quarterly support of \$1.05, \$0.95,
    \$1.05, and \$0.95 per-line/per-month, respectively, then it would
    receive support of \$0.05 per-line/per-month during the first and
    third quarters of the year, but no support for the second and fourth
    quarters. The following year, a \$2.00 reduction would be applicable
    and the carrier would no longer receive support. We believe that
    this method of calculating interim hold-harmless support during the
    phase-down would be the most equitable to interim hold-harmless
    recipients and easiest to administer.

#### Calculation of High-Cost Loop Support for Rural Carriers

17. Under the Commission's rules, universal service support for all
    carriers under Part 36 is restricted by an "interim cap" that limits
    the total increase in support each year to the annual growth in
    nationwide loops.[^51] The cap is calculated by applying the total
    growth rate in industry working loops to the prior year support
    level. Although non-rural carriers (with the exception of interim
    hold-harmless support recipients) were shifted to the new,
    forward-looking support mechanism effective January 1, 2000, the
    Commission concluded in the *Ninth Report and Order* that the cap
    should continue to be calculated as if all carriers participate in
    the preexisting support mechanism.[^52] Otherwise, rural carriers
    would receive smaller annual increases in support, because the
    growth rate in working loops for non-rural carriers historically has
    been faster than the growth rate in working loops for rural
    carriers.[^53] The purpose of this interim "placeholder" measure was
    to avoid significant and immediate changes in high-cost support for
    rural carriers, consistent with the Commission's commitment "not to
    consider significant changes in rural carriers' support until after
    the Rural Task Force and the Joint Board have made their
    recommendations."[^54]

18. The effect that the Commission sought to avoid in the *Ninth Report
    and Order*---smaller annual cap increases---also could result from
    subtracting phased-down interim hold-harmless support amounts from
    calculation of the cap. This is so because the prior year support
    level used to calculate the cap includes the high-cost loop support
    for non-rural carriers that would be provided under Part 36 if the
    preexisting high-cost support mechanism had not been replaced. To
    avoid this undesired effect, we recommend that the cap continue to
    be calculated as if phased-down interim hold-harmless support were
    being distributed to non-rural carriers, pending reform of the
    high-cost support mechanism for rural carriers. This approach will
    avoid significant and immediate changes in high-cost support for
    rural carriers as a result of the phase-down of interim
    hold-harmless support, and is consistent with the Commission's
    action in the *Ninth Report and Order*. We do not recommend,
    however, that any of the support calculated for non-rural carriers
    under Part 36 (phased-down interim hold-harmless support or support
    calculated as a "placeholder") be redistributed to rural carriers.

#### Transferred Interim Hold-Harmless Support

19. Finally, we address issues related to the transfer of interim
    hold-harmless support. The transfer of universal service support
    when one carrier acquires another carrier's exchanges is governed by
    the targeting provisions of the *Ninth Report and Order* and section
    54.305 of the Commission's rules. Pursuant to the *Ninth Report and
    Order*, although a carrier receives interim hold-harmless support
    based on embedded costs averaged over its entire study area, the
    support is targeted for competitive purposes to its highest-cost
    wire centers based on forward-looking economic costs.[^55] Section
    54.305 of the Commission's rules provides that per-line support for
    a transferred exchange remains equal to the per-line amount the
    seller was eligible to receive prior to the transfer, rather than
    being recalculated based on the average cost of all of the buyer's
    lines.[^56] Under these provisions, as of the date of sale, the
    acquiring company would receive the same per-line interim
    hold-harmless support for the transferred exchange that the seller
    was eligible to receive. The issue, however, is whether transferred
    interim hold-harmless support should be phased down following the
    transfer, as it would have been if it had not been transferred, or
    should remain frozen at the per-line support level as of the sale
    date.

20. As an initial matter, we wish to express our general concern about
    the operation of section 54.305. The Commission adopted this rule in
    the *First Report and Order* as a stopgap measure "to discourage
    carriers from placing unreasonable reliance upon potential universal
    service support in deciding whether to purchase exchanges from other
    carriers\[.\]"[^57] At the time, the Commission anticipated that all
    carriers eventually would receive support based on forward-looking
    economic costs, at which point the rule would no longer be
    necessary.[^58] Although we recognize the importance of the rule's
    purpose, we believe that in practice it has negative consequences,
    at least with regard to transfers of exchanges between carriers that
    are not both receiving support based on the forward-looking
    mechanism. For example, by freezing support based on the seller's
    embedded costs, the rule prevents the acquiring carrier from
    receiving an amount of support related to the costs of providing
    supported services in the transferred exchange. Moreover, the rule
    requires the acquiring carrier to keep separate books of account for
    the acquired exchanges for an indefinite period of time. We strongly
    encourage the Commission to consider an alternative to section
    54.305 at the earliest opportunity.

21. Turning to the issue of whether transferred interim hold-harmless
    support should be phased down following the transfer, the Joint
    Board recommends that interim hold-harmless support for exchanges
    transferred to rural carriers should not be phased down following
    the transfer until the Commission reexamines the operation of
    section 54.305, as recommended above, and/or reforms the high-cost
    mechanism for rural carriers, so that replacement support for the
    transferred exchanges is available. This approach would ensure that
    rural carriers receive constant support for eligible transferred
    exchanges, thereby ensuring affordable access to telecommunications
    service in high-cost exchanges.

22. The Joint Board recommends, however, that interim hold-harmless
    support for exchanges transferred to non-rural carriers be phased
    down over the same time period as the seller's support would have
    been phased down. This approach would ensure a prompt and equitable
    phase-down of transferred interim hold-harmless support. It also
    would discourage carriers from transferring exchanges to delay or
    avoid the phase-down of interim hold-harmless support. Because
    targeted support is likely to be greater than average support on a
    per-line basis, targeted interim hold-harmless support for exchanges
    transferred to non-rural carriers would have to be reduced at a
    faster rate than the seller's support to be phased down over the
    same time period. We recommend that such support be phased down by
    an equal percentage for each year of the phase-down period, on an
    exchange-by-exchange basis.[^59] We believe that this approach would
    be administratively simple and predictable for acquiring non-rural
    carriers.

# Recommending clause

21. 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 described
    above relating to schedules and procedures for phasing out interim
    hold-harmless support.

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

**APPENDIX A**

**Parties Filing Comments and Reply Comments**

**Comments:**

1.  People of the State of California and the California Public
    Utilities Commission

2.  Public Service Commission of the District of Columbia

3.  GTE Service Corporation

4.  National Exchange Carrier Association, Inc.

5.  State of New York Department of Public Service

6.  Puerto Rico Telephone Company, Inc.

7.  Roseville Telephone Company

8.  Rural Telephone Coalition

9.  SBC Communications Inc.

10. Sprint Corporation

11. United States Telecom Association

12. U S WEST Communications, Inc.

13. Western Wireless Corporation

**Reply Comments:**

1.  AT&T Corporation

2.  Florida Public Service Commission

3.  GTE Service Corporation

4.  Independent Telephone and Telecommunications Alliance

5.  MCI Worldcom, Inc.

6.  North State Telephone Company

7.  Puerto Rico Telephone Company, Inc.

8.  Roseville Telephone Company

9.  Rural Telephone Coalition

10. Telephone Association of New England

11. United States Telecom Association

12. U S WEST Communications, Inc.

13. Wyoming Public Service Commission

**STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH, APPROVING IN PART
AND DISSENTING IN PART**

Re: Recommended Decision, Federal State-Joint Board of Universal
Service, CC Docket No. 96-45

I support the Joint Board's recommendations that the Commission
(1) retain the long-term support mechanism; (2) continue to calculate
the cap for rural high-cost loop support as if the preexisting high-cost
loop support for non-rural carriers had not been changed; and (3) not
implement a "phase down" of loop support when a non-rural carrier
transfers an exchange to a rural carrier. I cannot, however, endorse the
Board's recommendation that "hold-harmless" loop support be phased out
over the next three years, so that non-rural carriers eventually will
receive universal service support based exclusively on the model that
the Commission adopted last year. That model never worked, and it has no
prospect of working. As I have said before, the model does not satisfy
the Act's basic requirements that universal service support be
"specific" and "predictable," and I believe that relying in any way on
this model does not meet the requirements of the statute.

[^1]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Ninth Report and Order and Eighteenth Order on
    Reconsideration, 14 FCC Rcd 20432, 20478-79 (rel. Nov. 2, 1999)
    (*Ninth Report and Order*). "Non-rural carriers" are local exchange
    carriers that do not meet the definition of a rural telephone
    company contained in 47 U.S.C. § 153(37).

[^2]: *See Ninth Report and Order*, 14 FCC Rcd at 20436-39. The
    forward-looking mechanism became effective January 1, 2000. *Id.* at
    20439. The Commission explained that using forward-looking economic
    costs provides sufficient support without giving carriers an
    incentive to inflate their costs or to refrain from efficient
    cost-cutting. *See id.* at 20443 (citations omitted). The
    Commission's model for estimating forward-looking costs and the
    input values to be used in the model were discussed in a companion
    order. *Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, *Forward-Looking Mechanism for High Cost Support for
    Non-Rural LECs*, CC Docket No. 97-160, Tenth Report and Order, FCC
    99-304 (rel. Nov. 2, 1999) (*Tenth Report and Order*).

[^3]: *Ninth Report and Order*, 14 FCC Rcd at 20474; 47 C.F.R. §
    54.311(a); *see* 47 C.F.R. § 54.303. LTS provides carriers that
    participate in the National Exchange Carrier Association (NECA)
    carrier common line pool with support for interstate-allocated loop
    costs.

[^4]: *Ninth Report and Order*, 14 FCC Rcd at 20474; 47 C.F.R. §
    54.311(a); *see* 47 C.F.R. §§ 36.601, *et. seq.* High-cost loop
    support provides carriers with federal support for a variable
    percentage of their unseparated loop costs, as reflected in their
    books, depending on their number of working loops and the degree to
    which their costs exceed the national average. *See Ninth Report and
    Order*, 14 FCC Rcd at 20440. The term "unseparated" refers to the
    jurisdictional separations process which divides between the state
    and federal jurisdictions the costs of those portions of local
    exchange carriers' telephone plant that are used for intrastate and
    interstate services.

[^5]: *Ninth Report and Order*, 14 FCC Rcd at 20478 (emphasis in
    original); *see Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Seventh Report & Order and Thirteenth Order on
    Recon, *Access Charge Reform*, CC Docket No. 96-262, Fourth Report &
    Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd 8078,
    8111 (1999) (finding generally that interim hold-harmless support
    would serve "both to avoid any potential rate shock when the new
    federal support mechanism goes into effect, and to prevent undue
    disruption of state rate designs that may have been constructed
    upon, and thus are dependent upon, current federal high-cost support
    flows.") (subsequent history omitted).

[^6]: *Ninth Report and Order*, 14 FCC Rcd at 20479.

[^7]: *Federal-State Joint Board on Universal Service Seeks Comment on
    the Interim Hold-Harmless Provision of the Commission's High-Cost
    Support Mechanism*, CC Docket No. 96-45, Public Notice, FCC 99J-2
    (rel. Nov. 3, 1999). A list of the parties filing comments and reply
    comments is attached as Appendix A.

[^8]: *Ninth Report and Order*, 14 FCC Rcd at 20474; 47 C.F.R. §§
    54.303, 54.311(a).

[^9]: *See generally Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Fourth Order on Reconsideration, *Access Charge
    Reform, Price Cap Performance Review for Local Exchange Carriers,
    Transport Rate Structure and Pricing, End User Common Line Charge*,
    CC Docket Nos. 96-262, 94-1, 91-213, 95-72, Report and Order, 13 FCC
    Rcd 5318, 5352-54 (1997) (*Fourth Order on Reconsideration*).

[^10]: Rate-of-return LECS also recover interstate-allocated loop costs
    through subscriber line charges (SLCs).

[^11]: *See MTS and WATS Market Structure and Amendment of Part 67 of
    the Commission's Rules and Establishment of a Joint Board*, CC
    Docket Nos. 78-72 and 80-286, Report and Order, 2 FCC Rcd 2953
    (1987) ("\[LTS\] is necessary to ensure that \[small\] companies are
    not required to charge inordinately high CCL rates for access to
    their networks. The \[LTS\] mechanism allows these carriers to
    maintain the nationwide averaged CCL rate that would have existed
    had the mandatory full common line pool been retained. This should
    avoid unnecessary pressures for bypass in high cost areas, preserve
    toll averaging, and encourage competitive providers of interstate
    switched services to enter such markets.").

[^12]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Report and Order, 12 FCC Rcd 8776, 9164-66 (1997) (*First
    Report and Order*) (subsequent history omitted).

[^13]: LTS now is collected from all providers of interstate
    telecommunications services on an equitable and non-discriminatory
    basis, whereas previously only incumbent LECs that did not
    participate in the NECA pool made LTS payments. Furthermore, LTS
    previously was based on the difference between the NECA common line
    pool revenue requirement and the sum of the revenues obtained from
    charging a nationwide CCL rate calculated pursuant to section
    69.105(b)(2) of the Commission's rules and the revenues obtained
    through SLCs, but is now calculated by adjusting previous LTS
    support levels according to a prescribed rate of change that
    reflects annual changes in loop costs. *See Fourth Order on
    Reconsideration*, 13 FCC Rcd at 5355-56.

[^14]: *See First Report and Order*, 12 FCC Rcd at 8927 ("because we
    will continue to base support on the existing mechanisms for such a
    short period, we do not think it necessary to make significant
    changes to the existing universal service support mechanisms prior
    to the introduction of forward-looking economic cost mechanisms").

[^15]: *Fourth Order on Reconsideration*, 13 FCC Rcd at 5362 (discussing
    *First Report and Order*).

[^16]: *See Ninth Report and Order*, 14 FCC Rcd at 20439, n. 20 and
    accompanying text.

[^17]: *See Access Charge Reform for Incumbent Local Exchange Carriers
    Subject to Rate-of-Return Regulation*, CC Docket No. 98-77, Notice
    of Proposed Rulemaking, 13 FCC Rcd 14238 (1998) (*Access Charge
    Reform Notice*).

[^18]: *See* Appendix B; *see also infra*, n. 32 and accompanying text.
    All of the support estimates discussed herein are based on
    projections for the first quarter of 2000. Support estimates may
    vary from quarter to quarter because interim hold-harmless support
    is calculated on an ongoing, quarterly basis.

[^19]: We note that, as a result of its recent merger with GTE Holdings
    (Puerto Rico) LLC, Puerto Rico is required to convert from
    rate-of-return to price cap regulation, after which it would no
    longer be eligible to participate in the NECA pool or to receive
    LTS. Puerto Rico's request for waiver of the rules to remain subject
    to rate-of-return regulation or, alternatively, continue to receive
    LTS is pending before the Commission. *See* 47 C.F.R. §§ 61.41,
    54.303; *In the Matter of Puerto Rico Telephone Company, Petition
    for Waiver of Section 61.41 or Section 54.303(a) of the
    Commission\'s Rules*, FCC 00-199 (adopted June 2, 2000) (extending
    the deadline by which Puerto Rico may be required to convert to
    price cap regulaton to July 1, 2001, while the Commission weighs the
    merits of the petition).

[^20]: *See* NECA comments at 3-7, Roseville comments at 3-6, ITTA reply
    comments at 3-5, NE Tel. Assoc. reply comments at 2-3, North State
    Tel. Co. reply comments at 2-3, RTC reply comments at 2-4, USTA
    reply comments at 3. NECA, USTA, and Puerto Rico have filed
    petitions for reconsideration of this issue in the *Ninth Report and
    Order*.

[^21]: *See Ninth Report and Order*, 14 FCC Rcd at 20479.

[^22]: *See* NECA comments at 5; Roseville comments at 5-6; ITTA reply
    comments at 5; NE Tel. Assoc. reply comments at 2-3; North State
    Tel. Co. reply comments at 2; RTC reply comments at 2-3; USTA reply
    comments at 3.

[^23]: *See Ninth Report and Order*, 14 FCC Rcd 20467-68. The
    preexisting high-cost loop support mechanism under Part 36 likewise
    supported only intrastate-allocated costs for non-rural carriers.
    *See First Report and Order*, 12 FCC Rcd at 8891-92.

[^24]: *See supra*, para. 5.

[^25]: *Ninth Report and Order*, 14 FCC Rcd at 20478 (emphasis in
    original).

[^26]: *See Fourth Order on Reconsideration*, 13 FCC Rcd at 5362.

[^27]: *See* NECA comments at 4-5; *see also* Roseville comments at 6;
    NE Tel. Assoc. reply comments at 3; North State Tel. Co. reply
    comments at 2; RTC reply comments at 4.

[^28]: *See Ninth Report and Order*, 14 FCC Rcd at 20491-92 (noting the
    "Commission's "commitment not to consider significant changes in
    rural carriers' support until after the Rural Task Force and the
    Joint Board have made their recommendations.").

[^29]: *See Ninth Report and Order*, 14 FCC Rcd at 20439, n. 20 and
    accompanying text; *Access Charge Reform Notice*, 13 FCC Rcd at
    14238.

[^30]: We note that this approach is consistent with the comments of all
    of the parties that specifically addressed LTS in response to the
    Joint Board's request for comments. *See supra*, n. 20 and
    accompanying text.

[^31]: *Ninth Report and Order*, 14 FCC Rcd at 20474*.*; 47 C.F.R. §
    54.311(a); *see also supra*, n.4 and accompanying text.

[^32]: *See* Appendix B. This figure represents the projected \$109
    million in annual interim hold-harmless support (excluding LTS),
    less \$22 million that will not be paid because the eligible
    carriers qualify for greater amounts of forward-looking support.
    *See Ninth Report and Order*, 14 FCC Rcd at 20474 ("To the extent
    that a carrier qualifies for forward-looking support, in an amount
    greater than it would receive pursuant to the existing mechanism,
    the carrier shall receive support based solely on the
    forward-looking methodology.").

[^33]: *See* Appendix B. Support is calculated on a study-area basis
    under Part 36. *See* 47 C.F.R. § 36.601, *et. seq.* Accordingly, we
    treat Puerto Rico's two study areas separately for purposes of
    calculating interim hold-harmless support amounts.

[^34]: *See Ninth Report and Order*, 14 FCC Rcd at paras. 20474-75,
    20480-81; 47 C.F.R. § 54.311(a). Three current interim hold-harmless
    support recipients would be entitled to lesser amounts of
    forward-looking high-cost support from the new mechanism in the
    absence of interim hold-harmless support: Mountain Bell in Wyoming
    and GTE South Inc. and Cincinnati Bell in Kentucky. *See* Appendix
    B.

[^35]: *See* California PUC comments at 4-5; DCPSC comments at 3-4;
    NYDPS comments at 2-3; SBC comments at 1-2; Western Wireless
    comments at 2-3; AT&T reply comments at 2; MCI reply comments at 2;
    *see also* Florida PSC *ex parte* reply comments filed February 7,
    2000.

[^36]: *See* California PUC comments at 4-5; NYDPS comments at 2-3; AT&T
    reply comments at 4. These commenters observe that different
    treatment may be warranted for Puerto Rico because it receives a
    large amount of interim hold-harmless support but does not qualify
    for forward-looking support.

[^37]: *See* GTE comments at 2-5, Puerto Rico comments at 3-6, Roseville
    Telephone Co. comments at 7-10, RTC comments at 5, Sprint comments
    at 5-6, USTA comments at 3-4, US West comments at 3-4, ITTA reply
    comments at 5-9, Wyoming PSC comments at 3-4.

[^38]: *See First Report and Order*, 12 FCC Rcd at 8917.

[^39]: *See Ninth Report and Order*, 14 FCC Rcd at 20479.

[^40]: For example, as mentioned above, one GTE North Inc. study area in
    Missouri is projected to receive \$3.26 in average interim
    hold-harmless support per-line/per-month, excluding LTS. Under our
    recommended approach, this study area would receive average monthly,
    per-line support of \$2.26 (\$3.26 - \$1.00) during the year 2001,
    \$1.26 during the year 2002 (\$3.26 - \$2.00), \$.26 during the year
    2003 (\$3.26 - \$3.00), and no support thereafter.

[^41]: *See Ninth Report and Order*, 14 FCC Rcd at 20479.

[^42]: *See infra*, para. 14.

[^43]: *See supra*, n. 35.

[^44]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Second Recommended Decision, 13 FCC Rcd 24744, 24763 (Jt.
    Bd. 1998) ("If substantial reductions \[in federal high-cost
    support\] were to occur in a single year, some consumers could
    experience rate shock.").

[^45]: *See* Appendix B. In addition to the 12 carriers currently
    receiving support of less than \$1.00 per-line/per-month, Mountain
    Bell-Wyoming's interim hold-harmless support would be phased out
    because, as a result of the applicable \$1.00 annual reduction, it
    would receive forward-looking support under the new mechanism in
    lieu of interim hold-harmless support. *See Ninth Report and Order*,
    14 FCC Rcd at 20474.

[^46]: *See* Appendix B. Specifically, during the year 2002, interim
    hold-harmless support would be phased out for the four carriers and
    for the one Puerto Rico study area receiving support of less than
    \$2.00 per-line/per-month.

[^47]: *See* Appendix B. Phase-down of interim hold-harmless support for
    the remaining Puerto Rico study area would require approximately
    twelve years based on projections for the first quarter year 2000.

[^48]: *See supra*, n. 37. With regard to rural high-cost reform, these
    commenters assert that states must able to calculate their total
    prospective high-cost funding needs, including funding for both
    non-rural and rural carriers, in order to adapt to the shifted
    burden of high-cost funding as a result of the new mechanism. *See,
    e.g.,* GTE comments at 3-5; Sprint comments at 5-6; US West comments
    at 3-4; ITTA reply comments at 7-9. Furthermore, some of these
    commenters maintain that interim hold-harmless support should remain
    in place as a safety net until the Commission has examined the
    overall results of the new support mechanism to determine its
    consistency with universal service principles. *See, e.g.*, Puerto
    Rico comments at 3-6; RTC comments at 4-5; Roseville comments at
    7-10; ITTA reply comments at 5-7.

[^49]: *See Ninth Report and Order*, 14 FCC Rcd FCC 99-306 at 20478-79
    ("We stress that the \[interim hold-harmless\] provision that we
    adopt today is a *transitional* provision intended to protect
    consumers in high-cost areas during the shift to the new federal
    support mechanism . . . . We agree with commenters that the
    hold-harmless provision should not be a perpetual entitlement, and
    should be phased out as carriers and states adapt to the new
    forward-looking mechanism.") (emphasis in original). Arguments that
    the phase-down of interim hold-harmless support should await
    comprehensive review of the new mechanism, *see supra*, n.48, appear
    to be challenges to the validity or sufficiency of the new,
    forward-looking mechanism.

[^50]: *See Ninth Report and Order*, 14 FCC Rcd at 20474-75, 20480-81;
    47 C.F.R. § 54.311(a).

[^51]: *See generally* 47 C.F.R. Part 36, Subpart F.

[^52]: *See Ninth Report and Order*, 14 FCC Rcd at 20490-92.

[^53]: *Ninth Report and Order*, 14 FCC Rcd at 20490.

[^54]: *Ninth Report and Order*, 14 FCC Rcd at 20490-91.

[^55]: *Ninth Report and Order*, 14 FCC Rcd at 20476-78; *see
    Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, *Twentieth Order on Reconsideration*, FCC 00-126 (released
    April 7, 2000), at para. 15-16 (clarifying "cascading approach" to
    targeting of interim hold-harmless support). Consistent with the
    portability provisions of the *Ninth Report and Order*, targeting
    "ensures that, in a wire center where the incumbent is receiving
    hold-harmless support, a competitor will receive an amount of
    support that is related to the costs in that wire center." *Ninth
    Report and Order*, 14 FCC Rcd at 20477. For purposes of this
    discussion, the terms "exchange" and "wire center" are synonymous,
    and "exchange" is used to refer to both.

[^56]: 47 C.F.R. § 54.305.

[^57]: *First Report and Order*, 12 FCC Rcd at 8942-43.

[^58]: *See First Report and Order*, 12 FCC Rcd at 8942-43 ("when all
    carriers receive support based on forward-looking economic costs,
    the level of support will not be a primary factor in a carrier's
    decision to purchase exchanges because the carrier's support will
    not be based on the size of the study area nor embedded costs.").

[^59]: For example, assume Carrier A is entitled to interim
    hold-harmless support in 2000 of \$2.50 per-line/per-month. Under
    the recommended phase-down approach set forth above, Carrier A's
    support would be phased down over a three-year period: in 2001,
    Carrier A would receive monthly per-line support of \$1.50, then
    \$.50 in 2002, then zero in 2003. Assume further that Carrier A
    proposes to sell three exchanges to Carrier B in 2000, and that the
    targeted interim hold-harmless support for the transferred exchanges
    at the time of sale is \$3.00, \$6.00, and \$9.00
    per-line/per-month, respectively. Under the approach proposed here,
    the transferred support would be phased down over a three-year
    period, and Carrier B's support would not depend on subsequent
    recalculations of Carrier A's phased-down support levels. In 2001,
    Carrier B would receive per-line support for the transferred
    exchanges of \$2.00 (=67% of \$3.00), \$4.00 (=67% of \$6.00), and
    \$6.00 (=67% of \$9.00), respectively. In 2002, the per line support
    for each transferred exchange would be 33 percent of the original
    support levels. In 2003, support would phase down to zero for all
    three exchanges. In 2001 and 2002, Carrier A would receive the
    support it would have received absent the sale, minus the support
    that is paid to Carrier B for the three transferred exchanges.