**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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**NOTICE OF PROPOSED RULEMAKING**

**Adopted: December 9, 2005 Released: December 9, 2005**

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

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

By the Commission: Commissioner Abernathy issuing a statement.

Table of Contents

**Paragraph \#**

I. introduction 1

II\. background 2

A. The 1996 Act 2

B. Ninth Report and Order 3

C. Qwest I 4

D. Order on Remand 5

E. Qwest II 6

III\. issues for comment 7

A. Definition of "Sufficient" 8

B. Definition of "Reasonable Comparability" 18

C. Funding Mechanisms 23

D. Puerto Rico Telephone Company's Request for an Insular-Specific
Support Mechanism 30

IV\. PROCEDURAL MATTERS 39

A. Initial Regulatory Flexibility Analysis 39

B. Paperwork Reduction Act Analysis 40

C. Ex Parte Presentations 41

D. Comment Filing Procedures 42

V. ORDERING CLAUSES 46

APPENDIX

# introduction

1.  In this Notice of Proposed Rulemaking, we seek comment on issues
    raised by section 254(b) of the Communications Act of 1934, as
    amended (the Act) and the United States Court of Appeals for the
    Tenth Circuit's (Tenth Circuit) decision in *Qwest Corp. v. FCC*
    (*Qwest II*).[^1] Specifically, we seek comment on how to reasonably
    define the statutory terms "sufficient" and "reasonably comparable"
    in light of the court's holding in *Qwest II*.[^2] The court
    directed the Commission on remand to articulate a definition of
    "sufficient" that appropriately considers the range of principles in
    section 254 of the Act and to define "reasonably comparable" in a
    manner that comports with its duty to preserve *and* advance
    universal service.[^3] We also seek comment on the support mechanism
    for non-rural carriers, which the *Qwest II* court invalidated due
    to the Commission's reliance on an inadequate interpretation of
    statutory principles and failure to explain how a cost-based
    mechanism would address problems with rates.[^4] Finally, we seek
    comment on a proposal by Puerto Rico Telephone Company, Inc. (PRTC)
    that the Commission adopt a non-rural insular mechanism.[^5] PRTC
    sought clarification and/or reconsideration of the *Order on Remand*
    and requests, among other things, that it receive support based on
    its embedded costs.[^6] Because granting PRTC's request would
    require amendment of the Commission's rules,[^7] we will treat
    PRTC's Petition as a petition for rulemaking.

# background

## The 1996 Act

2.  The Telecommunications Act of 1996 Act codified the historical
    commitment of the Commission and state regulators to promote
    universal service by ensuring that consumers in all regions of the
    nation have access to affordable, quality telecommunications
    services.[^8] In section 254 of the Act, Congress directed the
    Commission, after consultation with the Federal-State Joint Board on
    Universal Service (Joint Board), to establish specific, predictable,
    and sufficient support mechanisms to preserve and advance universal
    service.[^9] 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.[^10] Among
    other things, section 254(b) provides 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."[^11] In
    addition, section 254(e) provides that federal universal service
    support "should be explicit and sufficient to achieve the purposes
    of this section."[^12]

## Ninth Report and Order

3.  In the *Ninth Report and Order*, the Commission established a
    federal high-cost universal service support mechanism for non-rural
    carriers based on forward-looking economic costs.[^13] The non-rural
    mechanism determines the amount of federal high-cost support to be
    provided to non-rural carriers by comparing the statewide average
    non-rural, forward-looking cost per line to a nationwide cost
    benchmark that was set at 135 percent of the national average cost
    per line.[^14] Federal support is provided to non-rural carriers in
    states with costs that exceed the benchmark. In the companion *Tenth
    Report and Order*, the Commission finalized the computer model
    platform and adopted model inputs used to estimate the
    forward-looking costs of a non-rural carrier's operations, which are
    then used to determine support under the mechanism adopted in the
    *Ninth Report and Order*.[^15]

## Qwest I

4.  In *Qwest I*, the Tenth Circuit remanded the *Ninth Report and
    Order* to the Commission for further consideration.[^16] On remand,
    the court directed the Commission to define more precisely the
    statutory terms "sufficient" and "reasonably comparable" and then to
    assess whether the non-rural mechanism will be sufficient to achieve
    the statutory principle of making rural and urban rates reasonably
    comparable.[^17] In addition, the court found that the Commission
    failed to explain how its 135 percent nationwide cost benchmark will
    help achieve the goal of reasonable comparability or
    sufficiency.[^18] The court directed the Commission on remand "to
    develop mechanisms to induce adequate state action" to preserve and
    advance universal service.[^19] Finally, because the non-rural
    mechanism concerns only one piece of universal service reform, the
    court stated that it could not properly assess whether the total
    level of federal support for universal service was sufficient and
    indicated the Commission would have the opportunity on remand to
    explain further its complete plan for supporting universal
    service.[^20]

## Order on Remand

5.  In response to the court and the recommendations of the Joint
    Board,[^21] the Commission modified the high-cost universal service
    support mechanism for non-rural carriers and adopted a rate review
    and expanded certification process to induce states to ensure
    reasonable comparability of rural and urban rates in areas served by
    non-rural carriers.[^22] The *Order on Remand* adopted in large part
    the Joint Board's recommendations, with certain modifications. In
    particular, the Commission defined the statutory terms "sufficient"
    as "enough federal support to enable states to achieve reasonable
    comparability of rural and urban rates in high-cost areas served by
    non-rural carriers,"[^23] and defined "reasonably comparable" in
    terms of a national urban residential rate benchmark.[^24] The
    Commission also set a national urban rate benchmark at two standard
    deviations above the average urban residential rate in an annual
    Wireline Competition Bureau (Bureau) rate survey,[^25] and sought
    comment on specific issues related to the rate review.[^26] In
    addition, the Commission modified the 135 percent cost benchmark by
    adopting a cost benchmark based on two standard deviations above the
    national average cost.[^27]

## Qwest II

6.  On February 23, 2005, the Tenth Circuit remanded the *Order on
    Remand* to the Commission.[^28] The court held that the Commission
    failed to reasonably define the terms "sufficient" and "reasonably
    comparable."[^29] The court directed the Commission on remand to
    articulate a definition of "sufficient" that appropriately considers
    the range of principles in section 254 of the Act and to define
    "reasonably comparable" in a manner that comports with its duty to
    preserve and advance universal service.[^30] Because the non-rural,
    high-cost support mechanism rests on the application of the
    definition of "reasonably comparable" rates that was invalidated by
    the court, the court also deemed the support mechanism invalid.[^31]
    The court also noted that the Commission based the two standard
    deviations *cost* benchmark on a finding that *rates* were
    reasonably comparable, without empirically demonstrating a
    relationship between the costs and the rates in the record.[^32] On
    remand, the court directed the Commission to "utilize its unique
    expertise to craft a support mechanism taking into account all the
    factors that Congress identified in drafting the Act and its
    statutory obligation to preserve *and* advance universal
    service."[^33] The court upheld the Commission's determination that
    section 254 of the Act does not require the states to replace
    existing implicit subsidies with explicit universal service support
    mechanisms.[^34] In addition, the court also affirmed that portion
    of the *Order on Remand* requiring states to certify annually that
    rural rates within their boundaries are reasonably comparable, or if
    they are not, to present an action plan to the Commission.[^35]

#  issues for comment

7.  We seek comment on a number of issues that will enable the
    Commission to craft a non-rural high-cost support mechanism
    consistent with the court's decision and the statute. Specifically,
    we seek comment on: (1) how the Commission should define the
    statutory term "sufficient" to take into account all the principles
    enumerated in section 254(b); (2) how the Commission should define
    "reasonably comparable" under section 254(b)(3), consistent with its
    concurrent duties to preserve and advance universal service; (3)
    how, in light of the interpretation of the key statutory terms, the
    Commission should modify the high-cost funding mechanism for
    non-rural carriers; and (4) whether the Commission should adopt a
    non-rural insular mechanism.

## Definition of "Sufficient"

8.  In *Qwest II*, the court directed the Commission to demonstrate that
    it has appropriately considered all principles in section 254(b) of
    the Act in defining the term "sufficient."[^36] In the *Order on
    Remand*, the Commission defined "sufficient," for purposes of the
    statutory principle in section 254(b)(3) as applied to the non-rural
    mechanism, as enough federal support to enable states to achieve
    reasonable comparability of rural and urban rates in high-cost areas
    served by non-rural carriers.[^37] The court found this definition
    inadequate.[^38] We seek comment on how the Commission should
    balance all seven principles in section 254(b) of the Act in
    defining the term "sufficient" for purposes of the non-rural
    high-cost support mechanism. While the court directed the Commission
    to consider all the section 254(b) principles in addition to
    reasonable comparability in section 254(b)(3), the court recognized
    that the Commission could give greater weight to one principle over
    another. We seek comment on whether any of the section 254(b)
    principles conflict with one another and, if so, how to balance the
    principles to resolve such conflict. Should the Commission give
    greater weight to any particular principle? If so, how would the
    Commission justify such an approach? We seek comment on how the
    Commission should weigh each principle in relationship to the
    purposes of the non-rural high-cost mechanism, and discuss each
    principle in turn below.

9.  Section 254(b)(1) provides that "\[q\]uality services should be
    available at just, reasonable, and affordable rates."[^39] Although
    the Commission did not explicitly discuss how the non-rural
    mechanism helps to keep rates affordable in the *Order on Remand*,
    it has explained in the past that "\[a\] major objective of
    universal service is to help ensure affordable access to
    telecommunications services to consumers living in areas where the
    cost of providing such services would otherwise be prohibitively
    high."[^40] We seek comment on whether ensuring that rates in rural
    areas are reasonably comparable to rates in urban areas also ensures
    that those rates are affordable.

10. We also seek comment on whether we should define the phrase
    "affordable rates." In the *Order on Remand*, the Commission
    declined to adopt an affordability benchmark for local telephone
    service, proposed by SBC, based on the median household income of a
    particular geographic area.[^41] Although the court did not address
    this issue specifically, it was "troubled by the Commission's
    seeming suggestion that other principles, including affordability,
    do not underlie the federal non-rural support mechanisms."[^42] We
    seek comment on whether we should reconsider SBC's proposal or any
    other proposals for defining affordability in relationship to
    income. Alternatively, should the Commission create eligibility
    requirements based on household income for non-rural high-cost
    support? In previously rejecting proposals to require that states
    implement such eligibility requirements in conjunction with
    non-rural high-cost support, the Commission found that "section
    254(b)(3) reflects a legislative judgment that all Americans,
    regardless of income, should have access to the network at
    reasonably comparable rates."[^43] We seek comment on whether
    defining affordability in terms of individual household income would
    be consistent with section 254(b)(3). We also seek comment from
    state commissions about implementation issues that would arise if
    the Commission were to adopt any of these approaches to determining
    affordability. The Commission previously determined that it was
    better to address affordability issues unique to low-income
    consumers through the federal low-income programs specifically
    designed for this purpose rather than through the high-cost support
    programs.[^44] Is this conclusion still appropriate in light of
    *Qwest II*?

11. In addition, we seek comment on whether we should consider the
    burden on universal service contributors when determining whether
    rates are affordable. In the *Order on Remand*, the Commission found
    that the principle of sufficiency means that non-rural high-cost
    support should be "only as large as necessary" to meet the statutory
    goal.[^45] While the court was not troubled by this language in the
    abstract, because excessive subsidization arguably may affect the
    affordability of telecommunications services for unsubsidized users,
    the court found that the Commission had failed to take into account
    the full range of principles by defining sufficiency only in terms
    of reasonable comparability.[^46] Would it be more appropriate to
    ground the idea that the amount of support should only be as large
    as necessary in the principle of affordability?[^47] We also seek
    comment on whether the Commission should define any of the other
    terms in section 254(b)(1) for purposes of determining whether
    non-rural high-cost support is sufficient. For example, the
    Commission and the Joint Board previously have interpreted the term
    "quality services" in this section to mean quality of service.[^48]
    We seek comment on both this prior interpretation and whether the
    Commission should consider quality of service in determining whether
    non-rural high-cost support is sufficient.[^49]

12. Section 254(b)(2) provides that "\[a\]ccess to advanced
    telecommunications and information services should be provided in
    all regions of the Nation."[^50] Although advanced
    telecommunications and information services currently are not
    supported by the non-rural high-cost mechanism, the public switched
    telephone network is not a single-use network, and modern network
    infrastructure can provide access not only to voice services, but
    also to data, graphics, video, and other services. The Commission
    has found that the use of high-cost support to invest in
    infrastructure capable of providing access to advanced services is
    not inconsistent with the requirement in section 254(e) that support
    be used "only for the provision, maintenance, and upgrading of
    facilities and services for which the support is intended."[^51] To
    what extent should the Commission consider whether non-rural
    high-cost support is sufficient to enable carriers to upgrade
    networks in their high-cost areas so that the networks are capable
    of providing access to advanced services?

13. Section 254(b)(3) provides that "\[c\]onsumers in all regions of
    Nation, including low-income consumers and those in rural, insular,
    and high cost areas, should have access to telecommunications and
    information services, including interexchange services and advanced
    telecommunications and information services, that are reasonably
    comparable to those services provided in urban areas and that are
    available at rates that are reasonably comparable to rates charged
    for similar services in urban areas."[^52] Although we seek comment
    below on the definition of reasonably comparable rates,[^53] we seek
    comment here on whether we should consider other aspects of this
    principle in determining whether non-rural high-cost support is
    sufficient. For example, should the Commission consider whether the
    telecommunications and information services provided in rural areas
    are reasonably comparable to those services provided in urban areas?

14. Section 254(b)(4) provides that "\[a\]ll providers of
    telecommunications services should make an equitable and
    nondiscriminatory contribution to the preservation and advancement
    of universal service."[^54] We note that the Commission is
    considering modifications to its current universal service
    contribution methodology.[^55] A critical component of that inquiry
    is determining whether any proposed change meets section 254(d)'s
    requirement that providers of "interstate telecommunications
    services shall contribute, on an equitable and nondiscriminatory
    basis. . . ."[^56]   We seek comment on the extent to which the
    Commission should consider whether all providers' contributions are
    "equitable and nondiscriminatory" in considering whether non-rural
    high-cost support is sufficient.  We seek comment on whether and why
    the Commission should apply a different interpretation to the term
    "equitable and nondiscriminatory," as contained in section
    254(b)(4), than it applies with respect to that term as used in
    section 254(d).  We also note that the statute uses the same terms
    in section 254(f), which concerns the permissive authority of states
    to require telecommunications carriers that provide intrastate
    telecommunications services to contribute, in a manner determined by
    the state, to state universal service mechanisms.[^57] In *Qwest
    II*, the court rejected petitioners' argument that implicit state
    subsidies may force some carriers to bear a disproportionate and
    inequitable share of the burden in supporting their own high-cost
    consumers.[^58] Agreeing with the Commission that section 254(f)
    merely imposes an obligation on carriers within a state to
    contribute if the state establishes universal service programs, the
    court said that "it does not impose a requirement of parity with
    respect to internal functioning and the distribution of funds
    between and among carriers."[^59] Although the court was
    interpreting "equitable and nondiscriminatory" in section 254(f),
    does the court's statement shed any light on how these terms should
    be interpreted in section 254(b)(4)?

15. Section 254(b)(5) provides that "\[t\]here should be specific,
    predictable, and sufficient Federal and state mechanisms to preserve
    and advance universal service."[^60] In determining whether
    non-rural high-cost support is sufficient, to what extent should the
    Commission also determine whether such support is specific and
    predictable? How should the terms specific and predictable be
    defined or interpreted?[^61] We also seek comment on whether the
    Commission should determine how each section 254(b) principle
    advances universal service in light of the court's direction that
    the Commission define reasonably comparable consistent with its
    duties to preserve *and* advance universal service.[^62]

16. Section 254(b)(6) provides that "\[e\]lementary and secondary
    schools and classrooms, health care providers, and libraries should
    have access to advanced telecommunications services as described in
    subsection (h)."[^63] We note that the Commission has established
    separate programs to meet this goal. To what extent should the
    Commission consider whether non-rural high-cost support helps enable
    schools, libraries, and health care providers to have access to
    advanced telecommunications services?

17. Section 254(b)(7) provides that the Joint Board and the Commission
    may base their policies on additional principles that "are necessary
    and appropriate for the protection of the public interest,
    convenience, and necessity and are consistent with \[the 1996
    Act\]."[^64] Pursuant to this section and based on the Joint Board's
    recommendation, the Commission established "competitive neutrality"
    as an additional principle upon which to base policies for the
    preservation and advancement of universal service.[^65] In
    determining whether non-rural high-cost support is sufficient, to
    what extent should the Commission determine that such support is
    competitively neutral? How does the Commission's prior determination
    that non-rural high-cost support is portable affect this
    analysis?[^66]

## Definition of "Reasonable Comparability"

18. In *Qwest II*, the court directed the Commission to define the term
    "reasonably comparable" in a manner that comports with its
    concurrent duties to preserve and advance universal service.[^67] In
    the *Order on Remand*, the Commission concluded that that the range
    of variability of urban rates is an appropriate measure of what
    should be considered reasonably comparable rural and urban rates,
    and defined reasonably comparable in terms of a national urban rate
    benchmark.[^68] The court rejected this analysis, finding that "the
    Commission erred in premising its consideration of the term
    'preserve' on the disparity of rates existing in 1996 while ignoring
    its concurrent obligation to advance universal service, a concept
    that certainly could include a narrowing of the existing gap between
    urban and rural rates."[^69] We seek comment on how the Commission
    should define reasonably comparable rates in order to preserve and
    advance universal service. In *Qwest II*, the court was concerned
    that the variance between rural and urban rates was
    significant.[^70] Upon what rate data should the Commission rely to
    assess the extent of the existing variance between rural and urban
    rates?[^71] Should the Commission gather additional rate data? If
    so, how and where should the Commission obtain such data? We invite
    commenters, including state commissions, to submit rate data,
    suggest sources of such data, and propose methods of collecting and
    analyzing the data.

19. We seek comment on whether the Commission should compare rural and
    urban rates within each state instead of, or in addition to,
    comparing rural rates in all states to a national urban rate
    benchmark. Would a state-specific urban rate benchmark provide
    states more flexibility in designing state rates? For example, while
    some states may want to keep local rates in rural areas very low,
    customers in such states may have very small calling areas and,
    consequently, make more toll calls. Other states may want rural
    customers to have very large calling areas so they do not have to
    make as many intrastate toll calls, but that may require higher
    local rates to offset the revenues the carrier would lose from toll
    calls. If rural rates in the second group of states were no higher
    than urban rates in the state, should they be considered to be
    reasonably comparable even though they may be higher than the rural
    rates in the first group of states? We seek comment, including
    comment form state commissions, on how the Commission would
    determine state-specific rate comparability benchmarks and how those
    benchmarks should relate to any national urban rate benchmark.

20. We seek comment on whether the Commission should continue to compare
    rural rates in all states to a single national urban rate benchmark.
    If so, which urban rates should the Commission use to establish the
    benchmark? How should the Commission interpret the *Qwest II*
    court's rejection of the Commission's reliance on the range of urban
    rates? Should the Commission seek to narrow the range of urban
    rates? Should the Commission compare rural rates to a national
    average urban rate, rather than some benchmark above the
    average?[^72] If the Commission uses a single national urban rate
    benchmark, should the Commission compare rural rates to the lowest
    urban rate? If the Commission uses the lowest urban rate as a
    benchmark, what would be the range of reasonably comparable rates?
    For example, should the Commission require that rural rates in all
    states be no more than ten percent, or perhaps twenty-five percent,
    above the lowest urban rate in the Bureau's annual rate survey
    (\$15.65 in 2002)?[^73] We seek comment on how the Commission would
    justify any particular percentage above a benchmark.

21. We seek comment on whether the Commission should continue defining
    reasonably comparable rates in terms of local rates only. Most
    consumers do not purchase only local service, but purchase bundles
    of telecommunications services from one or more providers.[^74]
    Moreover, it may be that most rural consumers, who typically have
    smaller calling areas than urban consumers, purchase more long
    distance services than urban consumers. We seek comment on whether
    the Commission should consider a broader range of rates in
    determining whether rates are reasonably comparable. We also seek
    comment on whether comparing rates for packages of services would
    simplify the task of establishing a comparability benchmark. For
    example, if we were to compare what average consumers pay for a
    package of services that includes long distance services, we may not
    need to adjust local rates to account for differences in calling
    scopes between rural and urban areas.

22. We also seek comment on whether defining reasonably comparable rural
    and urban rates in terms of consumers' total telephone bills would
    be more consistent with our obligation to preserve and advance
    universal service than focusing only on local rates. As discussed
    above, the principles in section 254(b) provide that consumers in
    all regions of the nation should have access to telecommunications
    and information services, including advanced services and
    interexchange services.[^75] The telecommunications marketplace has
    changed considerably since the Commission adopted the non-rural
    mechanism in 1999. Consumers increasingly are purchasing packages of
    services that include unlimited local, regional toll, and long
    distance calling. If such packages were unavailable to consumers in
    rural areas, would their rates be reasonably comparable if they had
    very low local rates, but per-minute toll and long distance charges
    that exceeded the price of the flat-rate package? How does a
    consumer's ability to access the Internet via a local call or
    broadband connection affect our analysis? We invite commenters
    recommending that the Commission consider packages of services in
    determining reasonably comparable rates to submit rate data, as well
    as to propose methods of analyzing such data.

## Funding Mechanisms

23. In this section we seek comment on the non-rural high-cost support
    mechanism. The *Qwest II* court found that the current mechanism
    must be invalidated because the mechanism rested on the application
    of a definition of "reasonably comparable" rates that the court also
    invalidated.[^76] The court remanded this issue, directing the
    Commission to "craft a support mechanism taking into account all the
    factors that Congress identified in drafting the Act and \[the
    Commission's\] statutory obligation to preserve and advance
    universal service."[^77] We seek comment regarding how the non-rural
    support mechanism achieves the Act's goals and statutory principles,
    with specific emphasis on the concerns raised by the court in *Qwest
    II*. In light of the *Qwest II* court's direction that the
    Commission provide stronger evidence that its universal service
    support mechanisms achieve the Act's rate-related goals, we seek
    comment regarding a rate-based universal service support
    mechanism.[^78] Would a rate-based support mechanism better address
    the statutory principles discussed above? Would it be easier to show
    an empirical relationship between a rate-based support mechanism and
    rates, as the *Qwest II* court instructs?

24. *Rate-Based Support Mechanism*. We seek comment regarding how a
    rate-based support mechanism would be designed. What data would be
    necessary to administer a rate-based mechanism? Should the data be
    collected from the state ratemaking authority or from carriers?
    Would support simply be provided to areas which experience rates in
    excess of a nationwide benchmark? If so, how would the Commission
    set that benchmark? What elements should be included in the rate
    mechanism? Should the mechanism address residential and business
    rates, or only residential rates? Should the mechanism support only
    the basic rate elements, or should it include other mandatory fees
    and taxes? In areas where the basic calling plans rely heavily on
    message units, how would the rate mechanism compare those to the
    benchmark? As discussed above, consumers increasingly purchase their
    basic local service as part of a bundle of services, including long
    distance.[^79] How, if at all, should a rate-based mechanism account
    for bundled services?

25. We note that there are urban and suburban areas that have rates that
    would likely exceed any rate benchmark that the Commission would
    set.[^80] Should the rate mechanism have some means of excluding
    these areas, or should the mechanism fund all areas with high rates,
    including those with low costs for providing service? Conversely,
    many high-cost rural areas currently have lower rates that would
    likely not trigger support under a rate benchmark.[^81] Should the
    rate-based mechanism provide support to these areas? To the extent
    that these areas currently have low rates because they receive
    support under the high-cost mechanism, should there be a phase-out
    of high-cost support in conjunction with the introduction of a
    rate-based mechanism?

26. If the Commission adopted a rate-based support mechanism, is it
    likely that states would change their ratemaking policies? What are
    the likely consequences of a rate-based support mechanism on state
    ratemaking? Would a rate-based support mechanism have the effect of
    promoting rational rate-rebalancing? Would it be necessary for the
    Commission to adopt constraints to ensure that states do not set
    rates with the purpose of maximizing federal universal service
    support? How would the Commission do so, and does it have the
    authority to do so under the Act? Also, would a rate-based support
    mechanism work if a state were to deregulate its retail rates? What
    effect would a rate-based support mechanism have on the size of the
    universal service fund?

27. *Cost-Based Support Mechanism*. How does the current mechanism
    address the statutory principles discussed above? Can the current
    cost-based support mechanism be used to achieve the Act's
    rate-related goals? How are costs related to rates? Can the current
    cost-based support be shown empirically to reduce rates, as directed
    by the court in *Qwest II*? What data would be necessary to make
    such a demonstration and from what sources would such data be
    available? If the current non-rural support mechanism cannot be
    shown, empirically, to reduce rates, can another cost-based
    mechanism be shown to reduce rates? If not, can any cost-based
    mechanism address the concerns expressed by the court in *Qwest II*?
    How would a cost-based mechanism have to be designed to address the
    court's concerns? Would a support mechanism based on embedded costs,
    study area or wire center average costs, or a different distributive
    mechanism better achieve the Act's goals? We seek comment regarding
    whether the adoption of additional measures that tie cost-based
    support to rates would better enable a cost-based mechanism to
    address the court's concerns.[^82]

28. *Other Support Mechanisms.* We seek comment generally regarding
    whether there are any universal service support mechanisms other
    than cost- or rate-based mechanisms (e.g., revenue-based) that would
    address the court's concerns.[^83] We ask that commenters describe
    any proposed plan in detail and explain exactly how the proposal
    would better address the Act's goals than other universal service
    support mechanisms. Commenters should place specific emphasis on how
    any plan could be shown empirically to address the Act's
    rate-related goals.

29. We specifically ask commenters to address the universal service
    aspects of the comprehensive plan proposed by the National
    Association of Regulatory Utility Commissioners (NARUC) Task Force
    in the Intercarrier Compensation proceeding.[^84] In sum, the NARUC
    Task Force plan proposes combining the support contained in all of
    the federal high-cost support mechanisms and giving the states
    discretion, within guidelines set by the Commission, to determine
    how the support should be distributed among carriers serving the
    state.

## Puerto Rico Telephone Company's Request for an Insular-Specific Support Mechanism

30. In its Petition and in subsequent filings, PRTC requests high-cost
    universal service support through a non-rural insular support
    mechanism.[^85] Specifically, PRTC requests that, pending the
    Commission's comprehensive review of its high-cost support program,
    the Commission adopt, on an interim basis, a non-rural insular
    mechanism based on embedded costs.[^86] PRTC states that this
    interim mechanism should be "patterned after, but distinct from,"
    the existing mechanism for rural telephone companies.[^87] Thus,
    PRTC proposes that the Commission adopt a non-rural insular
    mechanism based on actual costs, calculated using Part 36 of the
    Commission's rules.[^88]

31. PRTC claims that high-cost support to Puerto Rico is essential for
    maintaining and expanding affordable telephone service in Puerto
    Rico.[^89] According to PRTC, the penetration rate in Puerto Rico
    has increased from 25 percent in the 1970s to over 70 percent in
    1996.[^90] PRTC claims, however, that since its high-cost funding
    began to be reduced in 2001 pursuant to Commission action,[^91]
    Puerto Rico's previously growing penetration rate has fallen back to
    below 70 percent.[^92] PRTC asserts that its low penetration rate is
    a result of the high cost of providing service in Puerto Rico.[^93]
    In its Petition, PRTC explains that the need to have equipment and
    supplies shipped to the island increases infrastructure costs and
    requires that PRTC maintain a larger inventory of supplies and
    repair parts than would normally be necessary.[^94] PRTC also argues
    that it has other challenges which further complicate operations and
    increase costs including water-based erosion, unpredictable terrain,
    and operating in the Caribbean, which frequently faces hurricanes
    and tropical storms.[^95] PRTC contends that the cost of providing
    service in Puerto Rico is further increased as a result of providing
    service to Puerto Rico's sparsely populated mountainous region in
    its rural interior.[^96] For example, PRTC claims that the cost per
    local loop to install wireline service in these areas ranges from
    \$5,000 to more than \$15,000.[^97]

32. PRTC argues that section 254(b)(3) of the Act requires the
    Commission to address the unique needs of insular areas.[^98]
    Section 254(b)(3) of the Act directs the Commission and the states
    to devise methods to ensure that "\[c\]onsumers in all regions of
    the Nation, including low-income consumers and those in rural,
    insular, and high cost areas . . . have access to telecommunications
    and information services . . . at rates that are reasonably
    comparable to rates charged for similar services in urban
    areas."[^99] In its White Paper, PRTC argues that the reference to
    "insular" in the statute was specifically added to recognize the
    unique concerns of these areas.[^100] In the *Unserved Areas NPRM*,
    which was initiated to examine areas with low penetration rates, the
    Commission tentatively concluded that Puerto Rico, American Samoa,
    the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and
    the U.S. Virgin Islands are properly included in the definition of
    insular areas.[^101] To date, the Commission has released an order
    addressing only the tribal lands issues raised in the *Unserved
    Areas NPRM*. In that order, the Commission stated that it would
    continue to examine and address the causes of low subscribership in
    other areas and among other populations, especially among low-income
    individuals in rural and insular areas.[^102] The Commission has yet
    to establish a universal service mechanism for insular areas.

33. We tentatively conclude that section 254(b) provides the Commission
    with the authority to establish a new interim support mechanism for
    non-rural insular areas based on embedded costs. We seek comment on
    this tentative conclusion. We agree with PRTC that, through section
    254(b), Congress intended that consumers in insular areas, as well
    as in rural and high-cost areas, have access to affordable
    telecommunications and information services.[^103] We believe that
    the low penetration rates in Puerto Rico demonstrate that this goal
    is not being met and that the Commission could be doing more to help
    the residents of Puerto Rico. Because of the unique challenges in
    providing telephone service in Puerto Rico, we believe that a
    special support mechanism, in combination with the Commission's
    low-income program, will help to combat the problem of low
    subscribership in Puerto Rico. The evidence provided by PRTC
    supports a finding that there appears to be a correlation between
    the recent decline in Puerto Rico's subcribership rates and the
    reduction of Puerto Rico's high-cost support. Although we
    tentatively conclude that an interim insular mechanism is the
    appropriate measure to help reverse this trend, we seek comment on
    this tentative conclusion in particular and on the impact of
    high-cost support on subscribership rates in general. We also seek
    comment on how previous Commission decisions affect our tentative
    conclusion that we should establish a new interim support mechanism
    for non-rural insular areas based on embedded costs.

34. We believe that our tentative conclusion to adopt a non-rural
    insular mechanism is appropriate because, as PRTC has explained,
    newly available universal service funds will enable PRTC to
    construct new network and loop infrastructure to unserved areas,
    update its existing facilities, improve quality of service, maintain
    affordable rates, and educate and solicit potential first-time
    telephone customers.[^104] Moreover, we tentatively conclude that
    adopting a non-rural insular mechanism would have a limited impact
    on the universal service fund because this mechanism would only
    affect carriers operating in the Commonwealth of Puerto Rico if we
    adopt the Commission's proposed definition of "insular areas."[^105]
    There would be no need for a rural insular mechanism because all
    rural insular carriers already receive rural high cost support. PRTC
    is the only incumbent carrier serving a high-cost insular area that
    is not currently classified as a rural carrier under the rural
    high-cost loop mechanism. Further, while we agree with PRTC that the
    impact would be limited because the total cost of the new mechanism
    would be less than one percent of the total fund, we invite comment
    on the impact the adoption of a non-rural insular mechanism would
    have on the universal service fund.[^106]

35. Appended to its White Paper, PRTC proposes rules establishing an
    insular mechanism based on embedded costs.[^107] We seek comment on
    these proposed rules and invite commenters to propose other rules
    that may be necessary to provide for a non-rural mechanism for
    insular areas. To the extent that commenters propose different rules
    or would propose modifications to PRTC's proposed rules, we ask that
    such commenters provide explanations for their proposals. We also
    invite commenters to compare and contrast the proposed insular
    mechanism with the mechanism currently in place for rural carriers.

36. We seek comment on whether or how the support already received by
    PRTC affects our tentative conclusion to adopt a non-rural insular
    mechanism.[^108] We also seek comment on how a non-rural insular
    mechanism in general would work in conjunction with the Commission's
    existing high-cost mechanisms. For example, high-cost loop support
    for rural carriers is subject to an indexed cap. Should high-cost
    loop support provided under a non-rural insular mechanism be subject
    to the same or similar cap? If the same cap is used for both
    mechanisms, should the cap be adjusted or should the high-cost loop
    support fund be rebased to account for the additional support
    provided to PRTC?

37. We note that under PRTC's proposed rules for the interim insular
    mechanism, federal high-cost funding would be available for those
    non-rural insular study areas in which the average unseparated cost
    per loop exceeds 115 percent of the national average loop
    cost.[^109] PRTC proposes that the national average loop cost would
    be calculated pursuant to section 36.622(a) of the Commission's
    rules.[^110] Section 36.622(a) states that the national average is
    equal to the sum of the loop costs for each study area in the
    country (as calculated pursuant to section 36.621(a)) divided by the
    sum of the working loops reported for each study area in the
    country.[^111] For rural incumbent LECs, however, section 36.622(a)
    provides that the national average unseparated loop cost is frozen
    at \$240 per loop.[^112] Considering that section 36.622(a) provides
    for a separate national average loop cost for rural carriers, we
    seek comment on PRTC's proposal which would calculate the national
    average loop cost pursuant to section 36.622(a). If a non-rural
    insular mechanism is created, would there be any reason to use the
    national average loop cost that is used for rural incumbent LECs,
    which is frozen at \$240 per loop? Also, if the Commission adopts
    its tentative conclusion and creates an interim non-rural insular
    mechanism, should it impose any conditions on the disbursement of
    these funds (*e.g.*, require PRTC to submit and implement build-out
    plans to address unserved areas of the island)? In addition, to what
    extent should the Commission consider steps taken by the
    Telecommunications Regulatory Board of Puerto Rico to achieve rate
    comparability as required by the *Order on Remand*?[^113]

38. Finally, if we adopt the tentative conclusion herein, we will need a
    definition of "insular areas." In the *Unserved Areas NPRM,* the
    Commission proposed defining "insular areas" as "islands that are
    territories or commonwealths of the United States," and sought
    comment on whether the definition of insular areas should exclude
    sovereign nations that are not subject to the laws of the United
    States.[^114] The Commission tentatively concluded that Puerto Rico,
    American Samoa, the Commonwealth of the Northern Mariana Islands
    (CNMI), Guam, and the U.S. Virgin Islands are properly included in
    the definition of insular areas.[^115] We seek to refresh the record
    initially established in the *Unserved Areas NPRM*, and seek comment
    on the definition of "insular areas" proposed in that proceeding.

# PROCEDURAL MATTERS

## Initial Regulatory Flexibility Analysis

39. As required by the Regulatory Flexibility Act of 1980, as amended, 5
    U.S.C. § 603, the Commission has prepared an Initial Regulatory
    Flexibility Analysis (IRFA) for this NPRM, of the possible
    significant economic impact on a substantial number of small
    entities by the policies and rules proposed in this NPRM. The IRFA
    is in the Appendix. Written public comments are requested on this
    IRFA. Comments must be identified as responses to the IRFA and must
    be filed by the deadlines for comments on the NPRM. The Commission
    will send a copy of the NPRM, including this IRFA, to the Chief
    Counsel for Advocacy of the Small Business Administration.[^116] In
    addition, the NPRM and IRFA (or summaries thereof) will be published
    in the Federal Register.[^117]

## Paperwork Reduction Act Analysis

40. This Notice of Proposed Rulemaking does not contain proposed
    information collections subject to the Paperwork Reduction Act of
    1995 (PRA), Public Law 104-13. In addition, therefore, it does not
    contain any new or modified "information collection burden for small
    business concerns with fewer than 25 employees," pursuant to the
    Small Business Paperwork Relief Act of 2002, Public Law 107-198,
    *see* 44 U.S.C. § 3506(c)(4).

## Ex Parte Presentations

41. These matters shall be treated as a "permit-but-disclose" proceeding
    in accordance with the Commission's *ex parte* rules.[^118] Persons
    making oral *ex parte* presentations are reminded that memoranda
    summarizing the presentations must contain summaries of the
    substance of the presentations and not merely a listing of the
    subjects discussed. More than a one or two sentence description of
    the views and arguments presented is generally required.[^119] Other
    requirements pertaining to oral and written presentations are set
    forth in section 1.1206(b) of the Commission's rules.[^120]

## Comment Filing Procedures

42. Pursuant to sections 1.415 and 1.419 of the Commission's rules, 47
    CFR §§ 1.415, 1.419, interested parties may file comments and reply
    comments on or before the dates indicated on the first page of this
    document. Comments may be filed using: (1) the Commission's
    Electronic Comment Filing System (ECFS), (2) the Federal
    Government's eRulemaking Portal, or (3) by filing paper copies. *See
    Electronic Filing of Documents in Rulemaking Proceedings*, 63 FR
    24121 (1998).

-   Electronic Filers: Comments may be filed electronically using the
    Internet by accessing the ECFS: <http://www.fcc.gov/cgb/ecfs/> or
    the Federal eRulemaking Portal:
    [http://www.regulations.gov](http://www.regulations.gov/). Filers
    should follow the instructions provided on the website for
    submitting comments.

    -   For ECFS filers, if multiple docket or rulemaking numbers appear
        in the caption of this proceeding, filers must transmit one
        electronic copy of the comments for each docket or rulemaking
        number referenced in the caption. In completing the transmittal
        screen, filers should include their full name, U.S. Postal
        Service mailing address, and the applicable docket or rulemaking
        number. Parties may also submit an electronic comment by
        Internet e-mail. To get filing instructions, filers should send
        an e-mail to <ecfs@fcc.gov>, and include the following words in
        the body of the message, "get form." A sample form and
        directions will be sent in response.

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-   Paper Filers: Parties who choose to file by paper must file an
    original and four copies of each filing. If more than one docket or
    rulemaking number appears in the caption of this proceeding, filers
    must submit two additional copies for each additional docket or
    rulemaking number.

> Filings can be sent by hand or messenger delivery, by commercial
> overnight courier, or by first-class or overnight U.S. Postal Service
> mail (although we continue to experience delays in receiving U.S.
> Postal Service mail). All filings must be addressed to the
> Commission's Secretary, Office of the Secretary, Federal
> Communications Commission.

-   The Commission's contractor will receive hand-delivered or
    messenger-delivered paper filings for the Commission's Secretary at
    236 Massachusetts Avenue, NE., Suite 110, Washington, DC 20002. The
    filing hours at this location are 8:00 a.m. to 7:00 p.m. All hand
    deliveries must be held together with rubber bands or fasteners. Any
    envelopes must be disposed of [before]{.underline} entering the
    building.

-   Commercial overnight mail (other than U.S. Postal Service Express
    Mail and Priority Mail) must be sent to 9300 East Hampton Drive,
    Capitol Heights, MD 20743.

-   U.S. Postal Service first-class, Express, and Priority mail should
    be addressed to 445 12^th^ Street, SW, Washington DC 20554.

People with Disabilities: To request materials in accessible formats for
people with disabilities (braille, large print, electronic files, audio
format), send an e-mail to <fcc504@fcc.gov> or call the Consumer &
Governmental Affairs Bureau at 202-418-0530 (voice), 202-418-0432 (tty).

43. In addition, one copy of each pleading must be sent to each of the
    following:

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(1) The Commission's duplicating contractor, Best Copy and Printing,
    Inc, 445 12^th^ Street, S.W., Room CY-B402, Washington, D.C. 20554;
    website: [www.bcpiweb.com](http://www.bcpiweb.com/); phone:
    1-800-378-3160;

(2) Sheryl Todd, Telecommunications Access Policy Division, Wireline
    Competition Bureau, 445 12^th^ Street, S.W., Room 5-B540,
    Washington, D.C. 20554; e-mail: <sheryl.todd@fcc.gov>.

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44. Filings and comments are also available for public inspection and
    copying during regular business hours at the FCC Reference
    Information Center, Portals II, 445 12th Street, S.W., Room CY-A257,
    Washington, D.C., 20554. Copies may also be purchased from the
    Commission\'s duplicating contractor, BCPI, 445 12th Street, S.W.,
    Room CY-B402, Washington, D.C. 20554. Customers may contact BCPI
    through its website: [www.bcpiweb.com](http://www.bcpiweb.com/), by
    e-mail at <fcc@bcpiweb.com>, by telephone at (202) 488-5300 or (800)
    378-3160, or by facsimile at (202) 488-5563.

45. For further information regarding this proceeding, contact Ted
    Burmeister, Attorney Advisor, Telecommunications Access Policy
    Division, Wireline Competition Bureau at (202) 418-7389, or
    theodore.burmeister@fcc.gov, or Katie King, Special Counsel,
    Telecommunications Access Policy Division, Wireline Competition
    Bureau, (202) 418-7491, e-mail: [katie.king@fcc.gov]{.underline}.

# ORDERING CLAUSES

46. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1, 4(i), 201-205, 214, 254, and 403 of the
    Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i),
    201-205, 214, 254, and 403, this Notice of Proposed Rulemaking IS
    ADOPTED.

47. IT IS FURTHER ORDERED that the Commission's Consumer and
    Governmental Affairs Bureau, Reference Information Center, SHALL
    SEND a copy of this Notice of Proposed Rulemaking, including the
    Initial Regulatory Flexibility Analysis, to the Chief Counsel for
    Advocacy of the Small Business Administration.

FEDERAL COMMUNICATIONS COMMISSION

Marlene H. Dortch

Secretary

**APPENDIX**

**Initial Regulatory Flexibility Analysis**

1.  As required by the Regulatory Flexibility Act of 1980, as amended
    (RFA),[^121] the Commission has prepared this present Initial
    Regulatory Flexibility Analysis (IRFA) of the possible significant
    economic impact on a substantial number of small entities by the
    policies and rules proposed in this Notice of Proposed Rulemaking
    (NPRM). Written public comments are requested on this IRFA. Comments
    must be identified as responses to the IRFA and must be filed by the
    deadlines for comments on the NPRM provided on the first page of
    this item. The Commission will send a copy of the NPRM, including
    this IRFA, to the Chief Counsel for Advocacy of the Small Business
    Administration (SBA).[^122] In addition, the NPRM and IRFA (or
    summaries thereof) will be published in the Federal Register.[^123]

### Need for, and Objectives of, the Proposed Rules

48. The Telecommunications Act of 1996 requires that the Commission
    establish rules to "preserve and advance" universal service.[^124]
    This NPRM addresses several issues related to universal service
    support for non-rural carriers. Seeking, and receiving, comment on
    these issues is a necessary step toward the adoption of rules that
    meet the 1996 Act's requirements.

49. First, we address issues remanded by the United States Court of
    Appeals for the Tenth Circuit for the second time.[^125]
    Specifically, we contemplate rules regarding how the Commission
    should define the statutory term "sufficient" to take into account
    all the principles enumerated in the statute. Further, we further
    address how the Commission should define "reasonably comparable" in
    the context of section 254(e)(3)'s requirement that consumers in all
    regions of the nation should have access to telecommunications and
    information services that are "reasonably comparable to those
    provided in urban areas and that are available at rates that are
    reasonably comparable to rates charged for similar services in urban
    areas."[^126] We also contemplate whether, in light of the
    interpretation of the key statutory terms, the Commission should
    modify the high-cost funding mechanism for non-rural carriers by
    adopting a rate-based support mechanism, by adjusting the current
    cost-based support mechanism, or if some other mechanism would
    better meet the statutory requirements of the Act.

50. Second, we address a proposal by Puerto Rico Telephone Company, Inc.
    (PRTC) that the Commission create a support mechanism for non-rural
    carriers serving insular areas.[^127] Currently, non-rural carriers
    receive support based on forward-looking economic costs, as
    estimated by the High-Cost Model. PRTC proposes that non-rural
    carriers serving insular areas receive support based on their
    embedded (i.e., historical) costs, as rural carriers do currently.

### Legal Basis

51. The legal basis for the NPRM is contained in sections 1, 4, 201
    through 205, 214, 254, 303(r), and 403 of the Communications Act of
    1934, as amended, 47 U.S.C. §§ 151, 154, 201-205, 214, 254, 303(r),
    and 403, and section 1.411 of the Commission's rules, 47 C.F.R. §
    1.411.

### Description and Estimate of the Number of Small Entities to Which Rules May Apply

52. The RFA directs agencies to provide a description of, and, where
    feasible, an estimate of the number of small entities that may be
    affected by the rules adopted herein.[^128] The RFA generally
    defines the term "small entity" as having the same meaning as the
    terms "small business," "small organization," and "small
    governmental jurisdiction."[^129] In addition, the term "small
    business" has the same meaning as the term "small business concern"
    under the Small Business Act, unless the Commission has developed
    one or more definitions that are appropriate to its
    activities.[^130] Under the Small Business Act, a "small business
    concern" is one that: (1) is independently owned and operated; (2)
    is not dominant in its field of operation; and (3) meets any
    additional criteria established by the SBA.[^131]

53. The Commission has determined that the group of small entities
    directly affected by the rules adopted in this NPRM are eligible
    telecommunications carriers (ETCs) providing service in areas served
    by non-rural carriers. Within the category of ETCs we find
    competitive local exchange carriers (CLECs), which are all wired
    telecommunications carriers, and wireless carriers. Further
    descriptions of these entities are provided below.

54. *Wired Telecommunications Carriers.* The SBA has developed a small
    business size standard for Wired Telecommunications Carriers, which
    consists of all such companies having 1,500 or fewer
    employees.[^132] According to Census Bureau data for 1997, there
    were 2,225 firms in this category, total, that operated for the
    entire year.[^133] Of this total, 2,201 firms had employment of 999
    or fewer employees, and an additional 24 firms had employment of
    1,000 or more.[^134] Thus, under this size standard, the great
    majority of firms can be considered small.

55. *Competitive Local Exchange Carriers (CLECs), Competitive Access
    Providers (CAPs) and "Other Local Exchange Carriers."* Neither the
    Commission nor the SBA has developed a size standard for small
    businesses specifically applicable to providers of competitive
    exchange services or to competitive access providers or to "Other
    Local Exchange Carriers." The closest applicable size standard under
    SBA rules is for Wired Telecommunications Carriers. Under that size
    standard, such a business is small if it has 1,500 or fewer
    employees.[^135] According to Commission data,[^136] 532 companies
    reported that they were engaged in the provision of either
    competitive access provider services or competitive local exchange
    carrier services. Of these 532 companies, an estimated 411 have
    1,500 or fewer employees and 121 have more than 1,500
    employees.[^137] In addition, 55 carriers reported that they were
    "Other Local Exchange Carriers." Of the 55 "Other Local Exchange
    Carriers," an estimated 53 have 1,500 or fewer employees and two
    have more than 1,500 employees.[^138] Consequently, the Commission
    estimates that most providers of competitive local exchange service,
    competitive access providers, and "Other Local Exchange Carriers"
    are small entities that may be affected by the rules and policies
    adopted herein.

56. *Cellular and Other Wireless Telecommunications Carriers.*[^139] The
    SBA has developed a small size standard for Cellular and Other
    Wireless Telecommunications Carriers which consists of all such
    companies having 1,500 or fewer employees. According to the
    Commission's most recent data,[^140] 1,761 companies reported that
    they were engaged in the provision of wireless service. Of these,
    1,761 companies, and estimated 1,175 have 1,500 or fewer employees
    and 586 have more than 1,500 employees.[^141] Consequently, the
    Commission estimates that most wireless service providers are small
    entities that may be affected by the rules and policies adopted
    herein.

57. *Eligible Telecommunications Carriers (ETCs) that Provide Service in
    Areas Serviced by Non-Rural Carriers.* Neither the SBA nor the
    Commission has developed a definition of small entities specifically
    applicable to ETCs. ETC designation allows a carrier to receive
    universal service support in accordance with section 254 of the Act.
    An entity is designated as an ETC by a state commission or, if there
    is no state jurisdiction, by the Commission upon meeting the
    requirements of section 214(e) of the Act. Any entity offering
    services supported by federal universal service mechanisms that uses
    its own facilities or a combination of its own facilities and resale
    of another carrier's services and advertises such charges and rates
    can seek designation as an ETC.[^142] ETCs are competitive carriers
    that are not dominant in the field. The group of ETCs providing
    service in areas served by non-rural carriers is composed of mostly
    CLECs and wireless carriers. We have indicated above that, pursuant
    to SBA standards, ETCs are CLECs or wireless carriers. In addition,
    we note that the only ETCs affected by this Order are those that
    provide service in areas served by non-rural carriers. If we had no
    further information concerning the specific ETCs affected by this
    rulemaking, we would estimate that numerous ETCs, which are either
    CLECs or wireless service providers that provide service in areas
    served by non-rural carriers, are small businesses that may be
    affected by the rules adopted herein.

58. At this time, however, the Commission is aware of approximately 30
    ETCs providing service in areas served by non-rural carriers. We
    have determined that at least 9 of these ETCs are subsidiaries of
    public companies -- not independently owned and operated -- and,
    therefore, not small businesses under the Small Business Act.[^143]
    We do not have data specifying whether the remaining ETCs, or other
    ETCs not accounted for, are independently owned and operated, and
    therefore we are unable to estimate with greater precision the
    number of these carriers that would qualify as small business
    concerns under SBA's definition. Consequently, we estimate that
    there are 20 or fewer small entities that may be affected directly
    by the proposed rules herein adopted.

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

59. The NPRM does not propose specific reporting, recordkeeping, or
    other compliance requirements at this time. The NPRM does, however,
    ask whether additional rate data should be collected for the purpose
    of defining the statutory term, "reasonably comparable."[^144] The
    NPRM also considers the collection of data to administer a
    rate-based support mechanism, in the event that the Commission
    adopts one.[^145] A universal service support mechanism for
    non-rural insular carriers, if adopted, may require reporting,
    recordkeeping or other compliance requirements.[^146]

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

60. The RFA requires an agency to describe any significant alternatives
    that it has considered in reaching its proposed approach, which may
    include the following four alternatives (among others): (1) the
    establishment of differing compliance and reporting requirements or
    timetables that take into account the resources available to small
    entities; (2) the clarification, consolidation, or simplification of
    compliance or reporting requirements under the rule for small
    entities; (3) the use of performance, rather than design, standards;
    and (4) an exemption from coverage of the rule, or part thereof, for
    small entities.[^147]

61. In this NPRM, we seek comment on issues related to universal service
    support for non-rural carriers. We note that many, if not all,
    non-rural carriers are not small entities. To the extent that there
    may, in fact, exist a non-rural carrier that is a small entity, or
    any rule that may be adopted by the Commission related to these
    issue could affect some other small entity, we have considered and
    will consider alternatives to minimize significant economic impact
    on small entities.

62. We seek comment regarding several issues related to the high-cost
    support mechanism for non-rural carriers that have been remanded by
    the United States Court of Appeals for the Tenth Circuit for the
    second time.[^148] We seek comment regarding the meaning of the
    statutory terms "sufficient" and "reasonably comparable." Because we
    anticipate that the Commission will define these terms in a manner
    conducive to creating a viable non-rural support mechanism, we
    conclude that defining these statutory terms will not have a
    significant economic impact on small entities. We also seek comment
    regarding how a universal service support mechanism for non-rural
    carriers should be designed, consistent with the statutory terms. We
    conclude that adopting a new high-cost support mechanism for
    non-rural carriers, including particularly a rate-based support
    mechanism, or retaining a modified version of the current mechanism,
    based on forward-looking economic cost estimates, will not create a
    significant economic impact on small entities. In the event,
    however, that a commenter proposes rules that may create a
    significant economic impact on a small entity, we seek comment on
    steps to be taken or possible alternatives that would minimize the
    economic impact.

63. We also tentatively conclude that the Commission should adopt PRTC's
    proposed interim support mechanism for non-rural carriers serving
    insular areas.[^149] Pursuant to this proposal, non-rural carriers
    serving insular areas would receive universal service support based
    on their embedded costs rather than forward-looking economic cost
    estimates. Currently, PRTC is the only non-rural carrier serving an
    insular area, and it is not a small entity. CETCs (which receive
    support based on the incumbent's level of support) serving in PRTC's
    service territory would receive additional support, but would not
    have any other significant economic impact. Other alternatives to be
    considered include retaining the current rules, under which
    non-rural carriers serving insular areas receive support pursuant to
    the same mechanism as all other non-rural carriers.

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

64. None.

**STATEMENT OF**

**COMMISSIONER KATHLEEN Q. ABERNATHY**

> *Re: Federal-State Joint Board on Universal Service and High-Cost
> Universal Service Support.*

Just over two years ago, the Commission issued its *Order on Remand* in
this docket, responding to the Tenth Circuit's 2001 rejection of the
Commission's high-cost support mechanism for large, "non-rural"
carriers. At the time, I commented that we had brought the issue to
closure, and had addressed the court's concerns.

Earlier this year, we learned that the Tenth Circuit disagreed, when it
again remanded our decision. When a court overturns an agency rule, the
regulator's role is not to second-guess, but simply to try again. So,
while I supported the rules that gave rise to the court's most recent
remand, I also fully support this Notice of Proposed Rulemaking.

I am also pleased to vote for the Notice's tentative conclusion that the
Act authorizes the creation of a new mechanism designed to support large
carriers serving insular areas such as Puerto Rico. The evidence before
us suggests that such carriers face unique challenges that might not be
reflected by existing cost models, and that subscribership in the areas
they serve is now *falling*. We cannot know where the record compiled in
this docket ultimately will lead the Commission, but facts such as these
demonstrate that it is time to consider bolder action to meet the needs
of insular areas.

Finally, I am gratified that this Notice expressly seeks comment from
the states regarding these very important issues. The Federal-State
Joint Board on Universal Service, which I have been proud to chair since
2001, has worked diligently to aid us in implementing the Act's
provisions, and I have great respect for the expertise and perspective
that my state commission colleagues have brought to this subject. In
responding to the Tenth Circuit's decision, I urge the Commission to pay
careful attention to their views.

This proceeding offers the Commission the opportunity to provide clarity
and finality to an industry that sorely needs both. The task ahead is
difficult, but the rewards of success will be well worth the effort. I
wish the Commission the best of luck in resolving this set of very
difficult issues once and for all.

[^1]: 47 U.S.C. § 254(b); *Qwest Corp. v. FCC*, 398 F.3d 1222 (10^th^
    Cir. 2005).

[^2]: *See id.* at 1233.

[^3]: *Id.* at 1237.

[^4]: The term "non-rural carriers" refers to incumbent local exchange
    carriers that do not meet the statutory definition of a rural
    telephone company. *See* 47 U.S.C. § 153(37). Under this definition,
    rural telephone companies are incumbent carriers that either serve
    study areas with fewer than 100,000 access lines or meet one of
    three alternative criteria. *Id.* Thus, "non-rural carriers" are
    principally defined by study area size. Non-rural carriers serve the
    majority of access lines nationwide, including lines in rural,
    insular, and high-cost areas. Rural incumbent carriers serve fewer
    than twelve percent of lines nationwide, and their operations tend
    to be focused in high-cost areas. *See* USAC Quarterly
    Administrative Filing 2006, First Quarter (1Q) Appendices, HC05,
    filed November 2, 2005, at
    <http://www.universalservice.org/overview/filings>. "Non-rural
    support" refers to high-cost universal service support for non-rural
    carriers.

[^5]: Petition for Clarification and/or Reconsideration of the Puerto
    Rico Telephone Company, Inc., CC Docket No. 96-45 (filed Jan. 14,
    2004) (PRTC Petition); *see also* Puerto Rico Telephone Company
    White Paper: Proposed Interim Insular Mechanism, CC Docket No. 96-45
    (filed May 6, 2005) (PRTC White Paper).

[^6]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Order on Remand, Further Notice of Proposed Rulemaking, and
    Memorandum Opinion and Order, 18 FCC Rcd 22559 (2003) (*Order on
    Remand*), *remanded, Qwest II*, 398 F.3d 1222; PRTC Petition at
    21-22.

[^7]: *See* PRTC White Paper, App. A.

[^8]: 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*.

[^9]: 47 U.S.C. § 254. *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).

[^10]: 47 U.S.C. § 254(b)(1)-(7).

[^11]: 47 U.S.C. § 254(b)(3).

[^12]: 47 U.S.C. § 254(e).

[^13]: *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 (10^th^ Cir. 2003)
    (*Qwest I*), *Order on Remand*, 18 FCC Rcd 22559 (2003), *remanded*,
    *Qwest II*, 398 F.3d 1222.

[^14]: The court in *Qwest I* found that the Commission failed to
    explain how its 135 percent nationwide cost benchmark will help
    achieve the goal of reasonable comparability or sufficiency. *Qwest
    I*, 258 F.3d at 1202-03. In the *Order on Remand*, the Commission
    adopted a cost benchmark of two standard deviations above the
    national average cost. *See Order on Remand*, 18 FCC Rcd at 22589,
    para. 49.

[^15]: *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 I*, 258 F.3d 1191.
    The model platform refers to the computer model's assumptions about
    the design of the network and network engineering, and fixed
    characteristics such as soil and terrain. *See 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, Fifth
    Report and Order, 13 FCC Rcd 21323 (1998).

[^16]: The court affirmed *Tenth Report and Order*, which Qwest also had
    challenged. *See Qwest I*, 258 F.2d at 1206-07.

[^17]: *Id.* at 1202.

[^18]: *Id.* at 1202-03.

[^19]: *Id.* at 1204. ("\[T\]he FCC may not simply assume that the
    states will act on their own to preserve and advance universal
    service. It remains obligated to 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.").

[^20]: *Id.* at 1205.

[^21]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Recommended Decision, 17 FCC Rcd 20716 (2002)
    (*Recommended Decision*); *see also Federal-State Joint Board on
    Universal Service*, CC Docket No. 96-45, Notice of Proposed
    Rulemaking and Order, 17 FCC Rcd 2999 (2002) (*Remand Notice*).

[^22]: *See generally Order on Remand*, 18 FCC Rcd 22559.

[^23]: *Id.* at 22578, para. 30; *see also id.* at 22581, para. 36.

[^24]: *Id.* at 22578, para. 30, 22584-85, paras. 40-42.

[^25]: *Id.* at 22607-10, paras. 80-82; *see also id.* at 22584-85,
    paras. 40-42.

[^26]: The *Further Notice of Proposed Rulemaking* sought comment on
    specific issues that relate to the rate review and expanded
    certification process recommended by the Joint Board. In particular,
    the *Further Notice* sought comment on how to address state requests
    for further federal action, and whether additional targeted federal
    support should be made available for high-cost wire centers as an
    inducement for states to replace implicit support in local rates
    with explicit state support. *Id.* at 22623-33, paras. 108-132.

[^27]: *Id.* at 22589, para. 49, 22593-601, paras. 55-69

[^28]: *Qwest II*, 398 F.3d 1222.

[^29]: *Id.* at 1233.

[^30]: *Id.* at 1237.

[^31]: *Id.*

[^32]: *Id.*

[^33]: *Id.* (emphasis in original).

[^34]: *See id.* at 1232-33.

[^35]: The court found that the rate review and certification process
    established by the Commission adequately responded to the court's
    direction to establish adequate state inducements. *Id*. at 1238.

[^36]: *Id.* at 1234. The court agreed with the petitioners that argued
    that the Commission's definition of sufficient is impermissible
    because it ignores all but one principle enumerated in section
    254(b). While the court observed that the Commission may exercise
    its discretion to balance the principles against one another when
    they conflict, it found that the Commission failed to demonstrate
    why reasonable comparability conflicts with or outweighs the
    principle of affordability, or any other principle. *Id.*

[^37]: *Order on Remand*, 18 FCC Rcd at 22578, para. 30, 22581, para.
    36.

[^38]: *Qwest II*, 398 F.3d at 1234.

[^39]: 47 U.S.C. § 254(b)(1).

[^40]: *Remand Notice*, 17 FCC Rcd at 3001, para. 3; *see also Ninth
    Report and Order*, 14 FCC Rcd at 20439, para. 12.

[^41]: *Order on Remand*, 18 FCC Rcd at 22586-87, para. 45. SBC proposed
    that the Commission establish an affordability benchmark based on
    the average household income of a particular geographic area, e.g.,
    a county. The proposed funding mechanism would provide support for
    geographic areas where the forward-looking cost of providing service
    exceeds the affordability benchmark. SBC views affordability as an
    end user's ability to bear the cost of service relative to household
    income. Bureau of Labor Statistics data indicated that a typical
    household spends 2.1 percent of its annual income on
    telephone-related expenses, but only 1.2 percent is associated with
    local telephone service. SBC argues that the Commission should
    compare local telephone service expenses to other categories of
    household expenses. The average household spends 3.2 percent on
    energy expenses, 3.1 percent on gasoline and motor oil, 5.1 percent
    on food away from home, and 1.5 percent on television, radios, and
    sound equipment. *See* SBC Comments, CC Docket No. 96-45, at 12-15
    (filed April 10, 2002).

[^42]: *Qwest II*, 398 F.3d at 1234.

[^43]: *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 8078, 8097, para. 39 (1999) (*Seventh Report and Order*); *see
    also Order on Remand*, 18 FCC Rcd at 22586-87, para. 45.

[^44]: *See Seventh Report and Order*, 14 FCC Rcd at 8097, para. 39;
    *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776, 8844-45, para. 124 (1997)
    (*Universal Service First Report and Order*) (subsequent history
    omitted).

[^45]: *See Order on Remand*, 18 FCC Rcd at 22578, para. 30.

[^46]: *Qwest II*, 398 F.3d at 1234.

[^47]: *See id*.

[^48]: *See Universal Service First Report and Order*, 12 FCC Rcd at
    8830-34, paras. 97-102.

[^49]: In the *Order on Remand*, the Commission rejected the National
    Association of State Utility Consumer Advocates' argument that we
    should consider service quality issues, as well as comparability of
    rates and costs. Although the Commission agreed that service quality
    is an important goal, it determined that states are in the best
    position to address service quality issues and will have ample
    opportunity to do so in the rate review and expanded certification
    process. *See Order on Remand*, 18 FCC Rcd at 22588, para. 47.

[^50]: 47 U.S.C. § 254(b)(2).

[^51]: 47 U.S.C*.* § 254(e); *Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Fourteenth Report and Order and
    Twenty-Second Order on Reconsideration, *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, Report and Order, 16 FCC Rcd 11244, 11342, para.
    200 (2001).

[^52]: 47 U.S.C. § 254(b)(3).

[^53]: *See* *infra* part III.B.

[^54]: 47 U.S.C. § 254(b)(4).

[^55]: *Federal-State Joint Board on Universal Service, 1998 Biennial
    Regulatory Review -- Streamlined Contributor Reporting Requirements
    Associated with Administration of Telecommunications Relay Service,
    North American Numbering Plan, Local Number Portability, and
    Universal Service Support Mechanisms, Telecommunications Services
    for Individuals with Hearing and Speech Disabilities, and the
    Americans With Disabilities Act of 1990, Administration of the North
    American Numbering Plan and North American Numbering Plan Cost
    Recovery Contribution Factor and Fund Size, Number Resource
    Optimization, Telephone Number Portability, Truth-in-Billing and
    Billing Format*, CC Docket Nos. 96-45, 98-171, 90-571, 92-237,
    99-200, 95-116, 98-170, Report and Order and Second Further Notice
    of Proposed Rulemaking, 17 FCC Rcd 24952 (2002).

[^56]: 47 U.S.C. § 254(d).

[^57]: 47 U.S.C. § 254(f). Section 254(f) provides, in relevant part,
    that "\[e\]very telecommunications carrier that provides intrastate
    telecommunications services shall contribute on an equitable and
    nondiscriminatory basis, in a manner determined by the State to the
    preservation and advancement of universal service."

[^58]: *Qwest II*, 398 F.3d at 1233.

[^59]: *Id.*; 47 U.S.C. § 254(f).

[^60]: 47 U.S.C. § 254(b)(5).

[^61]: We note in this regard that, in *Qwest II*, the court determined
    that petitioners could not read into the terms "specific,
    predictable and sufficient" a statutory mandate requiring states to
    transition from implicit to explicit support mechanisms. *Qwest II*,
    398 F.3d at 1232.

[^62]: *See id.* at 1237; *infra* part III.B.

[^63]: 47 U.S.C. § 254(b)(6).

[^64]: 47 U.S.C. § 254(b)(7).

[^65]: *See Universal Service First Report and Order*, 12 FCC Rcd at
    8801, para. 47. The Commission defined the competitive neutrality
    principle as follows:

    Universal service support mechanisms and rules should be
    competitively neutral. In this context, competitive neutrality means
    that universal service support mechanisms and rules neither unfairly
    advantage nor disadvantage one provider over another, and neither
    unfairly favor nor disfavor one technology over another.

[^66]: *See, e.g.*, *Ninth Report and Order*, 14 FCC Rcd at 20479, para.
    89.

[^67]: *Qwest II*, 398 F.3d at 1237.

[^68]: *Order on Remand*, 18 FCC Rcd at 22578, para. 30, 22583, para.
    39. For purposes of assessing the sufficiency of the non-rural
    high-cost mechanism, rates in rural areas are presumed to be
    reasonably comparable to urban rates if they deviate no further than
    two standard deviations above the national average urban rate in the
    Bureau's annual rate survey. *Id.* at 22582, para. 38.

[^69]: *Qwest II*, 398 F.3d at 1236.

[^70]: The court calls the variance significant, which implies that the
    existing gap between urban and rural rates is generally as wide as
    the gap between the lowest urban rate (\$15.65 in 2002) and the rate
    comparability benchmark (\$32.28 in 2002), but this range is based
    on a survey of urban rates only. *Id.* at 1236-37 ("Under the 2002
    data, rural rates falling just below the comparability benchmark may
    exceed the lowest urban rates by over 100%.").

[^71]: The rural rate data in the record from a General Accountability
    Office (GAO) Report indicated that, in most states, rural rates were
    the same as or lower than urban rates in the same state. In most
    states, rates for residential customers of the largest local
    exchange carriers are geographically averaged, either throughout the
    company's service territory, in broad geographic areas, or in areas
    with similar geographic size and number of access lines. In states
    where non-rural carriers have multiple geographic areas over which
    rates are averaged, more than half reported using value-of-service
    pricing to establish relative rates for different geographic areas,
    which results in lower rates in rural, less populous areas relative
    to rates in urban areas. *See Order on Remand*, 18 FCC Rcd at 22571
    n.55, 22658-71, App. C. GAO was known as the General Accounting
    Office when the report was released.

[^72]: *Qwest II*, 398 F.3d at 1237 ("Even if such rural rates are
    compared against the national urban average, we fail to see how they
    could be deemed reasonably comparable . . . .").

[^73]: The court seemed to reject the use of the national average urban
    rate, which was 149% above the lowest urban rate in 2002, as a
    benchmark. *See id*.

[^74]: *See, e.g.*, J.D. Power and Associates Reports: Three-Quarters of
    Households Now Bundle Local and Long Distance Telephone Service with
    One Provider, July 13, 2005, available at
    <http://www.jdpa.com/news/releases/pressrelease.asp?ID=2005091>
    (retrieved December 9, 2005).

[^75]: *See supra* para. 13.

[^76]: *Qwest II*, 398 F.3d at 1237.

[^77]: *Id.*

[^78]: In *Qwest I*, the court indicated that it would be inclined to
    affirm the Commission's cost-based universal service mechanism if
    the Commission demonstrated that it resulted in reasonably
    comparable rates. *Qwest I*, 258 F.3d at 1202-03; *see also Qwest
    II*, 398 F.3d at 1237. In response, the Commission noted that,
    because the states retain jurisdiction over intrastate rates, the
    Joint Board and the Commission always have looked at cost
    differences, not rate differences, in determining high-cost support.
    *Order on Remand*, 18 FCC Rcd at 22572-73, para. 23 (citing *Second
    Recommended Decision*, 13 FCC Rcd at 24754, para. 19; *Ninth Report
    and Order*, 14 FCC Rcd at 20453-54, paras. 36-38; *Recommended
    Decision*, 17 FCC Rcd at 20724-26, paras. 17-21). The Commission
    noted that because states may base rates on a variety of factors,
    comparing only rates would not be a fair and equitable way to
    apportion federal support. Specifically, the Commission stated,
    "\[b\]ecause the underlying purpose of rates is to recover the cost
    of providing service, comparing costs provides a more accurate and
    consistent measure of what rate differences would be in any given
    state, given identical state rate policies." *Id.* The Commission
    also noted that "\[s\]tates with high costs would have higher rates
    in the aggregate than those in other states, were it not for federal
    support." *Id.* The Commission further justified the cost-based
    non-rural support mechanism by concluding that it had been
    successful in achieving reasonably comparable rates. *Id*. at
    22572-73 para. 23, 22593-601 paras. 55-69. In *Qwest II*, the court
    stated that it had "expected the Commission to return to \[it\] with
    empirical findings supporting this conclusion \[that the cost-based
    mechanism resulted in reasonably comparable rates\]," but found such
    support lacking in the *Order on Remand*. *Qwest II*, 398 F.3d at
    1237 (stating that the "FCC based the two standard deviations *cost*
    benchmark on a finding that *rates* were reasonably comparable,
    without empirically demonstrating a relationship between the costs
    and rates surveyed in this context") (emphasis in original).

[^79]: *See supra* paras. 21-22.

[^80]: *Order on Remand*, 18 FCC Rcd at 22659-70, App. C: Adjusted GAO
    Rate Data (showing rates in several urban areas near or exceeding
    the reasonable comparability benchmark of the nationwide average
    urban rate plus two standard deviations that the *Qwest II* court
    rejected); *see also* Industry Analysis and Technology Division,
    Wireline Competition Bureau, *Reference Book of Rates, Price
    Indices, and Household Expenditures for Telephone Service*, Table
    1.3 (May 2005) (showing urban areas with rates near or exceeding the
    2005 nationwide urban rate benchmark of \$34.21).

[^81]: *Order on Remand*, 18 FCC Rcd at 22659-70, App. C (showing rates
    in many rural areas below the nationwide average urban rate).

[^82]: For example, would a requirement that any universal service funds
    received by a carrier be displayed on an end user's bill as a credit
    serve to tie cost-based support to rates in a way that would satisfy
    the court?

[^83]: Although the Commission, in the *Universal Service First Report
    and Order*, determined that support should be based on the
    difference between the forward-looking economic cost of providing
    service and a nationwide revenue benchmark, it later reconsidered
    and, in the *Seventh Report and Order*, rejected the use of a
    revenue benchmark. *See* *Universal Service First Report and Order*,
    12 FCC Rcd at 8819-24 paras. 257-67; *Seventh Report and Order*, 14
    FCC Rcd at 8107-08, paras. 61-62.

[^84]: Letter from Robert B. Nelson, Michigan Public Service Commission,
    and Elliott G. Smith, Iowa Utilities Board, to Chairman Kevin
    Martin, Federal Communications Commission, CC Docket No. 01-92, App.
    C (filed May 18, 2005).

[^85]: PRTC Petition, *supra* note Error: Reference source not found.
    The PRTC Petition seeks clarification or reconsideration of the part
    of the *Order on Remand* that denied a prior PRTC request for
    insular funding. *See also* Letter from Nancy Victory, Counsel for
    Puerto Rico Telephone Corp., to Jeffrey Carlisle, FCC, dated Nov. 4,
    2004 (PRTC Letter); PRTC White Paper, *supra* note Error: Reference
    source not found. In the *Universal Service First Report and Order*,
    the Commission determined that non-rural carriers would receive
    support based on forward-looking economic costs, adopted a
    definition of rural carriers that excluded PRTC, and declined to
    adopt a separate support mechanism for carriers serving insular
    areas. *See Universal Service First Report and Order,* 12 FCC Rcd at
    8889, 8943-44, and 8997-9001, paras. 203, 310, and 414-23. The
    Commission has also rejected previous requests from PRTC that the
    Commission treat non-rural carriers serving insular areas as rural
    carriers for purposes of calculating and distributing high-cost
    support. *See Universal Service First Report and Order,* 12 FCC Rcd
    at 8946, para. 315; *Order on Remand,* 18 FCC Rcd at 22637-38,
    paras. 139-40; *Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Order on Reconsideration, 19 FCC Rcd 23824,
    23831-32, para. 20 (2004).

[^86]: PRTC Petition at 21-22. We note that PRTC also requests the
    Commission to reexamine the high-cost model (model) to address its
    impact on Puerto Rico and its ability of the to accurately identify
    Puerto Rico's costs. *Id.* at 14-19. Because the creation of a
    non-rural insular support mechanism as proposed by PRTC may render
    PRTC's request to reexamine the model unnecessary, we will defer
    consideration of this PRTC request at this time.

[^87]: PRTC White Paper at 28.

[^88]: PRTC Petition at 22. Because granting PRTC's request would
    require amendment of the Commission's rules, we will treat PRTC's
    Petition as a petition for rulemaking and consider it as part of
    this proceeding.

[^89]: PRTC Letter at 1.

[^90]: *Id.* at 1-2.

[^91]: *See infra* n. Error: Reference source not found.

[^92]: PRTC Letter at 1-2. As of July 2005, the penetration rate for
    U.S. households was 94 percent. *See* Telephone Subscribership in
    the United States, Industry Analysis and Technology Division,
    Wireline Competition Bureau (rel. November 7, 2005).

[^93]: *See* PRTC Letter at 1-2.

[^94]: PRTC Petition at 6.

[^95]: *Id.* at 7.

[^96]: *Id.*

[^97]: According to PRTC, the costs of line extensions to these remote
    areas far exceed the low-income support available. *Id.* This amount
    does not include support that would be available to competitive
    eligible telecommunications carriers.

[^98]: PRTC Petition at 8. *See also* PRTC White Paper at 12-13.

[^99]: 47 U.S.C. § 254(b)(3).

[^100]: PRTC White Paper at 12 (citation omitted).

[^101]: *Federal-State Joint Board on Universal Service: Promoting
    Deployment and Subscribership in Unserved and Underserved Areas,
    Including Tribal and Insular Areas*, CC Docket No. 96-45, Further
    Notice of Proposed Rulemaking, 14 FCC Rcd 21177, 21233-34 (1999)
    (*Unserved Areas NPRM*).

[^102]: *Federal-State Joint Board on Universal Service: Promoting
    Deployment and Subscribership in Unserved and Underserved Areas,
    Including Tribal and Insular Areas*, CC Docket No. 96-45,Twelfth
    Report and Order, Memorandum Opinion and Order, and Further Notice
    of Proposed Rulemaking, 15 FCC Rcd 12208, 12215, para. 11 (2000).

[^103]: *See* 47 U.S.C. §§ 254(b)(1), (b)(3).

[^104]: PRTC Letter at 3-5.

[^105]: *See supra* at para. 38. *See also* PRTC White Paper at 29.

[^106]: According to PRTC, the non-rural insular mechanism would restore
    approximately \$40 million in annual funding. *Id.* This amount does
    not include support that would be available to competitive eligible
    telecommunications carriers.

[^107]: *See* PRTC White Paper, App. A.

[^108]: Puerto Rico currently does not receive any forward-looking,
    high-cost model support but, as a rate-of-return carrier, PRTC is
    eligible to receive high-cost, interstate common line support
    (ICLS). According to USAC's most recent estimate, PRTC will receive
    approximately \$55 million in ICLS in 2005. *See* USAC Quarterly
    Administrative Filing 2006, First Quarter (1Q) Appendices, HC09,
    filed November 2, 2005, at
    <http://www.universalservice.org/overview/filings>. PRTC serves
    almost 1.2 million lines. *Id.* In 1999, PRTC received a total of
    approximately \$133 million in high cost universal service support,
    comprised of \$44 million in high-cost loop support, and \$89
    million in long term support (LTS). *See* Industry Analysis and
    Technology Division, Wireline Competition Bureau, Universal Service
    Monitoring Report, Tables 3.22, 3.25 (Oct. 2004). PRTC received
    "hold-harmless" high-cost loop support in 2000 through 2003. PRTC
    also received LTS in 2000 though June 2004. LTS was merged with ICLS
    July 1, 2004. With the consolidation of LTS into ICLS, no carriers
    received interim hold-harmless LTS support after the second quarter
    of 2004. We also note that PRTC is permitted to assess the
    subscriber line charge (SLC), which is a flat-rated charge imposed
    on end users to recover the interstate-allocated portion of local
    loop costs. This charge is also referred to as the end user common
    line (EUCL) charge. *See* 47 C.F.R. § 69.152. The residential and
    single-line business SLC is currently capped at \$6.50 per line.
    *See* 47 C.F.R. § 69.152(d)(1)(i).

[^109]: PRTC White Paper at 28.

[^110]: PRTC White Paper, App. A. *See also* 47 C.F.R. § 36.622(a).

[^111]: 47 C.F.R. § 36.622(a). The National Exchange Carrier Association
    (NECA) is responsible for calculating the national average
    unseparated loop cost per working loop. *Id.*

[^112]: *Id.*

[^113]: *See Order on Remand*, 18 FCC Rcd at 22613-14, paras. 89-92. We
    note that in 2004, the Telecommunications Regulatory Board of Puerto
    Rico failed to file a required certification stating whether its
    rural rates were reasonably comparable to the urban national
    average. *See* 47 C.F.R. § 54.316.

[^114]: *Unserved Areas NPRM*, 14 FCC Rcd at 21233-34. This proposed
    definition would exclude the Freely Associated States, including the
    Republic of the Marshall Islands, the Federated States of
    Micronesia, and the Republic of Palau from the definition of
    "insular area." The Freely Associated States are sovereign nations
    that are associated with the United States through terms of a
    Compact of Free Association.

[^115]: *Id.* at 21234. Carriers serving American Samoa, Guam, CNMI, and
    the U.S. Virgin Islands currently receive support based on embedded
    costs under the rural high-cost mechanisms and would not be affected
    by the tentative conclusion proposed herein. *Id*.

[^116]: *See* 5 U.S.C. § 603(a).

[^117]: *Id.*

[^118]: 47 C.F.R. §§ 1.1200-1.1216.

[^119]: 47 C.F.R. § 1.1206(b)(2).

[^120]: 47 C.F.R. § 1.1206(b).

[^121]: *See* 5 U.S.C. § 601-612, has been modified by the Small
    Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Pub.
    L. No. 104-121, Title II, 110 Stat. 857 (1996).

[^122]: *See* 5 U.S.C. § 603(a).

[^123]: *See id.*

[^124]: 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 the NPRM refer to the universal service
    provisions of the 1996 Act, which are codified at 47 U.S.C. § 254 of
    the Act. 47 U.S.C. § 254; *see also* 47 U.S.C. § 214(e).

[^125]: *Qwest Corp. v. FCC*, 398 F.3d 1222 (10^th^ Cir. 2005).

[^126]: 47 U.S.C. § 254(e)(3).

[^127]: Petition for Clarification and/or Reconsideration of the Puerto
    Rico Telephone Company, Inc., CC Docket No. 96-45 (filed Jan. 14,
    2004); *see also* Puerto Rico Telephone Company White Paper:
    Proposed Interim Insular Mechanism, CC Docket No. 96-45 (filed May
    6, 2005). Non-rural carriers are carriers that do not meet the
    definition of "rural telephone company." 47 C.F.R. § 51.5. Rural
    carriers tend to be significantly smaller than non-rural carriers.

[^128]: 5 U.S.C. § 604(a)(3).

[^129]: 5 U.S.C. § 601(6).

[^130]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small business concern" in 5 U.S.C. § 632). Pursuant to 5 U.S.C. §
    601(3), the statutory definition of a small business applies "unless
    an agency after consultation with the Office of Advocacy of the
    Small Business Administration and after opportunity for public
    comment, establishes one or more definitions of such term which are
    appropriate to the activities of the agency and publishes such
    definition in the Federal Register."

[^131]: 15 U.S.C. § 632.

[^132]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 517110.

[^133]: U.S. Census Bureau, 1997 Economics Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 5, NAICS code 517110.

[^134]: *Id.* The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is "Firms with 1,000
    employees or more."

[^135]: 13 C.F.R. § 121.201, NAICS code 517110.

[^136]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3 (May
    2002).

[^137]: *Id.*

[^138]: *Id.*

[^139]: 13 C.F.R. § 121.201, NAICS code 517212.

[^140]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3 (May
    2002).

[^141]: *Id.*

[^142]: 47 C.F.R. § 54.201

[^143]: 15 U.S.C. § 632.

[^144]: *See supra* para. 18.

[^145]: *See supra* para. 24.

[^146]: *See supra* paras. 30-38.

[^147]: *See* 5 U.S.C. § 603(c).

[^148]: *See Qwest Corp. v. FCC*, 398 F.3d 1222 (10^th^ Cir. 2005).

[^149]: Petition for Clarification and/or Reconsideration of the Puerto
    Rico Telephone Company, Inc., CC Docket No. 96-45 (filed Jan. 14,
    2004); *see also* Puerto Rico Telephone Company White Paper:
    Proposed Interim Insular Mechanism, CC Docket No. 96-45 (filed May
    6, 2005).