Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, DC 20554

In the Matter of )

) CC Docket No. 96-45

Federal-State Joint Board on )

Universal Service )

**[COMMENTS OF U S WEST, INC.]{.underline}**

> Kathryn Marie Krause
>
> Suite 700
>
> 1020 19th Street, N.W.
>
> Washington, DC 20036
>
> \(303\) 672-2859
>
> Attorney for
>
> U S WEST, INC.

Of Counsel,

Dan L. Poole

April 12, 1996

[TABLE OF CONTENTS]{.underline}

[Page]{.underline}

SUMMARY

I. A FEDERAL UNIVERSAL SERVICE PLAN SHOULD BE GUIDED BY ARTICULATED
FEDERAL\
PRINCIPLES

II\. UNIVERSAL SERVICE DEFINITIONS

A. Universal Service Definition For The General Population

B. Universal Service Definition For Low-Income Individuals

III\. A MODEL FEDERAL UNIVERSAL SERVICE FUND FOR RURAL, INSULAR AND
HIGH-COST AREAS: U S WEST'S PROPOSED BENCHMARK COST MODEL

IV\. FUNDING OF A UNIVERSAL SERVICE FUND FOR RURAL, INSULAR AND
HIGH-COST AREAS AND CUSTOMERS

A. Cost Standards For Explicit High-Cost Funding

B. Level Of The FFB

C. How Should Responsibility For Universal Service Support Be Assigned
Between Interstate And Intrastate Jurisdictions?

V. COST RECOVERY AND CONTRIBUTIONS TO THE USF HCF SHOULD BE BROADLY
BASED AND COMPETITIVELY NEUTRAL

A. The Current TRS Cost Recovery/Contribution Model Can Be Adapted To Be
A Sound USF Cost Recovery/Contribution Model

B. The Other Proposed Models Are Not Appropriate For A USF HCF

VI\. UNIVERSAL SERVICE CONSIDERATIONS FOR SCHOOLS, LIBRARIES AND HEALTH
CARE\
PROVIDERS

A. General Considerations Regarding The Universal Service Definition And
The Fund Size

B. The Universal Service Definition Or Service Menu

VII\. CONCLUSION

#   {#section .unnumbered}

# [SUMMARY]{.underline}

Herein, U S WEST, Inc. ("U S WEST") points out the significant federal
interest associated with the definitions of universal service for the
general population, as well as for educational institutions, libraries
and rural health care providers. While the Communications Act of 1934
certainly reflected such an interest, the Telecommunications Act of 1996
("1996 Act") clearly defines a national agenda with regard to universal
service initiatives, particularly with respect to the provision of
affordable service to all citizens in the Nation.

U S WEST previously proposed a Benchmark Cost Model ("BCM"), which
incorporated the use of Census Block Groups ("CBG") and ARMIS factors,
as an appropriate model to determine "high cost" geographic areas, such
that high-cost funding can be specifically targeted to those areas. We
continue to support that model, believing that it produces the most
reliably-sized federal universal service high-cost fund ("HCF").

We propose a Federal Funding Benchmark ("FFB") of \$30.00 per month.
Where the BCM indicates it would cost an eligible provider more than
\$30.00 to serve a particular CBG, the federal USF HCF would provide
support to that provider for service to that CBG. Utilizing an FFB of
\$30.00, U S WEST proposes a HCF of \$5 billion.

While continuing to support the BCM/ARMIS in this filing, we do so with
the following caveat: The BCM/ARMIS model was not designed to identify
(therefore, to recover) the full costs that local exchange carriers
("LEC") experience in providing basic universal service today. These LEC
embedded costs reflect investments prudently made in prior years, upon
which LECs are entitled to earn full recovery. In addition to the
recovery of "high costs" of certain CBGs on a going-forward basis, an
imperative agenda item within the context of universal service
deliberations require that LECs be able to re-balance their rates to
remove implicit support from their rate structures and set rates for
services to customers closer to the cost of providing service.

Thus whatever federal HCF is crafted from the instant proceeding, that
fund is expected to recover only some, but not all, of the difference
between the current price of basic service and the embedded cost of
providing that service. U S WEST will be proposing plans at both the
federal and state level to assure that recovery for the remainder
occurs.

Beginning with a universal service HCF, additional funding dollars will
be required for services to educational institutions, libraries and
rural health care providers. The amount of funding required to
accommodate the needs of these particular groups will ultimately be
dependent on the services that the Federal Communications Commission
("Commission") determines should be included in the menu of services
provided, as well as the extent of the discounts (schools) and
"comparability" (rural health care) that the Commission requires with
respect to such offerings.

Whatever the "total" USF, U S WEST recommends that the funding be
accomplished through an explicit surcharge on end-user customers' bills
for all telecommunications services purchased (including both voice and
data). Upon collection of that surcharge, all telecommunications
carriers and providers of telecommunications services should contribute
to the fund. The Commission should keep to the bare minimum those
providers or industry segments exempted from such contribution
requirements under the [de minimis]{.underline} theory of the 1996 Act.
We believe the current funding mechanism utilized for the Telephone
Relay Service ("TRS"), while not a perfect model, provides a good
starting place in formulating a workable USF model.

There is significant regulatory and industry benefit to a uniform
"universal service" definition and a uniform cost-recovery/contribution
mechanism. However, to the extent that states determine that more or
different services should be included in the state definition of
universal service than in the federal, or determine to charge a basic
residential local service rate lower than the FFB, they should be
strictly held to the 1996 Act's statutory mandate that they "adopt
additional specific, predictable, and sufficient mechanisms to support
such definitions or standards."

Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, DC 20554

In the Matter of )

) CC Docket No. 96-45

Federal-State Joint Board on )

Universal Service )

**[COMMENTS OF U S WEST, INC.]{.underline}**

# I. [A FEDERAL UNIVERSAL SERVICE PLAN SHOULD BE GUIDED BY ARTICULATED FEDERAL PRINCIPLES]{.underline}

The national concerns with universal service issues, long a part of the
federal legislative regime incorporated in the Communications Act of
1934 and the Federal Communications Commission's ("FCC" or "Commission")
interpretations and implementation of that Act, are again evidenced in
the Telecommunications Act of 1996 ("1996 Act"). It is clearly a matter
of national policy "to make available, so far as possible, to all the
people of the United States, without discrimination on the basis of
race, color, religion, national origin, or sex, a rapid, efficient,
nationwide and world-wide wire and radio communication service with
adequate facilities at reasonable charges."[^1] These services are to
contribute to economic development, enhance educational opportunities
and provide for broad-based health care services for the "people of the
United States."

To achieve the goals set out by the 1996 Act, the Commission is directed
to provide a national definition of universal service, to assess the
affordability of services included in such definition, to explicitly
identify universal service subsidies and to develop a federal universal
service fund (or "USF")which will provide the support for the
maintenance of affordable service throughout the United States. While
States have considerable responsibility under the 1996 Act, the scope of
federal leadership envisioned by Congress in addressing universal
service issues is substantial and significant.

Herein U S WEST, Inc. ("U S WEST") proposes a universal service fund
that addresses support for both rural, insular and high-cost areas
([i.e.]{.underline}, the High Cost Fund ("HCF")) and for schools,
libraries and rural health care providers. With respect to the former,
the HCF, we continue our support for the model we have advocated in the
past, [i.e.]{.underline}, the Benchmark Cost Model (or "BCM"), utilizing
ARMIS cost factors. We believe this model produces the most reliably
sized HCF. We propose a HCF of \$5 billion, which would represent a
Federal Funding Benchmark ("FFB") with respect to "affordable"
residential basic service of \$30.00.

Additional funding dollars would be required for the schools, libraries
and health care services. The amount of such funding will ultimately be
dependent on the services that the Commission determines should be
included in the menu of services provided to educational and library
institutions and to health care providers in rural areas, as well as the
extent of the discounts and "comparability" that the Commission requires
with respect to such offerings.

We propose that the total USF be funded through an explicit surcharge on
end-user customers' bills for all telecommunications services
purchased.[^2] Upon collection of that surcharge, all telecommunications
carriers and providers of telecommunications services should contribute
to the fund. We believe the current funding mechanism utilized for the
Telephone Relay Service ("TRS"), while not a perfect model, provides a
good starting place in formulating a workable USF funding model.

In all, our proposal is sound with respect to both "affordability" of
universal service and competitive neutrality. Our proposal also
positively supports those principles that the 1996 Act states should
form the basis for universal service determinations: quality services
provided at just, reasonable and affordable rates; access to advanced
telecommunications and information services; comparability between
high-cost and urban subscribers with respect to basic access and
telecommunications services; equitable and nondiscriminatory cost
recovery and contribution mechanisms; and specific and predictable
support mechanisms.[^3]

Our proposal also benefits from its support of other, additional
principles that should operate as guideposts in the formulation of any
USF proposal. We believe that any federal universal service initiative
must be guided by the following seven principles:

> 1\. To the greatest extent possible, the competitive marketplace
> should be relied upon to define and provide universal service at
> reasonable rates.
>
> 2\. Existing rates must be re-balanced for services such as business,
> toll, access and residential service.
>
> 3\. If particular customers or groups of customers are to receive
> support, support must be explicit, rather than implicit.
>
> 4\. Any subsidies should be targeted to the appropriate low-income
> individuals, to social programs and to eligible companies serving
> customers in high-cost areas.
>
> 5\. High-cost support should be targeted to the smallest geographical
> area reasonably identifiable.
>
> 6\. Federal and State universal service funds should be complementary.
>
> 7\. The size of a USF should not be artificially constrained. Nor
> should it be "divvied up" according to prior, arbitrary
> "jurisdictionally separated cost" principles.

As the Commission formulates its post-1996 Act universal service agenda,
it is important to keep in mind that the support mechanisms currently
associated with universal service obligations were devised in an
environment steeped in notions of social compacts, where a local service
monopoly was presumed. These compacts created a complex system of
internal pricing support mechanisms[^4] which helped maintain low basic
rates for all residential customers. These pricing policies imposed upon
local exchange carriers ("LEC") were made in an environment where
competition did not exist and where participants to the compact felt
relatively assured that extended depreciation lives would ultimately
allow for the recovery of invested capital. The assumptions underlying
this social compact are obviously no longer valid.

Congress clearly acknowledged in the 1996 Act that the local market was
(or soon would be) competitive. The emergence of such competition
displaces many historical support mechanisms. Thus, at a minimum, well
thought out policy changes, with concomitant broadly-based funding
proposals are necessary to preserve universal service in the future,
particularly with respect to high-cost, rural and insular populations.
But that is not the end of the matter.

LECs have the right to recover their full cost of providing universal
service, including costs incurred historically. In a competitive
environment, these costs cannot \-- contrary to past practice \-- be
recovered implicitly, by spreading the universal service costs fairly
ubiquitously across a broad-base of services. Nor should they be.

Universal service "costs" should be specifically identified and
recovered. Services which currently provide "implicit" support should be
freed from the encumbrance of such support obligations; explicit
universal service funds \-- state as well as federal \-- should be
established to address the continued social, regulatory, legislative and
industry commitment to universal service.

Below, U S WEST addresses portions of the Commission's recently issued
[NPRM]{.underline}.[^5] Given space limitations,[^6] U S WEST addresses
only a limited number of issues herein. First, we address the definition
of "universal service," with a particular view to the rural, insular and
low-income populations. Second, we address the mechanics of the BCM and
its continued validity post-1996 Act enactment. Third, we address cost
recovery and contribution methodologies. Fourth, we discuss the
appropriate universal service package with respect to educational
institutions and libraries, as well as rural health care providers.
Included in this discussion, we address the appropriate "discounting" of
access to telecommunications and information services provided by
telecommunications carriers, as well as "comparability" of prices for
services between rural and urban health care service providers.

# II. [UNIVERSAL SERVICE DEFINITIONS]{.underline}

## A. [Universal Service Definition For The General Population]{.underline}

U S WEST supports the ubiquitous deployment of a core set of basic
[telephony]{.underline} services, available to all who want them:
one-party service; a voice-grade line with touch-tone capability; access
to competing long-distance carriers; access to telephone relay services
for hearing or speech disabled customers; dialing access to 911/Enhanced
911 emergency services; and access to directory assistance.[^7]

As the 1996 Act acknowledges, the marketplace must be allowed over time
to identify the applications most customers actually want and are
willing to pay for. In establishing the definition of those component
services that constitute "universal service," consideration should be
given to "the extent to which such telecommunications services . . .
have, through the operation of market choices by customers, been
subscribed to by a substantial majority of residential customers;
\[and\] are being deployed in public telecommunications networks by
telecommunications carriers."[^8]

Customer choice must be allowed to drive the evolution of those basic
elements associated with "universal service" in an information market
with evolving information technology. As the legislation clearly
contemplates, a service should be added to the universal service
definition only when it reaches a high-market-penetration level and
there is a net benefit to society from providing the service
universally.

U S WEST supports the development of public policies that encourage
competing providers to offer more advanced communications services to
urban and rural communities on an economically sustainable basis.[^9]
For example, a federal policy making microwave frequencies available for
use in providing telephone exchange service can clearly contribute to
the availability of exchange service in remote areas. Government support
mechanisms should apply only in those instances where market forces
demonstrably fail to result in the deployment of advanced
telecommunications services.

## B. [Universal Service Definition For Low-Income Individuals]{.underline}

In the current [NPRM]{.underline}, the Commission describes its current
LifeLine and LinkUp programs.[^10] U S WEST has long supported, and we
continue to support, these initiatives. We believe, however, that it
would be appropriate for the Commission to examine the caps placed on
these programs as rates are re-balanced over time (a competitive
necessity) and as basic service rates increase (as States assume their
responsibilities under the 1996 Act to provide support for intrastate
services at affordable rates).

While supporting the current federal low-income support mechanisms,
U S WEST does not believe that federal regulatory intervention is
necessary with respect to certain of the other federal "support"
mechanisms the Commission identifies for comment. In U S WEST's
experience, state regulatory authorities are fully cognizant of the
impact of different types of business office and toll access policies on
local subscribership. For example, matters such as service deposits,
full toll denial ("FDT")[^11] and local service denial are being
responsibly addressed at the state level. Absent a demonstration that
market[^12] or state regulatory resolution of these matters seriously
impedes federal universal service goals or the implementation of those
goals, federal intervention in this area is not necessary.

# III. A MODEL FEDERAL UNIVERSAL SERVICE FUND FOR RURAL, INSULAR AND HIGH-COST AREAS: [ U S WEST'S PROPOSED BENCHMARK COST MODEL]{.underline} 

In comments and reply comments submitted in CC Docket No. 80-286 last
year,[^13] U S WEST outlined a comprehensive methodology for the
targeting of universal service support to high-cost areas. We believe
this methodology remains viable post-1996 Act enactment. The essentials
of this methodology consist of the following components:

> 1\. Costs of providing basic service to customers are developed for
> small areas of geography defined by Census Block Groups ("CBG").[^14]
>
> 2\. Costs are determined using a standard costing methodology, based
> on current technology and efficient network design.[^15]
>
> 3\. A federal fund would be established to efficiently distribute
> support to high-cost areas:
>
> a\. An "affordability benchmark" (what U S WEST has called a FFB)
> would be established to represent a price above which, as a matter of
> federal policy, basic service is deemed to be not affordable and
> should be subsidized by an explicit federal high-cost funding
> mechanism.[^16]
>
> b\. CBGs where the cost is determined to be above the FFB would
> receive the difference between the BCM cost and the FFB through a
> federal high-cost fund.
>
> c\. Funding would be available to any eligible[^17] local service
> provider serving customers in a qualifying CBG.
>
> 4\. To the extent that the present price for basic service was below
> the FFB, such differences would be addressed at the state level,
> through rate re-balancing, interconnection charges, and the
> establishment of state high-cost funds.
>
> 5\. The plan described above would be implemented as soon as possible
> for Price Cap LECs. Non-Price Cap LECs would remain under a funding
> mechanism similar to the present USF.[^18]

In the time since U S WEST first proposed this plan, events,
particularly the passage of the 1996 Act, have reinforced the
appropriateness of this funding plan for the emerging competitive local
telecommunications marketplace. The 1996 Act specifically adds
"affordability" of basic service as a national goal, and directs the
Commission to develop a "specific and predictable" funding mechanism to
assure that this goal is met. The 1996 Act also calls for the
development of funds at both the state and federal levels.

With the December 1, 1995 filing of nationwide BCM data, we now have the
ability to illustrate the outcomes of several alternative funding
strategies. We demonstrate those outcomes below.

Prior to that demonstration, however, U S WEST reiterates something we
have stated repeatedly, both in formal comments and informally with
industry colleagues and Commission Staff. The BCM, as originally filed,
was not touted as a perfect or final model. Rather, it was the result of
efforts by a number of industry players to develop a tool for targeting
high-cost support. As detailed in subsequent *ex parte* filings,[^19]
U S WEST has indicated our belief that certain enhancements to the BCM
can, in fact, increase its effectiveness. We also believe certain
proposals made by Pacific Telesis[^20] warrant further analysis and
possible incorporation into a final model which can become the
foundation for a nationwide system for the distribution of universal
service funds to rural, high-cost and insular areas.

In determining the best method of meeting the Congressional mandate for
affordable universal service nationwide, it is important to avoid the
temptation to engage in a debate over "dueling models." Based on
U S WEST's knowledge and experience, models designed to capture
high-cost information for universal service support are all attempts to
achieve the same result. If the Commission makes the threshold decision
that a "proxy modeling approach"[^21] represents the most efficient and
effective way to target high-cost support in a multi-vendor local
marketplace, it should establish an Industry Task Force which, under
Commission or Joint Board oversight, could develop a final model process
utilizing consensus model assumptions and input data.[^22]

The following chart illustrates how the December 1st BCM data can be
used to construct a high-cost targeting process, along the lines
recommended in U S WEST's plan:

+-----------------+-----------------+-----------------+-----------------+
| FUNDING         | BCM             | BCM             | EMBEDDED COST   |
| BENCHMARK       |                 |                 |                 |
|                 | MCI/HATFIELD    | ARMIS           |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| \$20/mo.        | \$4.0B(illion)  | \$8.1B          | \$11.6B         |
+-----------------+-----------------+-----------------+-----------------+
| \$30/mo         | 2.2             | 4.9             | 7.0             |
+-----------------+-----------------+-----------------+-----------------+
| \$40/mo.        | 1.4             | 3.2             | 4.6             |
+-----------------+-----------------+-----------------+-----------------+
| \$50/mo         | 1.0             | 2.2             | 3.2             |
+-----------------+-----------------+-----------------+-----------------+
| \$60/mo.        | 0.7             | 1.7             | 2.4             |
+-----------------+-----------------+-----------------+-----------------+
| \$70/mo         | 0.5             | 1.3             | 1.9             |
+-----------------+-----------------+-----------------+-----------------+
| \$80/mo.        | 0.4             | 1.0             | 1.4             |
+-----------------+-----------------+-----------------+-----------------+

This chart illustrates that the size of a fund necessary, given FFBs of
\$20 to \$80 per month, when measured against the two different expense
factors utilized in the BCM,[^23] as well as an extrapolation of BCM
costs to embedded cost.[^24] Examining this chart, it is evident that
the size of the fund is a combination of the funding benchmark chosen
and the cost methodology utilized.

# IV. FUNDING OF A UNIVERSAL SERVICE FUND FOR RURAL, INSULAR AND HIGH-COST [AREAS AND CUSTOMERS       ]{.underline}

## 

## A. [Cost Standards For Explicit High-Cost Funding]{.underline}

U S WEST recommends that explicit funding to support rural, insular and
high-cost areas be based upon the BCM costs using the ARMIS expense
factor. The ARMIS factor takes into account the relationship between
investments, expenses and overheads reflected in the historic operation
of providers. At the same time, the factor encourages efficiency, since
it is applied to an investment level based upon an optimally designed
network utilizing forward-looking technology.

Basing explicit high-cost funding on a forward-looking cost standard has
an advantage in a competitive local marketplace. The 1996 Act
specifically requires that high-cost support mechanisms be available to
all "eligible" carriers. Since the BCM approximates the cost of building
a network today, it is a reasonable and appropriate means of
establishing explicit funding requirements with respect to new market
entrants. Using current costs as the basis for the determination of the
explicit federal funding component minimizes the chances that high-cost
support funds will serve as an incentive for uneconomic market entry.

While U S WEST prefers the BCM/ARMIS approach with respect to current
USF HCF matters, we recognize that our choice of model is one that would
not cover the full costs which LECs experience in providing basic
universal service today. These costs are represented in the Table above
by the embedded cost, and reflect investments prudently made in prior
years, upon which LECs are entitled to earn full recovery.

As U S WEST has stated repeatedly in the past, explicit high-cost
funding is but one element in a comprehensive solution to funding
support for universal service. Of greater importance is the ability of
LECs to re-balance their rates to remove implicit support from their
rate structures and set rates for services to customers closer to the
cost of providing service. Thus, a Federal HCF should be expected to
recover some, but not all, of the difference between the current price
of basic service and the embedded cost of providing that service. We
believe that the BCM/ARMIS approach represents a reasonable way to
target Federal high-cost support dollars.[^25]

## B. [Level Of The FFB]{.underline}

Determination of the level of the FFB, that level above which BCM costs
would be recovered from a Federal HCF, is at best a subjective exercise.
The level must be low enough to allow the Commission to meet the
Congressionally-mandated objective of assuring that basic service is
"affordable" to all Americans. At the same time, it must be high enough
that the resultant fund is within the capability of the marketplace to
sustain. It must also leave room for individual states to find the right
mix of rate re-balancing and targeted State HCFs for their markets.

U S WEST recommends that the Commission establish a FFB of \$30/month.
This would result in a fund of approximately \$5 billion, which we
believe is sustainable.[^26] A \$30 FFB would also leave room for states
to establish policies, prices and funds to meet the needs of both the
incumbent LECs and their individual state requirements.[^27]

## C. How Should Responsibility For Universal Service Support Be Assigned Between [Interstate And Intrastate Jurisdictions?  ]{.underline}

Section 254 of the 1996 Act states that "\[t\]here should be specific,
predictable and sufficient Federal and State mechanisms to preserve and
advance universal service."[^28] In defining the role of States, the
1996 Act says that States "may adopt regulations not inconsistent with
the Commission's rules to preserve and advance universal service. . . .
A State may adopt regulations to provide for additional definitions and
standards to preserve and advance universal service within that State
only to the extent that such regulations adopt additional specific,
predictable, and sufficient mechanisms to support such definitions or
standards that do not rely on or burden Federal universal service
support mechanisms."[^29]

For jurisdictional separations purposes, the treatment of the Federal
funding amounts would be handled in a manner similar to how payments
under the present USF are handled today. BCM costs in excess of the FFB
would be assigned to the interstate jurisdiction and covered by payments
from the Federal HCF.

To the extent that States determine to charge a residential access rate
lower than the FFB,[^30] or they determine that more or different
services should be included in the State definition of universal service
than in the Federal, they may do so, [provided]{.underline} they devise
an explicit funding mechanism for such shortfall and deviations.

# V. COST RECOVERY AND CONTRIBUTIONS TO THE USF HCF SHOULD BE BROADLY [BASED AND COMPETITIVELY NEUTRAL      ]{.underline}

Universal service is an overarching legislative, regulatory and social
goal. All citizens benefit from the ubiquity of the network, which
allows access to others and to information. As such, social and
regulatory theory suggests that it should be funded on as broad a base
as possible, ideally through general funds.[^31] However, despite the
long-standing and continued recognition of universal service as a
fundamental social good and an integral part of the American social
fabric, Congress has determined that the telecommunications industry,
rather than the general public, should bear the economic burden
associated with USF funding.

The 1996 Act requires that "\[e\]very telecommunications carrier that
provides interstate telecommunications services shall contribute, on an
equitable and nondiscriminatory basis, to the specific, predictable, and
sufficient mechanisms established by the Commission to preserve and
advance universal service."[^32] The Commission should construe the
funding obligations under the 1996 Act more, rather than less,
broadly.[^33] To the greatest extent possible, consistent with the
provisions of the 1996 Act, all public network beneficiaries should help
to support universal service goals. The Commission should keep to the
barest minimum exemptions on the ground that a specific provider's (or
industry's) contribution levels would be [de minimis]{.underline}. A
funding mechanism that is as broad as possible ensures a lower
assessment on specific providers and their customers, reducing the
universal service support burden borne by any one class of providers or
customers.

Within the context of this broadly based funding mechanism, two other
principles should guide the Commission in determining the appropriate
outline of the mechanism. First, funding should be competitively
neutral. To allow for broadly-based contribution requirements in as
competitively neutral a way as possible, reliance on historical
"classifications" must be rejected. As the telecommunications industry
evolves, distinctions between and among providers, as well as the
services provided, are becoming less and less meaningful.

Second, the funding mechanism should recognize the need for flexible and
adaptive policies in an environment where historical and easy
"classifications" of providers are blurring rapidly. The funding
mechanism should be flexible enough to adapt to changes in the funding
base, such as an increase in the size of the base, the entry of new
providers, and changes in market share among providers.

Like others in the industry,[^34] U S WEST supports USF HCF explicit
cost-recovery assessments on individual end users (with respect to the
Federal fund, from those users purchasing interstate services). A
separate, identifiable item would appear on an end-user's bill for the
USF cost recovery. From there, the money would flow to
telecommunications providers, who would contribute to the USF itself.
This model, we believe, correctly incorporates the two goals mentioned
above, producing a broad base of payors (customers of all providers) and
a broad base of services subject to contribution obligations, and an
"explicit" funding mechanism.

While we appreciate that the Commission is seeking comment specifically
on an interstate USF model, given the fact that the Federal/State Joint
Board must implement a funding mechanism that can be used in both state
and interstate jurisdictions, U S WEST believes the most broadly-based
and competitively-neutral model that can be implemented should be the
model that is implemented.

## A. The Current TRS Cost Recovery/Contribution Model Can Be Adapted[ To Be A Sound USF Cost Recovery/Contribution Model]{.underline} 

The current TRS fund provides a potential funding model that might be
utilized within a universal service context.[^35] While U S WEST does
not believe that this model, in its entirety, is appropriate in a USF
environment, there are aspects of the model which we believe are quite
appropriate. First, to the extent that the model seeks cost recovery
from a broad base ("\[c\]osts . . . \[should\] be recovered from all
subscribers for every interstate service"),[^36] we believe it is a good
model and one that should be replicated in a USF environment. Second, we
think the type of providers contributing to the TRS fund is broadly
based, and could form a sound basis for replication in a USF
environment.[^37]

Like the aspects of the TRS model U S WEST considers appropriate in a
USF environment, the shortcomings of the TRS model are also twofold.
First, unlike certain state models,[^38] the current interstate TRS
recovery model does not explicitly identify the TRS "cost recovery" on
the end-user's bill. The cost recovery is allowed to be handled as a
carrier's "cost of doing business," an approach we believe is
[not]{.underline} competitively neutral and is inconsistent with the
1996 Act's direction that USF matters be treated explicitly.[^39] We
discuss our opposition to the TRS "implicit" cost-recovery mechanism
within the context of a USF HCF below.

Second, the TRS model works off of gross revenues, which U S WEST does
not believe is appropriate. In a USF environment, U S WEST would include
only costs associated with [retail]{.underline} telecommunications
services, not with wholesale services.[^40]

With respect to the lack of specific identification of the TRS cost
recovery on the end-user's bill, U S WEST does not support the model.
When support for certain social goals (such as TRS and universal
service) is recovered through rates as a general cost input, the support
mechanism and its recovery become implicit, perpetuating the implicit
subsidy problem inherent in rates today. We believe that the approach
taken by Vermont, for example,[^41] where the USF assessment is
specifically identified on the bill, is the more appropriate approach
from a public policy perspective, as well as more aligned with the 1996
Act's mandated approach.

Furthermore, including the assessment as a cost of doing business is not
competitively neutral, as long as one provider is subject to a different
set of regulatory rules than another provider. Were the universal
service funding costs permitted to be included in a provider's overall
"cost of doing business," all providers would have to be on the same
market footing. That is, each and every provider would have to have the
flexibility to increase [any or all of its rates]{.underline} to cover
these costs. Because all USF HCF providers predictably will
[not]{.underline} be on the same footing in this regard, a "cost of
doing business" approach is inequitable and competitively
disadvantageous to incumbent LEC providers, in particular.

When an incumbent LEC is constrained from raising its rates with respect
to one particular category of service ([e.g.]{.underline}, local
residential service), it will be required to focus all of its increased
USF "cost of doing business" recovery on its more competitively
vulnerable services, thus disadvantaging it vis-à-vis its competitors.
Similarly, even if a local service rate increase is not absolutely
prohibited, if that LEC must suffer time-consuming regulatory
proceedings to increase its rates to cover its USF HCF costs, while
other competitive providers can recover the costs any time, any way they
want, the incumbent LEC is disadvantaged. In either event, the LEC faces
the unattractive "choice" of raising its more competitive rates, both
disadvantaging itself in the marketplace and perpetuating the
insidiousness of implicit supports.

## B. [The Other Proposed Models Are Not Appropriate For A USF HCF]{.underline}

Despite its deviation from the preferred "retail revenues/specific
identification on end user's bill model" argued above as the most
appropriate, the TRS model \-- while far from perfect \-- would be
preferred over the other proposals mentioned by the Commission.[^42] The
second alternative, a mechanism similar to that established in the
Commission's [Regulatory Fees Order]{.underline},[^43] would require
contributions based on revenues, net of payments to other carriers
([e.g.]{.underline}, total interstate toll revenue minus access charges
paid).[^44]

As we have indicated above, we believe the most efficient way to handle
USF funding is to base assessments on the retail revenues of
telecommunications service providers. The [Regulatory Fees
Order]{.underline} approach allows certain providers
([e.g.]{.underline}, IXCs, CAPs, etc.) to pay fees "based on gross
interstate revenues net of payments made to other telecommunications
carriers."[^45] For many IXCs, this equates to an assessment on net
retail revenues. On the other hand, other providers ([e.g.]{.underline},
incumbent LECs), having no current "payments to other carriers,"
contribute based on their total gross revenues, which include both their
end-user retail revenues (net nothing) as well as their wholesale
service revenues.

This is obviously an inequitable and unfair result. Thus, while the
[Regulatory Fees Order]{.underline} approach appears to address what
U S WEST sees as the "double assessment" problem associated with the
existing TRS recovery mechanism, its application is not accomplished in
a competitively neutral manner.[^46] Thus, we oppose it.

Nor is this model easily administered. For it to work in a manner that
was competitively neutral, the Commission would have to allow incumbent
LECs to net out imputed access from their toll revenues, for
example.[^47] While "competitive neutrality" might be achieved by this
treatment of incumbent LECs, U S WEST still would not favor this
approach because it produces \-- in its efforts to achieve parity \-- a
reduction in the funding base. The retail revenue approach does not
suffer from this infirmity. Because of the potential to favor one
competitor over the other and the complex scenarios raised by the
net-of-payments option, the option should be rejected and the retail
methodology should be adopted.

The final Commission-described option, contribution based on per-line or
per-minute units, should be rejected for the reasons discussed in the
[NPRM]{.underline}.[^48] As the [NPRM]{.underline} implies, this would
require the Commission to immerse itself in the adoption and
administration of "'equivalency ratios' for calculating the
contributions owed by providers of services that were not sold on a
per-line or per-minute basis into . . . respective per-line or
per-minute units."[^49] We believe this methodology is simply too
complex for the benefits that might be derived from it. This is
particularly the case because, as the Commission acknowledges, the
"approach\[ \] may favor certain services or service providers over
others."[^50]

Clearly, U S WEST's proposed funding alternative, based on retail
end-user revenue, is superior to the three alternatives discussed in the
[NPRM]{.underline}. The retail option is the most easily administered;
and it benefits from its competitive neutrality. For the reasons
outlined above, it should be adopted by the Joint Board and the
Commission.

# VI. [UNIVERSAL SERVICE CONSIDERATIONS FOR SCHOOLS, LIBRARIES AND HEALTH CARE PROVIDERS]{.underline}

## A. [General Considerations Regarding The Universal Service Definition And The Fund Size]{.underline}

An obvious goal of the 1996 Act, as it pertains to telecommunications
and information access to schools, libraries and rural health care
providers, is to provide affordable access to advanced
telecommunications services to those institutions that do not currently
have them.[^51] The 1996 Act requires that the additional services
targeted for support through universal service mechanisms must be
offered to schools and libraries at a discount and to rural health care
providers at rates comparable to rates for the same services in urban
areas.[^52]

The determination of the funding necessary to support these subsidies is
dependent upon two factors:

> 1\. The menu of services which are determined to be eligible for
> discounted provisioning, and
>
> 2\. The amount of discount determined to be appropriate by State and
> Federal regulators.

The larger the "menu" of services for which USF support is required, the
greater the pressure to increase the overall size of the USF.
Furthermore, as the menu gets larger, less discounting can reasonably be
expected to occur. For example, a service menu reflecting \$10 billion,
with a 50% discount, results in a USF school/health care support fund of
\$5 billion. A service menu reflecting \$100 billion, with a 50%
discount, results in a \$50 billion support fund. Or, stated another
way, a \$5 billion support fund for educational institutions and
libraries, as well as health care providers, will produce a 50% discount
when the service menu involves services valued at \$10 billion; but only
a 5% discount with respect to a service menu valued at \$100 billion.

There obviously is some practical cap on the total size of a Federal USF
fund (including funding for both rural, insular and high-cost areas, as
well as schools, libraries and rural health care) sustainable in the
telecommunications marketplace, from both a regulatory and an industry
perspective. Yet, as can be discerned from the above, the broader the
service menu is defined, or the greater its value, the larger the
support fund must be or the smaller the discount possibilities.

Since most schools, libraries and rural health care providers operate in
an environment of limited funds and tight budgets, it makes sense for
regulators to find the mix of services which best meets the needs of
these institutions for basic service functionality, at the lowest total
price. By so doing, maximum discounts can be applied to the lower
prices.

While the service proposals we make below may appear to some to be
unduly modest, given the scope of available technology, we believe they
incorporate immediately useful services at reasonable costs, which would
allow for the maximization of discounting.

## B. [The Universal Service Definition Or Service Menu]{.underline}

The Commission seeks specific comment on what services, over and above
those included in the general "universal service definition" package,
should be made available to eligible schools and libraries and what an
appropriate discount might be. Inquiry is also made on what services
should be made available to eligible rural health care providers, at
rates comparable to those in urban areas.

Based on U S WEST's experience serving the educational and health care
communities in our 14-state territory over many years, U S WEST proposes
the following for consideration. Upon a bona fide request, any eligible
school, library or rural health care provider[^53] shall be provided
with a 56/64 Kbps access line and toll-free dial-up access to an
Internet Service Provider ("ISP").

U S WEST's proposal for school, library and health care provider special
services definitions are not dependent on a specific technologies.
U S WEST urges the Commission to refrain from specifying any specific
technology when designating the appropriate "universal" services for
these institutions.[^54] These special services should be founded on a
baseline transmission rate, capable of supporting a number of
applications. The most cost-effective means of delivery will vary by
carrier and geographic location. Options for carriers might include
digital private line, frame relay, ISDN, or wireless. Carriers should be
able to choose the most cost-effective technology. This, in turn, will
produce the most reasonable "costs" to be recovered from the USF.

Below, we describe in more detail the two definitional components.

> 1\. [56/64 Kbps Line]{.underline}

With respect to educational institutions and libraries, a 56/64 Kbps
line has the ability to support multiple users and multiple applications
simultaneously. It also permits access to the Internet. Schools with
56/64 Kbps lines additionally will have the capability to perform
administrative tasks utilizing a data network to which district schools
and administration offices could be connected.

In the case of rural health care providers, 56 Kbps circuits allow for
health administration, remote admissions, tele-consulting, tele-trauma
and tele-psychiatry, for example. In addition, these circuits will
provide isolated health care professionals a means of continuing
education from larger medical communities and resources.[^55]

> 2\. [Toll-Free Access to an Internet Service
> Provider]{.underline}[^56]

The other component of the universal service package for schools,
libraries and rural health care providers should be toll-free dial-up
access to an ISP. Such access will provide those institutions with the
opportunity to utilize, for example, electronic mail; information
retrieval applications ([e.g.]{.underline}, access to on-line resources
otherwise not available); and bulletin boards ([i.e.]{.underline},
resource and idea sharing unrestricted by distance or location).

While U S WEST enthusiastically supports the provision of Internet
access, we do not believe that how such access is provided should be
prescribed. The Commission should allow telecommunications providers
flexibility to carry Internet toll traffic by whatever method they
choose, such as an 800 or Foreign Exchange service.

# VII. [CONCLUSION]{.underline}

U S WEST believes that utilizing a BCM/ARMIS model for identifying and
targeting universal service high-cost support produces the most reliable
Federal USF HCF. Using a FFB of \$30.00, the BCM/ARMIS produces a USF
HCF of \$5 billion. We believe this is an appropriate starting point for
providing targeted relief to customers who live in rural, insular and
high-cost areas.

In addition to this Federal HCF, of course, there will be additional
funding needed for providing support to educational institutions,
libraries and rural health care providers. This will increase the
overall size of the Federal USF. In making determinations as to the
appropriate mix of services that should be funded, the Commission should
keep the menu of prescribed services at a minimum ([i.e.]{.underline},
those functionally necessary) so as to maximize the potential
discounting available.

Finally, it is obvious that a Federal USF will only go part way in
resolving the matter of reforming historical universal service notions.
The identification of implicit universal service subsidies, now often
hidden in competitive or at-risk services, is absolutely necessary to
the reformation, so that LECs are capable of recovering not just
on-going universal costs but those historically and prudently incurred.

There remains much work to be done in the area of universal service
reform. The Federal USF proposals under consideration are a promising
start. We believe that the proposals we offer up in these comments
promote the most reliable, most explicit, start possible.

> Respectfully submitted,
>
> U S WEST, INC.
>
> By:
>
> Kathryn Marie Krause
>
> Suite 700
>
> 1020 19th Street, N.W.
>
> Washington, DC 20036
>
> \(303\) 672-2859
>
> Its Attorney

Of Counsel,

Dan L. Poole

April 12, 1996

[^1]: The Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat.
    56, 86 § 104, amending 47 USC § 151.

[^2]: While we understand that the Commission has jurisdiction over only
    the interstate component of these services, we believe that sound
    public policy and administrative efficiency supports utilizing the
    surcharge with respect to both types of services.

[^3]: 1996 Act, 110 Stat. at 71-72 § 254(b).

[^4]: These support mechanisms include: toll, access, business and
    vertical services priced at artificially high levels to provide
    support to residential basic service; statewide rate averaging
    providing support from low-cost customers to high-cost areas; and
    extended depreciation schedules which kept revenue requirements
    down, all resulting in artificially low basic service prices.

[^5]: [In the Matter of Federal-State Joint Board on Universal
    Service]{.underline}, CC Docket No. 96-45, [Notice of Proposed
    Rulemaking and Order Establishing Joint Board]{.underline}, FCC
    96-93, rel. Mar. 8, 1996 ("[NPRM]{.underline}").

[^6]: While U S WEST certainly understands, and is sympathetic to, the
    Congressional time mandates imposed on the Commission, it must be
    stated that a 25-page limit to comment on a 68-page
    [NPRM]{.underline} seems a bit undue processed. Given the denseness
    of the [NPRM]{.underline}, and the facts that it mostly asks
    questions and seeks comments, rather than making tentative
    conclusions, the imposed page limit seems at odds with a full and
    fair deliberation of the complex, often thorny, issues raised.

[^7]: In addressing universal service issues, it is important to keep in
    mind the distinction between universal service and universal access,
    as well as the difference between support for high-cost areas and
    support for low-income individuals. Universal service is a core set
    of services which are ubiquitously available to everyone who wants
    them. Universal service will be funded to support the provision of
    these services where the competitive market fails to provide them.

    New and advanced services, on the other hand, are not automatically
    deemed part of universal service, nor are they deployed
    ubiquitously. Universal access (defined as the ubiquitous access to
    interactive multimedia wired and wireless networks open to all users
    and providers) to new and advanced services will evolve as market
    demand makes it economically sustainable to deploy such services.
    Below, U S WEST addresses universal service and universal access
    issues with these differences and distinctions always in mind.

[^8]: 1996 Act, 110 Stat. at 72 § 254(c)(1)(B),(C).

[^9]: [Id..]{.underline} 110 Stat. at 153 § 706(a) (regulatory
    commissions with jurisdiction over telecommunications services
    "shall encourage the deployment on a reasonable and timely basis of
    advanced telecommunications capabilit\[ies\]").

[^10]: [NPRM]{.underline} ¶¶ 61-65.

[^11]: FTD blocks the majority of long-distance calling (Interexchange
    carriers' ("IXC") and U S WEST's toll), but allows for 1-800, 950+,
    911, 1+411, 411, 1+620 dialing.

[^12]: For example, U S WEST has a project called Project Hope Box which
    is designed to provide help to economically disadvantaged and
    unemployed individuals by providing them the stability and access of
    a personal, private number with voice-mail capability. Undoubtedly,
    other LECs have similar programs or projects in place.

[^13]: The Commission has incorporated certain aspects of the record
    from 80-286 into this proceeding, specifically those portions
    dealing with the BCM and support mechanisms ([NPRM]{.underline} ¶¶
    31, 39).

[^14]: A CBG is a unit of geography defined by the U. S. Bureau of the
    Census, which includes approximately 400 households. In urban areas,
    CBGs can be quite small; while in rural areas they can be quite
    large.

[^15]: U S WEST, in partnership with Sprint Telecommunications, Inc.,
    NYNEX Corporation and MCI Communications, ("Joint Sponsors")
    submitted the BCM. Through four Workshops, the Joint Sponsors made
    the copyrighted software for the BCM available for inspection and
    comment by interested parties. On December 1, 1995, the Joint
    Sponsors made an *ex-parte* filing providing complete BCM results
    for 49 states. (Due to unique circumstances, the BCM was not run for
    Alaska.)

[^16]: Comments of U S WEST Communications, Inc., CC Docket No. 80-286,
    filed Oct. 10, 1995 at 25-27 ("U S WEST Communications Comments").

[^17]: [See]{.underline} § 214(e) of the 1996 Act for a definition of
    eligible telecommunications carriers.

[^18]: In earlier comments U S WEST presented economic and public policy
    rationales for this bifurcated approach to high-cost funding.
    U S WEST Communications Comments at 25-29.

[^19]: In Appendix A, U S WEST outlines some of the *ex parte*
    activities surrounding the BCM. Furthermore, in the
    [NPRM]{.underline}, the Commission invited comments on several
    aspects of the operation of the BCM. [NPRM]{.underline} ¶¶ 31-34.
    Because we would categorize most of the requested comments as being
    somewhat technical in nature ([i.e.]{.underline}, those variables to
    be (or not to be) included in the BCM), and because many of these
    issues have already been addressed and the responses included in
    various *ex partes*, we include information on these issues in
    Appendix A, as well.

[^20]: Reference to the Pacific Telesis *ex parte* is found in Appendix
    A.

[^21]: U S WEST Communications Comments at 9, n.21.

[^22]: [Id.]{.underline} at 24.

[^23]: In the BCM documentation, these factors are referred to as
    Expense Factor 1 and Expense Factor 2. Their values are 31.6765% and
    22.97%, respectively. Expense Factor 2 was based upon special
    studies done by Hatfield Associates for MCI. Expense Factor 1 was
    developed through a ratio of expenses to investment developed from
    historical ARMIS data. U S WEST Communications, Inc. supported the
    use of Expense Factor 1 with the BCM in its earlier comments.
    [See]{.underline} U S WEST Communications Comments.

[^24]: Embedded costs are developed based upon a national ratio (data
    for the 7 Regional Bell Operating Companies and GTE) of BCM cost per
    household to USF cost per loop of 0.6965.

[^25]: While the BCM/ARMIS approach makes sense within the context of
    targeting Federal high-cost support dollars, it must be remembered
    that the BCM results are not the appropriate standard for the
    pricing of services. LECs are entitled to full recovery of their
    costs incurred to meet historical carrier-of-last-resort
    obligations. This recovery should be through a combination of
    service prices at the federal and state level, as well as federal
    and state explicit high-cost funds.

[^26]: The combination of HCFs and funds targeted to schools, libraries
    and rural health care must meet the test of market sustainability.
    U S WEST believes that \$5 billion is a reasonable amount for the
    high-cost component of the USF.

[^27]: [See]{.underline} further comment on this issue at
    [supra]{.underline} p.2.

[^28]: 1996 Act, 110 Stat. at 72 § 254(b)(5).

[^29]: [Id.]{.underline}, 110 Stat. at 73 § 254(f).

[^30]: The Commission, after identifying those "core services" which it
    proposes would receive universal service support ([NPRM]{.underline}
    ¶17), one of those core services being "voice grade access to the
    public switched network, with the ability to place and receive
    calls"), inquires "whether providing universal service support for
    each proposed service could serve as a barrier to entry by new
    competitors." [Id.]{.underline} ¶¶ 16-17. U S WEST believes that
    without appropriate state action, it is quite possible that current
    pricing of basic residential service can and will constitute such a
    barrier. The current pricing of such service in many state
    jurisdictions continues to create a situation where true competition
    will never develop, so long as incumbent LECs must continue to
    subsidize basic residential service with prices for other services.
    In fact, absent meaningful reform in the near future, whereby LECs
    are allowed to raise basic residential service prices, the local
    rate subsidy problem will only worsen, as LECs will face new costs
    ([e.g.]{.underline}, mutual compensation payments) with minimal
    prospect of increasing local rates to recover these new costs.

[^31]: For example, food stamps are deemed to be a social goal and are
    funded out of general tax funds. The food industry is not required
    to fund the food stamp program.

[^32]: 1996 Act, 110 Stat. at 73 § 254(d).

[^33]: [NPRM]{.underline} ¶ 2.

[^34]: We believe similar arguments will be proffered by the United
    States Telephone Association, as well as Southwestern Bell
    Communications. [See also]{.underline} Supplemental Comments of AT&T
    on the Proposed Rules Regarding the Implementation of the Colorado
    High Cost Fund, Colorado Docket No. 95R-558T, filed Feb. 26, 1996.

[^35]: 47 USC § 225.

[^36]: 47 CFR § 64.604(c)(4)(ii). [And see]{.underline}
    [id.]{.underline} at (iii)(A). U S WEST supports funding based on
    retail revenues, rather than on gross revenues. Thus, we would
    eliminate the "access" products from the interstate products on
    which cost recovery and contributions would be assessed.

[^37]: These service providers contribute based on both voice and data
    services, which U S WEST believes is absolutely essential with
    respect to USF funding.

[^38]: In the majority of U S WEST's states, TRS costs are recovered
    utilizing a specific line-item identification on the end-user's
    bill.

[^39]: "\[S\]upport should be explicit and sufficient to achieve the
    purposes of this section." 1996 Act, 110 Stat. at 73 § 254 (e).

[^40]: The assessment would not apply to wholesale transactions between
    service providers, where the wholesale service is a component of a
    service provided to an end user ([e.g.]{.underline}, access being a
    component of long-distance message toll service).

[^41]: The Commission and the Federal/State Joint Board should look to
    the funding mechanism implemented in the state of Vermont as a
    model. Vermont legislation allows for and has implemented an
    end-user surcharge on retail revenues.

[^42]: [NPRM]{.underline} ¶ 122.

[^43]: [In the Matter of Assessment and Collection of Regulatory Fees
    for Fiscal Year 1995, Price Cap Treatment of Regulatory Fees Imposed
    by Section 9 of the Act]{.underline}, [Report and
    Order]{.underline}, 10 FCC Rcd. 13512 (1995).

[^44]: [NPRM]{.underline} ¶ 123.

[^45]: [Id.]{.underline}

[^46]: Attached as Appendix B, U S WEST provides a mathematical equation
    showing the operation and effects of a [Regulatory Fees
    Order]{.underline} approach to USF HCF funding, as compared to
    U S WEST's preferred approach.

[^47]: This phenomena is described in more detail in Appendix B.

[^48]: [NPRM]{.underline} ¶ 124.

[^49]: [Id.]{.underline}

[^50]: [Id.]{.underline}

[^51]: 1996 Act, 110 Stat. at 72 § 254(b)(6).

[^52]: [Id.]{.underline}, 110 Stat. at 73-74 §§ (h)(1)(B), (h)(1)(A).

[^53]: [NPRM]{.underline} ¶¶ 87, 104.

[^54]: [Id.]{.underline} ¶¶ 80, 92.

[^55]: In addition to providing timely health information and training
    to local practitioners, connection to outside resources has the
    added benefit of improving recruitment and retention of health care
    professionals in rural areas.

[^56]: The ISP, of course, will impose its own charges on the requesting
    school, library or rural health care provider. U S WEST expects that
    ISPs, as well as computer equipment suppliers, will come to the
    market with attractive product and pricing packages that will
    complement the services being offered by telecommunications
    providers pursuant to the 1996 Act.