Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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**THIRTEENTH REPORT AND ORDER**

**AND FURTHER NOTICE OF PROPOSED RULEMAKING**

**Adopted: December 6, 2000** **Released: December 8, 2000**

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

**Reply Comment Date: 45 days from publication in the Federal Register**

By the Commission:

# INTRODUCTION

1.  In this Thirteenth Report and Order, we adopt the recommendations of
    the Federal-State Joint Board on Universal Service (Joint Board) for
    phasing down the interim hold-harmless provision of the
    forward-looking high-cost universal service support mechanism for
    non-rural carriers.[^1] Specifically, we adopt measures to phase
    down interim hold-harmless support, excluding Long-Term Support
    (LTS),[^2] through \$1.00 reductions in average monthly, per-line
    support beginning January 1, 2001, and every year thereafter until
    there is no more interim hold-harmless support. For the reasons
    discussed below, we believe that these measures will ensure a
    prompt, equitable phase-down of interim hold-harmless support
    without causing undue rate disruption. We conclude that several
    issues, such as appropriate reforms for the LTS program, should be
    addressed in the context of our pending proceedings for rural
    high-cost reform and/or interstate access charge reform for
    rate-of-return carriers.[^3]

2.  In the attached Further Notice of Proposed Rulemaking, we seek
    comment on the narrow issue of whether to continue to apply section
    54.305 of the Commission's rules to transfers of telephone exchanges
    between non-rural carriers following the phase-down.[^4] Section
    54.305 requires a carrier that acquires an exchange to step into the
    seller's shoes for universal service support purposes.[^5] The
    Commission adopted the rule in 1997 as a stopgap measure to prevent
    carriers receiving support based on the size of their study areas
    and embedded costs from "placing unreasonable reliance upon
    potential universal service support in deciding whether to purchase
    exchanges\[.\]"[^6] Because all non-rural carriers will receive
    support based on forward-looking economic costs following the
    phase-down of interim hold-harmless support, we believe that the
    need for section 54.305 would no longer exist with regard to
    transfers between non-rural carriers once the phase-down is
    complete.

# BACKGROUND

3.  In the *Ninth Report and Order*, the Commission adopted a new
    high-cost universal service support mechanism for non-rural
    carriers, based on the estimated forward-looking economic costs of
    providing services eligible for support.[^7] The Commission also
    adopted an interim hold-harmless provision to protect consumers in
    high-cost areas from potential rate shock as a result of any sudden,
    significant increases in rates during the shift to the new,
    forward-looking mechanism. Under the interim hold-harmless
    provision, a carrier receives the greater of the support amount for
    which it qualifies under the forward-looking mechanism or under two
    preexisting support mechanisms: (1) LTS;[^8] and (2) high-cost loop
    support under Part 36 of the Commission's rules.[^9]

4.  The Commission emphasized in the *Ninth Report and Order* that the
    interim hold-harmless provision is "a *transitional* provision" to
    avoid rate shock during the shift to forward-looking support.[^10]
    Accordingly, we requested a Joint Board recommendation as to how
    interim hold-harmless support can be phased down or eliminated
    without causing undue rate disruption.[^11] The Joint Board released
    its recommendations on June 30, 2000.[^12] The Common Carrier Bureau
    subsequently requested comment on the Joint Board's recommendations
    in a public notice.[^13] Twenty parties filed comments and reply
    comments with the Commission concerning the Joint Board's
    recommendations.[^14]

5.  The salient features of the Joint Board's recommended phase-down
    approach, which are discussed in detail below, are as follows. The
    Joint Board recommended that LTS be maintained under the current
    rules until the Commission considers appropriate reforms for the LTS
    program in connection with the pending proceedings for high-cost
    reform for rural carriers and/or interstate access charge reform for
    rate-of-return carriers.[^15] It further recommended that the
    Commission phase down the balance of interim hold-harmless support,
    excluding LTS, through \$1.00 reductions in average monthly,
    per-line support beginning January 1, 2001, and every year
    thereafter until there is no more interim hold-harmless
    support.[^16] The Joint Board recommended against phasing down
    interim hold-harmless support that is transferred to a rural carrier
    when it acquires telephone exchanges from a non-rural carrier, until
    the Commission completes a review of section 54.305 of the
    Commission's rules or until rural high-cost reform is complete.[^17]

# PHASE down of interim hold-harmless support

## Long-Term Support

1.  **Background**

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6.  LTS supports interstate access rates by reducing the carrier common
    line (CCL) charges[^18] of rate-of-return carriers that participate
    in the National Exchange Carrier Association (NECA) common line
    pool.[^19] In the *First Report and Order*, the Commission concluded
    that the LTS program serves the public interest by facilitating
    interexchange service in high-cost areas, but that modifications
    were necessary to make LTS explicit, portable, and competitively
    neutral.[^20] Therefore, the Commission continued the LTS program,
    but removed its recovery from the interstate access charge system
    and modified its calculation and distribution scheme.[^21] The
    Commission anticipated that LTS for non-rural carriers would be
    subsumed in the new, forward-looking support mechanism in the near
    future.[^22] The Commission anticipated, however, that rural
    high-cost reform would require a more extended time period, during
    which it sought to maintain the existing LTS support structure for
    rural carriers, as modified.[^23] As stated above, the Commission's
    related proceedings to reform the high-cost support mechanism for
    rural carriers and to reform the interstate access charge system for
    rate-of-return carriers are pending.[^24]

7.  Rural carriers are the primary recipients of LTS and will receive
    approximately \$381 million in LTS in the year 2000. LTS for
    non-rural carriers will total approximately \$97 million in 2000,
    which is slightly more than half of the projected \$184 million in
    net annual interim hold-harmless support.[^25] Three non-rural
    carriers receive LTS: Roseville Telephone Company (Roseville) in
    California; North State Telephone Company in North Carolina; and
    Puerto Rico Telephone Company (PRTC), which is projected to receive
    over 90 percent (approximately \$89 million) of the total annual LTS
    for all three carriers in 2000.[^26]

8.  The Joint Board recommended that LTS for non-rural carriers be
    maintained under the Commission's current rules until the Commission
    considers appropriate reforms to the LTS program in connection with
    the pending proceedings for rural high-cost reform and/or interstate
    access charge reform for rate-of-return carriers.[^27] It reasoned
    that no substitute for LTS currently exists for non-rural carriers,
    because LTS supports interstate-allocated costs, whereas the
    forward-looking mechanism supports only intrastate-allocated
    costs.[^28] In addition, the Joint Board expressed concern about the
    potential rate impact on rural LTS recipients of phasing down LTS
    for non-rural carriers.[^29] Twelve commenters support the Joint
    Board's recommendation regarding LTS, and none express
    opposition.[^30] WorldCom, however, conditions its support on denial
    of PRTC's waiver requests.[^31]

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2.  **Discussion**

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9.  We adopt the Joint Board's recommendation regarding LTS. The
    forward-looking mechanism adopted in the *Ninth Report and Order*
    does not replace LTS for non-rural carriers, contrary to the
    Commission's originally anticipated outcome.[^32] Therefore, we
    agree with the Joint Board that LTS for non-rural carriers should be
    preserved until we have considered further reform of the LTS
    program. In addition, maintaining LTS for non-rural carriers is
    consistent with our objective to maintain the current support
    structure, as modified, for rural LTS recipients pending rural
    high-cost reform. Because LTS is geared primarily to the needs of
    small, rural carriers, we find that this determination should take
    place in the context of our related proceedings to reform the
    high-cost support mechanism for rural carriers and the interstate
    access charge system for rate-of-return carriers. We will examine
    these matters in the near future.[^33]

## High-Cost Loop Support for Non-Rural Carriers Under Part 36 of the Commission's Rules 

### Background

10. In addition to LTS, the interim hold-harmless provision provides
    support to eligible non-rural carriers based on the preexisting
    high-cost loop support mechanism under Part 36 of the Commission's
    rules.[^34] Under this mechanism, 19 non-rural study areas are
    projected to receive a total of about \$87 million in net annual
    interim hold-harmless support (excluding LTS) in the year 2000.[^35]
    On a per-line basis, 12 of the 19 study areas receive average,
    monthly support of less than \$1.00, five receive support of less
    than \$2.00, one receives support of \$3.26 (GTE North,
    Inc.-Missouri), and one (PRTC-Central) receives support of
    \$12.06.[^36]

11. The Joint Board recommended that the Commission phase down interim
    hold-harmless support, excluding LTS, through \$1.00 reductions in
    average monthly, per-line support beginning January 1, 2001, and
    every year thereafter.[^37] It also recommended that the Commission
    reexamine the phase-down schedule in conjunction with our
    comprehensive review of the forward-looking mechanism, which is to
    be completed by January 1, 2003.[^38] Seven commenters generally
    favor this phase-down schedule.[^39] Six commenters, representing
    LEC and state recipients of interim hold-harmless support, oppose
    any phase-down at this time.[^40] The District of Columbia Public
    Service Commission (DC Commission) advocates immediate,
    across-the-board elimination of interim hold-harmless support.[^41]

### Discussion

12. We adopt the Joint Board's recommendation that interim hold-harmless
    support, excluding LTS, be phased down beginning January 1, 2001,
    through annual \$1.00 reductions in each carrier's average monthly,
    per-line support until this support is eliminated.[^42] This
    approach will promptly phase out interim hold-harmless support for
    the majority of carriers currently receiving less than \$1.00
    per-line/per-month, without reducing any carrier's average monthly,
    per-line support by more than \$1.00 per year.[^43] Thus, there will
    be no significant, sudden reductions in per-line support to an
    individual study area. We agree with the Joint Board that this
    approach is a reasonable means of ensuring a prompt, equitable
    phase-down of interim hold-harmless support without causing undue
    rate disruption, consistent with the objectives we announced in the
    *Ninth Report and Order*.[^44]

13. We also agree with the Joint Board that the phase-down schedule
    should be reexamined in conjunction with our review of the
    forward-looking mechanism, which is to be completed by January 1,
    2003.[^45] At that time, PRTC is likely to be the only carrier still
    receiving interim hold-harmless support,[^46] and more information
    will be available on the impact of the phase-down in Puerto Rico. We
    disagree with those commenters that argue for a more accelerated
    phase-down for PRTC.[^47] Based on the current record, we cannot
    determine whether acceleration of the annual phase-down rate after
    two years, as WorldCom proposes, would result in rate shock. Our
    approach, however, will ensure that rate shock is minimized. We
    reject the arguments of the Florida Commission and WorldCom that the
    current schedule discriminates in favor of PRTC. The phase-down rate
    is the same for all interim hold-harmless recipients. Indeed,
    although PRTC's support will take longer to phase down than any
    other carrier's because it receives higher amounts of per-line
    support, PRTC also will lose more total interim hold-harmless
    support than any other carrier as a result of the phase-down.[^48]
    We conclude the approach recommended by the Joint Board reasonably
    balances the need to phase down interim hold-harmless support in an
    equitable way with a desire to minimize potential rate shock for
    Puerto Rico.

14. We disagree with commenters who argue that interim hold-harmless
    support should be preserved at its current level pending resolution
    of other federal high-cost issues, including rural high-cost reform
    and exhaustion of "all judicial appeals\[.\]"[^49] We adopted the
    interim hold-harmless provision to ensure a nondisruptive transition
    to the forward-looking mechanism for non-rural carriers, not to
    provide a means of postponing or avoiding the need for a transition
    in the event that some parties raised concerns regarding this
    mechanism.[^50] As stated above, we are mindful of the
    interrelationships between different elements of the federal
    universal service scheme, but we are not persuaded that any of the
    high-cost issues or decisions cited by commenters justify
    postponement of this transition. Based on our examination of the
    record, we conclude that the public interest will be served by
    expeditiously advancing the transition to forward-looking support
    for non-rural carriers.

#### Mechanics of Phase-Down

15. To ensure that the phase-down conforms with the quarterly schedule
    on which interim hold-harmless support is calculated, the Joint
    Board recommended that the applicable annual reductions be
    subtracted from the interim hold-harmless support that a carrier
    otherwise would be eligible to receive on an ongoing, quarterly
    basis.[^51] We adopt this recommendation. We disagree with the New
    York Department of Public Service's (NYDPS) argument that this
    approach would defeat the intent of the phase-down because a carrier
    may continue to be eligible for interim hold-harmless support during
    a particular year even if it does not qualify for such support in a
    given quarter.[^52] The possibility that interim hold-harmless
    support amounts will vary from quarter to quarter does not affect
    the consistency of the annual phase-down rate. We also agree with
    the Joint Board that this method of calculating interim
    hold-harmless support during the phase-down is the most equitable to
    interim hold-harmless recipients and the easiest to administer.[^53]

16. We also conclude that the targeting provisions of the *Ninth Report
    and Order* should govern the distribution of phased-down support.
    Although non-rural carriers receive interim hold-harmless support
    based on embedded costs averaged over their entire study areas, the
    support is targeted for competitive purposes to their highest-cost
    exchanges based on forward-looking economic costs.[^54] The Joint
    Board did not address the issue of whether phased-down support
    should be targeted to individual exchanges, except in connection
    with transferred exchanges.[^55] We find, however, that targeting
    phased-down interim hold-harmless support to a carrier's
    highest-cost exchanges is consistent both with the Joint Board's
    recommendations and with the *Ninth Report and Order*. Accordingly,
    we disagree with PRTC's argument that any phase-down should be
    calculated on a wire-center basis to avoid "a premature and
    detrimental reduction in support to the highest cost wire centers,
    contrary to the Commission's targeting rules."[^56]

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

17. We adopt the Joint Board's recommendation that the "interim cap" on
    high-cost loop support for rural carriers be calculated as if
    phased-down interim hold-harmless support were being distributed to
    non-rural carriers, pending reform of the high-cost support
    mechanism for rural carriers.[^57] Under the current rules,
    universal service support for all carriers under Part 36 is
    restricted by a cap that limits the total increase in support each
    year to the annual growth in nationwide loops.[^58] To avoid smaller
    annual increases in the support available to rural carriers as a
    result of the shift to forward-looking support for non-rural
    carriers, we directed in the *Ninth Report and Order* that the cap
    be calculated as if all carriers continue to participate in the
    preexisting Part 36 high-cost support mechanism.[^59] Subtracting
    phased-down support amounts from calculation of the cap likewise
    could result in smaller annual cap increases, because the prior year
    support level used to calculate the cap includes the high-cost loop
    support for non-rural carriers under Part 36 that will be phased
    down as a result of the approach we adopt herein. Accordingly, we
    agree with the Joint Board that an interim "placeholder" measure is
    warranted to avoid significant and immediate changes in high-cost
    support for rural carriers as a result of the phase-down. We
    disagree with the NYDPS's argument that "the Joint Board is seeking
    to provide \[rural carriers\] with yet additional support based upon
    the operations of non-rural carriers."[^60] The calculation method
    we adopt is consistent with our commitment "not to consider
    significant changes in rural carriers' support until after the Rural
    Task Force and the Joint Board have made their recommendations"
    regarding rural high-cost reform.[^61] In accordance with the Joint
    Board's recommendations, we also conclude that phased-down support
    for non-rural carriers (support calculated as a "placeholder")
    should not be collected or distributed to other carriers.[^62] We
    note that we expect this placeholder to remain in effect for a
    limited time, as we are committed to moving forward expeditiously on
    high-cost reform for rural carriers.

#### Transferred Interim Hold-Harmless Support

18. The transfer of interim hold-harmless support is governed by the
    targeting provisions of the *Ninth Report and Order* and section
    54.305 of our rules. As stated above, although carriers receive
    interim hold-harmless support based on embedded costs averaged over
    their entire study areas, the support is targeted for competitive
    purposes to their highest-cost telephone exchanges based on
    forward-looking economic costs.[^63] Section 54.305 requires a
    carrier that acquires an exchange to step into the seller's shoes
    for universal service support purposes.[^64] Under these provisions,
    as of the date of the sale, the acquiring company receives the same
    per-line, targeted interim hold-harmless support amount for the
    transferred exchange that the seller was eligible to receive as of
    the date of the sale. The Joint Board identified an issue, however,
    as to "whether transferred interim hold-harmless support should be
    phased down following the transfer, as it would have been if it had
    not been transferred, or should remain frozen at the per-line
    support level as of the sale date."[^65] To date, a total of
    approximately \$9 million in annual interim hold-harmless support
    has been transferred.[^66]

19. The Joint Board expressed general concern about the operation of
    section 54.305 with regard to transfers between carriers that are
    not both receiving support based on forward-looking economic
    costs.[^67] It urged the Commission to consider alternatives to the
    rule. In the meantime, or until rural high-cost reform is completed,
    the Joint Board recommended that interim hold-harmless support for
    exchanges transferred to a rural carrier not be phased down
    following the transfer.[^68] The Joint Board recommended, however,
    that interim hold-harmless support for exchanges transferred to
    non-rural carriers be phased down over the same time period as the
    seller's support would have been phased down.[^69] Six commenters
    generally support the Joint Board's recommendations.[^70] AT&T and
    the NYDPS oppose these recommendations.[^71]

20. We are mindful of the Joint Board's concerns regarding the operation
    of section 54.305. As the Joint Board recognized, however, the rule
    serves the important purpose of preventing carriers receiving
    support based on the size of their study areas and embedded costs
    from "placing unreasonable reliance upon potential universal service
    support in deciding whether to purchase exchanges\[.\]"[^72] Section
    54.305 was adopted as a temporary measure to be utilized during our
    transition to universal service support mechanisms that provide
    support to all carriers based on the forward-looking economic costs
    of operating a given exchange.[^73] The Joint Board is currently
    considering reform of the rural high-cost support mechanism,
    including the operation of section 54.305 for rural carriers.[^74]
    We believe that the rural high-cost reform proceeding is the most
    appropriate context in which to reexamine the operation of section
    54.305 with regard to transfers involving rural carriers.

21. We therefore adopt the Joint Board's recommendation not to phase
    down interim hold-harmless support for eligible exchanges
    transferred to rural carriers until we reexamine section 54.305 or
    until rural high-cost reform is complete. We disagree with AT&T's
    argument that section 54.305 requires that an acquiring rural
    carrier "receive no more than the necessary \[forward-looking\]
    support amount" following the phase-down.[^75] The Commission did
    not determine in the *Ninth Report and Order* that forward-looking
    support calculated under the new mechanism for non-rural carriers is
    appropriate for rural carriers, as AT&T's argument suggests. We
    recognize that the Joint Board's recommended approach raises gaming
    concerns with regard to transfers from nonrural to rural
    carriers.[^76] However, the window of opportunity for gaming will be
    small, because under the phase-out schedule most exchanges will no
    longer receive interim hold-harmless support as of January 1, 2001.
    On balance, we conclude that adoption of the Joint Board's
    recommended approach would serve the public interest.

22. We also adopt the Joint Board's recommendation that interim
    hold-harmless support for exchanges transferred to non-rural
    carriers be phased down over the same time period as the seller's
    support would have been phased down.[^77] We agree with the Joint
    Board that this approach will ensure a prompt and equitable
    phase-down of transferred interim hold-harmless support, and
    discourage carriers from transferring exchanges to delay or avoid
    the phase-down of interim hold-harmless support. In addition, we
    adopt the recommendation that targeted support for exchanges
    transferred to non-rural carriers be phased down by an equal
    percentage for each year of the phase-down period, on an
    exchange-by-exchange basis.[^78] This approach will be
    administratively simple and predictable for acquiring non-rural
    carriers.

# FURTHER NOTICE OF PROPOSED RULEMAKING

23. As set forth above, section 54.305 of the Commission's rules
    requires a carrier that acquires a telephone exchange from an
    unaffiliated carrier to step into the seller's shoes for universal
    service support purposes.[^79] The Commission adopted the rule in
    1997 as a stopgap measure to prevent carriers receiving support
    based on the size of their study areas and embedded costs from
    "placing unreasonable reliance upon potential universal service
    support in deciding whether to purchase exchanges\[.\]"[^80] The
    Commission anticipated that the rule would no longer be necessary
    once all carriers received support based on forward-looking economic
    costs.[^81]

24. Following the phase-down of interim hold-harmless support, all
    non-rural carriers will receive high-cost support based on the
    forward-looking economic costs of operating a given exchange. As a
    result, "the level of support will not be a primary factor in a
    \[non-rural\] carrier's decision to purchase exchanges because the
    carrier's support will not be based on the size of the study area
    nor embedded costs."[^82] We believe this rule change is necessary
    regardless of the outcome of the current Joint Board examination of
    the RTF Recommendation on section 54.305,[^83] because application
    of section 54.305 to transfers between non-rural carriers may impede
    operation of the forward-looking mechanism by preventing calculation
    of the forward-looking economic costs of operating a transferred
    exchange on an ongoing, quarterly basis.[^84] We, therefore, seek
    comment on whether to amend section 54.305 of our rules so that it
    does not apply to transfers of exchanges between non-rural carriers
    following the phase-down of interim hold-harmless support.

# PROCEDURAL MATTERS

#### Regulatory Flexibility Act Certifications---Final and Initial

25. The Regulatory Flexibility Act (RFA)[^85] requires an Initial
    Regulatory Flexibility Analysis (IRFA)[^86] of the possible
    significant economic impact on small entities of proposed policies
    and rules, and a Final Regulatory Flexibility Analysis (FRFA)[^87]
    whenever an agency subsequently promulgates a final rule, unless the
    agency certifies that the proposed or final rule will not have \"a
    significant economic impact on a substantial number of small
    entities,\" and includes the factual basis for such certification.
    The RFA generally defines \"small entity\" as having the same
    meaning as the terms \"small business,\" \"small organization,\" and
    \"small governmental jurisdiction.\"[^88] In addition, the term
    \"small business\" has the same meaning as the term \"small business
    concern\" under the Small Business Act.[^89] A small business
    concern is one which: (1) is independently owned and operated; (2)
    is not dominant in its field of operation; and (3) satisfies any
    additional criteria established by the Small Business Administration
    (SBA).[^90] The SBA defines a small telecommunications entity in
    Standard Industrial Classification Code 4813 (Telephone
    Communications, Except Radiotelephone)[^91] as an entity with 1,500
    or fewer employees.

26. We conclude that neither an FRFA nor an IRFA is required here. The
    foregoing Thirteenth Report and Order and Further Notice of Proposed
    Rulemaking adopts a final rule and proposes a rule change. The rules
    adopted and the proposed rules affect the amount of high-cost
    support provided to non-rural carriers. Non-rural carriers generally
    do not fall within the SBA\'s definition of a small business concern
    because they are usually large corporations or affiliates of such
    corporations. Thus, the final rules adopted here do not affect a
    substantial number of small entities. Therefore, we certify,
    pursuant to section 605(b) of the RFA, that the final rule adopted
    and the rule change proposed in the Thirteenth Report and Order and
    Further Notice of Proposed Rulemaking will not have a significant
    economic impact on a substantial number of small entities. The
    Commission will send a copy of the Thirteenth Report and Order and
    Further Notice of Proposed Rulemaking and of this certification to
    the Chief Counsel for Advocacy of the SBA. In addition, this
    certification will be published in the Federal Register.[^92] The
    Commission will send a copy of this Thirteenth Report and Order and
    Further Notice of Proposed Rulemaking, including a copy of this
    certification, in a report to Congress pursuant to the SBREFA.[^93]

#### Effective Date of Final Rules

27. We conclude that the amendments to our rules adopted herein shall be
    effective upon publication in the Federal Register. In this
    Thirteenth Report and Order we conclude that the phase-down of
    interim hold-harmless support, excluding LTS, will be implemented
    beginning January 1, 2001. Thus, the amendments must become
    effective by January 1, 2001. Making the amendments effective 30
    days after publication in the Federal Register would jeopardize the
    required January 1, 2001 implementation date. This implementation
    date is important because January 1, 2001 is the beginning of a new
    funding year, and interim hold-harmless support is a *transitional*
    funding mechanism that increases the size of the federal high-cost
    fund and should be phased down as rapidly as possible without
    causing undue disruption to consumer rates in high-cost areas.
    Accordingly, pursuant to the Administrative Procedure Act, we find
    good cause to depart from the general requirement that final rules
    take effect not less than 30 days after their publication in the
    Federal Register.

#### Paperwork Reduction Act

28. The instant Report and Order contains no information collections,
    and the instant Further Notice proposes no information collections.

#### Comment Filing Procedure

29. Pursuant to sections 1.415 and 1.419 of the Commission\'s rules, 47
    C.F.R. §§ 1.415, 1.419, interested parties may file comments 30 days
    or fewer from publication in the Federal Register, and reply
    comments 45 days or fewer from publication in the Federal Register.
    Comments may be filed using the Commission\'s Electronic Comment
    Filing System (ECFS) or by filing paper copies. *See Electronic
    Filing of Documents in Rulemaking Proceedings*, 63 Fed. Reg. 24,121
    (1998).

30. Comments filed through the ECFS can be sent as an electronic file
    via the Internet to \<http://www.fcc.gov/e-file/ecfs.html\>. Only
    one copy of an electronic submission must be filed. In completing
    the transmittal screen, commenters should include their full name,
    Postal Service mailing address, and the applicable docket or
    rulemaking number. Parties may also submit electronic comments by
    Internet e-mail. To receive filing instructions for e-mail comments,
    commenters should send an e-mail to ecfs@fcc.gov, and should include
    the following words in the body of the message, \"get form \<your
    e-mail address\>.\" A sample form and directions will be sent in
    reply.

31. Parties who choose to file by paper must file an original and four
    copies of each filing. All paper filings must be sent to the
    Commission\'s Secretary, Magalie Roman Salas, Office of the
    Secretary, Federal Communications Commission, 445 12th Street, S.W.,
    Washington, D.C. 20554. Parties who choose to file by paper also
    must send three paper copies of their filing to Sheryl Todd,
    Accounting Policy Division, Common Carrier Bureau, Federal
    Communications Commission, 445 Twelfth Street S.W., Room 5-B540,
    Washington, D.C. 20554. In addition, parties who choose to file by
    paper must send diskette copies to the Commission\'s copy
    contractor, International Transcription Service, Inc., 1231 20th
    Street, N.W., Washington, D.C. 20037.

# ORDERING clauseS

21. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1-4, 201-205, 214, 218-220, 254, 303(r), 403, and 410 of
    the Communications Act of 1934, as amended, 47 U.S.C. §§ 151-154,
    201-205, 214, 218-220, 254, 303(r), 403, and 410, this Thirteenth
    Report and Order IS ADOPTED.

22. IT IS FURTHER ORDERED that Part 36 of the Commission's rules, 47
    C.F.R. Part 36, IS AMENDED as set forth in Appendix B hereto,
    effective immediately upon publication in the Federal Register.

23. IT IS FURTHER ORDERED that Part 54 of the Commission's rules, 47
    C.F.R. Part 54, IS AMENDED as set forth in Appendix B hereto,
    effective immediately upon publication in the Federal Register.

24. IT IS FURTHER ORDERED that, pursuant to the authority contained in
    sections 1-4, 201-205, 214, 218-220, 254, 303(r), 403, and 410 of
    the Communications Act of 1934, as amended, 47 U.S.C. §§ 151-154,
    201-205, 214, 218-220, 254, 303(r), 403, and 410, this Further
    Notice of Proposed Rulemaking IS ADOPTED and comments ARE REQUESTED
    as described above.

25. IT IS FURTHER ORDERED that the Commission's Consumer Information
    Bureau, Reference Information Center, SHALL SEND a copy of the
    Thirteenth Report and Order and Further Notice of Proposed
    Rulemaking, including the Regulatory Flexibility Act Certifications,
    to the Chief Counsel for Advocacy of the Small Business
    Administration.

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

**APPENDIX A**

**Parties Filing Comments and Reply Comments**

**Comments:**

1.  AT&T

2.  General Services Administration

3.  National Exchange Carrier Association, Inc., National Rural Telecom
    Association, and Organization for the Promotion and Advancement of
    Small Telecommunications Companies

4.  National Telephone Cooperative Association

5.  Public Service Commission of the District of Columbia

6.  Puerto Rico Telephone Company, Inc.

7.  Roseville Telephone Company

8.  Sprint Corporation

9.  State of Florida Public Service Commission

10. State of New York Department of Public Service

11. Telecommunications Regulatory Board of Puerto Rico

12. United States Telecom Association

13. Verizon

14. WorldCom, Inc.

15. Wyoming Public Service Commission

**Reply Comments:**

1.  AT&T

2.  General Services Administration

3.  National Exchange Carrier Association, Inc., National Rural Telecom
    Association, and Organization for the Promotion and Advancement of
    Small Telecommunications Companies

4.  Puerto Rico Telephone Company, Inc.

5.  Qwest Corporation

6.  Rural Independent Competitive Alliance

7.  Valor Telecommunications Enterprises, LLC

**APPENDIX B**

**Final Rules**

Part 36 of Title 47 of the Code of Federal Regulations is amended as
follows:

**PART 36 -- JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES
FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES, EXPENSES,
TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES**

**Subpart F -- Universal Service Fund**

1.  Section 36.601 is amended to add the following sentence at the end
    as paragraph (c):

**§ 36.601**

(c) . . . Support amounts calculated pursuant to this subpart F but not
    received due to the phase down of interim hold-harmless support or
    the receipt of forward-looking support pursuant to section 54.311 of
    this Chapter shall not be redistributed to other carriers.

Part 54 of Title 47 of the Code of Federal Regulations is amended as
follows:

**PART 54 -- UNIVERSAL SERVICE**

**Subpart D -- Universal Service Support for High Cost Areas**

2.  Add paragraph (d) to § 54.311 to read as follows:

**§ 54.311**

(d) *Phase down of interim hold-harmless support*. Beginning January 1,
    2001, the interim hold-harmless support for which a non-rural
    incumbent local exchange carrier qualifies under paragraph (a) of
    this section, excluding Long Term Support, shall be phased down
    through annual \$1.00 reductions in average monthly, per-line
    support. Applicable annual reductions shall be subtracted from the
    total amount of interim hold-harmless support that a non-rural
    incumbent local exchange carrier otherwise would be eligible to
    receive on an ongoing, quarterly basis. The provisions of
    paragraph (b) of this section shall apply to the total amount of
    phased-down interim hold-harmless support provided to each non-rural
    incumbent local exchange carrier.

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(1) Interim hold-harmless support for a wire center transferred to a
    carrier that does not meet the definition of rural telephone company
    in § 51.5 of this chapter shall be phased down following the
    transfer over the same time period as the seller's support would
    have been phased down, by an equal percentage for each year of the
    phase-down period.

(2) Interim hold-harmless support for a wire center transferred to a
    carrier that meets the definition of rural telephone company in §
    51.5 of this chapter shall remain frozen at the per-line support
    level as of the sale date.

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

Re: *Federal-State Joint Board on Universal Service*, Thirteenth Report
and Order and Further Notice of Proposed Rulemaking, CC Docket No.
96-45.

I cannot endorse the Commission's decision that "hold-harmless" loop
support be phased out over the next three years, so that non-rural
carriers eventually will receive universal service support based
exclusively on the model that the Commission adopted last year. That
model never worked, and it has no prospect of working. As I have said
before, the model does not satisfy the Act's basic requirements that
universal service support be "specific" and "predictable," and I believe
that relying in any way on this model does not meet the requirements of
the statute. I therefore dissent from those aspects of this order that
reach that conclusion.

[^1]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Recommended Decision, 15 FCC Rcd 14714 (released June 30,
    2000) (*Recommended Decision*); 47 C.F.R. § 54.311. "Non-rural
    carriers" are local exchange carriers (LECs) that do not meet the
    definition of a rural telephone company contained in 47 U.S.C. §
    153(37).

[^2]: LTS, which provides carriers that participate in the National
    Exchange Carrier Association (NECA) carrier common line pool with
    support for interstate-allocated loop costs, is one of two support
    mechanisms included under the interim hold-harmless provision. 47
    C.F.R. §§ 54.303, 54.311(a); *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, 20474 (1999) (*Ninth
    Report and Order*), *pets. for review pending* *sub nom*., *Qwest
    Corp. v. FCC*, 10^th^ Cir. No. 99-9546 and consolidated cases
    (1999).

[^3]: *See Ninth Report and Order*, 14 FCC Rcd at 20439, n. 20 and
    accompanying text; *Access Charge Reform for Incumbent Local
    Exchange Carriers Subject to Rate-of-Return Regulation*, CC Docket
    No. 98-77, Notice of Proposed Rulemaking, 13 FCC Rcd 14238 (1998).
    We note that the Rural Task Force submitted to the Joint Board
    recommendations regarding rural high-cost reform on September 29,
    2000, and the Multi-Association Group (MAG) recently submitted to
    the Commission a comprehensive proposal for interstate access charge
    and universal service reform for rate-of-return carriers. *See
    Petition for Rulemaking of the LEC Multi-Association Group*, RM
    10011 (filed October 20, 2000); *Letter of William R. Gillis, Chair,
    Rural Task Force to Magalie Roman Salas, Secretary, Federal
    Communications Commission*, CC Docket No. 96-45 (September 29, 2000)
    (RTF Recommendation). We intend to act expeditiously on these
    matters with full consideration of the interrelationships of the
    proposals.

[^4]: 47 C.F.R. § 54.305.

[^5]: *Id.*; *see Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 8942-42 (1997)
    (*First Report and Order*) (subsequent history omitted).

[^6]: *Id.*

[^7]: *Ninth Report and Order*, 14 FCC Rcd at 20436-39. The Commission
    explained that using forward-looking economic costs provides
    sufficient support without giving non-rural carriers an incentive to
    inflate their costs or to refrain from efficient cost-cutting. *Id.*
    at 20443 (citations omitted). The forward-looking mechanism became
    effective January 1, 2000. *Id.* at 20439. The Commission's model
    for estimating forward-looking costs and the input values to be used
    in the model are discussed in a companion order. *Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45, Tenth Report
    and Order, 14 FCC Rcd 20156 (1999) (*Tenth Report and Order*),
    *pets. for review pending* *sub nom*., *Qwest Corp. v. FCC*, 10^th^
    Cir. No. 99-9546 and consolidated cases (1999).

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

[^9]: *Ninth Report and Order*, 14 FCC Rcd at 20474; 47 C.F.R. §
    54.311(a); *see* 47 C.F.R. §§ 36.601, *et. seq.* High-cost loop
    support provides carriers with federal support for a variable
    percentage of their unseparated loop costs, as reflected in their
    books, depending on their number of working loops and the degree to
    which their costs exceed the national average. *See Ninth Report and
    Order*, 14 FCC Rcd at 20440. The term "unseparated" refers to the
    jurisdictional separations process which divides between the state
    and federal jurisdictions the costs of those portions of local
    exchange carriers' telephone plant that are used for intrastate and
    interstate services. *See* 47 C.F.R. Part 36.

[^10]: *Ninth Report and Order*, 14 FCC Rcd at 20478 (emphasis in
    original).

[^11]: *Id.* at 20479.

[^12]: *Recommended Decision*, 15 FCC Rcd at 14714.

[^13]: *Common Carrier Bureau Seeks Comment on Federal-State Joint Board
    on Universal Service Recommendations for Phasing Down Interim
    Hold-Harmless Provision*, CC Docket No. 96-45, Public Notice, 65
    Fed.Reg. 44507 (July 18, 2000).

[^14]: *See* Appendix A.

[^15]: *Recommended Decision*, 15 FCC Rcd at paras. 8-10; ***see
    supra*,** n. 3.

[^16]: *Recommended Decision*, 15 FCC Rcd at paras. 13-15.

[^17]: *Id.* at paras. 19-21; *see* 47 C.F.R. § 54.305.

[^18]: CCL charges are per-minute charges that LECs assess on
    interexchange carriers to recover a portion of their
    interstate-allocated loop costs. LECs also recover
    interstate-allocated loop costs through subscriber line charges
    (SLCs), which are flat, non-traffic-sensitive charges. With regard
    to price-cap carriers, the Commission has taken measures to replace
    per-minute charges such as CCL charges with SLCs, in order to align
    the rate structure more closely with the manner in which costs are
    incurred. *See Access Charge Reform, Price Cap Performance Review
    for Local Exchange Carriers*, CC Docket Nos. 96-262 and 94-1, Sixth
    Report and Order, *Low-Volume Long-Distance Users*, CC Docket No.
    99-249, Report and Order, *Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Eleventh Report and Order, 15 FCC Rcd
    12962 at paras. 64-75, *pets. for review pending, Texas Office of
    Public Util. Counsel et al. v. FCC*, 5^th^ Cir. Nos. 00-60434 (and
    consolidated cases) (2000).

[^19]: *See generally Federal-State Joint Board on Universal Service*,
    CC Docket No. 96-45, Fourth Order on Reconsideration, *Access Charge
    Reform, Price Cap Performance Review for Local Exchange Carriers,
    Transport Rate Structure and Pricing, End User Common Line Charge*,
    CC Docket Nos. 96-262, 94-1, 91-213, 95-72, Report and Order, 13 FCC
    Rcd 5318, 5352-54 (1997) (*Fourth Order on Reconsideration*).

[^20]: *First Report and Order*, 12 FCC Rcd at 9164-66.

[^21]: *Id.*; *see Fourth Order on Reconsideration*, 13 FCC Rcd at
    5355-56.

[^22]: *First Report and Order*, 12 FCC Rcd at 8927.

[^23]: *Fourth Order on Reconsideration*, 13 FCC Rcd at 5362 (discussing
    *First Report and Order*).

[^24]: ***See supra***, n. 3 and accompanying text.

[^25]: *See* Appendix C. Support estimates for the year 2000 are based
    on projections from data for the first quarter of 2000, the same
    data which the Joint Board used in its *Recommended Decision*.
    Support estimates may vary from quarter to quarter because interim
    hold-harmless support is calculated on an ongoing, quarterly basis.
    *See Ninth Report and Order*, 14 FCC Rcd at 20474-75, 20480-81; 47
    C.F.R. § 54.311(a). Appendix C also includes support estimates for
    the year 2001 based on projections from estimates for the first
    quarter of 2001 filed by USAC on November 2, 2000.

[^26]: *See* Appendix C*.* As a result of its merger with GTE Holdings
    (Puerto Rico) LLC, the Commission's rules require PRTC to convert to
    price-cap regulation, after which it would no longer be eligible to
    participate in the NECA pool or to receive LTS. The Commission
    extended PRTC's deadline to convert to price cap regulation to July
    1, 2001, while it considers PRTC's waiver requests to remain subject
    to rate-of-return regulation or, alternatively, continue to receive
    LTS for a transitional period. *Puerto Rico Telephone Co. Petition
    for Waiver of Section 61.41 or Section 54.303(a) of the Commission's
    Rules*, CCB/CPD No. 99-36, Order, 15 FCC Rcd 9680 (released June 5,
    2000) (*PRTC Waiver Order*).

[^27]: *Recommended Decision*, 15 FCC Rcd at paras. 8-10.

[^28]: The Joint Board explained that, to properly account for the
    separations rules, the forward-looking mechanism provides support
    only for the percentage of total costs exceeding the national
    benchmark that are allocated to the *intrastate* jurisdiction, not
    for interstate-allocated costs such as those supported by LTS. *Id.*
    at para. 8.

[^29]: *See id.* at para. 9 ("Because NECA pools costs, revenues, and
    support to calculate an average CCL rate for pool participants, if
    LTS were phased down for the three eligible non-rural carriers
    without a corresponding reduction in costs, the CCL rate for all
    NECA pool participants would increase."). The Joint Board noted
    NECA's estimate that the loss of LTS for non-rural carriers could
    cause the NECA CCL rate to rise by up to 42 percent. *Id.*

[^30]: *See* AT&T Comments at 2, Florida Public Service Commission
    (Florida Commission) Comments at 1, General Services Administration
    (GSA) Comments at 3-5, NECA/NRTA/OPASTCO Comments at 2-4, NTCA
    Comments at 10-11, PRTC Comments at 2-3, Roseville Comments at 1-3,
    Telecommunications Regulatory Board of Puerto Rico (PRTRB) Comments
    at 2-3, USTA Comments at 3-4, and WorldCom Comments at 2. NECA,
    NRTA, and OPASTCO filed joint comments and reply comments with the
    Commission.

[^31]: *See* WorldCom Comments at 4-5; ***supra***, n. 26. GSA concurs
    with WorldCom that PRTC should not continue to receive LTS, and
    conditions its own support on the Commission "setting a schedule for
    completing the reforms within a reasonable period of time, such as
    18 months." GSA Comments at 3 and Reply Comments at 7.

[^32]: *Ninth Report and Order*, 14 FCC Rcd 20467-68; *see First Report
    and Order*, 12 FCC Rcd at 8927.

[^33]: *See supra*, n. 3. We emphasize that, by adopting the Joint
    Board's recommendation regarding LTS, we are not prejudging PRTC's
    requests for waiver of the Commission's rules to remain subject to
    rate-of-return regulation or, alternatively, continue to receive LTS
    for a transitional period, ***see supra***, n. 26**,** which we have
    stated "raise complex issues regarding local competition, universal
    service support in Puerto Rico, and operation of the \[NECA pool\]."
    *PRTC Waiver Order*, 15 FCC Rcd at 9682.

[^34]: *Ninth Report and Order*, 14 FCC Rcd at 20474*.*; 47 C.F.R. §
    54.311(a).

[^35]: *See* Appendix C. This figure represents the projected \$109
    million in annual interim hold-harmless support (excluding LTS),
    less \$22 million that will not be paid because the eligible study
    areas qualify for greater amounts of forward-looking support. *See
    Ninth Report and Order*, 14 FCC Rcd at 20474. Because high-cost loop
    support is calculated on a study-area basis under Part 36, we treat
    study areas separately for purposes of calculating interim
    hold-harmless support. *See* 47 C.F.R. § 36.601, *et seq.* As stated
    above, support estimates for the year 2000 are based on the same
    first quarter 2000 data that the Joint Board used, and may vary from
    quarter to quarter because support is calculated on an ongoing,
    quarterly basis. *See **supra***, n. 25. Based on first quarter 2001
    estimates, five fewer study areas are projected to qualify for
    interim hold harmless support next year due to changes in carriers'
    average costs and line counts, and net annual interim hold-harmless
    support (excluding LTS) will decrease by a total of approximately
    \$4 million. *See* Appendix C. In addition, the Mountain
    Bell-Wyoming study area will receive forward-looking support rather
    than interim hold-harmless support, and two study areas will no
    longer receive high-cost support under the interim hold-harmless
    provision because Central Telephone Company has self-certified as a
    rural carrier under the Commission's rules in Virginia and Texas.

[^36]: *See id.* Based on projections from estimates for the first
    quarter of 2001 filed by USAC on November 2, 2000, seven study areas
    will qualify for average, monthly support of less than \$1.00
    per-line in 2001, one will qualify for support of less than \$2.00,
    one will qualify for support of over \$2.00, and PRTC's two study
    areas will qualify for support of \$2.59 and \$10.21, respectively.
    *See id.* However, GTE's two Missouri study areas may no longer
    qualify for support once their costs are recalculated to reflect the
    transfer of some of GTE's highest-cost exchanges in Missouri to
    Spectra Communications Group, LLC (Spectra). *See Spectra
    Communications Group, LLC and GTE Midwest Incorporated, Joint
    Petition for Waiver of Definition of "Study Area" Contained in the
    Part 36 Appendix-Glossary of the Commission's Rules and Section
    69.3(e)(9) of the Commission's Rules, Petition for Waiver of Section
    61.41(c) of the Commission's Rules*, CC Docket No. 96-45, Order, DA
    00-1624 (Acc. Pol. Div. rel. Jul. 27, 2000); ***see also infra***,
    n. 66.

[^37]: *Recommmended Decision*, 15 FCC Rcd at paras. 13-15.

[^38]: *Id.*

[^39]: *See* AT&T Comments at 2, Florida Commission Comments at 1, GSA
    Comments at 6-7, New York Department of Public Service Comments
    (NYDPS) at 1-2, PRTRB Comments at 4, USTA Comments at 3, and
    WorldCom Comments at 5-8. As discussed below, the Florida Commission
    and WorldCom object to the phase-down schedule as applied to one
    Puerto Rico study area. ***See infra***, para. 13.

[^40]: *See* PRTC Comments at 3-6, Sprint Comments at 1-3, Verizon
    Comments at 2-4, Wyoming Public Service Commission (Wyoming
    Commission) Comments at 3-6, Qwest Reply Comments at 1-4, Valor
    Telecom. Enterprises, LLC (Valor) Reply Comments at 2. PRTC is a
    Verizon subsidiary as a result of PRTC's acquisition by GTE and the
    subsequent Bell Atlantic-GTE merger to form Verizon.

[^41]: DC Commission Comments at 3-4. Notwithstanding its position, the
    DC Commission acknowledges that the Joint Board's recommended
    approach "may . . . also be reasonable." *Id.* at 1.

[^42]: For example, under this approach a study area that qualifies for
    \$3.00 in average monthly, per-line support would receive support of
    \$2.00 (\$3.00 - \$1.00) during the year 2001, \$1.00 during the
    following year (\$3.00 - \$2.00), and no support (\$3.00 - \$3.00)
    thereafter.

[^43]: Specifically, based on first quarter 2001 estimates (and not
    taking into account the recent GTE transfers), this approach is
    projected to phase out interim hold-harmless support for 7 of 11
    study areas that otherwise would qualify for such support in 2001.
    One more study area will be phased out in 2002, two in 2003, and
    PRTC-Central in 2011. *See* Appendix C; *see also supra*, n. 35,
    36*.*

[^44]: *See Ninth Report and Order*, 14 FCC Rcd at 20478. The Joint
    Board observed that it considered "a range of options, from the
    immediate, across-the-board elimination of interim hold-harmless
    support advocated by some commenters, to the 'wait-and-see' approach
    advocated by others." *Recommended Decision*, 15 FCC Rcd at para.
    13. We note that although some commenters continue to advocate these
    diametrically opposed alternatives, ***see infra***, para. 14, none
    proposes a different or modified phase-down schedule, except the
    Florida Commission and WorldCom with regard to one PRTC study area.

[^45]: *Recommended Decision*, 15 FCC Rcd at para. 13; *see Ninth Report
    and Order*, 14 FCC Rcd at 20479.

[^46]: *See* Appendix C; ***supra***, n. 43.

[^47]: The Florida Commission and WorldCom argue that, unless the annual
    rate of \$1.00 is accelerated, the phase-down period will be too
    long and will primarily benefit PRTC. Florida Commission Comments at
    1-2; WorldCom Comments at 2, 5-8. On the other hand, PRTC contends
    that the support "remains critical to PRTC's efforts to provide
    affordable, basic telephone service throughout Puerto Rico," and
    that its loss will result in rate shock. PRTC Comments at 5. Puerto
    Rico's state regulatory agency supports the Joint Board's
    recommended approach. *See* PRTRB Comments at 4.

[^48]: *See* Appendix C.

[^49]: Verizon Comments at 4; *see also Recommended Decision*, 15 FCC
    Rcd at para. 15 (addressing similar arguments).

[^50]: *See Ninth Report and Order*, 14 FCC Rcd at 20478-79. In this
    regard, we note that many of the arguments against phase-down
    essentially challenge the validity or sufficiency of the
    forward-looking mechanism. *See, e.g.*, PRTC Comments at 3 (arguing
    that forward-looking support methodology and its inputs "are flawed
    and drastically change the level of support to be provided to Puerto
    Rico."); Wyoming Commission Comments at 4 (arguing that Wyoming
    already receives insufficient federal high-cost support, and the
    pending loss of any additional support would exacerbate the
    situation). The appropriate context for such challenges is in
    petitions for reconsideration of the *Ninth* and *Tenth Reports and
    Orders*, or in the comprehensive review of the forward-looking
    mechanism.

[^51]: *Recommended Decision*, 15 FCC Rcd at para. 16; *see Ninth Report
    and Order*, 14 FCC Rcd at 20474-75, 20480-81; 47 C.F.R. § 54.311(a).

[^52]: *See* NYDPS Comments at 2. For example, if during the year 2001 a
    carrier otherwise would be eligible for quarterly support of \$1.05,
    \$0.95, \$1.05, and \$0.95 per-line/per-month, respectively, then it
    would receive support of \$0.05 during the first and third quarters
    of the year, but no support for the second and fourth quarters. The
    following year, a \$2.00 reduction would be applicable and the
    carrier would no longer receive support.

[^53]: *Recommended Decision*, 15 FCC Rcd at para. 16.

[^54]: 47 C.F.R. § 54.311(b); *Ninth Report and Order*, 14 FCC Rcd at
    20476-78; *see Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, *Twentieth Order on Reconsideration*, 15 FCC Rcd
    12070 (2000), at paras. 15-16 (clarifying "cascading approach" to
    targeting of interim hold-harmless support). Consistent with the
    portability provisions of the *Ninth Report and Order*, targeting
    "ensures that, in a wire center where the incumbent is receiving
    hold-harmless support, a competitor will receive an amount of
    support that is related to the costs in that wire center." *Ninth
    Report and Order*, 14 FCC Rcd at 20477. For purposes of the instant
    Report and Order and Notice of Proposed Rulemaking, the terms
    "exchange" and "wire center" are synonymous, and "exchange" is used
    to refer to both.

[^55]: *See Recommended Decision*, 15 FCC Rcd at paras. 19-22; *see
    also* Wyoming Commission Comments at 6 (requesting clarification as
    to whether the Commission's targeting provisions will apply to any
    phase-down).

[^56]: PRTC Comments at 3-4.

[^57]: *Recommended Decision*, 15 FCC Rcd at paras. 17-18.

[^58]: *See generally* 47 C.F.R. Part 36, Subpart F. We note that the
    Rural Task Force has recommended to the Joint Board modifications in
    the method by which the cap is calculated. *See* RTF Recommendation
    at 23-25.

[^59]: *Ninth Report and Order*, 14 FCC Rcd at 20490-92.

[^60]: NYDPS Comments at 3.

[^61]: *Ninth Report and Order*, 14 FCC Rcd at 20490-91.

[^62]: *Recommended Decision*, 15 FCC Rcd at para. 18. Arguments that
    the interim cap should be eliminated entirely are outside the scope
    of this proceeding, and are currently before the Joint Board in
    connection with the RTF Recommendation. *See* NECA/NRTA/OPASTCO
    Comments at 8, NTCA Comments at 10; ***supra***, n. 3. We note that,
    contrary to NTCA's argument, there are no remaining caps on
    high-cost loop support for individual study areas. NTCA Comments at
    5-9; *see Petitions for Waiver Concerning the Definition of "Study
    Area" Contained in Part 36 Appendix-Glossary of the Commission's
    Rules* *filed by Accent Comm'ns, Inc., et al.*, CC Docket No. 96-45,
    Order, DA 00-1761 (Common Carrier Bur. rel. Aug. 4, 2000).

[^63]: ***See supra***, n. 54 and accompanying text.

[^64]: 47 C.F.R. § 54.305. Specifically, the rule provides that "\[a\]
    carrier that acquires telephone exchanges from an unaffiliated
    carrier shall receive universal service support for the acquired
    exchanges at the same per-line support levels for which those
    exchanges were eligible prior to the transfer of the exchanges."
    *Id.*

[^65]: *Recommended Decision*, 15 FCC Rcd at para. 19.

[^66]: Valor currently receives about \$71,000 per month in interim
    hold-harmless support for exchanges acquired from GTE Southwest Inc.
    in Texas. *See Valor Telecommunications of Texas, LP and GTE
    Southwest Incorporated, Joint Petition for Waiver of Definition of
    "Study Area" Contained in the Part 36 Appendix-Glossary of the
    Commission's Rules*, CC Docket No. 96-45, Order, DA 00-1908 (Acc.
    Pol. Div. rel. Aug. 21, 2000). Spectra currently receives about
    \$693,000 per month in interim hold-harmless support for exchanges
    acquired from GTE in Missouri. ***See supra***, n. 36. We note that
    Valor has self-certified as a rural carrier under the Commission's
    rules, and that Western Wireless Corporation has filed a petition
    challenging Valor's self-certification. *See Common Carrier Bureau
    Seeks Comment on Western Wireless Corporation Petition to Reject
    Valor Telecommunications Southwest, LLC Rural Telephone Company
    Self-Certification*, Public Notice, DA 00-1882 (rel. August 17,
    2000).

[^67]: *Recommended Decision*, 15 FCC Rcd at para. 20 ("by freezing
    support based on the seller's embedded costs, the rule prevents the
    acquiring carrier from receiving an amount of support related to the
    costs of providing supported services in the transferred exchange.
    Moreover, the rule requires the acquiring carrier to keep separate
    books of account for the acquired exchanges for an indefinite period
    of time.").

[^68]: *Id.* at para. 21.

[^69]: *Id.* at para. 22.

[^70]: *See* NECA/NRTA/OPASTCO Comments at 5-6, NTCA Comments at 3-5,
    RICA Reply Comments at 2-3, and Valor Reply Comments at 3-4.

[^71]: *See* AT&T Comments at 4-6, NYDPS Comments at 3-4.

[^72]: *First Report and Order*, 12 FCC Rcd at 8942-43; *see Recommended
    Decision*, 15 FCC Rcd at para. 20; *see also* AT&T Comments at 6.

[^73]: *See First Report and Order*, 12 FCC Rcd at 8942-43.

[^74]: We note that the Rural Task Force has recommended to the Joint
    Board retention of section 54.305 with a new "safety valve"
    mechanism permitting additional support for transferred exchanges if
    the acquiring rural carrier makes meaningful new investments. *See*
    RTF Recommendation at 47-48.

[^75]: AT&T Comments at 6; *see also* NYDPS Comments at 3-4.

[^76]: *See* AT&T Comments at 5-7; *see also infra*, n. 80 and
    accompanying text. Specifically, it could encourage transfers to
    rural carriers merely to preserve interim hold-harmless support, and
    allow sellers to obtain the benefit of such support by inflating the
    sale price.

[^77]: As the Joint Board explained, because targeted support is likely
    to be greater than average support on a per-line basis, targeted
    support for exchanges transferred to non-rural carriers must be
    reduced at a faster rate than the seller's support to be phased down
    over the same time period. *Recommended Decision*, 15 FCC Rcd at
    para. 22.

[^78]: For example, assume Carrier A is entitled to interim
    hold-harmless support in 2000 of \$2.50 per-line/per-month. Thus,
    Carrier A's support would be phased down over a three-year period:
    in 2001, Carrier A would receive monthly per-line support of \$1.50,
    then \$.50 in 2002, then zero in 2003. Assume further that Carrier A
    sells three exchanges to Carrier B in 2000, and that the targeted
    interim hold-harmless support for the transferred exchanges at the
    time of sale is \$3.00, \$6.00, and \$9.00 per-line/per-month,
    respectively. Under the approach we adopt herein, the transferred
    support would be phased down over a three-year period, and Carrier
    B's support would not depend on subsequent recalculations of Carrier
    A's phased-down support levels. In 2001, Carrier B would receive
    per-line support for the transferred exchanges of \$2.00 (=67% of
    \$3.00), \$4.00 (=67% of \$6.00), and \$6.00 (=67% of \$9.00),
    respectively. In 2002, the per line support for each transferred
    exchange would be 33 percent of the original support levels. In
    2003, support would phase down to zero for all three exchanges. In
    2001 and 2002, Carrier A would receive the support it would have
    received absent the sale, minus the support that is paid to Carrier
    B for the three transferred exchanges.

[^79]: 47 C.F.R. § 54.305; ***see supra***, n. 64 and accompanying text.

[^80]: *First Report and Order*, 12 FCC Rcd at 8942-43*.*

[^81]: *See id.*

[^82]: *Id.*

[^83]: ***See supra***, n. 74. The RTF Recommendation focuses on the
    operation of section 54.305 when the acquiring carrier is a rural
    carrier eligible to receive high-cost support based on embedded
    costs. *See id.*

[^84]: *See Ninth Report and Order*, 14 FCC Rcd at 20480-81.

[^85]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et. seq.*,
    has been amended by the Contract With America Advancement Act of
    1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of
    the CWAAA is the Small Business Regulatory Enforcement Fairness Act
    of 1996 (SBREFA).

[^86]: *See* 5 U.S.C. § 603.

[^87]: *See* 5 U.S.C. § 604.

[^88]: 5 U.S.C. § 601(6).

[^89]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in 15 U.S.C.  632). Pursuant to the RFA,
    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(s) in the Federal Register.\" 5 U.S.C. § 601(3).

[^90]: 15 U.S.C. § 632.

[^91]: 13 C.F.R. § 121.201, SIC Code 4813.

[^92]: 5 U.S.C. § 605(b).

[^93]: 5 U.S.C. § 801(a)(1)(A).