Before the

Federal Communications Commission

Washington, D.C.

  ----------------------------------- ------- ---------------------------------
  *In the Matter of*                  )))))   

  Price Cap Performance Review for            CC Docket No. 94-1
  Local Exchange Carriers                     

  Federal State Joint Board on        )))     CC Docket No. 96-45
  Universal Service                           

  Low-Volume Long Distance Users      )))     CC Docket No. 99-249

  Access Charge Reform                        CC Docket No. 96-262
  ----------------------------------- ------- ---------------------------------

Memorandum in Support of the Revised Plan of the

**Coalition for Affordable Local and Long Distance Service**

The Coalition for Affordable Local and Long Distance Services ("CALLS")
today submits its Modified Universal Service and Access Reform Proposal
(Appendix A, attached), which reflects amendments[^1] to its plan for
interstate access charge and universal service reform.[^2] CALLS also
submits revised draft proposed rules (Appendices B-D) to aid the
Commission and commenters.[^3] Taken as a whole, the CALLS plan provides
a comprehensive blueprint for reform in an area that has challenged the
Commission for nearly two decades and has become increasingly urgent
since the passage of the Telecommunications Act of 1996 ("1996 Act") and
the emergence of packet-based networks like the Internet.

The modifications described below build on the strengths of the original
plan and provide even greater public interest benefits. In brief, the
revised plan, together with additional unilateral long distance pricing
commitments by AT&T and Sprint, incorporates:

-   Lower caps on Subscriber Line Charges ("SLCs") than under the
    original CALLS proposal, both initially and throughout the five year
    plan;

-   An interim cost review to verify the caps for residential and single
    line business Subscriber Line Charges;

-   A \$2.1 billion reduction in switched access usage rates on July 1,
    2000, if all companies participate, and a nearly 50% reduction in
    switched access rates over five years, without shifting local
    switching costs to primary residence and single line business end
    user charges (as would have resulted from the original plan);

-   Elimination of minimum usage charges for AT&T basic schedule long
    distance callers, and preservation of a no-minimum plan by Sprint,
    provided that there is a \$2.1 billion reduction in switched access
    usage rates as of July 1, 2000;

-   Guaranteed rate reductions in special access services for the first
    four years of the plan;

-   A commitment by CALLS to work with the FCC Consumer Information
    Bureau to develop a consumer education plan.

These changes preserve and enhance the substantial benefits of the CALLS
plan. The modified CALLS plan yields strong, upfront consumer benefits,
a stable, robust and explicit universal service support system for rural
and low-income Americans, and regulatory stability that will promote
competition and investment in all markets. The modified CALLS plan
continues to promote investment by incumbents and entrants in all
markets, especially rural and residential markets, while also reducing
the combined local and long distance telephone bills by over \$4.60 per
month for an AT&T customer who makes no long distance calls. The
Commission now has the opportunity to adopt a plan that is a clear win
for consumers, the country, and all companies investing to compete in
telecommunications.

The modified plan is still comprised of three essential and
interdependent parts. First, the plan establishes an explicit and
portable universal service support mechanism of \$650 million, replacing
support that currently is implicit in interstate access charges. Because
the CALLS plan renders this support explicit and portable to competitive
local exchange carriers, it will preserve and enhance universal service
for rural and small town America and make it more likely that
competition, new investment, and new services will come to those areas
as well. In addition, low-income consumers continue to be protected
through an increase in Lifeline support.

Second, the plan consolidates and simplifies the existing patchwork of
loop charges. The residential and single line business pre-subscribed
interexchange carrier charge ("PICC") is consolidated with the SLC and
eliminated. As a result of reducing the primary residence/single line
business SLC cap from the original CALLS plan and consolidating the
residential/single line business SLC and PICC charges, most consumers
will see their total combined SLC and PICC-"pass-through" line charges
[fall]{.underline} by \$0.65 on July 1, 2000, rather than increasing by
approximately \$0.50 on that date, as would occur under current rules.
This yields a combined benefit for consumers of \$1.15 per month.
Although the nominal residential and single line business SLC cap
thereafter is permitted to increase gradually in most areas, most
primary residence and single line business SLCs will never reach the
\$6.50 cap. In addition, the FCC should initiate a proceeding to review
the primary residence/single line business SLC progression after July
2001 to verify that it reflects underlying costs in those areas where
higher SLCs would apply, and the signatory LECs will submit cost
information to assist in that review. The PICC for non-primary lines is
eliminated immediately. Multiline business PICCs and the carrier common
line charge ("CCLC") are eliminated in the vast majority of areas over
the plan's five-year term.

Third, the modified plan provides for an immediate \$2.1 billion
reduction in per minute switched access charges, as provided for in the
original CALLS proposal, and in addition, guarantees reductions in
special access rates. With the exception of X-factor reductions related
to special access, X-factor reductions will be targeted to reduce
switched access usage rates to \$0.0055 for the Bell Companies and GTE,
and \$0.0065 for the other price cap incumbent LECs. Both AT&T and
Sprint, in their separate letters related to long distance pricing,
committed to flow these savings through to residential and business
consumers over the life of the plan.[^4] By reducing the component of
long distance costs attributable to traffic-sensitive charges, the
reductions will ease the tension between the switched network and the
packet-based services that are typically billed on a flat-rated basis.

These modifications respond to issues raised by commenters and FCC staff
over the course of this proceeding. The changes enhance the original
plan and have a common thrust: *they reduce consumer charges, especially
for the low volume consumer*. AT&T basic schedule customers who make no
long distance calls will see combined local and long distance bills cut
almost in half, dropping by over \$4.60 per month on July 1, 2000.[^5]
AT&T light user customers with, for example, 10 minutes of long distance
calling could see local and long distance bills fall by over \$2.50.[^6]
Even for those low volume residential consumers who would pay the
highest possible SLCs at the end of the plan, monthly bills would still
be lower at the end of this plan than they are today. In response to
concern from both consumer representatives and state regulators, this
modified plan now unambiguously delivers clear, demonstrable consumer
benefits, both initially and throughout the plan.

These consumer benefits are, however, only possible if this plan is
implemented coincident with the 2000 price cap LEC tariffs. Delay serves
no public policy goal, and will deprive consumers of these immediate,
tangible benefits.

More than ever, the CALLS plan provides a clear path toward access
charge and universal service reform. The plan substantially reduces
charges to consumers, preserves universal service in a manner that
enhances competition and investment, and creates an interstate access
charge rate structure that is more consistent with the development of
the Internet and other packet-based services. The CALLS plan, taken as a
whole, accomplishes all of these goals in a manner consistent with sound
economic principles and the dictates of the 1996 Act. Swift adoption of
the plan will pave the way for broad growth of competition and
affordable universal service in all telecommunications markets.

# Pro-Consumer Modifications to Common Line/Universal Service Reform

The original plan proposed several reforms to common line and universal
service regulation. These reforms were designed to rationalize the
Commission's complex rules in a way that would further the goals of the
1996 Act and benefit consumers, especially low-income consumers and
those in rural and other high cost areas. Among other things, the plan's
universal service and common line reforms enhance competition and
otherwise benefit consumers by making universal service support portable
to CLECs; simplify consumer bills through the consolidation of common
line charges into a single, flat-rated SLC; and allow for limited
geographical deaveraging. In addition, the plan makes universal service
support explicit, and therefore furthers a principal goal of the 1996
Act.

Two amendments to the plan enhance consumer benefits through common line
and universal service reforms.

First, the progression of SLC caps both begins at a lower level
initially and maintains lower levels throughout the five-year term of
the plan. Second, after July 1, 2001, when the primary residential and
single line business SLC cap reaches \$5.00, CALLS proposes that the
Commission should initiate a proceeding for the purpose of verifying
that the progression of change in the primary residence and single
business SLC caps is appropriate in the UNE zone or zones where they
would apply and that the progression reflects higher costs in these
zones.

A.  **SLC Caps Reduced from Original CALLS Plan.**

In the original plan, single line residence and single line business SLC
caps were increased according to the following schedule:

> January 1, 2000 \$5.50
>
> July 1, 2001 \$6.25
>
> July 1, 2002 \$6.75
>
> July 1, 2003 \$7.00

The revised CALLS plan proposes that the SLC caps begin at a
significantly lower level, increase more slowly, and maintain a lower
level throughout the five-year period:

July 1, 2000 \$4.35

July 1, 2001 \$5.00

July 1, 2002 \$6.00

July 1, 2003 \$6.50

These measured changes in the progression of SLC caps, together with
AT&T's and Sprint's unilateral long distance pricing commitments, remove
any basis for concern that the CALLS plan will harm callers who make few
long distance calls. These adjustments also allay any concerns regarding
affordability for non-Lifeline "working poor" consumers, as low volume
consumers will pay less in total charges under the modified CALLS plan
than they pay today, even if they live in areas that will pay a SLC of
\$6.50 after July 2003.

Although the progression of the SLC caps has been slowed, the modified
proposal maintains the same level of switched access rate reductions as
was provided under the original CALLS plan. For example, in the original
plan, switched access rates were reduced in part by shifting 25% of
incumbent LEC local switching revenues into common line charges to be
collected through subscriber line charges, including primary residence
and single line business subscriber line charges. Under the revised
plan, this transfer does not occur, and the revenues are largely
eliminated, subject to limited safeguards for smaller, rural carriers.
Therefore, although switched access rates will fall dramatically (and
therefore result in lower long distance bills for consumers),
residential and single line business end users will pay a maximum SLC
initially of only \$4.35, increasing at most to \$6.50 by 2003, and they
will pay no PICC pass-through charges. Most residential and single line
business consumers, of course, will pay a SLC significantly below the
cap.

# Verification of Primary Residential and Single Line Business SLC Caps for Higher Cost UNE Zones.

As an additional safeguard to respond to concerns of consumer groups and
state commissions, after July 1, 2001, when the primary residential and
single line business SLC cap would reach \$5.00, CALLS proposes that the
Commission initiate a proceeding for the purpose of verifying that the
progression of change in the primary residence and single business SLC
caps beyond \$5.00 is appropriate in the UNE zone or zones where they
would apply and that the progression reflects higher costs in these
zones.

To facilitate this verification, the LEC members of the Coalition commit
to providing the Commission with economic data, including data
identifying the forward-looking costs associated with the provision of
retail voice grade access to the public switched telephone network for
those areas. [^7] In the event that the Commission finds that the
progression of caps beyond \$5.00 in a certain UNE zone or zones does
not reflect higher costs in such UNE zone or zones, the Commission
should at that time set an appropriate cap for such UNE zone or
zones.[^8]

# Effect on Universal Service Fund

Although the SLC caps have been reduced, this change will not affect the
size of the interstate access related universal service fund. The fund
will remain at \$650 million annually, and support will be distributed
in accordance with the original plan, with the previously proposed \$7
threshold for residential line support. Given the difficulty of
determining the size of the fund and the level of SLC caps, the
temporary adjustment in the SLC caps need not change the size of the
fund. By establishing the \$650 million universal service support, the
Commission will gain experience and develop an empirical basis during
the five year term from which it can evaluate the plan's operation. This
experience will assist the Commission in determining the levels of the
fund and/or primary residence and single line business SLC caps to be
effective after July 2005.

In addition, there is no reason to alter the originally proposed
distribution conventions. The plan provides a methodology for
distributing \$650 million in Interstate Access-related USF to the areas
served by each of the participating price cap LECs. This methodology
again is predictable and specific. It also ensures that virtually all
areas receive enough support to eliminate the multiline business PICC
and carrier common line charges, and that most areas also receive
support to permit geographic deaveraging of SLCs.

The members of CALLS believe that this \$650 million "safety net," when
combined with the common line and switched access reforms also proposed
under the plan as an integrated whole, will ensure that interstate end
user rates remain affordable and comparable between rural and urban
areas, during this five-year transitional period. By establishing a set
amount of \$650 million, the CALLS plan sets a "specific" and
"predictable" amount of explicit support that will be fully portable
among eligible telecommunications carriers, and be offset dollar for
dollar by appropriate reductions in interstate access charges.

In this area, as in others, this plan reflects a balancing of public
interests defined by the 1996 Act. Estimates of the amount of implicit
support in interstate access charges have varied widely. Those estimates
have ranged from \$250 million to \$3.9 billion.[^9] As reflected by
AT&T's calculations using the FCC's HCPM model, the outputs of that
model also support creation of a universal service support mechanism of
approximately \$650 million.[^10]

The Commission can reasonably conclude that, given the public interest
and pro-competitive benefits of immediately establishing a support
mechanism that will allow competition to develop, the universal service
mechanisms proposed by the CALLS plan, taken in its entirety including
\$650 million in explicit support and proposed common line and switched
access reform, meet the requirements and goals of Section 254. Moreover,
the Commission has previously endorsed -- and the courts have upheld --
the validity of consensus industry proposals as an appropriate interim
approach for reform.[^11] Similarly, the state commissions have used
social compacts as a basis for decision-making.[^12]

### Reductions in Switched and Special Access Rates

Under existing rules, the Commission regulates interstate access charge
levels through a price cap mechanism adjusted by inflation and an annual
productivity offset. The productivity offset, or "X-factor," has been
the subject of extensive regulatory proceedings and litigation, and it
has created significant uncertainty in the marketplace. The CALLS plan
is designed to end this regulatory gridlock by adopting an X-factor of
6.5 % to reach target rates for local switching and switched transport.

This approach is reasonable, given that it is a settlement between
buyers and sellers negotiating at arms-length.[^13] As discussed above,
the Commission has previously adopted the product of an industry-wide
settlement negotiation in an effort to further the public interest,
particularly when --- as in this case --- the settlement will apply for
a limited period of time.[^14] Since the Commission has already operated
under a 6.5% X-factor, it is reasonable to use this adjustment factor to
reach a predetermined and agreed upon price level. Hence, there is no
reason for the X-factor battles to continue. As the D.C. Court of
Appeals has admonished, "the best must not become the enemy of the good,
as it does when the \[Commission\] delays making any determination while
pursuing the perfect tariff."[^15]

In response to comments regarding the level and structure of the access
rate reforms,[^16] CALLS proposes several modifications to the plan.
First, the revised plan no longer generally shifts local switching costs
to common line, marketing or TIC elements. Shifting these costs to
common line elements would have increased some primary residence and
single line business SLCs, among other charges. Eliminating this shift,
subject only to limited safeguards for smaller, rural carriers and for
those carriers facing disproportionate initial reductions per line
reduces total primary residence and single line business SLC charges
under the plan.[^17]

The second change involves the mechanism used for targeting reductions
to switched access. The plan reduces switched access usage-based
revenues by \$2.1 billion in its first year. This reduction is
accomplished by reducing rates on average traffic sensitive rates and
carrier common line charges excluding SLCs and PICCs. Under the original
plan, the 6.5% initial reduction was to apply to all access rates,
including special access. As discussed below, under the revised plan,
special access rates are reduced in the first year by 3.0% rather than
6.5 %. In order to accomplish the same switched access usage-based \$2.1
billion reduction in the first year, further reductions must be taken
from the switched trunking and local switching baskets. Additional
reductions to average traffic sensitive charge rates necessary to
achieve a total of \$2.1 billion reduction in switched access rates on
July 1, 2000, will be calculated as a percentage of the local switching
element of all price cap LECs. Carriers, however, may take these
reductions against any of the average traffic sensitive charge rate
elements, provided that they still generate the same amount of
reductions. At least a proportionate share of the additional reduction
in average traffic sensitive charge rates will be taken from local
switching rates. These additional reductions to average traffic
sensitive charge rates -- those necessary to achieve a \$2.1 billion
reduction in switched access usage rates after implementing all other
changes under the plan -- may not be offset by increases in other rate
elements, except for limited safeguards for mid-sized price cap carriers
that serve rural areas.[^18]

While the proposal provides for switched access reductions that are
commensurate with those expected of the larger LECs, these LECs will be
allowed to "pool" all or a portion of the reductions and target them for
recovery from sources other than residential end users and per-minute
charges, until the conclusion of the cost review proceeding. Building a
safeguard for these companies into the plan is consistent with
Commission precedent, and restricting the manner in which recovery takes
place ensures that end user customers will enjoy the full benefits of
the CALLS plan.

In other contexts, the Commission has recognized that the disparity
between large and mid-size LECs goes far beyond differences in customer
base. Due to their size, mid-sized LECs generally have different
economies of scale than do the large LECs; they incur greater costs to
provide service, do not receive the same volume discounts from vendors,
and overall, shoulder a disproportionate burden, both in terms of time
and expense, in meeting regulatory costs.[^19] The recovery safeguard
proposed in the CALLS plan recognizes these disparities, as does the
existing differential in target rates for the non-carrier common line
switched access charges.

Similarly, in implementing its plan for universal service, the
Commission has carefully distinguished between rural and non-rural
providers, understanding that caution must be employed when defining
support levels for rural, high-cost areas. It is for all these same
reasons that the CALLS plan provides for distinct, but balanced
treatment for mid-sized, rural LECs with respect to switched access rate
reductions.

It is important to recognize that this particular provision of the
proposal affects only those rate reductions [above and
beyond]{.underline} the reductions that result from the operation of the
existing price cap rules. Consequently, those mid-sized LECs qualifying
for this provision will still make their normal price cap rate
reductions. Moreover, these companies will also implement the additional
switched access rate reductions called for by the modified CALLS plan.

The proposal further recognizes that, in some instances, reduction of
those qualifying mid-sized LECs' total revenues beyond that required by
existing price cap rules may not be appropriate. In particular,
mid-sized LECs with significant rural holdings have raised the
possibility that their common line revenues are below - and perhaps
significantly below - their forward-looking economic costs.[^20] Further
examination of forward-looking costs for these companies may in fact
show that common line recovery should increase rather than decrease. The
safeguard for smaller, rural carriers will provide them with some
revenue stability while allowing the Commission to review the level of
common line recovery in more detail as part of the SLC cap proceeding
beginning in 2001.

The safeguard for carriers that face above average reductions per line
in the first year is designed to spread those reductions more equitably
over time. Carriers that elect this option can pool a portion of their
initial year reductions and recover these pooled amounts as additional
components of a non-primary residential SLC or multiline business SLC or
PICC. These pooled amounts will be eliminated through application of an
X-factor of 6.5% beyond the date on which the average non-CCL switched
access rates reach the applicable target rates.

The third change to non-common line carrier access charge rates involves
the targeting of special access reductions. Under the original plan,
carriers were not required to target X-factor reductions to special
access services after the first year of the plan. Because productivity
results were targeted to switched access, they primarily benefited
residential and small business users. In order to further extend the
benefits of the CALLS plan to dedicated or high volume users, the
modified plan targets special access as well. The revised plan requires
price cap LECs to reduce special access rates using an X-factor equal to
3.0% in 2000 and 6.5% annually in 2001, 2002, and 2003. Thereafter,
there will be a price cap freeze for special access (*i.e.*, X will
equal inflation). Thus, special access customers continue to be
guaranteed reductions in special access rates through the modified CALLS
plan.

This schedule of guaranteed reductions for special access is an
important component of the unified plan. The 3.0% productivity offset in
the first year is necessary for two reasons. First, special access rates
will fall in the first year because incumbent LEC universal service
contributions will be removed from special access rates as of July 1,
2000. Second, price cap LECs will be taking greater reductions in
switched access to reach the \$2.1 billion reduction than otherwise
would be realized from ordinary targeted reductions. During the next 3
years, when these factors are not present, the X-factor will be 6.5%. By
July 2004, the special access X-factor equals inflation so that the
price cap system will encourage additional investment in those areas
remaining under price caps at that time.[^21]

# Conclusion

The CALLS plan was conceived as a compromise among carriers with
divergent interests. The proposed modifications to the plan respond to
comments and suggestions by other parties, including state
commissioners, consumers, public interest groups and Commission staff.
The revised plan therefore amounts to a carefully balanced and intricate
resolution of the thorny issues of universal service and access charge
reform. It provides the Commission with the best opportunity it has ever
had to move beyond contentious debate and adopt a solution.

For all the reasons described, the public interest will be served by the
expeditious adoption of the plan. The public --- and all segments of the
telecommunications industry --- should be given the opportunity to enjoy
the immediate, tangible benefits of the plan.

> Respectfully submitted,
>
> By:

John T. Nakahata

Karen L. Gulick

Evan R. Grayer

> [Harris, Wiltshire & Grannis llp]{.smallcaps}
>
> [1200 Eighteenth Street, N.W.]{.smallcaps}
>
> [Washington, D.C. 20036]{.smallcaps}
>
> [(202) 730-1300]{.smallcaps}
>
> *Attorneys for the Coalition for Affordable Local and Long Distance
> Service (CALLS)*

March 8, 2000

[^1]: *See,* Letter from John T. Nakahata to Magalie Roman Salas,
    Outline of Modifications to CALLS Proposal (filed Feb. 28, 2000).

[^2]: *See,* Memorandum in Support of the Coalition for Affordable Local
    and Long Distance Service Plan (filed Aug. 20, 1999).

[^3]: ^3^ Due to time constraints, these are preliminary draft rules.
    CALLS continues to review these drafts and will file updates as
    necessary with the Commission. These drafts and any updates will be
    posted to the CALLS website: www.phonepolicy.com.

[^4]: *See*, Letter from Richard Juhnke to Magalie Roman Salas (filed
    Feb. 25, 2000); Letter from JoelLubin to Magalie Roman Salas (filed
    Feb. 25, 2000).

[^5]: *See*, Appendix E.

[^6]: *Id*.

[^7]: Nothing herein alters or waives the CALLS members' positions with
    respect to the legality, definition, application, or use of
    forward-looking costs.

[^8]: If the Commission acts to establish a SLC cap lower than the
    proposed SLC caps, it may result in a higher CCL rate than would
    otherwise occur. The Commission should adjust the multiline PICC to
    the extent necessary to mitigate the change in CCL rates.

[^9]: *See*, HAI Model Version 5.0a, CC Dkt. No. 96-45; Comments of
    United States Telephone Association on Further Notice of Proposed
    Rulemaking, CC Dkt. No. 96-45 and 96-262 (filed July 23, 1999).

[^10]: BellAtlantic, BellSouth, GTE, and SBC do not support use of a
    model to calculate universal service support, and together with
    Sprint do not join in the citation of AT&T's model-based
    calculation.

[^11]: *See*, *MCI Telecommunication Corp. v. FCC*, 712 F.2d 517, 532-33
    (D.C. Cir. 1983) ("ENFIA"); *see also*, Advanced Television Systems
    and Their Impact Upon the Existing Television Broadcast Service,
    *Fourth Report and Order*, 11 F.C.C. Rcd. 17771 (1996).

[^12]: *See*, *for example*, D.C. Public Service Commission Formal Case
    814, Phase 4, Order 11545 (rel. Nov. 17, 1999) (approval of
    settlement agreement regarding infrastructure deployment); Indiana
    Utility Regulatory Commission, Cause No. 41324, Interim Order (rel.
    February 16, 2000) (approving OSS settlement agreement)

[^13]: The magnitude of usage sensitive switched access reductions is
    the same under the modified plan as under the original CALLS
    proposal. The target usage sensitive switched access rates are also
    the same in both the modified and the original proposal. In the
    comments and replies with respect to the original proposal, no party
    offered any evidence to support any claim that these reductions or
    target rates result in predatory prices.

[^14]: *See,* i*nfra*, note 12.

[^15]: *MCI Telecoms Corp. v. FCC*, 627 F.2d 322, 341-342 (D.C. Cir.
    1980).

[^16]: *See, for example*, Comments of Time Warner Telecom (filed Nov.
    12, 1999); Comments of the People of the State of California and the
    California Public Utilities Commission, at 20-21 (filed Nov. 12,
    1999).

[^17]: *See*, Appendix A, paragraphs 3.2.4.1 and 3.2.4.2 for a
    description of these exceptions.

[^18]: *See*, Appendix A, paragraph 3.2.4.1 for a description of the
    exception for smaller rural carriers.

[^19]: It was for these very reasons that the Commission recently
    determined that mid-sized price cap LECs should be permitted to use
    Class B Accounts and submit their cost allocation manuals based on
    the Class B System of Accounts. *See*, 1998 Biennial Regulatory
    Review -- Review of Accounting and Cost Allocation Requirements,
    *Report and Order*, 14 F.C.C. Rcd. 11396 (1999).

[^20]: This could be due, in part, to the application of a uniform
    productivity offset to all price cap baskets when gains in switching
    and transport technology may have reduced unit cost for these
    services more quickly than corresponding costs for loops.

[^21]: The Commission's access charge pricing flexibility order requires
    that services granted Phase II pricing flexibility and contract
    tariffs entered into during Phase I pricing flexibility be removed
    from price caps. Access Charge Reform, Fifth Report and Order and
    Further Notice of Proposed Rulemaking, 14 F.C.C. Rcd. 14221, ¶¶
    24-25 (1999) ("Pricing Flexibility Order").