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Before the
               Federal Communications Commission
                     Washington, D.C. 20554
In the Matter of
Federal-State Joint Board on
Universal Service
)
)
)
)
CC Docket No. 96-45
                      RECOMMENDED DECISION
   Adopted:  June 28, 2000              Released:  June 30, 2000
By the Federal-State Joint Board on Universal Service:  Commissioner Furchtgott-Roth approving in part,
dissenting in part, and issuing a statement.
     I.   INTRODUCTION
1.   This Recommended Decision sets forth the recommendations of the Federal-State Joint Board
on Universal Service (Joint Board) for phasing down the interim hold-harmless provision of the new, forward-
looking high-cost universal service support mechanism for non-rural carriers.  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.  The
interim hold-harmless provision ensures that the amount of high-cost support provided to a non-rural carrier
on a per-line basis under the new mechanism will be no less than it receives under the preexisting high-cost
support mechanism.  Support from the interim hold-harmless provision is based on two preexisting support
mechanisms:  (1) Long-Term Support (LTS); and (2) high-cost loop support under Part 36 of the
Commission's rules.
2.   The Commission emphasized that the interim hold-harmless provision is "a transitional
provision" to protect consumers in high-cost areas from rate shock as a result of any sudden, significant
increases in rates during the shift to forward-looking support.  Accordingly, it requested a Joint Board
recommendation by July 1, 2000 as to how interim hold-harmless support can be phased down or eliminated
without causing undue rate disruption.  On November 3, 1999, the Joint Board sought comment on schedules
and procedures for phasing down or eliminating interim hold-harmless support.
3.   For the reasons discussed below, we recommend that LTS be maintained under the current
rules until the Commission considers appropriate reforms for the LTS program in connection with the pending
proceedings for high-cost reform for rural carriers and/or interstate access charge reform for rate-of-return
carriers.  We further recommend that the Commission phase down the balance of interim hold-harmless
support, excluding LTS, through $1.00 reductions in average monthly, per-line support beginning January 1,
2001, and every year thereafter.  We believe that this recommended approach will ensure a prompt, equitable
phase-down of interim hold-harmless support without undue disruption of consumer rates in high-cost areas.
Finally, we recommend against phasing down any interim hold-harmless support that is transferred to a rural
carrier when it acquires exchanges from a non-rural carrier.  Such transferred interim hold-harmless support
should be maintained until the Commission completes a review of the rule governing the transfer of universal
service support or until rural high-cost reform is complete.
     IV.  RECOMMENDATIONS
          A.   Long-Term Support
               1.   Background
2.   As stated above, the interim hold-harmless provision includes LTS for non-rural carriers
under section 54.303 of the Commission's rules.  The LTS program ensures reasonable comparability of
interstate access rates among local exchange carriers (LECs) by reducing the carrier common line (CCL)
charges of rate-of-return LECs that participate in the National Exchange Carrier Association (NECA)
common line pool.  CCL charges are per-minute charges that LECs assess on interexchange carriers (IXCs)
to recover a portion of their interstate-allocated loop costs.  Formerly, all incumbent LECs had to pool such
costs to set a uniform, nationwide CCL rate.  When individual LECs were allowed to leave the NECA pool
in 1989, departing LECs predominantly larger, lower-cost carriers were required to pay LTS to prevent
the CCL rates of the remaining, high-cost LECs from rising significantly above the national average.
3.   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.  Therefore, the Commission continued the LTS
program, but removed it from the access charge system and modified its calculation and distribution scheme.
In the First Report and Order, the Commission anticipated that LTS for non-rural carriers would be
subsumed in the new, forward-looking support mechanism.  The Commission anticipated, however, that
rural high-cost reform would require a more extended time period, during which the Commission sought to
maintain the existing LTS program for rural carriers, as modified, "to provide rural LECs . . . sufficient time
to adjust to any changes in universal service support."  The Commission's proceeding to reform the high-
cost support mechanism for rural carriers is pending, as is the related proceeding to reform the interstate
access charge system for rate-of-return carriers.
4.   Rural carriers are the primary recipients of LTS and receive approximately $381 million in
annual LTS.  Annual LTS for non-rural carriers is approximately $97 million, which is slightly more than half
of the projected $184 million in net annual interim hold-harmless support.  Only three non-rural carriers
receive LTS: Roseville Telephone Co. in California; North State Telephone Co. in North Carolina; and the
Puerto Rico Telephone Co. (Puerto Rico), which is projected to receive $89 million, or over 90 percent, of the
total annual LTS for all three carriers.  Each of the seven parties that addressed LTS argues that, regardless
of how the balance of interim hold-harmless support is handled, LTS for non-rural carriers should not be
eliminated or phased down at this time because it has no substitute in the new, forward-looking support
mechanism.
               5.   Discussion
6.   As set forth below, we recommend that LTS be maintained under the current rules until the
Commission considers appropriate reforms for the LTS program in connection with the pending proceedings
for rural high-cost reform and/or interstate access charge reform for rate-of-return carriers. As an initial
matter, we recognize that, because LTS supports only interstate-allocated loop costs and therefore does not
directly affect intrastate rates, it is within the Commission's jurisdiction to determine whether to phase down
or eliminate LTS.  At the Commission's request, however, we have prepared a recommendation on this
issue.
7.   Our recommendation is based principally on two considerations.  First, unlike the preexisting
high-cost loop support mechanism under Part 36, LTS for non-rural carriers is not replaced by the new,
forward-looking high-cost support mechanism.  The Commission concluded in the Ninth Report and Order
that, to properly account for the separations rules, the new mechanism should provide support only for the
percentage of total costs exceeding the national benchmark that are allocated to the intrastate jurisdiction, not
for interstate-allocated costs such as those supported by LTS.  As a result, the new high-cost mechanism
does not replace LTS for non-rural carriers, as the Commission originally had anticipated at the time of the
First Report and Order.  Because no substitute support mechanism currently exists, we believe that the
Commission's rationale for phasing down interim hold-harmless support that it is "a transitional provision
. . . during the shift to the new federal support mechanism" may not be appropriate to LTS.
8.   Second, we find that phasing down LTS for non-rural carriers will have an indirect impact on
rural LTS recipients, thereby undermining the Commission's objective to maintain the current support
structure, as modified, for rural LTS recipients.  Because NECA pools costs, revenues, and support to
calculate an average CCL rate for pool participants, if LTS were phased down for the three eligible non-rural
carriers without a corresponding reduction in costs, the CCL rate for all NECA pool participants would
increase.  According to NECA, loss of LTS for non-rural carriers could cause the NECA CCL rate to rise by
up to 42 percent.  Thus, we are concerned about the potential rate impact on rural LTS recipients as a result
of the phase-down of LTS for non-rural carriers.
9.   In light of these considerations, we recommend that the Commission consider the future of
LTS to non-rural carriers in conjunction with its consideration of the pending proceeding to reform the
Commission's high-cost support mechanism for rural carriers, and/or the related proceeding to reform the
interstate access charge system for rate-of-return carriers.  In the meantime, the Joint Board recommends
that the Commission preserve LTS.
          A.   Phase Down of Interim Hold-Harmless Support
               1.   Background
10.  In addition to LTS, the interim hold-harmless provision provides per-line support to eligible
non-rural carriers based on the preexisting high-cost loop support mechanism under Part 36 of the
Commission's rules.  Under this mechanism, 18 non-rural carriers will receive a total of about $87 million
in net annual interim hold-harmless support (excluding LTS), based on projections for the first quarter of the
year 2000.  These projections indicate that, on a per-line basis, 12 of the 18 carriers receive average monthly
support of less than $1.00, four receive support of less than $2.00, one (GTE North Inc. in Missouri) receives
support of $3.26, and one (Puerto Rico) receives support of $12.06 and $1.86, respectively, for each of its
two study areas.  We note that interim hold-harmless support recipients and support estimates may vary
from quarter to quarter, because support is calculated on an ongoing, quarterly basis, and in a given quarter
carriers may qualify to receive either interim hold-harmless support or forward-looking support, depending on
which is greater.
11.  The commenters are divided roughly into two groups.  The first, including payor states,
interexchange carriers (IXCs), and other net contributors to universal service support, favor rapid termination
of interim hold-harmless support.  Specifically, most of these commenters favor termination no later than
January 1, 2001, although three suggest a phase-down schedule of at least three years for Puerto Rico.  The
other group, which includes LECs and state recipients of interim hold-harmless support, opposes the
establishment of an elimination date or phase-down schedule at this time. These commenters argue that any
such action should await Commission reform of the high-cost support system for rural carriers, which will not
occur before January 1, 2001, and/or comprehensive review of the new, forward-looking support mechanism
for non-rural carriers, which is scheduled to be completed by January 1, 2003.
               1.   Discussion
12.  We recommend that interim hold-harmless support, excluding LTS, be phased down
beginning January 1, 2001, through annual $1.00 reductions in each recipient's average monthly, per-line
support.  In developing this recommendation, we have considered a range of options, from the immediate,
across-the-board elimination of interim hold-harmless support advocated by some commenters, to the "wait-
and-see" approach advocated by others.  We believe that our recommended approach is the best means of
ensuring a prompt, equitable phase-down of interim hold-harmless support without causing undue rate
disruption.  As discussed below, this approach would promptly phase out interim hold-harmless support for
the majority of carriers currently receiving less than $1.00 per-line/per-month, while permitting a gradual
withdrawal of support from those receiving higher amounts of interim hold-harmless support.  We also
recommend that the Commission reexamine the phase-down schedule in conjunction with its comprehensive
review of the new, forward-looking support mechansim, which is to be completed by January 1, 2003, at
which time only two carriers are projected to be receiving interim hold-harmless support, and the Commission
will have more information on the impact of our recommended phase-down approach on rates in the remaining
carriers' study areas.
13.  A number of commenters favor across-the-board termination of interim hold-harmless
support as of January 1, 2001, arguing generally that the Commission intended the interim hold-harmless
provision to be transitional only, that interim hold-harmless support is burdensome and inequitable to net
contributors to universal service support, and that in most cases the loss of interim hold-harmless support
would not cause rate shock.  We agree that in most cases a sweeping approach would be unlikely to cause
rate shock, as the majority of interim hold-harmless support recipients currently receive average monthly, per-
line support of less than $1.00.  We recommend a more tailored approach, however, because it will allow a
gradual withdrawal of support from carriers receiving higher amounts of per-line support, thereby avoiding
significant, sudden rate increases in the areas served by such carriers.  Nevertheless, we believe that our
recommendation is responsive to these commenters' concerns.  During the year 2001, and based on first
quarter year 2000 support estimates, our recommended approach would phase out interim hold-harmless
support for 13 of the 18 current recipients and save approximately $47 million in annual interim hold-
harmless support.  In the following year, our approach would phase out interim hold-harmless support for
four more recipients.  Interim hold-harmless support for GTE North Inc. in Missouri would be phased out
in the fourth year, leaving only one Puerto Rico study area as a recipient of interim hold-harmless support.
14.  We disagree with commenters who argue that interim hold-harmless support should be
preserved at its current level pending rural high-cost reform, which will not occur before January 1, 2001,
and/or comprehensive review of the new, forward-looking high-cost support mechanism, which is to be
completed by January 1, 2003.  The Commission's purpose in adopting the interim hold-harmless provision
was to ensure a nondisruptive transition to the new, forward-looking support mechanism for non-rural
carriers, not to postpone or avoid the need for a transition.  We anticipate that the states can adapt their rate
designs to the new, forward-looking support mechanism for non-rural carriers without waiting for rural high-
cost reform.  In this regard, we note that none of the states for which interim hold-harmless support will be
phased down maintain otherwise in their comments to the Joint Board.  We also observe that, under the
gradual phase-down approach that we recommend, no carrier's average monthly, per-line support will be
reduced by more than $1.00 per year, so that no state will be faced with significant, sudden reductions in
federal support to an individual study area.
1    Mechanics of Phase-Down
1.   The support amounts for which interim hold-harmless recipients qualify may vary from
quarter to quarter, because interim hold-harmless support is calculated on an ongoing, quarterly basis. To
ensure that the phase-down conforms with this quarterly schedule, the Joint Board recommends that the
applicable annual reductions be subtracted from the interim hold-harmless support that a carrier otherwise
would be eligible to receive on an ongoing, quarterly basis.  Under this approach, a carrier may continue to be
eligible for interim hold-harmless support during a particular year even if it does not qualify for such support
in a given quarter.  For example, if during the year 2001 a carrier otherwise would be eligible for quarterly
support of $1.05, $0.95, $1.05, and $0.95 per-line/per-month, respectively, then it would receive support of
$0.05 per-line/per-month during the first and third quarters of the year, but no support for the second and
fourth quarters.  The following year, a $2.00 reduction would be applicable and the carrier would no longer
receive support.  We believe that this method of calculating interim hold-harmless support during the phase-
down would be the most equitable to interim hold-harmless recipients and easiest to administer.
                    a.   Calculation of High-Cost Loop Support for Rural Carriers
2.   Under the Commission's rules, universal service support for all carriers under Part 36 is
restricted by an "interim cap" that limits the total increase in support each year to the annual growth in
nationwide loops.  The cap is calculated by applying the total growth rate in industry working loops to the
prior year support level.  Although non-rural carriers (with the exception of interim hold-harmless support
recipients) were shifted to the new, forward-looking support mechanism effective January 1, 2000, the
Commission concluded in the Ninth Report and Order that the cap should continue to be calculated as if all
carriers participate in the preexisting support mechanism.  Otherwise, rural carriers would receive smaller
annual increases in support, because the growth rate in working loops for non-rural carriers historically has
been faster than the growth rate in working loops for rural carriers.  The purpose of this interim
"placeholder" measure was to avoid significant and immediate changes in high-cost support for rural carriers,
consistent with the Commission's commitment "not to consider significant changes in rural carriers' support
until after the Rural Task Force and the Joint Board have made their recommendations."
3.   The effect that the Commission sought to avoid in the Ninth Report and Order smaller
annual cap increases also could result from subtracting phased-down interim hold-harmless support amounts
from calculation of the cap.  This is so because the prior year support level used to calculate the cap includes
the high-cost loop support for non-rural carriers that would be provided under Part 36 if the preexisting high-
cost support mechanism had not been replaced.  To avoid this undesired effect, we recommend that the cap
continue to be calculated as if phased-down interim hold-harmless support were being distributed to non-rural
carriers, pending reform of the high-cost support mechanism for rural carriers.  This approach will avoid
significant and immediate changes in high-cost support for rural carriers as a result of the phase-down of
interim hold-harmless support, and is consistent with the Commission's action in the Ninth Report and Order.
We do not recommend, however, that any of the support calculated for non-rural carriers under Part 36
(phased-down interim hold-harmless support or support calculated as a "placeholder") be redistributed to
rural carriers.
                    a.   Transferred Interim Hold-Harmless Support
4.   Finally, we address issues related to the transfer of interim hold-harmless support.  The
transfer of universal service support when one carrier acquires another carrier's exchanges is governed by the
targeting provisions of the Ninth Report and Order and section 54.305 of the Commission's rules. Pursuant
to the Ninth Report and Order, although a carrier receives interim hold-harmless support based on embedded
costs averaged over its entire study area, the support is targeted for competitive purposes to its highest-cost
wire centers based on forward-looking economic costs.  Section 54.305 of the Commission's rules provides
that per-line support for a transferred exchange remains equal to the per-line amount the seller was eligible to
receive prior to the transfer, rather than being recalculated based on the average cost of all of the buyer's
lines.  Under these provisions, as of the date of sale, the acquiring company would receive the same per-line
interim hold-harmless support for the transferred exchange that the seller was eligible to receive.  The issue,
however, is whether transferred interim hold-harmless support should be phased down following the transfer,
as it would have been if it had not been transferred, or should remain frozen at the per-line support level as of
the sale date.
5.   As an initial matter, we wish to express our general concern about the operation of section
54.305.  The Commission adopted this rule in the First Report and Order as a stopgap measure "to
discourage carriers from placing unreasonable reliance upon potential universal service support in deciding
whether to purchase exchanges from other carriers[.]"  At the time, the Commission anticipated that all
carriers eventually would receive support based on forward-looking economic costs, at which point the rule
would no longer be necessary.  Although we recognize the importance of the rule's purpose, we believe that
in practice it has negative consequences, at least with regard to transfers of exchanges between carriers that
are not both receiving support based on the forward-looking mechanism.  For example, by freezing support
based on the seller's embedded costs, the rule prevents the acquiring carrier from receiving an amount of
support related to the costs of providing supported services in the transferred exchange.  Moreover, the rule
requires the acquiring carrier to keep separate books of account for the acquired exchanges for an indefinite
period of time.  We strongly encourage the Commission to consider an alternative to section 54.305 at the
earliest opportunity.
6.   Turning to the issue of whether transferred interim hold-harmless support should be phased
down following the transfer, the Joint Board recommends that interim hold-harmless support for exchanges
transferred to rural carriers should not be phased down following the transfer until the Commission
reexamines the operation of section 54.305, as recommended above, and/or reforms the high-cost mechanism
for rural carriers, so that replacement support for the transferred exchanges is available.  This approach would
ensure that rural carriers receive constant support for eligible transferred exchanges, thereby ensuring
affordable access to telecommunications service in high-cost exchanges.
7.   The Joint Board recommends, however, that interim hold-harmless support for exchanges
transferred to non-rural carriers be phased down over the same time period as the seller's support would have
been phased down.  This approach would ensure a prompt and equitable phase-down of transferred interim
hold-harmless support.  It also would discourage carriers from transferring exchanges to delay or avoid the
phase-down of interim hold-harmless support.  Because targeted support is likely to be greater than average
support on a per-line basis, targeted interim hold-harmless support for exchanges transferred to non-rural
carriers would have to be reduced at a faster rate than the seller's support to be phased down over the same
time period.  We recommend that such support be phased down by an equal percentage for each year of the
phase-down period, on an exchange-by-exchange basis.  We believe that this approach would be
administratively simple and predictable for acquiring non-rural carriers.

     VIII.     Recommending clause
21.  For the reasons discussed herein, this Federal-State Joint Board, pursuant to section 254(a)(1)
and section 410(c) of the Communications Act of 1934, as amended, 47 U.S.C.  254(a)(1) and 410(c),
recommends that the Commission adopt the proposals described above relating to schedules and procedures
for phasing out interim hold-harmless support.
                              FEDERAL COMMUNICATIONS COMMISSION
                         Magalie Roman Salas
                              Secretary
                              
            APPENDIX A
Parties Filing Comments and Reply Comments
                              Comments:
  1. People of the State of California and the California Public Utilities Commission
  2. Public Service Commission of the District of Columbia
  3. GTE Service Corporation
  4. National Exchange Carrier Association, Inc.
  5. State of New York Department of Public Service
  6. Puerto Rico Telephone Company, Inc.
  7. Roseville Telephone Company
  8. Rural Telephone Coalition
  9. SBC Communications Inc.
  10.     Sprint Corporation
  11.     United States Telecom Association
  12.     U S WEST Communications, Inc.
  13.     Western Wireless Corporation
                              Reply Comments:
  1. AT&T Corporation
  2. Florida Public Service Commission
  3. GTE Service Corporation
  4. Independent Telephone and Telecommunications Alliance
  5. MCI Worldcom, Inc.
  6. North State Telephone Company
  7. Puerto Rico Telephone Company, Inc.
  8. Roseville Telephone Company
  9. Rural Telephone Coalition
  10.     Telephone Association of New England
  11.     United States Telecom Association
  12.     U S WEST Communications, Inc.
  13.     Wyoming Public Service Commission
                              
 STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH, APPROVING IN
                  PART AND DISSENTING IN PART
Re:  Recommended Decision, Federal State-Joint Board of Universal Service, CC Docket No. 96-45
I support the Joint Board's recommendations that the Commission (1) retain the long-term support
mechanism; (2) continue to calculate the cap for rural high-cost loop support as if the preexisting high-cost
loop support for non-rural carriers had not been changed; and (3) not implement a "phase down" of loop
support when a non-rural carrier transfers an exchange to a rural carrier.  I cannot, however, endorse the
Board's recommendation that "hold-harmless" loop support be phased out over the next three years, so that
non-rural carriers eventually will receive universal service support based exclusively on the model that the
Commission adopted last year.  That model never worked, and it has no prospect of working.  As I have said
before, the model does not satisfy the Act's basic requirements that universal service support be "specific" and
"predictable," and I believe that relying in any way on this model does not meet the requirements of the
statute.