In the Matter of:                 )
               )
EN BANC HEARING -                 )
UNIVERSAL SERVICE METHODOLOGY     )



















Pages:  1 through 219

Place:  Washington, D.C.

Date:   June 8, 1998
                              Before the
                   FEDERAL COMMUNICATIONS COMMISSION
                        Washington, D.C.  20554
     
     
     In the Matter of:                 )
                    )
     EN BANC HEARING -                 )
     UNIVERSAL SERVICE METHODOLOGY )
                               
     
                    Federal Communications
                    Commission
                    
                    1919 M Street, N.W.
                                   Room 865, 
                    Commission Meeting Room
                    
                    Washington, D.C.
      
                    Monday,
                    June 8, 1998
     
               The parties met at 9:30 a.m.
     
               APPEARANCES:
     
               CHAIRMAN WILLIAM KENNARD
               COMMISSIONER MICHAEL K. POWELL
               COMMISSIONER HAROLD FURCHTGOTT-ROTH
               COMMISSIONER SUSAN NESS
               COMMISSIONER GLORIA TRISTANI
               GLENN BROWN
               PAT WOOD III
               DAVID BAKER
               LASKA SCHOENFELDER
               JULIA JOHNSON
               MARTHA HOGERTY
               TOM REIMAN
               JIM IRVIN
               MARK COOPER
               SUSAN BALDWIN
               DENNIS WELLER
               ERNEST BUSH
               PETER BLUHM
               WARREN WENDLING
               JOEL LUBIN
               JIM SICHTER
               LAVERA MARSHALL
               MAGALIE ROMAN SALAS
                    APPEARANCES:  (Continued)
     
               JIM SCHLICHTING
               JOEL SHIFTMAN
               MAUREEN SCOTT                         P R O C E E D I N G S
                   CHAIRMAN KENNARD:  Good morning.  Good morning and
     welcome to today's En Banc hearing of the Federal
     Communications Commission with the Joint Board concerning
     universal service.
                   We are joined today by the state commissioners who
     are members of the Federal State Joint Board on universal
     service and of course, by the consumer advocate member of
     the Joint Board, Martha Hogerty.  We're delighted that
     you've traveled to join us here today.
                   We have a lot to accomplish today.  This will be
     an open meeting of the Commission.  So, we'll have a
     transcript prepared.  And that transcript will be placed in
     the docket of the universal service reconsideration
     proceeding.
                   Before we get started, let me give you sort of a
     brief overview of how we intend to proceed today.  First of
     all, all of the Commissioners on the En Banc panel will be
     giving brief opening statements.  That will be followed by
     an overview by Jim Schlichting who is Deputy Chief of the
     Common Carrier Bureau, who will sort of set the stage for
     the issues that we're going to be discussing today.
                   Next, we will listen to presentations from
     representatives of 11 different interests -- stakeholders,
     if you will, who have an interest in the outcome of this
     proceeding.  The presentations will conclude at about 11:15. 
     We have our very expert and experienced timekeeper, LaVera
     Marshall who will be making sure that you all hold to your
     appointed three minute presentations.
                   At 11:15, we'll break for about 15 minutes.  Then,
     we will resume again at 11:30 whereupon the Commissioners
     will engage in questioning of the presenters.  And that
     should take us to about 12:45 when we'll break for lunch.
                   We will then reconvene at 2:30 for about two hours
     of discussion of the panelists and presenters.  And we
     intend to conclude promptly at 4:30 p.m. today.
                   Well, obviously, we are here to address some very
     difficult, vexing issues, but issues of great importance to
     the country at this time.  And I think it's important that
     we not try to sugarcoat these problems.  They are very hard. 
     They involve lots of different and competing interests.  And
     frankly, it tends to invoke a lot of emotion.  In my six
     months as Chairman, I don't think any issue has evoked more
     emotion than universal service from many, many different
     quarters.  
                   So, it's important that we recommit ourselves
     today to working together to solve these issues, because at
     the most fundamental level, universal service is about
     keeping our nation connected and not dividing us.  It's
     about guaranteeing that all Americans have access to
     advanced telecommunications at affordable rates,
     particularly those who live in rural and high cost areas. 
     And it's also about implementing the law in a meaningful way
     to make sure that schools, libraries and rural healthcare
     centers can also enjoy the benefits of our finest -- the
     finest telecommunication system in the world.
                   Now, I know we're here to talk specifically about
     high cost, but I don't think that we can do so without
     recognizing the intense debate that is swirling around us
     today about the implementation of the schools and libraries
     provisions of the '96 Act.  A very intense debate fueled by
     the announcement of -- by AT&T and others that they will
     start assessing their customers for universal service
     contributions based on a percentage of each customer's bill,
     around five percent.
                   Now, I mention this because this is just the tip
     of the iceberg in this debate in my view, because while some
     of these assessments will go to schools and libraries, a
     major portion will also go to fund the high cost mechanism
     of universal service.  So, you can't talk about one
     mechanism without talking about the other.  They are
     interrelated.
                   Now, interrelated -- and we're undergoing a
     transition in universal service in this country.  A
     transition from monopoly regulation where we had implicit
     subsidiaries to a competitive environment with explicit
     subsidies.  
                   And it's going to be a difficult transition.  But
     in the long run, I think we have to count on -- we have to
     have faith in the fact that competition will ultimately
     bring rates down.  Competition will also make these
     subsidies explicit.  I think we've got to recognize that
     we're moving toward a two-tier pricing system where carriers
     will pass their -- recover their fixed costs with a flat
     line and compete on per minute rates.  That's an
     inevitability, and we're going to have to adjust to that.
                   And in this adjustment, we certainly can't do it
     alone.  We're going to have to work together, the state
     jurisdiction and the Federal jurisdiction.  The state
     commissioners are our partners today at this hearing, and
     will be our partners in the future.
                   I want to offer my gratitude to all of them.  I
     want to welcome, in particular, Pat Wood, who is joining us
     today for the first time, and Dave Baker, also joining us
     for the first time on the Joint Board, and welcome you and
     thank you for your sacrifices in taking this effort on.
                   In talking to many of our colleagues, both on the
     Joint Board, and generally among state commissioners, it's
     very clear that folks are very focused on this issue.  And
     the state commissioners want to very much participate in
     this and obviously, have to have a vital role.  
                   I conferred with Julia Johnson and other members
     of the Joint Board and they have formally requested that we
     refer some of these matters, formally, to the Joint Board. 
     And I'm amenable to doing that.  I think that that would be
     a useful exercise if we can agree on the scope of the
     referral and if we can agree on a specific time period
     within which to act.  It's vitally important that we
     continue the momentum of trying to solve this problem going,
     because we've got to get a solution in a matter of months
     and not years.
                   Well, today, I hope we can get a lot of good and
     useful proposals on the table to insure that universal
     service support continues to keep basic telephone service
     affordable for Americans in rural and high cost areas, and
     doing so in a competitively neutral manner.  
                   But I think we also have to recognize, as we
     consider these issues, that all of you here today are
     motivated by self-interest.  You represent companies and
     organizations that have a particular stake.  And I think
     that in order for us in Government to solve this problem,
     we're going to challenge you to sort of peel back the veil
     of self-interest and level with us, and tell us who has
     truly benefitted and who is truly disadvantaged by these
     proposals.  I'm going to do that in the questioning.  And I
     invite my colleagues up here to do the same.
                   It sort of reminds me of the movie about Watergate
     when Woodward and Bernstein are consulting with their
     source, Deep Throat.  And they're pressing Deep Throat to
     try to tell them how to really get to the bottom of the
     Watergate problem -- the scandal.  And Deep Throat, in the
     now famous utterance said, "Well, just follow the money." 
     Well, I think that's what universal service is all about. 
     It's following the money, finding out who is getting the
     money and who is paying the money.  
                   And I think that we can have an appreciation of
     where your various proposals -- what they really do unless
     you level with us on that score.  
                   So, I look forward to your cooperation and getting
     your help today.  And I would like now to turn this over to
     my colleague at the Commissioner, Susan Ness, who has
     devoted a lot of time and attention to these issues and has
     been an invaluable member of the Joint Board.  And I am
     pleased that she has agreed to serve as chair of the Joint
     Board for this, probably its most challenging period.
                   Sorry to put you on the spot yet again, Susan. 
     Commissioner Susan Ness.
                   COMMISSIONER NESS:  Thank you, Mr. Chairman.  And
     I, too, wish to extend my welcome and appreciation to my
     colleagues on the Joint Board for joining us here today.
                   This is universal hearing -- service hearing high
     cost redux.  We have been looking at these issues for an
     extended period of time.  The underlying precepts have been
     discussed, debated.  The Joint Board originally issued its
     recommendations a year and a half ago.  And a year ago last
     May, the FCC adopted, for the most part, most of the
     recommendation that have been put forward by the Joint
     Board.  It was a very collaborative process.  And the Joint
     Board members continue to work with us through up until the
     very end when the Commission itself rendered its decision.
                   Certainly, we will be doing the same thing now,
     working to refer some items hopefully, to the Joint Board
     and then proceeding to work through these issues,
     collaboratively, with the members of the Joint Board up
     until the final decision is rendered by the Commission.  And
     the reason for that basically is, we're in it together.  As
     Chairman Kennard was saying, basically, it is a
     collaborative process.  It's a bit like a three-legged race
     in that we cannot move ahead in one piece without the other
     piece coming together and moving in unison.
                   It is a very complicated situation, made even more
     cumbersome perhaps by the fact that a lot of the basic
     assumptions of the speed with which the other pieces of the
     puzzle, namely the interconnection order and access reform,
     would take place where -- how rapidly we would see
     competition unfold, has not met expectations.  That's, in
     large measure as the Chairman was pointing out, because
     everyone is operating under their own economic self-
     interests.  And perhaps some of those self-interests found
     their heart in court rather than in the marketplace.
                   But in the meantime, we are, in fact, moving
     ahead.  The concerns that were raised in why we moved so
     rapidly in the very beginning to try to resolve these
     extremely difficult issues, was because we recognized that
     as competition unfolds, the implicit subsidies that have
     been relied on for so many years to underwrite the cost of
     local service in high cost areas, were being competed away.
                   And that be the case, some of those implicit
     subsidies, either by state commission action to reduce them
     and make them explicit or by FCC action to reduce them and
     make them explicit, or by the effect of the marketplace,
     that the underpinning for universal service implicit
     subsidies might very well begin to deteriorate.  We have not
     seen that happen today, largely because the pace of
     competition has not been as rapid as we envisioned.  
                   The point that I want to make here is that the
     most important thing, perhaps, for everybody to understand
     as we enter into this discussion of high cost is that these
     subsidies are still -- continue to be in effect.  Consumers
     in high cost areas today are enjoying the very same benefits
     of subsidized service that they have in the past.  The Joint
     Board and the FCC have done nothing that would require local
     rates to increase.  
                   The existing systems of subsidies, of course,
     needs to be changed and to make it more competitively
     neutral, competitively sustainable.  But again, I want to
     underscore consumers in high cost areas are already
     protected.  So, the first rule that we ought to be thinking
     about is, do no harm.
                   The focus with our discussions on high cost fund
     primarily are engaged around the large local exchange
     carriers.  Once again, at least with respect to the
     decisions that have been made to date, the rural carriers
     are not implicated by these decisions in the sense that any
     efforts to extend the systems to the rural carriers would
     not take place for several years to come, and then, only if
     we are absolutely convinced that the effect of these changes
     will not unduly harm the rural carriers by virtue of
     assumptions that are being made that are inapplicable to
     small carriers.
                   So, these are some of the concerns that I want to
     put to rest and some of the fears that seem to be out there
     that somehow by the FCC's decisions in the past, that there
     is a likelihood that rates are going to go up dramatically
     in the rural areas.  That is not so.  I don't think there's
     anyone here that believes that that is our goal, nor is that
     the mission that has been undertaken today.
                   Another myth I want to put to rest is, folks have
     come to believe the FCC was trying to shed three quarters of
     its burden that we previously carried in our 2575 rulemaking
     that was in place at the time last May.  And the reason for
     the 2575 was a placeholder, because we hadn't completed all
     of our thought processes with respect to how to structure
     the high cost fund.  
                   We needed to have something in place, and what we
     thought by preserving what we have in place today, which is
     essentially 2575, that we were not going to be changing
     anything dramatically, but basically giving everyone an
     opportunity to then think about how we go from here to the
     next step.  And again, it was not our intention for anyone
     to think that we were trying to shed three quarters of our
     burden that we have undertaken in the past.  And again, this
     does not effect the rural carriers.
                   We do need to be sensitive to shifting more of the
     burden to the intrastate jurisdiction.  Some say we need
     four billion dollars.  Some say it's a 20 billion dollar
     fund.  But even four billion, would require a tax of well
     over five percent if it's collected solely on intrastate
     revenues.  And this is a very sensitive issue.  It's one
     that we need to think about.
                   So, as I sit and listen to the discussions today,
     I am going to be focusing on issues such as, what will
     provided downward pressure on prices?  What will keep a fund
     low?  What will encourage competition?  What will be fair to
     folks in the high cost states as well as those in the lower
     cost states and trying to work with colleagues so that we
     have a solution that works for both the high cost states and
     the low cost states because anything else is going to be
     mired in litigation, as is likely as it is that I finish
     this cup of coffee by the end of this hearing.
                   I am pleased that Chairman has mentioned that.  We
     are planning to refer some of these issues to the Joint
     Board.  I look forward to working very diligently with my
     colleagues on the Joint Board to come up with solutions that
     meet all of those criteria that I just established, and
     particularly, serve both the needs of the high cost as well
     as the low cost states.  And the sacrifices, gang, have only
     just begun.  So, with that, I want to thank the Chairman for
     convening this hearing.
                   CHAIRMAN KENNARD:  Thank you, Commissioner Ness. 
     And now for the Chairman Julia Johnson who was chairman of
     the -- really co-chair of the Joint Board.  Works with the
     state members in conjunction with Commissioner Ness as
     chairman.  Wonderful leader, Julia Johnson.
                   MS. JOHNSON:  Thank you, Mr. Chairman.  I wanted
     to thank you for convening the meeting and inviting the
     state members of the Joint Board to participate in this
     forum.  I think this is an excellent first step.
                   Your comments were right on point.  The issues are
     very, very complex.  Certainly as Commissioner Ness
     mentioned, no one's goal is to see local rates go up or to
     see high cost areas that are not adequately served.  And I
     think by working closely with the state regulators and
     consumer advocates, we will have a better opportunity to
     insure that we come up with policies that will, indeed, be
     fair and reasonable to all.
                   Our expertise, generally, is working with and
     understanding the local rate-making process and
     understanding how those mechanisms work.  That, coupled with
     the expertise from the Federal members of the universal
     service Joint Board, I think, will serve us all quite well
     in reaching resolution.
                   On March 11, when the state members requested
     referral of issues to the Joint Board -- universal service
     Joint Board, we weren't doing that to be contrary.  We were
     doing it to be contributors.  And I am pleased to hear that
     the referral request will indeed be considered,
     understanding that referral at this point in time, may mean
     that we may need to add more time to the process.  
                   I do understand that the Joint Board process is a
     formal process, but that allows for dialogue, contribution,
     reflection, some of the things that we may need to do, and
     that will, in fact, take additional time.  I think it's well
     worth the time.
                   Let me delineate the issues that we had requested
     be referred to the Joint Board as, perhaps, a starting point
     for our discussions when we begin to determine what, in
     fact, will be referred.
                   First issue, whether the FCC should take
     responsibility for funding only 25 percent of the high cost
     subsidy or high cost fund.  Now, Commissioner Ness did
     mention that that particular provision -- the 7525, was just
     a placeholder.  That is encouraging for us.  And I think one
     of our concerns was that, to the extent that it is a
     placeholder, as we begin developing policies, we'd like to
     be actively involved in the formulation of those particular
     policies.
                   Second, whether the FCC should apply Federal
     universal service funds to reduce interstate access charges. 
     That goes to the paragraph 381 and the access reform docket. 
     We'd like to have more dialogue with respect to that issue.
                   Third, a determination of the appropriate method
     of formulating and distributing high cost fund money to the
     states.  That, I know and I've read or heard several
     speeches from members of the FCC and from the states to say
     that that is an issue that certainly states are interested
     in.  Oftentimes, it's been a debate between states.  I think
     that we can provide some expertise, some knowledge, some
     sensitivity to that issue as it's being developed.
                   And finally, whether and to what extent the FCC
     should have a role in making intrastate support explicit. 
     And as part and parcel of any such examination, a referral
     of Section 254(k) issues concerning the recovery of joint
     and common costs.
                   Those are the issues that we, originally in our
     March 11 petition requested to have referred to the
     universal service Joint Board.  We are committed to
     examining those issues, working closely with our fellow
     joint board members to reach some resolution on those issues
     and/or any other issues that we believe and that the FCC
     believes should be referred to the Joint Board.
                   Again, we welcome and thank you for the
     opportunity to participate and all of the other
     commissioners who have had very open door policy, welcomed
     our comments and our suggestions.  I'd like to thank you all
     because even though we haven't been on this formal track,
     we've been able to have the kind of dialogue that has been
     useful to moving the states and the Federal forward.  Thank
     you.
                   CHAIRMAN KENNARD:  Thank you, Julia.  Next, we'll
     go to FCC Commissioner Harold Furchtgott-Roth.
                   COMMISSIONER FURCHTGOTT-ROTH:  Thank you, Mr.
     Chairman, and thank you for convening this panel today.  I
     think this is what Congress intended.  I think this is the
     central issue in universal service, coming up with a
     solution to the high cost fund.  And I don't think it can be
     done by the Federal Commission along.  And I think it's
     absolutely necessary that we have the participation, and at
     times, even the leadership of the states on this.
                   I am encouraged by the petition from the state
     members of the Joint Board to have these issues referred to
     them, not because they're easy issues, not because they're
     issues that have easy answers, but because the states, and
     perhaps, the states alone, have the experience and the
     knowledge to come up with solutions that will work.
                   And I am very pleased to hear that, in fact, some
     of these issues may be referred to the Joint Board.  And I
     think that, again, is what Congress intended.  The language
     of the statute in 254 that refers to the Joint Board, speaks
     to its creation, but does not speak to its dissolution.
                   I think only at that time that the issues related
     to high cost are resolved, can all of the other portions of
     universal service be adequately addressed.  I think it can
     be done.  I think it must be done.  And I think that this
     Commission working together with the states will see to it
     that Section 254 is fully and properly implemented.
                   We have before us today a great deal of wisdom,
     many, many panelists, each with different ideas.  I think it
     represents the difficulty of the problems that we all face. 
     Each of you today will give us suggestions that have merit. 
     And it will be up to us, working together with the states,
     to sort through these options to find one that will work. 
     This is a very difficult challenge.  
                   I will keep my remarks brief because mostly what I
     want to do is to hear from these panelists so I can learn
     and so all of us can learn about the different options that
     are before us.
                   Mr. Chairman, I do want to emphasize how grateful
     I am and how grateful I think the American people that you
     are holding this session today.  And we all look forward to
     learning from it.  Thank you.
                   CHAIRMAN KENNARD:  Thank you, Commissioner. 
     Commissioner Schoenfelder.
                   COMMISSIONER SCHOENFELDER:  Thank you, Mr.
     Chairman, and good morning everyone.  I am not going to be
     very long because I don't need to just be redundant, but I
     do need to thank the Chairman and the rest of the FCC
     Commissioners for having us here today and for giving us an
     opportunity to participate in what I consider one of the
     most important things that I've done since I've been a
     public utilities commissioner.
                   I think what we're going to do, in collaboration
     with the FCC, is extremely important.  And if it takes a
     little time, I think it might be time well worth waiting for
     the end results.
                   I just want to make a commitment now, refer to the
     Joint Board that the states will step up.  We will offer
     something of substance, and we will do our part.  And we
     will work together with the Commissioners.
                   I would like to go a little bit further with
     something that Chairman Kennard said, in the fact that, you
     can't -- today we're going to talk about universal service
     for non-rural companies.  But no company or no service in
     telephony can be used in isolation or in a box by itself. 
     And I noticed by some of your comments already that were
     profiled that what some of the proposals do have an impact
     on rural companies.  And so, everything we do has an impact
     on another part of the network.  And I think we're all very
     much aware of that.  And we're also aware of the public
     policy that we're going to develop here.
                   I think what we're going to do is important.  I
     agree with Commissioner Furchtgott-Roth in the fact that
     this is what Congress intended for us to do.  And I would
     just like to thank the FCC and everyone else for the
     opportunity to be here and for the opportunity to address
     some of these issues one more time.  Thank you.
                   CHAIRMAN KENNARD:  Thank you.  Thank you for being
     here.  Commissioner Powell.
                   COMMISSIONER POWELL:  Thank you, Mr. Chairman. 
     This is my first opportunity, formally, to sit down with the
     Joint Board, and I should say it's a pleasure, but it really
     is a supreme challenge.  
                   Congress has invested this community of people
     with one of the tallest orders I've ever seen.  We are
     somehow supposed to simultaneously insure affordable, just
     and reasonable rates for all the nation, including low
     income consumers, rural insular high cost areas.  
                   We're also supposed to provide new services for
     schools, libraries and rural healthcare providers.  We're
     supposed to do so in a manner that's specific and
     predictable and sufficient, using both Federal and state
     mechanisms.  And we're not only supposed to preserve
     universal service, we're supposed to advance it in some way. 
     And all the while, we're supposed to be doing this in the
     context of stimulating and promoting competition
     deregulation and innovation.  
                   So, I don't need to know if I need to be
     congratulated or get condolences for now joining this
     effort.  But I'm excited by the challenge.
                   Bill mentioned that it's important for people to
     speak truthfully about who will really be advantaged and
     disadvantaged.  But when you look at the list of tall orders
     that we're presented with, the truth to it is, everyone will
     have an advantage and a disadvantage by the outcome. 
     Anything this complex will mean that.  And to recognize
     that.  And to recognize that no one will get everything they
     want.  And everybody will be required to make important
     compromises that's going to be important.
                   I'd also like to say a word about sort of this
     controversy about 25 and 75.  I think it's really important
     to remember the key hallmarks of the statute.  And the first
     and foremost of those is sufficiency.  It doesn't matter
     what the mechanisms are, as long as they are sufficient to
     achieve the national objectives.  
                   And so, I challenge us to be creative.  Creative
     in thinking about what universal service is and remember
     what it's really intended to do.  It's hallmark's being,
     ubiquity and affordability.  We should be careful to sort of
     continue to be vested in legacy forms of doing business that
     are loaded in the concept of universal service, and instead,
     sort of sit back and remember what the ultimate objectives
     of a universal service program are.
                   In conclusion, let me just say that it's very
     critical we get this right more than anything else.  In my
     own opinion, universal service will be the linchpin for
     everything that was intended in the Act.  And no matter what
     amount of time it takes, it's first and foremost imperative
     that we, whatever we do, we'd get it right as much as
     possible for the first time.  I'm pleased to be here and
     look forward to the discussion.  Thank you.
                   CHAIRMAN KENNARD:  Thank you, Commissioner. 
     Martha Hogerty.
                   MS. HOGERTY:  Thank you, Mr. Chairman.  I don't
     want to be redundant either, but I think it's important to
     reiterate that the '96 Act envisioned competition in the
     local network.  And once the Bell companies opened their
     local network to competition, full competition in the long
     distance network.  Those participating in those debates
     promised more choices, lower rates.
                   Recognizing that pure competition may be
     inconsistent with our traditional notions of universal
     service, the Act codified the universal section, and the
     purpose was to maintain affordable basic services in high
     cost rural areas and to insure affordable service for low
     income consumers.  Rate increase for basic services were not
     envisioned, as a couple of the previous Commissioner have
     pointed out.  
                   I think it's very important to remember that the
     public interest must be interpreted as serving the consumer
     interest, the consumers of this country, not first and
     foremost, the industry.  The interests of the industry is
     merely incidental to that of the consumers.  The object is
     not to guarantee financial rewards for industry players, but
     rather to devise a system to maintain and protect affordable
     basic rates as competition develops.  The pace of the
     development of competition is key, and it should be focused
     upon.
                   The challenge for this Board is to insure that a
     reasonable universal service program is put in place that
     serves the nations consumers.  Thank you.
                   CHAIRMAN KENNARD:  Thank you.  Commissioner
     Tristani.
                   COMMISSIONER TRISTANI:  Thank you, Mr. Chairman,
     and good morning.  I, too, would like to welcome my friends
     and former colleagues from the state commissions, both those
     on the Joint Board and those participating in other ways.  I
     think that some of our colleagues may be listening to this
     via the phone or via the Internet, so I'll welcome all state
     commissioners.  I also want to thank the panelists for
     taking time to participate in today's hearing.
                   I first want to note that this hearing is an
     important step in working closely with state commissions. 
     In previous en banc proceedings, I often found myself seeing
     an issue differently after hearing it discussed and debated. 
     I think the dynamic of a live discussion, as opposed to a
     paper presentation, definitely can influence the policy
     process.
                   I would note my particular interest in a couple of
     issues that we will discuss today.  First, I am interested
     in hearing about the role of state commissions under each
     plan.  Some plans envision immediate increases in the
     Federal share of support without requiring additional action
     by states.  Other plans condition additional Federal funds
     on some sort of state commission action.  This is an
     important issue, and it goes to the question of Federal
     versus state responsibility.
                   I, personally, believe Section 254 is at the end
     of the day, a directive to the FCC to insure local telephone
     service remains affordable.  But there are people whose
     views I greatly respect who favor some sort of state action
     prior to any change in the Federal share of support.
                   I don't think anyone would say additional Federal
     support is appropriate only if states balance rates and some
     customers cancel local service.  I also think it is a small
     number of parties who say the FCC should fund 100 percent of
     the cost of insuring affordable local service.  In between
     those positions, I expect there are grounds for general
     agreement.  I am optimistic the FCC and the states can
     devise an approach that can be supported in principle by a
     large percentage of state and industry segments.
                   The other point I would like to hear more about
     today is meeting the January 1999 deadline.  There are at
     least two factors that may help us determine whether January
     1, 1999 is a drop dead date.  
                   First, I am interested in knowing how competition
     is effecting universal service.  Some have argued that
     competition has taken longer than anticipated so there is
     less pressure on local rates and thus, more time to develop
     a new universal mechanism.
                   Second, as a matter of process, I would be
     reluctant to move forward with a final decision if it
     appears that some additional work would produce a broader
     base of parties supporting the final result.  And Mr.
     Chairman, with that in mind, I would sure welcome referring
     maybe the issue or some of these issues to the Joint Board.
                   Finally, Mr. Chairman, I would like to commend the
     state and federal Joint Board staff for their tireless work. 
     They are the glue that allows the Joint Board Commissioners
     to work through incredibly complex problems in a productive
     fashion.
                   CHAIRMAN KENNARD:  Thank you, Commissioner. 
     Commissioner Baker.
                   COMMISSIONER BAKER:  Mr. Chairman and members of
     the Federal Commission, thank you for having us here today. 
     We appreciate the opportunity.
                   In his February 9 speak to NASUCA, Chairman
     Kennard listed what are, by now, the well known eight
     principles of universal service reform.  And I find them
     noteworthy, not for their complexity, but rather for their
     simplicity.  They exhibit what I would refer to as
     articulated intuition.  That is, stating clearly and
     succinctly truths that one reaches after a thorough review
     of the issues.  While the list may not be exhaustive, I
     think it does hit an awful lot of the bases.  
                   And while they do need to be viewed together, I do
     have, if you will, two favorites.  Item 5 referred to
     Federal universal support should be the minimum necessary to
     achieve statutory goals.  All things being equal, when it
     comes to a universal service fund, smaller is better.  This
     implies efficiency in funding contribution, methodology and
     distribution.  And hopefully, minimizes the distorting
     effect that such funds can have on otherwise efficient
     markets.
                   My other "favorite" is Item 6 which states the
     Federal and state universal support mechanisms should
     collect contributions in a competitively neutral manner. 
     Universal service funding need not be incompatible with the
     development of competition in local markets.  And such
     things as portability of support should see CLECs begin to
     serve customers, will be increasingly important issues.
                   Ideally, competition would drive down prices
     enough to offset increases that would otherwise occur as
     prices in many area move toward costs.  In those cases where
     costs are higher than current prices.  
                   However, local competition, particularly
     residential, is far less developed than was envisioned when
     the Telecom Act became law two and a half years ago.  Today,
     we barely see penetration in residential markets in urban
     areas.  And we see virtually no penetration for local
     competition in residential market in rural and other non-
     urban areas.  
                   It is therefore all the more important to insure
     that in designing universal service support, be that high
     cost funds, schools and library fund, addressing rural
     carriers or as is the case today, non-rural carriers, that
     we "do no harm" to emerging competition in markets which
     will hopefully address many of the same issues that are
     currently the topic of discussion in today's universal
     service fund, high cost fund reform discussion.  Thank you.
                   CHAIRMAN KENNARD:  Thank you.  And last but not
     least, Chairman Pat Wood III.
                   MR. WOOD:  Thanks for the invitation to be here. 
     We're always glad to get out of the smoke-covered region of
     northern Mexico that we call Texas and come up to nice fresh
     weather up here.  The air is just as hot, though, I think,
     up here.  And I've enjoyed watching you alls deliberations
     from afar and around the time.
                   We're going through the same deal in Texas, trying
     to do our intrastate fund.  We need to do one.  We need to
     do one badly.  We had the live hearing.  And Gloria, you're
     right.  I think there's no substitute for hearing it live
     from these folks, a number of whom came down or their
     circuits came down to Texas to make a lot of the same
     issues.
                   I think just to cut to the chase as to the non-
     rural fund issue, you all got most, if not all of it right
     the first time.  I think we need to bring this train on in
     to the station, and I certainly join forces with my
     colleagues on the Joint Board to help you all get that done. 
     It should be done.  
                   I think this will be an interim fund.  The first
     fund should be set up.  The structure is the most important
     thing to do the first time.  The numbers are not.  It
     needn't be perfect.  I think anything above a B minus is a
     passing grade that everybody ought to be proud of.  
                   Generation one of this fund will be a defensive
     fund which will address the parts of the non-rural carriers
     rate structures that truly are support for their high cost
     rural operations within the company.  And these parts that
     are most subject to being competed away, particularly in
     urban areas as competition comes into the market.
                   The offensive fund is generation two.  And that's
     where we really address the proper quantification of the
     voucher, the shopping credit or whatever we want to call it
     that goes to the CLECs that go out there to the rural areas
     to compete.  So, I think the sequence is more important to
     address.  These eroding implicit structures are going to be
     assaulted before the need for the explicit voucher or waiver
     or subsidy is taken up in the rural areas.  
                   So, I think we've got time to work on the model
     and get the numbers perfect.  But the structure's important,
     I think, for the competitors to get into the business to
     know how it's going to play out.  So, the biggest favor, I
     think we can collectively do for the industry in furthering
     competition is to say, "This is how it's going to look.  The
     numbers will get crisper and better later on."
                   The cost models are the only way to go.  It's like
     democracy.  It's the worse form except for everything else. 
     And everything else is called historic book embedded.  If
     any of these folks out in the audience or their companies
     have gone through a probing, thorough rate review at the
     state level in the last 12 to 24 months, I would encourage
     you to use their embedded costs, otherwise the costs model
     is probably going to look better than a thoroughly rate
     reviewed embedded cost rate review would look.  So, I would
     encourage those parties to pick their poison.
                   The important issue and it's the one today, is the
     distribution of the dollars -- the Federal dollars portion
     among the high cost areas of the country.  And I think that
     is -- that's an issue that we don't have to deal with at
     this state.  I mean, we're really trying to deal with the
     same issues that we don't have other states to deal with. 
     We've just got company.  
                   So, it is a unique issue, and I'm glad to be able
     to sit here with you all and try to puzzle through.  I'm
     pretty open-minded as to the proposals that a number of the
     parties have put out here.  I think there are a lot of
     creative approaches that can get there.  I will indicate a
     predisposition towards those that do allow states, unlike my
     own, the ability to get more money if they can't make it
     work because of their relatively small intrastate taxable
     base.  
                   So, things that are -- mechanisms that allow for
     that kind of flexibility at the Federal Commission fund
     level, I think are ones that are -- ones I certainly will be
     interested in looking and learning more about from these
     folks here.  Let's get on with it.
                   CHAIRMAN KENNARD:  Thank you.  Okay.  We will get
     down to it then.  
                   I will remind the panelists of two things.  One is
     please introduce yourself so that -- we won't introduce you
     here from the panel.  And also, please keep your
     presentations to three to five minutes.  But first, we will
     start with the -- an impartial overview of this issue from
     our own Jim Schlichting, who is Deputy Chief of the Common
     Carrier Bureau.  
                   MR. SCHLICHTING:  Thank you.  Good morning. 
     During the remainder of the day, you will hear and discuss
     possible changes in the Commission's plan adopted last year
     to provide free universal service support in rural, insular
     and high cost areas under Section 254 of the Communications
     Act.
                   I will give you a brief overview of the high cost
     universal service.  Section 254 of the Communications Act
     directed the Commission to reform the existing system of the
     universal service support for high cost areas to make such
     support compatible with the emergence of competitive local
     telecommunication markets.  
                   Pursuant to that directive, the Commission, in an
     order issued last May, acted on the universal service Joint
     Board's recommendation for implementing Federal universal
     service support for rural, insular and high cost areas. 
     Full implementation of that plan for high cost areas certify
     larger telephone companies is currently scheduled to occur
     on January 1, 1999.
                   As background, high cost universal service support
     is currently achieved through a system of both implicit and
     explicit subsidies.  In addition to the explicit subsidies
     such as the Federal high cost loop fund, Federal DEM
     weighting and universal service funds in certain states,
     there exists implicit subsidies in the form of
     geographically averaged rated, access charges higher than
     economic costs and a variety of other increased prices in
     both the interstate and intrastate jurisdictions.
                   In its universal service order last May, based on
     the Joint Board's recommended decision, the Commission
     decided to determine the total need for high cost support
     for a local service provider in a particular area, replacing
     both the explicit and implicit subsidies existing today in a
     two-step process.  
                   The order defined high cost support requirements
     as the difference between one, before looking at costs
     reasonably incurred to provide quality service in a
     particular high cost area, and two, an amount computed on a
     nationwide basis representing the revenues the service
     provider should expect to receive directly from serving an
     end-user.  Those revenues include, not only local service
     revenues, but also revenues from access, full service and
     various discretionary services.
                   Based on the Joint Board's recommendation, the
     Commissioner determined that costs should be forward looking
     costs, the costs of constructing the network to provide the
     supported services using current technology at today's
     prices.  The Commission reasoned that use of forward looking
     costs would result in high cost support amounts that neither
     unfairly benefit nor unreasonably harm incompetent local
     telephone companies or their new competitors in providing
     supported services.  It should also insure that the local
     service provider will have the incentives to invest in
     current technologies in high cost areas.
                   With regard to the relative roles of the Federal
     and state jurisdictions in implementing high cost universal
     service support, the Commission largely preserved the
     existing division of responsibility between the FCC and the
     states for providing support.  Noting that state commissions
     regulate the intrastate rates that reflect implicit
     intrastate universal service support, the Commission decided
     not to attempt to identify the amount of implicit support
     existing in intrastate rates or to convert such implicit
     intrastate support into explicit Federal universal service
     support.
                   Instead, the Commission determined that,
     consistent with the provisions of the Act, states should in
     the first instance, be responsible for identifying implicit
     intrastate subsidies and making that support explicit.  In
     essence, the Commission found that the initial
     responsibility for implementing new high-cost support under
     the Act would be split among the jurisdictions.  The FCC
     would make explicit, the implicit support existing in
     interstate rates, while the states would undertake the same
     tasks on the intrastate side.
                   Looking to the traditional separation of cost of
     supported network facilities between Federal and state
     jurisdictions, the Commission that 25 percent of the new
     high cost need was the FCC's responsibility, while 75
     percent of that need was initially was within the state
     purview representing existing intrastate implicit and
     explicit subsidies.  This is what Commissioner Ness referred
     to earlier today as the placeholder pending further
     discussions.  
                   Because under the new system, high cost need was
     no longer based on the embedded cost of loop plan, but on
     the difference between forward looking costs and expected
     revenues, the universal service order eliminated the special
     separations rule underlying the old universal service
     approach.  This left the allocation of embedded cost between
     the jurisdictions to the general purpose separations rules. 
     For effected incumbent local telephone companies that change
     would transfer a little more than $200 million in embedded
     costs to the intrastate jurisdiction with full
     implementation of the plan.
                   In line with its determination that Federal
     universal service support in the first instance would make
     explicit the implicit support existing in interstate rates
     and to prevent double recovery by local telephone companies,
     the Commission also decided in paragraph 381 in the
     companion access reform order, that the amount received by
     incumbent local telephone companies in interstate high cost
     universal service support would be used to reduce interstate
     access charges.
                   Recently, the Commission issued a report to
     Congress on universal service.  In that, the Commission
     decided to revisit the 25 percent Federal allocation
     responding to concerns expressed by various parties that the
     25 percent Federal allocation would not be enough to permit
     sufficient support for universal service, and might provide
     less than current interstate high cost support in some
     areas.  
                   In its report, the Commission concluded that a
     strict across-the-board rule that provides 25 percent of
     unseparated high cost support to areas served by large local
     telephone companies, might provide some states with less
     total interstate high cost support than currently provided. 
     It said that no state should receive less interstate high
     support than it currently receives.
                   The Commission also found that a state may require
     greater assistance than it currently receives from
     intrastate support to maintain affordable rates.  As one
     example, the Commission said that where a state proposed to
     reform its own universal service mechanisms and collect much
     of what is currently implicit intrastate universal service
     report as is possible and consistent with maintaining
     affordable rates.  Additional Federal universal service
     support should be provided where the state mechanisms in
     combination with baseline Federal support is not sufficient
     to maintain rates at affordable levels.
                   It also said it would consider in its
     reconsideration proceeding any other circumstances under
     which additional Federal support would be appropriate.
                   That, Mr. Chairman, is sort of the background of
     what the Commission has said with regard to high cost
     universal service support.  You, in this hearing, along with
     the other Commissioners will begin the next chapter.  Thank
     you.
                   CHAIRMAN KENNARD:  Thank you, Jim.  We'll begin
     now with our first panelist. Mr. Tom Reiman from Ameritech.
                   MR. REIMAN:  Good morning.  My name is Tom Reiman. 
     I'm senior vice president of public policy at Ameritech. 
     With me this morning is Dick Kolb, director of universal
     service in Ameritech and our subject matter expert.
                   Though I'm mindful of the thousands of pages of
     incredibly complex comments, plans, studies and formulas
     that have been filed with this Commission on the subject of
     universal service and the high cost fund, and I'll try not
     to add to the complexity.
                   Ameritech's message is quite simple this morning. 
     Stay the course with a smaller fund, continuing the pressure
     on the states to carry their share of the burden.  Contrary
     to much of the rhetoric flowing around Washington on this
     topic, the Commission's original proposal of 25 percent/75
     percent jurisdictional split funded by interstate revenues
     is the best plan currently before the Commission.  It
     maintains the current Federal level of responsibility while
     allowing the states to come forward with their own
     innovative approaches for their share of the total solution.
                   You know, 14 years ago as associate general
     counsel of the newly created Ameritech, I spent months here
     in Washington negotiating, debating and arguing with Burt
     Halprin, then Chief of the Common Carrier Bureau, on what
     the first Federal access charges should be like.  And guess
     what?  The issues weren't much different than they are
     today, making implicit subsidies explicit, recovering
     subsidies in a competitively neutral manner, minimizing rate
     increases to end users, and keeping telephone service
     affordable and universally available.
                   Underlying the debate then as now, were four basic
     tenants.  Subsidies and free market competition are natural
     enemies.  Subsidies should be collected in a competitively
     neutral manner.  End user customer rate increases are
     politically unpopular.  And it's the public policy of this
     nation to keep telephone service affordable.
                   Now, how does this history and these figures apply
     to universal service and the high cost fund, in particular? 
     Well, let me answer it this way.  If we were starting with a
     clean sheet of paper, we would not design the system we have
     today, that this Commission and the state commissions are
     trying so hard to make work.  
                   I submit that this Commission would create a plan
     designed to deliver a set of desired results.  Affordable
     local service.  And by the way, our studies show that
     affordable toll rates are interval to high subscribership
     levels.  Robust competition in all markets, increased
     infrastructure investment leading to new and innovative
     services.  Competitive and investment are driven by
     economically rational pricing.  Simply stated, local rates
     must at least cover their costs.
                   Now, once local rates are set to cover costs, than
     affordable service is maintained by targeting subsidies only
     to customers who can't afford to pay the full rate.  
                   We would not design a system that subsidizes 60 to
     70 percent of the cost of telephone service of an American
     officer's Beaver Creek, Colorado condominium.  We would not
     design a system that subsidizes rates that have been kept
     far below any rational definition of reasonableness like
     five dollars a month where the statewide average is closer
     to $12 a month.
                   However, we don't have a clean sheet of paper.  We
     have a huge and complex system in place.  But this
     Commission and the state commission should keep these
     desired results firmly in mind, and all decisions should
     drive the system closer to, not further away from the
     desired results.
                   Using this model, it's clear I submit, that this
     Commission is on the right track, staying with its current
     proposal, based on a 25/75 percent jurisdictional split,
     funded on the basis of interstate revenues.  Not only is
     this consistent with historical separations formula, but
     more importantly, it keeps in place the incentive for states
     to fix their part of the problem, which is setting
     economically rationale local rates.  
                   Expanding the Federal fund to cover more of the
     subsidies is a move in the wrong direction.  It sends the
     wrong direction.  It does not move closer to the desired
     results.
                   As Chairman Kennard said, and I quote, "The vast
     bulk of universal service support today is generated and
     spent within the boundaries of each state.  This means the
     real key to subsidy reform is state rather than Federal
     action."
                   Now, Ameritech has worked in lowering its costs. 
     And some of our state commissions are national leaders in
     moving toward economically rational local rates.  As a
     result, Ameritech is the only RBOC that receives no high
     cost support today.  Don't punish our customer for our
     leadership position by asking them to substantially increase
     the amount of subsidy they send out of state.  
                   Let's not move backward.  Challenge the industry
     and policy makers in the states to fix local prices so that
     residential competition can flourish.  Then, build on that
     base to refine the system so that subsidies only go to those
     who truly can't afford pay cost-based rates.  
                   This is what's happening around the world, in
     other nations in Europe, Canada, Mexico, New Zealand and the
     Philippines among others, tackle this issue.  Let's not fall
     behind.
                   To quote from the ad from the current movie
     Godzilla, size does matter.  Only with subsidies, I submit,
     smaller is better.  Thank you.
                   CHAIRMAN KENNARD:  Thank you.  Mr. Irvin?
                   MR. IRVIN:  Thank you, Mr. Chairman and members of
     the Committee.  My name is Jim Irvin.  I'm chairman of the
     Arizona Corporation Commission.  I've got a ton -- as a good
     politician, I've got a ton of paperwork here, which you've
     all got in front of you, so I'll try to paraphrase so we can
     get through and stay within the time limits.  
                   First of all, I will not be here for this
     afternoon's panel due to my schedule.  I have a early flight
     out.  I do have with me an attorney from our legal division,
     Ms. Maureen Scott, who can certainly answer any of the
     panel's questions they may have with regard to our thoughts
     and ideas this afternoon.
                   I also want to thank the panel and all the people
     from the FCC, as well as the members of the panel, who have
     taken their time to look at this issue on how the difficult
     task before them.
                   What I do want to point out something about our
     proposal is, it is a lot different than what you're saying
     today from the other people up here.  Our proposal is
     something that is an alternative, and it's not a
     comprehensive universal service fund plan.
                   We want to look at our issue as it does deal with
     the distribution allocation of the Federal universal service
     funds.  However, it is something that an alternative and a
     partial alternative deal with a very sensitive problem that
     we have in Arizona.
                   And I have taken every opportunity that I can to
     make people aware of this opportunity.  And that is, the
     idea to provide telecommunication services to all Americans,
     not just those who happened to have the infrastructure
     brought to them.  So, please when you look at this, look at
     this as an alternative and some other ideas in order to help
     develop our infrastructure and system that we have.
                   The overlooking theme that I would like this
     Committee to remember is that we have 50 different states
     and/or regions here in the United States.  And this is not a
     one glove fits all approach.  Each state must be noted.  And
     you'll note that in my various exhibits that I have attached
     with my testimony -- I'll go through those.  
                   Our Exhibit A shows the geographical regions and
     the demographics that face the State of Arizona and why this
     is a rising problem or problem of great concern, not only
     amongst myself as a Chairman, but amongst my fellow
     Commissioners there on the Commission, Commissioners
     Jennings and Kanasek.
                   Our proposal that we're looking at is an idea
     that's going to address an area that has not yet been looked
     at.  And that is to address the area of the unserved and
     underserved people throughout the State of Arizona.  And we
     know there are people throughout this country that have
     that.  And those our customers -- those are Americans who
     cannot get telephone service because they cannot afford to
     pay the charges associated with having the facilities or the
     plants extended to their homes.  We cannot ignore this
     problem any longer as state and Federal regulators.  We must
     be able to address this problem head on.
                   My remarks today will be broken down to basically
     three parts.  First of all, identifying the problem of the
     unserved and underserved, why the problem exists, and some
     thoughts and ideas we can do to address it.
                   What I mean in defining the unserved areas and
     underserved areas, first, the underserved customers are
     those customers I'm referring to without telephone service
     who are located outside the exchange boundaries of an
     incumbent local carrier exchange.  And when I refer to
     underserved areas, I'm talking about citizens and consumers
     who are not able to get telephone service within the
     exchange boundaries of an incumbent exchange carrier.
                   But the one underlying program that both of these
     customers have is, they cannot afford to pay for line
     extensions or construction charges associated with extending
     facilities to their homes.
                   A lot of the data that we have received have been
     presented to through Citizens Utility.  They operate three
     companies in the northern part of our state.  They operate
     the White Mountain telephone service area.  They service the
     Navajo Communications and Citizens Rural Telephone Company.
                   Exhibit B of our program or my comments, contain a
     random sampling of line extension estimates that were given
     by Navajo Communications to consumers in its area.  And it
     ranged from a cost of $83,160 to a low of $18,480, with an
     average charge to citizens in that area of $44,700 for these
     people to obtain services just to put a phone in their
     areas.
                   Exhibit C of my testimony shows the actual letters
     to the consumers provided by citizens, which provide a
     relevant back-up and data and the estimates provides.  In
     Exhibit D of the information provided, you'll note that the
     White Mountain Telephone list various underserved areas
     within its area -- within its exchanged areas.  And it gives
     a number of dwellings, the square miles involved and the
     request for services reached.
                   And if you will note in Exhibit D -- if you care
     to go on the bottom of page 2 in Exhibit D, it indicates
     that in this area of the White Mountains, there are 691
     known customers in this area of which 288 of these people
     have requested service.  And of that 288, only 74 have been
     able to obtain line extensions required.  And that's because
     of the cost we have here, which really boils down to of
     those people, only 11 percent are able to get telephone
     services.
                   You'll also note that Exhibit D will show that the
     average cost in this area of the White Mountains ranges for
     line extensions from $14,412 to a low of $314.  Exhibit E of
     our testimony or my testimony here that we filed with you,
     will show the numerous complaints received by the
     telecommunications industry.
                   Am I running out of time, Mr. Chairman?
                   CHAIRMAN KENNARD:  If you could just sum up, I'd
     appreciate it.
                   MR. IRVIN:  Okay.  I will try to sum up in that,
     this program in moving to it, and we've got a lot of
     exhibits there, but what we're really asking for is to
     consider this program as an alternative and look at it and
     possibly block grants as a way of meeting line extension and
     meeting this, because it's an area that is not met by
     existing programs such as your lifeline programs, your hook-
     up programs and such like that.  They talk about monthly
     recurring revenues.  Our problem is talking in trying to
     meet the needs of the people that do not get the telephone
     services.
                   And Mr. Chairman, I think if you'll note as
     principle number 8 that you outlined in your February 9
     statements, that the was one of the principles, sir, that
     you underlined, that our program is trying to meet those
     needs that we have for the people.  And we would ask the
     Board to seriously consider this because this is a problem.
                   While it may not be a problem in Ameritech
     regions, it is certainly a problem in the midwest, the west,
     and I would suspect many parts of the Appalachian mountain
     regions.  And we need to get these folks with telephones and
     get the service so they at least have the opportunity to
     make the calls necessary.
                   Thank you, Mr. Chairman.
                   CHAIRMAN KENNARD:  That's very helpful.  Thank
     you.  Mr. Cooper?
                   MR. COOPER:  Thank you, Mr. Chairman.  My name is
     Mark Cooper.  I'm director of research at the Consumer
     Federation of America.  
                   I always like to start by pointing out that I had
     the pleasure of filing comments in the original Michigan
     petition, which was a universal service docket opened up
     immediately after the break-up of the national telephone
     monopoly.  And since then, I've testified about 50 times at
     the federal and state level.  
                   In fact, on universal service, I've testified a
     dozen times just since the passage of the Act in states from
     Washington to Hawaii to Texas to New Jersey.  And my message
     to you today is going to be simply the same message I will
     deliver tomorrow in North Carolina in a universal service
     docket.
                   First, you do not need to hurry the creation of
     the large universal service fund for the large LEC's,
     because competition has not made it necessary.  We don't
     have much competition.  It would be the cruelest of ironies
     to increase rate payers bills to support universal service
     in the name of competition when competition is not strong
     enough to put the downward pressure on prices that was the
     primary purpose of the Act.  You have the time you need to
     work these issues out.
                   Second of all, when you find you need a fund,
     analyze the net worth in a sensible manner.  And here I
     agree with the comments of the spokesman from Ameritech,
     although I don't think the road leads to the same place. 
     But I think you started down the right road.  Adopt
     forwarding looking efficient costs for pricing.  Stop
     building in all these historical inefficiencies that have
     crept into these models as time has gone forward.
                   Second, the FCC has declared time and again that
     the loop is a shared cost, and revenues from all the
     services that use the loop must be included in the
     calculation in universal service support.  There should be
     no free rides by any service on the loop, which all services
     use.
                   Third, the FCC has recognized that the universal
     service area should be the same as the unbundled network
     element area because that is where we will create
     competition, and that is where we will create the need for
     universal service.
                   Follow those three policies and you will have a
     manageable, sensible fund that will be easy to raise, and it
     will provide support to the areas that are truly high cost
     where they don't generate sufficient revenues to cover their
     costs.
                   Third, when you find you need to raise those
     funds, raise them the way the Act said, in contributions
     from telecommunication service providers.  Absolutely clear
     in the Act, it is the providers who use the network to sell
     services to create profits and value who are supposed to
     make the contributions to universal service.
                   The FCC started down that path in its original
     decisions on this.  It should stick to those paths.  And you
     have been fighting a very tough fight with them about how
     those monies should be raised.  You are to be commended for
     sticking to that fundamental principle.
                   Finally, if you want to put a line item on
     consumers bills, and they have become terribly popular these
     days.  A dollar for schools and libraries.  A dollar for
     local number portability.  A dollar for the pixie.  A $1.50
     for the second line for residential.  By the time we're
     done, those dollars at the bottom of the bill start to mount
     up.  And we have begun, as you know, to raise that concern
     very strongly.
                   If you think you need a line item on my bill for
     universal service, than you ought to back it out of the
     Federal subscriber line charge.  The Federal subscriber line
     charge is a core service defined to be supported by the
     universal service fund.  That would be consistent with the
     Act, and that position has been put forward by a number of
     consumer advocates.
                   You can make room for universal service funds
     without raising my bill by treating it as an offset to that
     subscriber line charge.  When the Telecommunications Act was
     passed, consumers were promised prices that would go down,
     choices from competitors and the universal service fund that
     could be created without raising our bills.  
                   Stay the course on the fundamental decisions you
     have made, and we may, in fact, get to that outcome.  Thank
     you, Mr. Chairman.
                   CHAIRMAN KENNARD:  Thank you, Mr. Cooper.  Ms.
     Baldwin?
                   MS. BALDWIN:  Thank you, Mr. Chairman.  I am Susan
     Baldwin, senior vice president of Economics and Technology,
     Inc.  ETI's a consulting firm specializing in
     telecommunications economics, regulation, management and
     public policy.
                   I was a principle author of the paper, Defining
     the Universal Service Affordability Requirement that forms
     the basis for Time-Warner Communications proposal to the FCC
     for consideration of community income as a factor in
     universal service support. 
                   ETI's analysis of the relationship between income
     and high cost support was an outgrowth of our detailed
     analyses of the various cost proxy models that were first
     presented to the Commission in 1996.  
                   One thing that struck us was the fact that the
     models that purported to target support on the basis of high
     cost, also directed support to many well to do communities
     where customers clearly could afford to pay for the entire
     cost of their local telephone service without any subsidy
     whatsoever.  Further research demonstrated that this was not
     an isolated condition.  It was a nationwide pattern.
                   ETI's analysis demonstrated that a decision not to
     fund support to high income CBG's would result in a
     significant reduction in the overall size of the interstate
     high cost fund.  
                   The Telecommunications Act of 1996 explicitly
     requires that affordability be included as a consideration
     in the development of a comprehensive universal support
     mechanism.  Quality services should be available at just,
     reasonable and affordable rates.
                   The extent to which services affordable to an
     individual customer inextricably linked to that consumer's
     income level and ability to pay.  And in fact, the Joint
     Board, in its recommended decision, and the Commission, in
     its report and order, have acknowledged that income level
     directly effects the determination of what is an affordable
     price.
                   The Commission has also agreed that community
     income, as represented by the percentage of students
     eligible for school lunches is a valid basis for
     establishing the variable discounts necessary to make
     telecommunications affordable to schools and libraries.
                   The universal service goal is not advanced by
     subsidizing consumers who can afford to pay the entire cost
     of their telephone service and whose decision to take
     services unaffected by the presence of such a subsidy. 
     Indeed, some of the specific attributes of exclusive high
     income communities, large lots, low population density,
     remoteness from primary population centers are the very same
     conditions that tend to raise the cost of providing local
     telephone service.  
                   Ironically, many low income areas, such as densely
     populated, inner-city communities are, because of such
     attributes, also low cost areas, and could well be forced to
     subsidize the high rent, high cost to serve suburbs.
                   Policies that would flow universal service support
     to high income communities serve only to impose significant
     costs and economic burdens upon other segments of the
     company, while doing nothing to advance the cause of
     universal service or produce any other offsetting economic
     or social benefit.  
                   Among other things, a funding obligation that is
     larger than one that is minimally necessary to achieve the
     universal service goal will undermine other Commission and
     Congressional objectives, perhaps, even including universal
     service itself by forcing new entrants to make larger than
     necessary payments to the universal service funding
     mechanism, such policies will increase the costs of and
     barriers to, competitive entry, and thereby diminish the
     prospects for effective competition overall.
                   They will also work to suppress demand for price
     elastic services, thereby limiting the potential benefits
     that all sectors of the economy can derive from increased
     access to and use of the nation's telecommunications
     resources.
                   The ETI study and Time-Warner's proposals are not
     offered as providing definitive or prescriptive guidance as
     to how structure an income-based funding mechanism.  Rather,
     it is offered to demonstrate that many high cost communities
     are also high communities.  That public data is available
     from the Census Bureau to support the administration of a
     community income-based funding mechanism.  And that there is
     an opportunity to achieve a significant decrease in the
     overall size of the universal service support fund fully
     consistent with the statutory requirement that service be
     affordable without any consequential impact upon the overall
     universal service goal.
                   The structure of community income-based funding
     mechanism should be built upon three specific policy
     initiatives.  First, the FCC and the states should conclude
     that the highest income, high cost areas are to be excluded
     from universal service support.  For example, if all CBG's
     with median -- time is up.  Shall I wrap this up?
                   CHAIRMAN KENNARD:  Please.
                   MS. BALDWIN:  If all CBG's with median income
     levels in the top 30 percent of their state were placed in
     this category, the funding requirement could be reduced
     significantly by as much as 20 to 30 percent.  Second, there
     should be a safety net for low income consumers residing
     within high income, high cost areas who cannot afford to pay
     full cost based rates.  And third, to avoid rate check,
     transition plans should be established that would allow
     carriers to move rates in high cost, high income carriers to
     their full forwarding looking costs.
                   If it's done correctly, and it can be done
     correctly, the result will be a win-win for all.  Thank you
     very much for the opportunity to present these comments
     today.
                   CHAIRMAN KENNARD:  Thank you, Ms. Baldwin.  Mr.
     Weller?
                   MR. WELLER:  Good morning, Mr. Chairman.  My name
     is Dennis Weller.  I'm chief economist at GTE.  
                   I've take the liberty of preparing a chart, which
     is in your materials, to help you follow the money.  It
     shows, basically, an overview of where the money is coming
     from and where it's going to within GTE-serving areas in 28
     states today.
                   The chart shows contribution by major service
     category.  And basically, what this is showing you is that
     you have very large contributions from interstate access and
     from other state rates, which makes it possible to fund a
     very large negative contribution from residents local
     service.
                   For comparison, I've provided another set of rates
     on the chart which shows what rate these category
     contributions would like if rates were re-balanced on the
     basis of a constant percentage mark-up over the direct cost
     of each service.  The difference between the two bars gives
     you a measure of the intervention, basically, that's been
     performed by regulation, and also, where the money is
     flowing in and out of each one of these service categories
     today.
                   Now, there are several observations I think we can
     make based on this chart.  First, debates about large or
     small fund sizes, I think, are moot.  We already have a
     large fund.  It's on the chart.  It's in our rates.
                   Second, only a very small portion of this funding
     today is implicit.  The very small black foot that you see
     on the left most set of bars, is the explicit support that
     GTE gets from the high cost fund today.
                   And third, if we use the consistent methodology
     with respect to both rates and costs, we should be able to
     look at either end of this chart and get a consistent
     answer.  In other words, we should be able to add up what
     local is receiving in support or add up what the other
     services are providing in excess contribution and get a
     consistent answer.
                   In other words, this is a price system that has to
     add up.  The only way to avoid that is to ignore part of the
     chart -- some of the bars, or to assume a completely
     different cost level.
                   Now, why can't we keep on doing this?  What's
     wrong with this picture?  Well, the first thing is we can
     forget about local competition if we keep doing this.  I
     mean, look at this contribution for residents local here. 
     Who wants to enter this market?  Nobody does.  And the
     support that comes from the other services implicitly can't
     be made portable for someone who tries to serve one of these
     customers.  Particularly, if they are low usage customers,
     which the majority of them are because the distribution of
     usage is highly skewed.  So, that's point number one.
                   You're right, Commissioner Ness, though.  The
     customers are protected.  But they're also protected against
     competition if we don't do something about this.
                   And the second thing, as the Chairman noted, is
     the competition will, ultimately, erode the sources of
     implicit support.  So, what should we do about this?  Well,
     first, I recommend that the Commission should establish a
     program that's based on three objectives.
                   The first is, that the fund should be sufficient
     to replace the implicit support that's coming from
     interstate access today.  That's the left-most bar.  It's
     unreasonable to expect that any state action will address
     that part of the problem.  My calculations show that that's
     about $6.3 billion at current levels.
                   Second, the fund should provide a reasonable
     amount of support for states with high cost and/or very low
     funding basis.  This, obviously, has to be balanced with the
     interest of other states.
                   And third, as several people have mentioned, the
     fund should do no harm.  That is, it should provide at least
     as much support.  It should, essentially, replace the
     support that comes from current explicit fund.
                   How would I recommend that we go about that?  I
     propose that the Commission follow the same basic benchmark
     methodology that it's already adopted, but use an array of
     benchmarks, which I refer to as a sliding scale.  Several
     benchmarks -- you need several benchmarks to hit the several
     policy targets that you have.  I don't think that you can do
     it with just one.  With increasing percentages of support
     above each benchmark, I've provided examples and
     illustrations of this in our comments and in the package in
     front of you.  I won't go into details here.
                   The point is that there's no benchmark that's
     perfect a priori.  A good benchmark is a benchmark that
     gives a good answer.  That's why I've held up in front of
     you objectives to hit.  And the exercise I have in mind is
     that you adjust the benchmarks until you hit the target.  If
     the benchmarks don't hit the target, you go back and adjust
     the benchmarks.  Obviously, to do this properly, you have to
     decide on the cost model of the inputs first, otherwise you
     have no idea of what effect the cost models and the inputs
     will have.
                   Finally, the cost models are necessary, as
     Commissioner Wood noted, but they're also unreliable.  And
     that's why it's important to have externally measurable
     goals that you can judge the reasonableness of the outcome
     against.  If the outcome isn't reasonable, than the model
     isn't reasonable.
                   Now, how would all this be funded?  I propose --
     well, first let me stop and say, this is a good way of
     getting the initial level of support in January.  But after
     that, I think that a process of competitive bidding would
     provide a way of correcting these amounts if they are wrong
     and also adjusting them over time.
                   Finally, I recommend that this program be funded
     by a uniform percentage surcharge on both state and
     interstate rates.  I estimate that it would take about a
     three percent surcharge to do that.  Rather than have wildly
     inconsistent tax rates on different people -- some people
     paying several hundred percent today through the rates on
     this chart, I think it's more fair, more competitively
     neutral and more efficient to have everyone pay three
     percent.
                   And finally, if we do that, for the first time,
     carriers will be able to come into local markets and serve
     these customers and find them a reasonable proposition,
     which they cannot do today.  Thank you, Mr. Chairman.
                   CHAIRMAN KENNARD:  Thank you, Mr. Weller.  Before
     we move on, I wanted to introduce and acknowledge one person
     who's here today.  I'm not sure how long she's going to be
     here, so I wanted to recognize her briefly.  And that is
     Kathy Brown is going to be joining us next week as Chief of
     the Common Carrier Bureau.  She will be leaving her job as
     associate administrator at the National Telecommunications
     and Information Administration. 
                   And Kathy has already rejected some advice that I
     gave her.  I advised her to take some time off between jobs,
     but Kathy decided that she would rather be here with us. 
     So, I think that's some measure of her commitment to the
     challenge that she's taking on.  Kathy will be playing,
     obviously, a major role in grappling the issues that we're
     discussing today.  So, we're delighted that you're here. 
     Thank you.
                   Mr. Bush?
                   MR. BUSH:  Thank you, Mr. Chairman.  Good morning. 
     My name is Ernest Bush.  I'm Assistant Vice president of
     Federal Regulatory for Bell-South Telecommunications.  On
     behalf of Bell-South, I would like to thank you for the
     opportunity to appear before you today to share my company's
     views on the critical issues of high cost support in
     universal service.
                   As we all know, it's a critical issue and a
     complicated one, but one that is literally vital to the
     constituents we all serve, the American public.
                   In the Telecommunications Act of 1996, Congress
     incorporated language laying out the requirements of the
     universal service program.  Clearly, Congress was concerned
     about preserving the availability of high quality
     telecommunications services in all regions of the country. 
     Obviously, any universal service plan adopted by the Federal
     Commission or the state commissions must address this
     concern.
                   However, a more subtle point grows out of the
     impact universal service support has -- universal service
     support and funding obligations has on the development of
     competition within the local exchange marketplace. 
                   It should be no surprise that my company is
     concerned about the existence and level of implicit
     subsidies built into our access and business rates.  And we
     are also concerned and believe others are as well, about the
     impact that subsidized rates have on the development of a
     competitive residential marketplace, especially for
     consumers located in rural and high cost areas.
                   It must be obvious, and indeed, Dennis just talked
     about it, that new entrants will find it difficult to
     compete with incumbents who, as a matter of social policy,
     are required to price their residential exchange service
     product offering below the cost of providing it.  Any high
     cost universal service plan, then, must not stand in the way
     of the development of balanced competition.  A fund too
     large is inefficient.  However, a fund too small will
     frustrate balanced competition development.
                   We believe that the Act, as well as sound public
     policy requires that this implicit subsidy be made explicit. 
     That is, be clearly identified, be shared among service
     providers in a competitively neutral fashion, and be made
     available to competing eligible carriers.  Failure to do so
     will, among other things, lead to the erosion of widespread
     availability of comparable telecommunication services, as
     well as frustrate the development of a competitive
     marketplace.
                   Dealing with this implicit subsidy will, in the
     final analysis, fall to the state public service
     commissions.  However, as we all recognize, there is a
     substantial role for the FCC to play in providing support
     targeted at reducing the overall subsidy problem.  
                   Clearly, Federal access charges implicitly support
     the cost of local exchange service.  Indeed, the
     Commission's separations process allocates local loop cost
     of the interstate jurisdiction for recovery by the -- via
     the subscriber line charge, pixies and the carrier common
     line charge.  This relationship between common line recovery
     and the support of universal service has been recognized by
     the Commission since its inception of its access charge
     structure.
                   Bell-South's proposal leverages off a statement
     the Chairman made in the FCC's report to Congress on
     universal service.  The Chairman argued that the state and
     the Commission should act to preserve existing sources of
     both implicit and explicit support.  We agree.
                   Our proposed plan, laid out more fully in the
     record, suggests the creation of a Federal high cost support
     fund for non-rural companies made up of two pieces.  The
     first piece converts existing explicit support plus the
     implicit support embodied in pixies and CCL, into explicit
     support targeted at the higher cost wire centers.  
                   The second piece, which we refer to as the safety
     net, provides new support for the very high cost wire
     centers.  Both funds operate to relieve state cost burdens. 
     Taken together, these two new mechanisms can be implemented
     on a revenue neutral basis.  Pixies and CCL charges replaced
     by the explicit fund can be reduced or eliminated, allowing
     reductions in toll rates.  
                   Safety net support will reduce the need for
     insupportably large state universal service funds and thus
     allow more reasonable sharing of universal service
     obligations in all jurisdictions.
                   Finally, we suggest that the burden of the new
     Federal fund be shared among all telecommunication providers
     operating in the interstate marketplace, via an allocation
     on one of them, based on each carrier's pro rata share of
     total retail revenues.
                   I thank you for your time, and I look forward to
     your questions.
                   CHAIRMAN KENNARD:  Thank you, Mr. Bush.  Mr.
     Bluhm?
                   MR. BLUHM:  Thank you, Mr. Chairman, members of
     the Commission and members of the Joint Board.  I'm Peter
     Bluhm, Policy Director for the Vermont Public Service Board. 
     With me today is Joel Shiffman from the main Public
     Utilities Commission who was the other lead staffperson who
     was the author of the ad hoc plan.  Mr. Shiffman will be
     available after the break to answer your questions.
                   I will focus in my remarks this morning on two key
     tests of the successful universal service plan.  The
     universal service plan must be sufficient, and it must be
     efficient.  Sufficiency means that the system must be --
     must allow affordable local telephone rates to be available
     to subscribers everywhere in the country.  Rates do not have
     to be equal between downtown Los Angles and rural Vermont,
     but they must be reasonably comparable.  
                   Efficiency is also necessary.  Financial resources
     are limited and regulators cannot federalize all high cost
     support objectives, including all implicit subsidies that
     today exist in state rate structures.  It is neither
     economically desirable, nor politically possible to raise 10
     or 15 billion dollars through a surcharge on interstate
     services.  
                   Universal service at the Federal level must make
     do with a smaller budget.  And it should limit its
     objectives to supporting the areas that are most closely
     connected with the objectives of the Act.
                   The current system fails to meet these standards. 
     First, because it is insufficient.  It does even pretend to
     support all rural and high cost areas equally.  It
     discriminates against rural areas that are served by large
     companies.  
                   Vermont is, by one definition, the most rural
     state in the country, and yet, we have a major carrier who
     serves 85 percent of our customers.  Customers who live in
     this area receive substantially less support today for high
     cost loops in switching than do customers in other equally
     rural areas.  Furthermore, the current program totally
     ignores the high interoffice trunking costs in many rural
     states.
                   The current system also fails to comply with the
     Act because, by basing support in part on the size of the
     incumbent, the current system is incompatible with
     competition.  Competition requires that subsidies be made
     explicit and portable.  A support system that links the
     amount of support available in an area to the identity or
     size of the incumbent clearly would destroy any effort to
     achieve meaningful affordability.
                   The Commission's order of May 1997 establishing
     the 25/75 split, likewise fails to test its sufficiency. 
     The text of the rule itself actually moves away from
     sufficient by, in effect, repealing high cost support for
     the state jurisdiction.  Even if current support levels were
     maintained to the state jurisdiction, however, the 25/75
     plan remains insufficient.  Indeed, even if the Commission
     were to apply the full 25 percent support entirely to the
     state jurisdiction, the result still would not be sufficient
     to insure that customers everywhere in the country have
     reasonably comparable rates.
                   Simply put, some states have low cost urban areas
     from which they can draw support.  Other states have only
     small or in one case, no real urban areas, and very limited
     ability to finance high costs.  For these states, average
     costs are so high that it is impossible for them to obtain
     comparable rates no matter what they do.
                   In states with many high cost customers and few
     low cost customers, the surcharges needed to achieve
     comparable rates would be so large that when they're added
     to existing rates, the result would no longer be comparable. 
     These high average cost states face a Hobson's choice.  They
     can either impose very high end user surcharges, thus
     destroying comparability, or they can impose very high
     interexchange carrier access charges, thus impeding
     competition and economic development.
                   A universal service support system can be both
     sufficient and efficient.  The Commission should set up an
     overall framework for support.  But that framework can
     anticipate that the states will fill some of the pieces.
                   While the Act does not require any state to enact
     a high cost support program, the Commission can
     appropriately make some assumptions about state effort.  The
     only alternative is raising 8 to 10 billion dollars,
     something that is politically unacceptable to the Congress,
     and frankly, something that is not necessary.
                   A sufficient fund of more modest size, however,
     requires regulators to be selective about how Federal
     support will be distributed.  If support is given to areas
     that can raise that support another way, such as in low cost
     areas that are today inside state borders, there will not be
     enough funds left over to finance affordable and comparable
     rates in other states.
                   The ad hoc plan, which I worked on, limits Federal
     support to the amount by which a state's costs exceeds the
     national average.  The plan assumes that if a state has
     average costs that are at or below the national average, the
     state can support its own high cost areas from within its
     own borders by surcharging its own low cost areas. 
                   This decision is appropriate since much of the
     anticipated support is implicit today in rates that are set
     by state commissions.  There is no immediate need to replace
     these in-state transfers with Federal support.
                   The ad hoc proposal also uses both forward looking
     and embedded costs in calculating support.  This feature has
     been controversial, but it serves important purposes --
                   CHAIRMAN KENNARD:  Mr. Bluhm, I am going to have
     to ask you to sum up.
                   MR. BLUHM:  Thank you, Mr. Chairman.  In summary,
     Mr. Chairman, I appreciate the chance to be here today, and
     I think you'll find the ad hoc plan provides a sound
     framework to meet the requirements of the Act.  Thank you.
                   CHAIRMAN KENNARD:  Thank you very much.  Mr.
     Wendling?
                   MR. WENDLING:  Yes, thank you, Mr. Chairman,
     members of the Commission and state members of the Joint
     Board.  My name is Warren Wendling.  I'm on the staff of the
     Colorado Public Utilities Commission.
                   I'm going to jump right into a couple of specifics
     of the type of plans that my colleague from Vermont, Mr.
     Bluhm, was talking about.  What happens when a state has
     relatively high cost and a fairly small revenue pot upon
     which to develop an intrastate fund?
                   The two proposals I want to outline in some just
     overview, are called the variable benchmark and the variable
     support method.  
                   The variable benchmark is exactly that.  It's a
     building upon the four step process that the Commission had
     previously adopted using a forward looking economic cost,
     but then to adjust the benchmark based upon a state's
     ability to internally generate funds to meet its share of
     the requirement for high cost fund.  For example, a state
     that has relatively low cost and lots of intrastate revenue
     might have a Federal benchmark set at $75, while another
     state with more high costs and less revenue -- intrastate
     revenues, might have a lower benchmark, say, of $40.
                   What kind of things would differentiate between
     these two states?  Well, the factor might recognize any
     number of different things.  It could be the ratio of
     revenues -- intrastate revenues -- the total revenues.  The
     ratio of intrastate traffic volumes if you're concerned
     about the prices that might be set.  It could look at the
     ratio of the variability of costs among the states.  Is
     there a high very cost area and a very low cost area, or it
     is uniform?
                   The factor might recognize the degree of number of
     lines located in urban or rural areas.  It could be the
     ability of the state to keep local rates low or within a
     reasonable range, or it could even incorporate a measure of
     local competition.  
                   The factor could be a combination of those
     factors.  It doesn't have to be any one of those, but any
     one of those or in combination with several could produce
     the result of a reasonable size fund that still could be
     supported within states that have very high costs and low
     revenues.
                   I have not provided any specifics about dollars of
     what this would be or how exactly it would work.  I think
     several of the commentators have mentioned one of the first
     steps we need to have is a Commission-adopted model with a
     set of inputs that then could be tested.  I think it was the
     Laska comments that said, "Be sure and test what you propose
     carefully before we adopt it."  And I think that's advice
     well given.
                   Another option that builds upon that, instead of
     varying the benchmark, if somehow the benchmark has with it,
     the baggage that that is an affordable benchmark.  One could
     adopt a single benchmark and than just look specifically, to
     varying the support by state.  Adopt a uniform nationwide 31
     residential/51 business benchmark, but vary the percent from
     25 percent interstate upward to address those issues of the
     state's ability to generate a support internally.
                   And again, the same kind of factors are the ones
     that we would have to look at, like the traffic revenue, the
     ratio of high cost lines to low cost lines, et cetera.  
                   So, I'll be brief, and I think that has come in
     under my time.  
                   CHAIRMAN KENNARD:  Thank you.  And we appreciate
     that.  Mr. Brown?
                   MR. BROWN:  Good morning, Mr. Chairman,
     Commissioners and Joint Board members.  My name is Glenn
     Brown.  I'm Executive Director of Public Policy for U.S.
     West.  And I'm here today to describe the interstate high
     cost affordability plan or IHCAP as we call it.
                   This plan was developed in an effort to find a
     workable, middle ground solution to an urgent problem.  And
     that is how to fund continuation of affordable service in
     high cost rural areas of the "non-rural" LEC's.  
                   And this is a problem not just in the western
     United States that we serve.  It's a problem in many
     southern states.  It's a problem in the New England area. 
     It's a problem in the Appalachian areas.
                   Let me give you an example using U.S. West
     figures.  In the 14 states that we serve, we serve over half
     a million customers who cost, in excess of $50 per month. 
     And that's not using our cost studies.  That's using the
     common inputs that the FCC staff developed.  And of that
     total, over 200,000 cost in excess of $100 per month to
     serve.  
                   Now, several times today, there's been discussion
     about, how important is January of 1999?  We think it's very
     important for this reason.  I've heard people say that the
     competition that people expected with the Act has not
     materialized.  But I think there, we're applying maybe the
     right data to the wrong problem, because the competition has
     not materialized for residential and small business
     customers, which for the most part, are priced near or below
     cost. 
                   But when you look at the large business customers,
     where a majority of the implicit support is derived, there's
     vibrant competition going on right now.  And our very
     serious concern is that that competition is draining out of
     the bucket as we speak.  And the customers that are going to
     feel the impact of that first, are these very highest of
     cost customers.  That's why we developed the IHCAP plan.
                   We had four objectives in mind when we developed
     it.  Number one, it must be simple and understandable.  Two,
     it must leave states with the primary role for rate
     rebalancing and assuring affordable service to all their
     citizens.  Three, it must address the needs of states that
     face a problem because of a lot of high cost customers and
     no large urban areas with low cost customers to spread them
     over.  And it must do so with minimum additions to the
     Federal fund.  And finally, it must be capable of
     implementation by January 1 of 1999.
                   The working of the IHCAP plan are shown on Chart 1
     in the material that I provided.  As you'll see, for costs
     as derived by a proxy model under $30 per month, there would
     be no Federal support or no Federal explicit support. 
     Between $30 and $50, we keep the same 25/75 in the original
     plan.  And then, over $50 per month, the costs would be
     funded from the Federal fund.
                   Now, if you look at Chart 2 that I've provided,
     I've shown, using as a representative cross-section the
     states represented by the Joint Board Commissioners, the
     impact of the two plans, the 25/75, the solid line that you
     see on that chart is the impact stated as a surcharge on
     intrastate rates of covering 75 percent of that state's high
     cost need.  Again, using the staff's common inputs.
                   The cross-hatched or red line shows what happens
     when you take the over $50 customer out of the mix.  And I
     find with this sample, but I also find when I look
     nationally, that somehow when we take the over $50 customer
     out of the mix, we bring each state in with a roughly
     similar problem to solve.  And again, I do believe that the
     fundamental solutions have to occur at the state level.
                   I agree with Commissioner Wood that we're probably
     not going to solve the whole universal service in one fell
     swoop.  However, the problems of the very high cost rural
     customers served by non-rural LEC's are real.  They require
     attention soon.  The January 1, 1999 date must be met.  I
     agree with others that have showed that there will be
     additional implicit support interstate access, and that'll
     have to be carefully managed as move forward.
                   Thank you.  We think the IHCAP plan is a
     reasonable first start.  And I look forward to your
     questions later.
                   CHAIRMAN KENNARD:  Thank you, Mr. Brown.  Mr.
     Lubin?
                   MR. LUBIN:  Thank you.  My name is Joel Lubin,
     Regulatory Vice President Public Policy of AT&T.  Thank you
     for giving an opportunity speak before you do on the
     proposals to revise the methodology for determining high
     cost support.
                   AT&T supports the Commission's proposed four step
     methodology for determining high cost funds.  However, the
     Commission should revise the timing and implementation of
     that methodology.
                   First and foremost, the Commission should withhold
     payment of any high cost support targeted for major, non-
     rural LEC's regardless of the methodology employed to
     determine the support.  Today, the major LEC's under 10
     companies are representing approximately 90 percent of the
     lines.  
                   If I look at the small rural telephone companies
     which represent over 1,300 companies in this country, they
     represent approximately 5 percent of the lines.  Of those
     five percent of the lines that their truly rural companies
     represent, 55 percent of those lines are in areas that have
     a 100 lines per square mile or less.  That is a phenomenal
     statistic such that clearly there needs to be a solution to
     the small rural companies that represent 1,300 companies in
     this country.
                   However, the notion of giving distributions to the
     major LEC's from an explicit fund, one that ultimately is
     supported by revenues from their competitors is untenable. 
     These local companies are giant corporations earning record
     profits.  They certainly have the wherewithal to deal with
     the high cost needs.  
                   As AT&T has demonstrated in its May 15 comments,
     in the vast majority of cases, the major LEC's current local
     revenues compensate them fully for all of their universal
     service costs.  For 62 of the major non-rural LEC's, 71
     study areas end user local service revenues, including the
     interstate subscriber line charge fee, exceed the forward
     looking costs of service.  And indeed, exceed it by well
     over $20 billion in aggregate.
                   In the nine study areas where such revenues fall
     short of forward looking costs, and even here the shortfall
     is approximately $200 million in aggregate, these LEC's have
     additional sources of support including intrastate toll,
     wireless revenues, Yellow Pages.  And this is before they
     turn to access charges for even one penny of support.  Any
     support explicit further support payments to these LEC's
     should be canceled until they can show that such payments
     are necessary.
                   I'd like to emphasize that our proposal of
     withholding payments of major non-rural LEC's should apply
     under the current support methodology, as well.  Today,
     there's approximately $110 million of the current $1.7
     billion explicit Federal funds is paid to the major local
     company.  
                   This amount was determined by a joint Federal
     state agreement that was developed in a monopoly
     environment.  It is counter to the competitive landscape
     explicitly anticipated by the Telecommunications Act. 
     Equally as distressing is the fact that major LEC's do not
     need this money to support universal service, is the use by
     which it has been used to undermine the competitor purposes
     of the Act and frustrate the development of local
     competition.  Therefore, these payments should be
     discontinued.
                   AT&T does not oppose payment of high cost support
     for non-major local companies.  However, the Commission
     should not adopt a methodology that would increase
     needlessly the size of the fund.  Yet, the Commission's
     proposed methodology, if it determines the high cost funding
     requirements at the wire center level or below, would do
     just that.  
                   To insure that ratepayers are not burdened with
     funding support payments beyond what is needed to insure
     universal service, the Commission should, instead, calculate
     the support at the study area level.  As the Commission,
     itself, recognized in the universal service order, universal
     support should not be calculated at a greater level of
     geographic disaggregation than unbundled network elements. 
     Most states have not disaggragated unbundled network rate
     elements for the loop below the study area level.  And those
     that have, have disaggragated them into only three or four
     rate zones.  There's probably over 20 or 25 states that have
     only one unbundled loop rate.
                   In addition, even this slight disaggregation
     remains more of a theoretical curiosity rather than
     providing real competitive opportunity because of excessive
     glue charges and non-functional operating support system,
     and neither anti-competitive conditions even in the few
     states that have disaggragated union rates, there has been
     no ability for new entrants to compete.  Therefore, the
     Commission should continue to calculate support at the study
     area level in all states as it does under the current
     system.
                   Finally, because of the underlying predicate for
     establishment of universal service system, local competition
     has thus far been stymied.  It is not necessary to implement
     the new high cost support system January 1991.  
                   Section 254(a)(2) of the Act expressly authorizes
     the Commission to establish a timetable for implementation
     of the new universal service system.  That is consistent
     with the standards and purposes of the Act.  But there has
     been no entry into the local exchange access market
     sufficient to put competitive pressure on those existing
     sources of universal service.
                   Therefore, the Commission can and should lawfully
     postpone implementation of the redesigned system until such
     competition arrives.
                   Thank you very much.
                   CHAIRMAN KENNARD:  Thank you, Mr. Lubin.  Mr.
     Sichter?
                   MR. SICHTER:  Yes, thank you.  I'm Jim Sichter,
     Vice President of Regulatory Policy for the Sprint local
     telecom division.
                   I want to start out with a few general
     observations to put Sprint's proposal into some context.  To
     begin with, I think we need to start with the reality of
     today.  And the reality of today is that the universal
     service funding that exists, both implicitly, and more
     implicitly, as well as explicitly, is indeed huge.  The
     Telecom Act requires that these implicit subsidies be made
     explicit and recovered in a competitively neutral manner. 
     Indeed, Sprint believes that the development of an explicit,
     competitively neutral universal service fund is a
     prerequisite to vibrant facility-based local competition.
                   We also need to recognize that the only way to
     reduce the size of the universal service funding that exists
     today is to rate rebalancing.  And we are certainly in
     agreement with others on this panel that have pointed out
     that the level of local rates today is way below the
     affordable levels.  And that we need to have rate
     rebalancing considered as a part of the solution to the
     universal service problem.
                   Finally, we do not need to create new revenues to
     address universal service funding.  The revenues exist
     today, and simply need to be more efficiently targeted to
     accomplish the goals of the universal service.  
                   Given that background, Sprint's proposal is,
     first, that the universal service funding be based on
     forward looking economic costs, that we have a national that
     universal service funding be assessed on state and
     interstate revenues, that all services, all providers, all
     customers pay on an equitable basis.  Thirdly, that the
     benchmark for determining universal service should be set at
     the maximum affordable rate levels.  Again, we need to
     target subsidies to those who truly need it to keep them on
     the network and not to maintain low subsidized local rates
     that are not necessarily to accomplish universal service
     goals.
                   Support must be made portable and equitably
     available to CLEC's as well as ILEC's.  The plan must be
     revenued neutral at its inception.  Again, any universal
     service funding that an ILE gets above and beyond today's
     levels, must be offset dollar for dollar with reductions in
     implicit subsidies.  
                   And finally, universal service funding must be
     recovered through a uniform surcharge on end user bills.
                   Thank you.
                   CHAIRMAN KENNARD:  Thank you very much.  We'll now
     take a short break.  Let's reconvene here at 20 minutes to
     12.  And we'll then go to some questioning of the panelists. 
     Thank you.
                   (Whereupon, a short recess was taken.)
                   CHAIRMAN KENNARD:  Okay.  I'd like to bring us
     back to order, please, so that we can stay within striking
     distance of being on schedule today.
                   We're now going to go into the Q and A phase of
     our panel this morning.  And I'd like to do this somewhat
     freeform, sort of like an oral argument where Commissioners
     here -- and you will get some rebuttal time, I assure you. 
     So, that Commissioners can jump with questions as the spirit
     moves them.
                   And I think in these discussions, it's always
     useful if we can get a little bit of debate going among the
     panelists.  Obviously, you all have differing points of
     view.  You've all done a lot of thinking about your issues. 
     And I think it would be most helpful to us if we could get a
     little point/counterpoint going.  And I'd like to start that
     off by asking a couple of questions of Mr. Lubin and Mr.
     Brown.  
                   Mr. Lubin, you have advocated for some time now
     that the FCC should reduce the rate of interstate access
     charges.  And often times, your proposals are met with
     opposition from the local exchange carriers represented here
     by Mr. Brown, who have argued that if we are to reduce
     interstate access charges, than we would somehow threaten
     universal service.  
                   So, I would like to ask each of you to comment on
     that.  And I'd like, particularly to know, how much of the
     universal service subsidy is today embedded in access
     charges?  And what is the break off point?  And if we were
     to start a process of reducing access charges, how would we
     reconcile that with the obligation to provide universal
     service?
                   Mr. Lubin, would you like to start off?
                   MR. LUBIN:  Sure.  Thank you for the question. 
     Very complicated question, and it finally comes down to what
     you believe is the cost standard, in my view, for universal
     service.  That's one critical question.
                   The other critical question is, who are we
     addressing?  Are we addressing the major local companies who
     represent about 90 percent of the lines, or the truly rural
     companies who represent five to seven percent of the lines?
                   And so, my remarks are going to address the 90
     percent issue in terms of the major local exchange companies
     because I truly believe the small rural areas, as I said in
     my comments, that roughly 55 percent of their lines are in
     densities that have a hundred lines per square mile.  That
     is a very, very high cost area and creates a unique problem.
                   But for the 90 percent of the lines, the question
     is, what cross-standard do you use?  The Commission came out
     and said forward looking.  And now, there's a critical
     question is selection of a cost proxy tool and the inputs in
     the level of disaggregation.  And if you select a study area
     level of disaggregation for the large carriers, what you'll
     find, at least with the inputs that we've looked at, would
     say that the local revenues including the interstate
     subscriber line charges at a study area level for the large
     major local companies, the revenues are well in excess of
     forward looking costs.
                   Therefore, from my point of view the interstate
     access fees -- again, if you pick the model, you pick the
     inputs and you pick a study area level of aggregation
     consistent with how roughly 20 to 25 percent of the states
     don't have disaggregation of the unbundled loop, meaning it
     is already at a study area level, what I, therefore,
     conclude, with this interstate aside, because I've included
     in that analysis.  But the carrier to carrier access for the
     major LEC's is not implicit subsidy.
                   So, from our point of view, given the logic I just
     laid out, I would say to you, you can -- if you define
     universal service at the level of disaggregation that I just
     described, I would say to you that carrier to carrier access
     fees at the major LEC level, does not include implicit
     subsidies for local service. 
                   And therefore, from my point of view, if you did
     the kind of things I just said, you can set up a rulemaking
     tomorrow to aggressively take access costs down with the
     logic that I just laid out.
                   CHAIRMAN KENNARD:  Thank you, Mr. Lubin.  Mr.
     Brown?
                   MR. BROWN:  Well, it might not surprise you that
     I'm going to disagree with Joel.  
                   CHAIRMAN KENNARD:  That's why I asked both of you.
                   MR. BROWN:  I think it's a fairly simple problem. 
     For generations, decades at least, we have been subsidizing
     local service with long distance services.  At divestiture,
     that subsidy got rolled into access charges.  At the access
     reform decision a year ago, the Commission set a target to
     reduce access to forward looking costs and estimated that
     was a reduction of $18.5 billion dollars.  
                   Now, if you run the map, that $18.5 billion
     dollars is roughly $10 per residential line per month of
     support.  Let me come at it from a different angle.  If you
     take the same study I used to build the chart you have in
     the package using the staff common inputs, the average cost
     per residential line is $26 per month.  And I don't know
     what the average residential rate is, but you know, 15 to 18
     seems ballpark to me.  So, there's -- you know, we've got
     that $10 per month that, you know, over time, through the
     separations process, very deliberately at Ozark and
     Chattanooga and all the other places where the separations
     evolved, it was put in there.  
                   Now, what we've got to do is move it out.  And as
     I mentioned, you know, Commissioner Wood has suggested a
     phased approach.  I think at some point, you know, we have
     to do one of two things.  Either remove it and replace it
     with explicit support, or you know, maybe it's okay for
     access charges to have a higher margin.
                   For example, in talking to the people that are
     running the Media One competitive venture in Atlanta, they
     tell me that one of the single most important drivers in
     building a facility-based network, is to be able to bypass
     Bell-South's access charges.  So, don't take them down
     because that's going to take away our incentives.
                   So, we don't have to pull it out.  But as I
     mentioned in my comments, I think we have to take a reasoned
     approach to managing it as we go forward.
                   CHAIRMAN KENNARD:  Well, certainly, you mentioned
     that access charges are subsidizing local rates.  Certainly,
     some of that subsidy is coming from intrastate subsidies,
     business to residential and vertical services, intrastate
     toll.  How do we get a handle on the percentage of subsidy
     from interstate access versus the intrastate portion of the
     subsidy?
                   MR. BROWN:  Okay.  On the loop plan, that's
     allocate 75 percent to the state, 25 to the Federal
     jurisdiction.  So, I think, you know there was some
     intuitive logic in the 25/75 split.  The problem comes for
     some states -- and I should mention that some states can
     solve that 75 percent problem very well themselves.  But in
     other states, I think panelists said where you've got large
     numbers of high cost customers and no major urban area that
     gives you lots of low cost customers to spread it over.
                   Take, for example, North Dakota.  We've got 21
     cents a minute intrastate toll rate.  We've got 7.6 cents
     per minute access rate on each end.  We've got business
     rates at three times residents rates.  That's where the
     support is coming from.  That's where the vulnerability is
     because a lot of those are bought by business customers.
                   So, if you were to pile that on the North Dakota
     customer, that's where you get the spike like I was showing. 
     South Dakota is in a similar situation.  They've got similar
     demographics.  And the states that don't have this large
     mass of low cost customers to spread the cost over, that we
     need some more help from the  Federal jurisdiction.
                   CHAIRMAN KENNARD:  Okay.  Mr. Weller, did you want
     to get in here?
                   MR. WELLER:  Mr. Chairman, if I could just add
     something.  I think I mentioned earlier that like most
     economic problems, this one has constraints.  The numbers in
     this chart have to add up and make sense relative to one
     another.  
                   The only way out of that fix is to assume a
     different cost level.  And that's basically what Mr. Lubin's
     done.  For example, we've done a study of our serving area
     in Texas.  If we were to take UNE rates at the levels
     predicted by the HAI model that Mr. Lubin was using to make
     his statements about profitability of local service, and if
     GTE were to sell its entire current output at those UNE
     rates, our revenue would fall by about 57 percent compared
     to where it is now.  
                   So, that means -- Mr. Lubin's statement may be
     correct if you're willing to assume that the overall level
     of costs in the industry will somehow magically fall by half
     or two-thirds as a result of the FCC adopting an order.  I'm
     not sure that that's a reasonable assumption.
                   Let me also note that if we do a study on
     individual customer segments by the amount that they
     purchased from us, and if we now assume, say, a CLEC coming
     into that same serving area in Texas, and buying UNE's at
     the interim rates that have been approved by the Texas
     Commission, 78 percent of the residents customers that we
     serve today would not cover their costs, even if we include
     all the revenues from all the services that those customers
     buy, and if we use those UNE cost rates which are
     substantially below our current costs as the CLEC's cost
     level.
                   CHAIRMAN KENNARD:  I'd like to give Mr. Lubin an
     opportunity to respond, and than we'll move to one of my
     other colleagues here.  Mr. Lubin?
                   MR. LUBIN:  Thank you, Chairman.  Dennis is
     absolutely right in terms of a key component of what I said. 
     And that is, in Glenn's statement, he used a number of $26
     for the cost of local service.  Dennis refers to you need
     some kind of something to check to.  And I presume that's
     kind of embedded costs.  
                   And what I have said is not predicated on embedded
     costs.  Absolutely, unequivocally correct.  It is based on
     an estimate of forward looking costs of local service.  And
     when you do that, lo and behold, you don't get this huge,
     huge dilemma for the major LEC's.  
                   And that's why, in my humble opinion, what the
     condition did May of 1997 when it had an access reform order
     that talked about a market-based strategy, it basically had
     a potential solution to the dilemma that said, "Make local
     exchange competition work.  Create the unbundled network
     elements.  Go through and do everything and make the
     operating systems support a reality."  
                   You create universal service using forward
     looking.  And you don't have to have a zero sum, as Dennis
     would talk about, which would create a huge, huge fund.  But
     you create the soft-landing approach that says, "Hey.  Allow
     competition to enter, and then if there is a drain, it will
     occur, theoretically, slowly."
                   And by the way, they'll be in other businesses
     because they would have presumably met the checklist.  The
     problem and the dilemma is, it isn't working.  That doesn't
     mean you should walk away and use embedded costs.  I would
     urge you still to continue to use forward looking.  
                   But now, you come into the square dilemma that I
     posed.  And that is if you do use forward looking, which is
     what I urge you to do to create a USF, what do you do in
     terms of access, because my assertion is you can take access
     down immediately.  And then the issue is, okay, are you
     going to take $6 billion?  That's Dennis's number earlier,
     or $10 billion out of the system immediately.  
                   And I think we need to debate that, because when
     people say to me, "Hey.  Competition and the business is
     there," and we're draining their profits and their revenues,
     I don't see it.  I see interstate rates of return that each
     year have been going up in a significant amount.  Even last
     year when there was a July 1997 $1.5 billion taken out
     because of the higher productivity factor reinitialized to
     '96, $1.5 billion taken out of the system.  
                   What I see in April of 1998 showing that 1997 rate
     of return is a rate of return that was approximately, six,
     seven, eight percent higher than it was last year.  And for
     some companies, it was probably 10 to 15 percent higher
     hitting 20 and 22 percent.  
                   And so, from my point of view, which is the point
     earlier that says, "You know, can take some steps."  And I
     think the step is decide the tool, decide the inputs, decide
     the level of aggregation, make that decision, but you don't
     have to implement it immediately because this competition
     isn't working the way in which it was envisioned.  Thank
     you.
                   CHAIRMAN KENNARD:  Thank you, Mr. Lubin.  I want
     to go back to one of my opening themes which was follow the
     money, because, obviously, somebody has to pay for these
     subsidies.  And that somebody is the American consumer.  So,
     we have an obligation to make sure that that subsidy is used
     in the most efficient way possible.
                   I've proffered some principles on universal
     service, which really, fundamentally, are about that. 
     Making sure that the subsidy is used in the most efficient
     manner.  That we're not overfunding universal service.
                   Now, Mr. Lubin has proffered a way of doing that,
     a forward looking cost methodology.  I'd like to know if any
     of the other of view have an alternative way of funding
     universal service that is not using a forward looking cost
     methodology, that still satisfies the principle of insuring
     that these subsidies are used in the most efficient manner
     possible.
                   Mr. Bush?
                   MR. BUSH:  Let me -- Mr. Chairman, let me try. 
     First off, our particular proposal from the state
     perspective, involves the use of a forward looking model. 
     We propose the utilization of a forward looking model
     compared to the actual price that the consumer pays for the
     universal service service set, as sizing the total universal
     service fund.  And it's a large fund.  And indeed, as Dennis
     has indicated before, we have a large fund today.  I mean,
     it's embedded in our implicit rates.
                   The issue for the -- that we believe for the
     Commission to deal with is how to size the interstate
     component, the amount of support that the interstate
     jurisdiction will provide.  Our argument there is to take as
     a starting point the combined CCL, pixie and the existing
     explicit support that is currently in the system, translate
     that into a support mechanism that than flows to the states. 
     The states can than flow that to the truly high cost wire
     centers, providing a specific portable interstate component
     to offset the state burden.
                   CHAIRMAN KENNARD:  Mr. Shiffman?
                   MR. SHIFFMAN:  Thank you.  The lynch pin of the ad
     hoc approach is its ability to net high and low cost areas
     within any given state or study area.  And to that extent,
     it does not Federalize or require additional Federal funding
     for those areas where the state has the ability throughout
     their internal rate structure to provide service at
     affordable comparable rates to high cost areas.  
                   And in some ways, our approach is similar to the
     Bell-South approach.  That they made the comment that most
     of the universal service support in the country is not
     explicit, but it's implicit within the internal rate
     structures of any given company.
                   What we're proposing to do is keep that support
     within the intrastate rate structures of any given company. 
     And on the state level, have states make that support which
     is now implicit, explicit but competitively neutral, but
     only to provide the Federal support where the state, when it
     balances its own high and low cost areas, comes wanting and
     needs funds from outside the state jurisdiction to meet the
     comparability test meant by the Act.
                   CHAIRMAN KENNARD:  Let me just follow up briefly
     on that comment.  I'm familiar with your proposal, and I
     think it has a lot to commend it.  But I'm also familiar
     with your efforts to try to get more state support for it. 
     And I understand that it has not been embraced by a number
     of states.  Can you give us a sense of sort of what the
     dynamic is, how that breaks out?  Why some states are
     supportive and others are not?  And again, follow the money. 
     Who pays?  Who's advantaged, and who's disadvantaged?
                   MR. SHIFFMAN:  Let me just actually follow the
     money.  And I guess I can look at the U.S. West plan versus
     the ad hoc plan.
                   The ad hoc plan benefits those states with
     uniformly above average costs, but which are not -- don't
     have costs that are heavily skewed.  And by heavily skewed,
     I mean there are states like California which have some very
     high cost areas in the Sierras, but moderately very low cost
     in the urban areas.  There are states like Colorado who have
     very high costs in the Rocky Mountains and in eastern
     Colorado, but relatively low cost in Denver.
                   Those states would make out very well under the
     U.S. West approach of a high benchmark, because they have
     some very high cost areas.  They're above the benchmark.  
                   There are other states in the Appalachians and
     primarily in the Appalachians and other areas of the
     northeast, some in the midwest, who do not have very high
     skewed costs, but they have relatively high costs
     everywhere, but not in the astronomical level.  Maybe they
     have costs in the $49 levels, but they don't have any costs
     that are very low in the $10 level.  And they don't have any
     costs in the $100 level.
                   Those states will not get sufficient support under
     the U.S. West approach unless the benchmark is sufficiently
     low as to have a very high fund.  So, if you look at who is
     supportive of the various plans, those states which have --
     which are high cost -- relatively high cost, but are
     relatively high cost all over the place, but who have very
     few low cost areas, have been supportive of the ad hoc
     approach.  
                   Those states which understandably will not get
     anything, which will have to create most of their explicit
     subsidies to replace their implicit subsidy in the state
     plan, don't find the ad hoc approach very attractive because
     it will not provide a lot of Federal dollars.
                   You're absolutely right.  You follow the money and
     you see who is benefitted by the ad hoc approach, who is not
     benefitted by the U.S. West-type approach.  And that's who
     we've got.
                   The other important thing is that we surprised a
     lot of people but we have the one low cost state or
     relatively low cost state in New York supporting the high
     cost approach.  And part of the reason why, I believe,
     they've signed on with us, is that they believe the fund
     should be relatively small, there not should be significant
     dollars exported.
                   But I think they also realize that of the plans
     that provide for a small fund, that the ad hoc plan is the
     only one that provides sufficient dollars to those high cost
     areas like Maine and Vermont and West Virginia.  And that
     the U.S. West approach attempts to make a plan, which is
     relatively small, by raising the benchmark.  But in the
     process of doing that, they don't provide sufficient funds
     to the outlying states.  And for that reason, I think they
     recognize that the U.S. West approach to provide enough
     money for Maine or Vermont or West Virginia, would result in
     a plan which would be too -- which would have too high a
     price tag.
                   So, I guess it's the combination of meeting both
     criteria, sufficiency and efficiency.  And I think they
     recognize looking at our -- at the various approaches that
     are out there that only the ad hoc approach both balances
     both a sufficient plan in a deficient size.
                   CHAIRMAN KENNARD:  Thank you.  I'd like to hear
     from some of my other colleagues.  Commissioner Ness?
                   COMMISSIONER NESS:  Thank you, Mr. Chairman.  How
     many of you -- this is going to be a quiz.  Okay?  
                   How many of you believe that one of the
     significantly distinguishing characteristics of your plan is
     to put downward pressure on cost, given that it is a
     declining cost industry, which we're all engaged?  Can I see
     a show of hands?  Okay.  All right.
                   How many of you believe, similarly, that your plan
     would significantly spur efficient, not efficient
     investment?  Okay.  You guys really believe in your plans. 
     Okay.
                   How many of you believe that your plan is
     competitively neutral and the funding comes from
     competitively neutral sources?  Well, this is getting
     interesting.  Okay.  Let's put it this way.  Is there
     anybody who disagrees with any of those top things?  Now, be
     honest about it.
                   CHAIRMAN KENNARD:  Let's put them under oath.
                   COMMISSIONER NESS:  All right.  There we go.  I'll
     throw a wild card in here.  How many of you have factored in
     wireless solutions into your equations?  A couple of --
     questionable answers there.  Okay.
                   How many of you believe, fundamentally, that the
     high cost fund should fund the lines to Ted Turner's ranch? 
     And Time-Warner, you don't have to answer that question. 
     Okay.  There was no one who believes that the high cost --
     yes.  Okay.  GTE, Mark Cooper believes that it should be. 
     Bell South, the ad hoc committee, that we should be -- Jim
     Sichter from Sprint.  Okay.  That we should be funding the
     lines to Ted Turner's ranch.  Okay.
                   MR. SICHTER:  Depends on how much.
                   COMMISSIONER NESS:  Okay.  How many of you believe
     that the funding should be based on both interstate as well
     as intrastate, or intrastate as well as interstate revenues?
                   MR. BROWN:  Together or separately?
                   COMMISSIONER NESS:  That we should be tapping from
     the Federal fund -- that we should be tapping both the
     intrastate as well as the interstate revenues.  Show of
     hands.  Okay.  GTE believes that's the case.  Bell-South
     believes that's the case.
                   MR. WENDLING:  Colorado Commission goes on the
     record.  We have a footnote to that.
                   COMMISSIONER NESS:  Okay.
                   MR. SHIFFMAN:  The plan -- our plan doesn't do
     that, as Maine and Vermont have so said.  As individual
     states, we believe it.
                   COMMISSIONER NESS:  Okay.  Did I see any other
     hands?  Sprint believes that it should be for both.  And I
     believe your testimony reflects that.  AT&T?
                   MR. SICHTER:  Inter only.  But it's a function of
     how big the account is.
                   COMMISSIONER NESS:  Okay.
                   MR. SICHTER:  If the fund gets huge, than it's a
     different answer.
                   COMMISSIONER NESS:  Okay.  How many believe that
     we should look at the revenue generated by the lines, not
     just the cost of the lines in determining how much should be
     funded?  Okay.  We have CFA.  We have Time-Warner.  We have
     AT&T.  Anyone else?  We have Colorado Commission.
                   MR. WENDLING:  Just Colorado.
                   COMMISSIONER NESS:  Okay.  And the others believe
     that it should only be based on costs so that if you can
     generate a tremendous amount of money from vertical services
     from the lines, from other data services or other services,
     that that should not count towards the determination as to
     whether or not the lines should be supported.  GTE, you have
     an answer on that.
                   MR. WELLER:  The problem is that it's not all the
     same revenue from the same lines.  If everybody bought 
     the -- exactly the same mix of services, I think you might
     get away with doing that.  You'd send bad price signals, but
     the system would be sustainable.  But the distribution is
     very highly skewed.  You have high and low income people,
     both all buying toll and access services.  Nationwide, I
     think 45 percent of the bill of people whose incomes are
     below $10,000 is toll.
                   COMMISSIONER NESS:  Okay.
                   MR. WELLER:  But it's still true that the majority
     of customers, the 78 percent that I mentioned don't buy
     enough of that stuff to get up to some average benchmark
     that you had said.  So, if you do it that way, you wall off
     78 percent of the customers from competition.
                   MR. COOPER:  Commissioner, could I respond on the
     other side?
                   COMMISSIONER NESS:  Okay.  Let me get U.S. West
     first, than if you would respond.  Go ahead.
                   MR. BROWN:  In our plan, we focused more on the
     affordability and for the high cost area we set it high
     enough so that revenue benchmark almost becomes irrelevant,
     because the first cut in the Commission's May order had it
     about $31.  And if we're -- you know, if we -- if
     affordability is above that, than it becomes a moot point.
                   COMMISSIONER NESS:  Okay.
                   MR. COOPER:  It's quite clear that for several
     decades now, we have been using all of these revenues to
     create just and reasonable rates at the state level.  So,
     when every state commission decides rates that look at
     vertical services, they say, "We count that in.  And those
     rates are just and reasonable.  We've included call waiting
     and other kinds of revenues."  So, it's clear that the
     notion that they can't be relied upon is simply not a legal
     fact.  They can be relied upon.
                   Second of all, I'll be perfectly willing to
     identify the lines that don't generate enough when you
     include all the other revenue and fund them through
     universal service.  That was the logic of 3151.  And that's
     fine.  We don't quibble with that. 
                   The difficulty is the chart he keeps showing you
     where he's got the big shortfall, he's included 100 percent
     of the loop costs in that chart, which is contrary to your
     assumption, and I believe the correct policy.
                   COMMISSIONER NESS:  Okay.  Yes, Mr. Shiffman.
                   MR. SHIFFMAN:  There's some confusion about the
     counting of revenues from vertical services or not.  And
     that is one of the reasons why the ad hoc approach does not
     appear -- does not use a revenue benchmark at all, but uses
     an average state cost benchmark -- an average national cost
     benchmark.  By using average costs, you're implicitly
     recovering all revenues that are recoverable from those
     services that provide those facilities.  
                   So that, for example, if you're looking at Maine
     versus the national average of Vermont versus the national
     average, you're not excluding vertical service revenues. 
     You're essentially assuming that the mix of vertical
     services coming in from each state that is the same as from
     another state.  And you're not assuming a way or including
     explicitly those revenues, but you're not excluding them
     either.
                   COMMISSIONER NESS:  Okay.  Last comment on that?
                   MR. BROWN:  I'd just like to add one thought.  And
     that is, if you do include them in a benchmark, than you
     have to make certain that the cost model that you use
     includes the cost for those.  Now, in HAI model and the
     BCPM, we have tried to get kind of a bare bones, so if we
     put more of the vertical in, that's another consideration
     that has to be taken into account.
                   MR. COOPER:  I have no comment.
                   COMMISSIONER NESS:  Okay.  Last question, and that
     is for me, at least.  Who believes that the FCC has the
     authority, when the statute says that contribution to
     universal service should be from all telecommunications
     carriers serving interstate on a competitively neutral
     basis, that we can impose a end user fee in lieu of charging
     specific categories of carriers for universal service.  
                   Does anyone support that position?  You believe
     that we can statutorily do that, and that that would be
     sufficient with respect to carriers contributing to
     universal service. 
                   MR. WELLER:  Yes.  I believe if you could
     establish a fee as the mechanism through which the carriers
     would recover their contributions, ultimately, the carrier
     contributions have to come from somewhere.  And the more and
     clear and explicit those contributions are, the better, I
     believe.
                   COMMISSIONER NESS:  If one were to -- I kind of
     fibbed out it being my last question.  But following up on
     that question, if one were to impose an end user charge,
     what would put downward pressure on the amount that would be
     imposed?  In other words, how could that be computed away? 
     Would it be competed away, or could it be computed away?
                   MR. WELLER:  Commissioner, several ways.  First, I
     think that you haven't taken the money out of the system. 
     You've attached it to a different transaction.  Today it's
     attached to access transactions, but the cost is really
     determined -- generated by local service.  So, what you've
     done is you've take the money and you've attached the
     universal service support to the local service transaction,
     and the support's portable.  So, I lose local customers, I
     lose that money, which I should do, because it's the money
     that supports those local customers.
                   What shouldn't happen is for me to lose the
     revenue that supports the local customers when I lose access
     minutes which is what's happening today.
                   The other thing I'd mention to you is that, as you
     remember, I've also proposed that the support amount itself
     not be left as static.  I think that a competitive bidding
     process over time is the way to make sure that we have --
     you've heard enough different opinions around this table, I
     think, to know one thing for sure, which is that you're not
     going to get exactly the right number when you finally do
     this.  So, just in case we're wrong about this, we need to
     have another mechanism that will enforce market discipline
     on an amount.  And I think competitive bidding is the way to
     do that.
                   COMMISSIONER NESS:  Mr. Cooper, did you want to
     respond?
                   MR. COOPER:  I think we know that auctions don't
     always produce the right number.  It depends on who's
     available, which competitors can enter the market.  I'm fine
     with auctions after there's competition, but not before.
                   COMMISSIONER NESS:  Thank you, Mr. Chairman.
                   CHAIRMAN KENNARD:  Chairman Johnson?
                   MS. JOHNSON:  Yes.  My question is directed back
     to some of the questions that Mr. Lubin made, and perhaps,
     Mr. Brown, you'd like to follow up.  
                   Mr. Lubin, I guess under your analysis of what
     truly costs to serve are one, you've concluded that the
     revenues generated from R-1 plus CLEC covers costs,
     generally.  And that we could, in fact, reduce access by --
     substantially, immediately, and the world would be a better
     place.
                   Now, let's go to your world being a better place. 
     So, what would that mean?  And I don't mean to be flippant,
     but how will rate payers benefit?  Who guarantees a flow-
     through, or will it be flow-through, or is there an
     obligation to flow it through?  Could you respond?
                   MR. LUBIN:  Sure.  First of all, let me just ask
     one question.  R-1 -- what is that?
                   MS. JOHNSON:  Residential -- I think residential
     service.  I'm sorry.
                   MR. LUBIN:  Right.  Okay.  All right.  I want to
     clarify something and than answer the specific question.
                   When we -- when I cited in my comments and than
     restated, and I said that if I look at the major LEC's and I
     look at the 69 -- I think it was 62 of 71 study areas had
     revenues in excess, that was looking at all revenues in
     terms of residents and business.
                   MS. JOHNSON:  Okay.
                   MR. LUBIN:  My belief is if I structured it, just
     for residents, you would see a similar thing, but you
     wouldn't see $23 billion.  You would see still a number
     that's greater.
                   MS. JOHNSON:  I'm sorry.  You said you would still
     see a number that's greater?
                   MR. LUBIN:  I believe the answer is yes, you'd
     still see -- but the $23 billion was really driven because
     business was included in that, and they looked at all local
     revenues including the interstate subscriber line charge.
                   The answer to your specific question in terms of
     follow the money and who will benefit, my view is
     ultimately, the consumer is going to benefit because those
     monies are going to be flowed through to lower prices for
     the consumer.  And so, that's what I would expect to happen. 
     That's what I would strongly see would happen.
                   MS. JOHNSON:  Is that happening now?
                   MR. LUBIN:  In my opinion --
                   MS. JOHNSON:  With respect to access going down?
                   MR. LUBIN:  Yes.  With regard to AT&T, that's all
     I can speak for, is that we have continued to see that our
     revenues have declined significantly more than the access. 
     We've seen that for the last several years, and we expect to
     see that on a continual basis.  
                   So, the bottom line in terms of who benefits, I
     believe the consumer will benefit.  And I believe the
     consumer will benefit by billions of dollars.
                   And by the way, I think ultimately, all of that's
     going to stimulate the pie so that the pie is simply bigger
     and bigger and bigger.
                   MS. JOHNSON:  Is there a check and balance, or is
     there a mechanism by which the FCC can measure or the states
     or some regulatory body could measure the flow-through?
                   MR. LUBIN:  Well, what we've done up to this point
     in time is respond to a Chairman letter that asked us, in
     terms of what has happened.  We responded and showed that
     the revenue net of access has declined, at least for AT&T,
     significantly above and beyond access.
                   MS. JOHNSON:  Should a regulatory body, FCC,
     states, be able to structure or require certain reduction,
     that the flow-through certain percentage must be applied to
     residential customers?  Certain percentage should be applied
     to R-1 customers?  Should we be able to do that?  Or can
     regulators do that, either Fed or states?  And if the answer
     is yes, should they be able to do that?
                   MR. LUBIN:  It's always hard for me to say what a
     regulator should and shouldn't do or what the legal
     ramifications are saying one should or shouldn't do.  Since
     I'm not a lawyer, I can't attest to the legal ramifications
     of that.  But in terms of the spirit of the question, it
     seems to me that we have over the last -- I don't know, 10,
     15 years, moved to create competition in the LD marketplace.
                   And someone earlier said -- I think it was
     Commissioner Power, who at least alluded, at least if I
     understood it correctly, is that competition gets to be a
     very messy process.  And when you're in a competitive
     marketplace, prices move toward costs.  And as they move
     toward costs, than we access reductions.  My view is those
     will get flowed through.  And as you see more and more
     competition, at some point you may see in certain particular
     areas, prices move up.  
                   And I'm not suggesting right now that an IXE is
     going to raise prices.  All I'm saying is competition is an
     extremely messy process.  And ultimately, it seems to me
     some questions should be asked in terms of -- you know, what
     are the most efficient ways of recovering some of these
     costs?  And when I talk about efficiency and sufficiency of
     collection, efficiency of distribution, we talk about an end
     user surcharge.  
                   Other people talk about other mechanisms to do it. 
     But the question is, what's most efficient, and where should
     the regulator be spending his or her time in terms of trying
     to create competition?
                   From where I sit, I see all the long distance
     companies.  I see the revenue per minute declines on both
     business and residents, in the aggregate at least for AT&T,
     continually dropping of revenue per minute by billions of
     dollars, in excess of access.
                   My hope is that with your finite resources, that
     we try to figure out how to create local exchange
     competition and implement the rulings that have come out in
     August and in May of last year to try to create local
     competition.  You know, sometimes I wake up in the morning
     and I say, "You know, we've got this huge debate.  You know,
     is all the access being flowed through?"  And I'm not
     suggesting this, because right now I don't have authority to
     suggest it.  
                   But sometimes I wake up and I say, "Goodness
     gracious.  We've got all these issues, universal service,
     local exchange competition."  Sometimes I ask myself, "Are
     we just better off putting access on the bill and just
     letting that be on the bill?  And as access comes down or
     goes up, just let it rip in terms of lower access." 
                   Now, my fear is if that if somebody ever did that,
     you know, they would see rates in terms of various parts of
     the country that people really wouldn't want to see.  And
     so, you know, I wake up sometimes saying, "Boy, I wish I
     could get out of this dilemma and this food fight."  And
     that's how I see getting out of it.  
                   And then I say, "But you know, if people really
     wanted to do that, you know, are they willing to accept the
     consequences of those actions?"  Because, you know, in
     certain areas, it would really look nice.  In other areas,
     it wouldn't look nice, because currently access is
     significantly de-averaged in this country.
                   MS. JOHNSON:  Well, one of the points that Mr.
     Brown raised as we look at this, and you're right.  The
     competitive market can give us some surprises.  And as we
     transition into a competitive market, what should be the
     role of the legislator -- or regulator?  Mr. Brown had
     suggested, "Well, maybe we shouldn't be so concerned about
     getting access to cost immediately, because having higher
     access will actually promote innovation and creativity and
     the market, and people will want to build these facilities." 
     As a transitionary step, maybe we shouldn't go directly to
     costs because maybe that will be your distance in it.
                   Could you respond to that?
                   MR. LUBIN:  Wonderful question from my point of
     view.  And it's a tough question because it basically gets
     to the heart of, how do you want to manage the public policy
     issues?  And you know, in May of 1997, the Commission came
     out with an order, a set of orders that addressed USF and
     access, and said, "Hey, let's go to that soft-landing
     approach, and let's get this checklist implemented."  And
     thereby, giving everyone the opportunity of buy unbundled
     network elements disaggragated, and maybe even matching USF
     consistent with the level of geographical deaveraging of the
     loop, and let's be on with it.
                   Quite candidly, I thought that was a very rational
     approach.  The dilemma is we put all of our eggs in one
     basket.  That is, the basket of making the checklist truly
     operational.  And for whatever reason, it's hard to
     legislate cooperation or to regulate cooperation.  And I'm
     not saying anybody's doing bad things.  It's just hard.  
                   And my bottom line is, it's not working.  And so,
     now you say, "Well, should I -- it's not working.  Local
     competition isn't working.  Should I keep access umbrella
     high to create the incentive?  But what's the incentive if
     the piece parts aren't truly operational.  What you do is
     the small CLEC will come in and slowly enter the market, but
     it's years and years.  And so, I come back to the Chairman
     in terms of follow the money.  You know, people will say,
     "Well, you're just going to pocket the money, and you're not
     going to flow it through."  You can debate that.
                   But my view is follow the money and get it into
     the consumers hands sooner rather than later, and from my
     point of view, again, the key most critical area in terms of
     defining USF is the level of aggregation.  If you go to the
     study area, my view is you're going to see a small fund.  If
     you go below that, you're going to see, potentially, a
     larger fund.  And then, bottom line is from my point of
     view, is to get access prices down, consumers will be far
     better off.
                   Sorry for taking the time.
                   CHAIRMAN KENNARD:  Could I just tie one thing down
     from your answer, Joel?  Am I to take from that response on
     flow-through, that you're not flowing through access
     reductions on a proportionate basis?  That you're flowing
     them through, but you're not flowing them through to the R-1
     consumers, necessarily?
                   MR. LUBIN:  No.  I'm glad you clarified the
     question.  And my answer is and what we have shown is that
     we're flowing through more than the access reductions that
     we see.  And my view is, that has been true for the last
     several years.  In my view is the residential market also
     has seen access reductions and seen the benefit of those
     reductions.  But when I said in aggregate, the aggregate --
     I can't remember the number offhand.  But the letter I think
     we highlighted was well in excess of a billion dollars.
                   I will say that this proportion amount of that in
     excess of the access reductions went into the business-side
     of the equation, but that isn't to say their fair share. 
     And I would also highlight to this Commission and the Joint
     Board members, is that when we got price caps in the --
     whenever -- I lost track, the mid-80s, late '80s, what we
     found is the price cap was disproportionately lowering the
     residential side of the equation.  
                   That isn't to say, you know, that's bad or good. 
     That's just simply to say, make the observations that when
     there was regulation in the heavy hand even thought it was
     price-capped, the way in which it was implemented
     disproportionately lowered that into the residential
     marketplace.  But my view is -- bottom line is, well in
     excess of access in both for business and residence, but
     disproportionate to business.
                   CHAIRMAN KENNARD:  Thank you.  Commissioner
     Furchtgott-Roth?
                   COMMISSIONER FURCHTGOTT-ROTH:  Thank you, Mr.
     Chairman.  This has been just a wonderful session.  I've
     learned a lot.  And I see we're probably going to miss our
     break for lunch.  But I will keep my comments very short.
                   In part, because in setting up this meeting, I
     know Chairman Kennard was very sensitive to the concerns of
     the states who very much wanted an opportunity to address
     questions to the panel that's here today.  You've all done
     just a wonderful and very thoughtful job in making your
     presentations today, probably more than I have completely
     absorbed in the past couple of hours.  But I look forward to
     trying to absorb them more in the coming weeks.
                   I just want to make a couple of points.  There are
     too many of you for me to ask questions, and while I'm
     attempted to follow Commissioner Ness's lead, I'm probably
     not as good at asking the questions.
                   I hope all of you will leave today with two
     salient memories.  One is that you addressed your comments
     to presentation before both Federal and state commissioners. 
     And that a lot of the issues related to high cost ultimately
     involved consumers.  They ultimately involved consumers in
     local telephony.  
                   And the first point of Government oversight of
     local telephony is today.  And I think what will remain in
     the dim and distant future, state regulators.  It is to them
     and probably not to the Federal Communication Commission,
     that consumers will look first on matters of local telephone
     service.  And frankly, just probably to the state regulators
     that telephone service providers will look first on matters
     of local telephone service.
                   We have a very difficult job before us, both at
     the Federal level and at the state level.  I would urge all
     of you to work closely both with the Federal and state
     regulators.  We've heard today presentations of 11 different
     plans, each of which, frankly, have a lot of merit.  
                   At the end of the day, I am not at all certain
     that a single plan is going to be the best for every state
     or is going to be the best for every consumer.  And it's
     quite possible that different states may, ultimately, adopt
     different plans.  And that is entirely consistent with the
     Act, which envisions state universal service plans.
                   And I think it is entirely consistent with the Act
     that those issues need to be resolved before any of the
     other elements of universal service and 254 can be fully and
     adequately addressed.  Thank you, Mr. Chairman.
                   CHAIRMAN KENNARD:  Thank you, Commissioner. 
     Commissioner Schoenfelder?
                   COMMISSIONER SCHOENFELDER:  How many questions can
     I ask?  Are we going to have time this afternoon for some
     questions?
                   CHAIRMAN KENNARD:  Yes, we can continue on this
     afternoon.
                   COMMISSIONER SCHOENFELDER:  Because I have
     several.  But one of the things that I'd like to ask all of
     you who are local exchange carriers is -- and you can answer
     it one at a time or collectively.  But I quite often hear
     and I've been hearing since we started this process that
     there's definitely a subsidy flow from business to
     residential, from business to local, however you want to
     call that.  
                   I want to know if anyone -- and I'm looking at Mr.
     Brown now and since that's my local RBOC, he's going to get
     picked on, but I really want to know if anytime during your
     calculations you've ever taken traffic use or minutes of use
     into account when you talk about that subsidy flow, because
     if I am -- and I'm going to use my own state as an example. 
     Citibank in Sioux Falls, South Dakota, and I'm Joe Sixpack
     on the corner, my traffic is going to be a lot different. 
     And when you calculate, do you ever calculate minutes of use
     or traffic into that equation, and how you would you do it
     if you did it?
                   MR. BROWN:  In the cost studies that we would file
     with the South Dakota Commission, yes, usage would be a
     component.  It tends to be a relatively small component
     because we've switched to large switches.  It tends to vary
     between customers.  If you looked at my daughter's
     residential usage, who's a teenager, you'd probably find
     that she rivals many businesses.  So, there's a mix.
                   But if I were to come to you and present a study
     for business and residents, it would have the usage built
     in, based upon averages, of course.  And that's one of the
     problems with studies.
                   In the models that Joel's company and mine and
     actually several others on this panel have been working on,
     we tend to look more at what drives high cost.  And that's
     the loop cost.  So, there is usage in there but not with the
     granularity to answer a question like you just asked.
                   COMMISSIONER SCHOENFELDER:  Anyone else?  Okay. 
     Then, as long as you're in front of me, in your new
     proposal, what is the size of the fund you're advocating? 
     Can you quantify that?
                   MR. BROWN:  Yes.  Let me give you some numbers. 
     These are going to be based on the common inputs.  When
     model sponsors filed their models, they had default inputs. 
     And frankly, we haven't looked at the inputs until just now
     because over the past year, we've been looking at the
     platform of the model.  But the staff, I think, did a very
     good job of kind of looking at what we had both put on the
     table, and they came up with what I think are some middle
     ground estimates, cutting the baby in half, in many
     respects.
                   If you look and you run the benchmark cost proxy
     model or at the national aggregate, if you run the HAI
     model, you come up with a fund of roughly $4.5 billion to
     cover 100 percent of the cost above $31 for residents and
     $51 for business.  Those are the numbers that were in the
     May decision.
                   That would say, under the 25/75, the Federal fund
     would be about $1.1 billion or 25 percent.  When you run the
     IHCAP or the two benchmark at 30 and 50, what you get is an
     interstate fund of $2.8 billion.  That is 1.7 higher than
     existed under the 25/75.  And the genesis for that is taking
     75 percent of all of the costs over 50 dollars and moving
     them into the interstate jurisdiction.
                   In a sense, it's like the USF works today.  When
     costs exceed 115 percent of the nationwide average, they're
     removed from the state jurisdiction and moved to the
     interstate jurisdiction and recovered through the fund.
                   What we're proposing is very analogous to that,
     and instead of 115 percent, you put loop costs from
     forwarding looking proxy model at a small area of geography
     above $50.  But the mechanics beyond that are similar.
                   COMMISSIONER SCHOENFELDER:  Let me follow up. 
     Now, we're focusing today on non-rural companies.  Are these
     non-rural numbers?
                   MR. BROWN:  This is non-rural only.
                   COMMISSIONER SCHOENFELDER:  And so, you still
     haven't added the rural component into the figures?
                   MR. BROWN:  No.  But I think the current fund for
     rural companies -- see, the whole name of the game in
     universal service funding is targeting to the areas where
     the high cost customers are.  By historical accident if
     nothing else, and I think it's the reason why a small
     company is this in many places.  They are small.  They don't
     have urban areas to offset costs on, so I think the current
     funding for the rurals is a reasonable benchmark for what
     they would need.
                   COMMISSIONER SCHOENFELDER:  Mr. Lubin, yes?
                   MR. LUBIN:  Commissioner, I'd just like to make an
     observation in terms of the various plans relative to the
     current fund.  The current fund is about $1.7 billion. 
     That's the high costs, LTS and DEM.  And then you have the
     various proposals that are being presented, and you have
     people looking at, calculating at a, let's say a serving
     wire center or a state average or, if you listen to us, it
     would be a study area.  Just to give you a reference point.
                   The current FCC plan, the 25/75, would probably
     raise the money by about $400 million relative to the
     current plan.  If you went to study area instead of serving
     wire center, it would be roughly comparable.  
                   If you look at the majority member plan or the
     U.S. West plan, what we see is that if you use either --
     again, the U.S. West Plan or the majority plan, you would
     still see about a billion dollar increase if you were at the
     serving wire center.  So, instead of 1.7, you're at 2.7.
                   The interesting -- I'll use the word phenomena. 
     This stuff always amazes me -- is that if you use the study
     area on the U.S. West plan, you come back to roughly the
     $1.7 billion number.  If you use the majority plan, you come
     back at a study area level, roughly $2.2 billion.  So, that
     case would be roughly $500 million.
                   My only message is that a key, key component are
     the input parameters and the level of aggregation that you
     use when you determine the fund, because you can use a level
     of aggregation that all of a sudden greatly changes that
     overall level of subsidy.
                   MR. BROWN:  But whenever you hear the word
     aggregation, think implicit support.  Think averaging.  And
     the Act says you need to rely less on implicit support.  The
     reason for that is that the urban areas --
                   COMMISSIONER SCHOENFELDER:  I don't think the Act
     says that.  I think the Act says that universal service
     should be explicit.  I don't think it says anything about
     implicit support.
                   MR. BROWN:  But in terms of measuring for explicit
     support is what we're talking about, the competition is
     going to hit first in the urban areas.  You're going to have
     to reduce your prices toward costs faster there so you're
     not going to be able to average across the study area as
     Joel is suggesting when you use study area aggregation.
                   I have concerns even at the wire center, because
     within the wire center, you've got customers on Main Street
     that cost $10, $20 a month, even in an exchange that might
     cost on average, $100 a month.  Do we want to throw, you
     know, a $70 or a $50 subsidy at a customer that costs $10 or
     $15 or $20 a month?  I think that -- this whole area of
     aggregation deserves some very thoughtful consideration. 
     But you can't just change your level of aggregation and not
     have other consequences.
                   COMMISSIONER SCHOENFELDER:  Joel?
                   MR. SHIFFMAN:  One thing that I think has been
     said which is somewhat confusing and might give the wrong
     idea is that the existing fund with its existing level of
     aggregation as Mr. Lubin talked about, meets the objectives
     of the Act.  
                   And I guess that's one of the ad hoc's serious
     concerns is that the existing fund or even if the -- if the
     FCC went ahead and said, "We're just going to forget about
     this whole thing.  Just leave the fund exactly like it is,"
     we don't believe that even with that -- notwithstanding, the
     issue of competition, that the existing fund provides
     sufficient funds to afford comparable and affordable rates. 
     And the reason that that is, is that -- and we did
     considerable regarding this.  
                   That areas like Vermont and Maine and West
     Virginia, which have large companies serving predominantly
     rural areas, get only pennies on the dollar to the extent
     that their costs exceed the national average, compared to
     similarly situated states that are served by small
     companies.  
                   And that the combination of 200,000 line problem,
     the lack of switching recognizing really high switching
     costs are now being tied to company size, and the lack of
     anything in the high cost current fund recognizing high
     interoffice trunking costs, that those three factors put
     together create a situation where the existing fund, the
     status quo can't meet the standards and the objectives of
     Section 254.  
                   Although, we've argued in pleadings that the 25/75
     cannot meet the comparability and affordability objectives. 
     But similarly, that even if we don't change the aggregation,
     the existing fund, the status quo, cannot comply to comport
     with the requirements of the Act.
                   COMMISSIONER SCHOENFELDER:  Mr. Chairman, I have
     more, but I'll quite right now.
                   CHAIRMAN KENNARD:  Okay.  Well, you'll have some
     more time this afternoon.  Commissioner Powell?
                   COMMISSIONER POWELL:  In the interest of your
     schedule, I'll be happy to defer my questions until later.
                   CHAIRMAN KENNARD:  Okay.  Thank you.  And with
     that, why don't we take our lunch break, and we'll reconvene
     here at 2:30.  Thank you all very much.
                   (Whereupon, at 12:45 p.m., the meeting recessed,
     to reconvene this same day, Monday, June 8, 1998, at 2:30
     p.m.)
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     //                   A F T E R N O O N   S E S S I O N
                                                        2:36 p.m.
                   CHAIRMAN KENNARD:  Okay.  Let's come to order for
     our afternoon session today.  Commissioner Powell, I'm told,
     is en route back to the FCC.  And so, until he gets back,
     I'm going to ask Martha Hogerty to proceed with her
     questioning, and than we'll double back and pick up
     Commissioner Powell's questions.  Martha?
                   MS. HOGERTY:  Thank you.  Mr. Lubin, you're not
     the only one who's suggesting that perhaps competition
     should be considered or the development of competition
     should be considered as we move to universal service
     funding.  How would you -- I know that you have said let's
     size it based upon the various density zones for the UNE.  I
     mean, do you have anything more specific in your proposals? 
     I mean, initially, AT&T, I think, supported the HAI and
     everything that went along with it.  So, you have changed
     your approach somewhat in recognition of the lack of
     competition?
                   MR. LUBIN:  Yes.
                   MS. HOGERTY:  A couple of questions there I've
     asked you, I think.
                   MR. LUBIN:  Should I begin?
                   MS. HOGERTY:  Yes.
                   MR. LUBIN:  Okay.  I appreciate the question
     because some people ask us, have we changed our position
     with regard to the proxy tool?  And our answer to that is
     no.  We would hope, quite candidly, that the Commission make
     a decision on the proxy tool.  We think the Hatfield, HAI,
     tool is a very flexible tool.  We think it's very open.  And
     it's using information that's public such that as more
     public information becomes open, you can modify and update
     the answers if better data becomes available. 
                   It's also a tool that attempts to geocode the
     locations such that it's looking at a hundred million
     customer's specific locations, and it's attempting to
     geocode as many of them as humanly possible.  Geocoding
     simply means looking at latitude and longitude of a customer
     location.
                   All that being said, we think it's right, quite
     candidly, to make a decision on the proxy tool.  We would
     hope that it would be the Hatfield tool.
                   Where there is a difference in terms of what we
     have said in the past, I'll say a year ago versus today, is
     given the state of local exchange competition, we would
     suggest that the level of aggregation be the study area,
     again, because we don't see UNE's disaggragated at a wire
     center, or some states only have one unbundled network
     element rate.  And so, I want to separate the issue of
     aggregation versus selection of a model, and a proceeding
     that I believe the FCC has under way in terms of trying to
     figure out what are the other input parameters to go into a
     model that hopefully is open and people could evaluate, et
     cetera.
                   All that being said, the next question we said is,
     "You know what?  Even if you pick the proxy tool, even if
     you select study area, you really don't have to implement
     this until you see local exchange competition."  And so, the
     final, at least the question I think I'm hearing you, you
     know is, when is that?  
                   We've identified a set of metrics that we have put
     in our May 15 comments that would suggest, from our point of
     view, is again, the Commission has a series of orders trying
     to implement unbundled network and OSS's, et cetera, because
     we would hope those things get implemented.  And that,
     ultimately, now a test we would say is, "Okay.  Get it
     implemented."  Once we see some penetration, I think we've
     put in a number of 15 percent penetration.  That's
     indicative that this process is working.
                   But we would even go one step further in our
     comments.  We said that, "By the way, even if you lose 15
     percent, there's still may not be an earnings problem, and
     you ought to evaluate whether there's truly an earnings
     problem before you implement."  And we suggested that the
     earnings problem could be evaluated based on the FCC's low
     end adjustment on price cap regulation. 
                   So, those are the things we have said in the
     record.
                   MS. HOGERTY:  Okay.  And you've also said that,
     based on your study, you believe that local revenues when
     you look at all the revenues, are greater than the forward
     looking costs in those areas as you have aggregated --
                   MR. LUBIN:  Yes.  For the major local companies,
     we have put in the record, we --
                   MS. HOGERTY:  For the large companies?
                   MR. LUBIN:  Right.  Sixty-two out of seventy-one
     study areas, that is true when you include local revenues
     including the interstate subscriber line charge.
                   MS. HOGERTY:  Okay.  And from that you have said,
     therefore, access is not necessarily a subsidy.
                   MR. LUBIN:  Correct.
                   MS. HOGERTY:  Well, what is it?
                   MR. LUBIN:  Well, I mean, you can hear Lubin's
     view or AT&T's view is that we think there's a lot of excess
     that is in access.  We would urge the FCC to immediately
     lower those prices, set a proceeding.  We believe that the
     productivity factor, even though it's at 6.5, and we commend
     the Commission for going up from where it was to 6.5.  We
     think using the own FCC data, could support a 9.3 or 8.4
     percent productivity offset, reinitialize that to 1995 would
     produce approximately $3.8 billion access reduction.  And we
     think the UNE data would support that.  
                   We also think, based on the record, in terms of
     what the local exchange companies filed in April of 1998,
     suggest that their rate of return each year has been going
     up by a significant amount even after each year money is
     taken out of the system.  And the last it was, the aggregate
     rate of return was over 15 percent.  Some LEC's it's 20
     percent.
                   And that's what happens.  And I'm not saying this
     is a pejorative way, is when you're a monopoly and you're
     growing at the industry, and we have a wonderful
     telecommunications industry that has double digit minute
     growth and has significant line growth, significant second
     line growth, it's a wonderful industry.  And so, what you
     see is unit prices being cut, but the aggregate industry
     demand growing at a healthy clip.  Thus, more revenues being
     produced.
                   MS. HOGERTY:  Okay.  Mr. Brown, you had suggested
     that essentially, rebalancing is necessary because you fear
     that competition -- in fact, I think you said that
     competition is beginning to take place.  And that is going
     to compete away some of your rates requiring more support
     for universal service.
                   MR. BROWN:  Yes.
                   MS. HOGERTY:  What if this competition does not
     develop and a large fund is developed?
                   MR. BROWN:  Okay.  As I mentioned this morning,
     where competition isn't developing is for residential
     customers.  And my hypothesis is because they are priced
     less than cost.  
                   I was reading a report last week written by Jack
     Grubman, an analyst for Solomon, Smith Barney, where he
     noted that in the first quarter of 1998, the CLEC's
     collectively gained more access lines than the ILEC.  I'm
     going from memory, but it's something like 490,000 versus
     460,000.  And he also noted in the long distance business,
     it took 10 years before the incremental growth rate of the
     MCI and the new entrants approached the growth rate of AT&T.
                   So, I think we've really got two markets going on
     here.  We've got the residential market that everybody's
     wondering why aren't we seeing the competition.  But you've
     also got the business market, the dense downtown areas.  Go
     down on M street, you can see stenciled on the street where
     MFS and others are cutting the streets to lay their fiber. 
     These are the rich veins of war in the telecommunications
     market, and they're where a lot of the implicit support is
     coming from.  
                   And the competition is doing very well there, I
     think, as Mr. Grubman's analysis shows.  And frankly, that's
     where most of the implicit support is coming from today.  As
     I mentioned earlier, you take western states, we've got
     access charges that are six, seven cents a minute on each
     end, and the interstate we're now down two or lower.  So,
     the business rates are three to four times the residential
     rate.  That's where we're seeing the damage right now.  And
     that's what is supporting, you know, the over $50 and over
     $100 customers.  
                   And that's, you know, why we've kind of sent up a
     flare and said, "There's a problem here that somebody's got
     to do something about because we're two years into this
     thing, and you know, we've drilled holes in the bottom of
     this bucket, and pretty soon we have to start putting
     something back in the bucket or we're going to have
     trouble."
                   MS. HOGERTY:  If it's true that returns are above
     normal levels, as many have alleged, I mean, why is there
     any rush to do this?
                   MR. BROWN:  Okay.  Joel referenced the 1997
     earnings level for U.S. West that happens to be 15.4 percent
     for the whole year.  In the middle of 1997, we had
     collectively for the industry, a $1.7 billion rate cut. 
     Looking just at my company, that drops to 13.6 roughly.  And
     regulatory returns could be a little misleading if you
     recompute that second half using the same depreciation rates
     that we used for financial reporting purposes.  Just make
     that change.  It drops the earnings down to 11.24 percent.
                   So, I mean, it's debatable.  Are we earning too
     much?  But I would suggest that under price caps, even that
     isn't the relevant question.  Price caps were supposed to
     spur innovation, productivity, investment, new services. 
     And I think, frankly, price caps are working pretty well.
                   MS. HOGERTY:  Joel?
                   MR. SHIFFMAN:  Yeah.  Both Mr. Lubin's comments as
     well as Glenn Brown's comments seem to be making the
     assumption that additional USF money either is or is not
     needed for companies.  And I guess our point is that, we're
     not proposing to the extent that additional monies received
     that those go to companies.  We're proposing that there not
     be any influence.  But we believe that this money is needed
     to keep rates comparable.  
                   The simple fact that rates in most jurisdictions,
     revenues exceed forward looking costs does not in any speak
     to the issue as to whether or not rates are comparable.  You
     could have rates -- you could have every jurisdiction having
     revenues exceed forward looking costs or even revenues
     exceed embedded costs.  That does not, in any way, speak to
     the issue of comparability or reasonableness at the rate
     levels.
                   So, when we talked about the need for extra
     universal service money, we're talking about it's basically,
     not being needed by the companies, but it's needed by the
     customers of those companies as an offset against existing
     rate levels to keep their rates in rural areas comparable
     with rates in rural areas.
                   MS. HOGERTY:  Mr. Cooper, you have talked about --
     Dr. Cooper, you have talked about -- the only one who talked
     about possibly reducing the subscriber line charge.  Isn't
     it true that when that was put into effect, the common line
     and the interstate jurisdiction was divided 50/50?  That the
     interexchange carrier is directly charged and the other half
     is charged to the customer?
                   MR. COOPER:  Yes.
                   MS. HOGERTY:  Okay.  Is that division still exist?
                   MR. COOPER:  Well, one of the things that's clear
     about loop costs since we arrived at the number of 350 is
     that they've been declining.  I think it was last year
     around this time that I said that the -- it's quite clear
     that the ugly duckling of the industry for decades had been
     the loop.  Everything else is getting cheaper.  Switching
     was getting cheaper, and the loop was just sort of assumed
     that it's cost never went down.  
                   Over the past three or four years, I've been in
     proceedings in which telephone company witnesses have
     admitted that with digital and loop gain and a variety of
     technologies, the cost of the loop has been declining
     dramatically, 30, 40 percent at least, and maybe even more.
                   The SLC has not.  It's actually, probably, the
     only element since 1985 or 1986 that's gone up in the bill
     after the first round of rate increase post-divestiture,
     when everything else has gone down.  So, that if you look
     back over the past decade, the SLC has been stuck there and
     not been the beneficiary of any rate reduction.
                   The way -- and the Chairman asked me this or I
     mentioned this during the break.  The fundamental point I
     want to make about the SLC is that if you find as Mr. Lubin
     has suggested, increased productivity, which means the price
     of the loop could come down, and therefore the price of the
     SLC could come down, that creates the room that you're
     looking for to raise some universal service funds.  So, that
     we can have all of these good programs.  
                   And let me be clear.  CFA supports all these
     programs, and we support the programs.  We need to find a
     way to fund them so that people don't end up with an
     increase in their bill.  And that's the way I have suggested
     is that you can lower the SLC and tell people, "Stop writing
     to those checks to the local companies, and start writing
     them to the universal service fund administrator."  I end up
     with the same bill and I get my good programs.
                   MS. HOGERTY:  Isn't that also true that the
     portion that's charged to the interexchange carrier just in
     relevant terms of the entire cost -- of the embedded cost,
     is much less now than it was when the 50/50 was put into
     place?
                   MR. COOPER:  Yes.  As we continually reduce access
     charges and don't reduce the loop, the 50/50 split goes
     away, and it becomes a larger share of course allocated of
     being recovered directly from the end user.
                   MS. HOGERTY:  So, the customer is paying a larger
     --
                   MR. COOPER:  Yes.  Directly as a line item, he's
     paying a larger share.
                   MS. HOGERTY:  There's been a lot of talk about
     rebalancing, and you seem to take the same view on
     competition.  When is it appropriate to rebalance?
                   MR. COOPER:  Well, one of the points I'd like to
     make is the Chairman asked this question about how do we
     move forward in terms of preserving universal service.  And
     Mr. Lubin emphasized the forward looking economic costs.  
                   I prefer to emphasize the loop.  If we treat the
     loop as a common cost, the example I like to use is every
     one of the major companies at this table has committed that
     the next generation of technology and application will be
     XDSL.  They've asked you to declare that a non-common
     carrier service.  They want to move billions of bits over
     the telephone network using this new technology. 
                   This technology is really interesting as described
     Spring's recent announcement.  All they're going to do is
     put a module on the switch and a splitter on my house.  And
     they're going to use that whole network in between.  But
     they don't want to pay for it.  
                   That's directly contrary to Smith v. Illinois,
     which is the principle that we've used in this country for
     70 years.  If they share those costs, when they move those
     millions of data bits over that network, not one change to
     the copper in between or the fiber in between.  If you make
     them contribute to the facilities they use, you won't have a
     universal service proper, because they'll sell more and more
     bits, and they'll spread the costs over more and more uses.
                   That's the fundamental principle, I think, is
     crucial.  We don't need to rebalance rates if we constantly
     force all services that use the loop to share the costs of
     the loop.  A principle that this Commission has applied
     since 1930 at the insistence of the Supreme Court.  And
     nothing change in the Act or in the court to prevent you
     from continuing to spread those costs.  
                   So, that's where I see -- no need for rate
     rebalancing, but to tap the gold mine of the
     telecommunications network.  As more and more applications
     are available, than more and more services can help pay for
     the fundamental infrastructure that we all use.
                   MS. HOGERTY:  Mr. Wendling, could you explain to
     me the difference between your proposal and the U.S. West
     proposal?
                   MR. WENDLING:  Yes.  On the variable benchmark
     approach, in that one the scheme is not just a $30 or $25
     benchmark and a $50.  It is a more continuous spectrum of
     variability of benchmarks on that particular one.  Wherein,
     any time you draw a single line, they're going to be -- it
     is a sudden shift at that one point.  And it may not be
     equitable right at that place of where you changed.  
                   A variable benchmark would smooth that curve out. 
     Let's say one of your goals in deciding on what the variable
     benchmark ought to be is that the intrastate surcharge on
     revenues should never exceed four percent.  By varying the
     benchmark in increments from one state to the next, you
     could more approximate, never exceeding that intrastate
     surcharge.
                   On the other hand, you could -- where you picked
     conversely the opposite proposal on the variable percentage,
     is to set the benchmark which is completely different from
     theirs, at one -- say, affordable benchmark nationwide, and
     than vary the percentage.  Instead of being 25 percent, it
     could be 26 percent, maybe even 80 percent for a state like
     Wyoming where they really don't have a population density
     center to generate the necessary revenues to keep a
     intrastate surcharge down below that five percent or four
     percent critical mass number you might decide upon.
                   MS. HOGERTY:  So, it pretty much kind of follows
     the same concept, but has more variables in it to deal with
     your equity concerns?
                   MR. WENDLING:  Exactly.
                   MS. HOGERTY:  I think that's all I have for now.
                   CHAIRMAN KENNARD:  Okay.  Thank you, Martha. 
     Commissioner Tristani?
                   COMMISSIONER TRISTANI:  As I said in my opening
     remarks, I'm interested in the way that each plan allocates
     responsibility between the FCC and the states.  And because
     of that, I'm interested in the variable support approach
     that the Colorado Commission has put forth.  And I'd like to
     hear from others if this could be a useful tool to allocate
     responsibility between the FCC and the states.  And I'd like
     particularly to hear from Mr. Shiffman.  I'd like to hear
     from the Arizona Commission and also from Mr. Cooper on
     that.
                   And also, I'd like to hear if Colorado has any
     responses to all of that.
                   MR. SHIFFMAN:  The variable support of the
     Colorado petition is not -- is really a variant of the 25/75
     rule except for the fact that it divides the responsibility
     between the FCC and the state commission on the ability to
     pay -- of the state to raise funds, rather than on the basis
     of a fixed national standard which may actually be
     impossible for states to pay in certain instances.
                   In a way the variable support, not the variable
     benchmark portion of the Colorado plan is remarkably similar
     to the ad hoc approach with one difference.  The variable
     benchmark -- not the variable -- the variable pay approach,
     not the variable benchmark, uses a fixed benchmark to
     calculate the size of the fund.  And it does that at a
     fairly smally defined or non-granular level, while the ad
     hoc approach does that -- does -- uses averages, not only
     over the study area but over the entire state to determine
     its support.
                   The results of the two plans are not terribly
     dissimilar because the Colorado approach does use statewide
     average costs to determine the percentage of the payout
     between the FCC and the states.  Part of the reason why we
     use statewide average costs to determine the amount of the
     fund rather than use something like the variable payout as
     Colorado uses, the variable payout is kind of confusing
     average in one step but also by CBG analysis in another
     step.  And we believe that that creates, in some instance,
     anomalous results.  
                   And that is if you did modify the 75/25 plan, we
     thought to reflect the state ability to pay, that the
     results should determine -- that that result should not just
     determine the percentage of costs determined in other way
     that's paid out, but also should determine the total
     aggregate amount of costs which a state receives.
                   But they're not the -- at least the variable
     payout method of Colorado, and the ad hoc approach are not
     totally dissimilar.  They vary with regard to the fact that
     the details such that what cost basis you use is better to
     forward looking, has not been analyzed in the variable
     payout approach.  And some other factors.  I've not been --
     it hasn't been priced out as the ad hoc plan has been.  But
     it's probably worth continued analysis of study.
                   MS. SCOTT:  Maureen Scott, I am legal counsel for
     Arizona Corporation Commission, and I am sitting in on
     behalf of Chairman  -- this afternoon.  Unfortunately I
     would have to say I am not familiar enough with the Colorado
     plan to make a comment at this time, but our Commission will
     be submitting some late filed comments on the various other
     proposals that have been filed with the FCC, probably within
     the next week or two.
                   MR. COOPER:  CFA has tried to stay a little bit
     out of the battling model, but I think there a couple of
     principles that we do support and have clearly been
     articulated by other consumer advocates in this proceeding. 
     And I can speak to those.
                   And it is worth starting from the history of 115
     percent, because 115 percent which was the old way of doing
     things was a fundamental recognition that between 100 and
     115, the states were responsible.  So, it clearly shared the
     responsibility for the above average costs between the
     Federal jurisdiction and the state jurisdiction.
                   On the other hand, there was no upper limit.  As
     has been pointed out, if you went way above 115, you got
     more from the Federal jurisdiction.  It did use statewide
     averages, and that kept the fund smaller since every company
     within the state was expected to average within that state.
                   And if you stayed below 115 or actually, I've been
     in a number of proceedings over the past decade where states
     have fallen below the 115, and been asked, "Will you ever
     get any money back from the Federal jurisdiction?"  And the
     companies would say, "No, because aggregate suburbanization,
     et cetera, are costs go down, and we're never going to draw
     from the Federal fund."  And that was a pretty good program. 
     I mean, it required some responsibility.
                   Does the Federal Act require us to change that
     program?  Probably not, but the FCC has actually decided it
     would.  It said it would stop averaging rates within the
     states.  
                   If you are going to do that, I think you
     absolutely have to have a hold harmless.  It would be an
     ironic twist of fate in the statute for companies to come
     forward over statute that had 15 paragraphs on universal
     service and lose support for companies that really need
     support, high cost companies.  So, I think that's important. 
     And you cannot let the decisions on 25 and abandoning 115
     impose harm on those states.
                   Second principle I think is important is that
     universal service funds should support the core services
     you, yourself, have defined as eligible for support in the
     universal service support policy.  I don't think the
     decision on access accomplishes that goal, because it's not
     part of the core services.
                   Thirdly, I think if you apply good principles of
     the cost model we're talking about between those three
     principles, hold harmless, a good cost model and only
     support the core services, I think you end up with a
     manageable fund.  Whether it's variable -- I think the
     notion of variable and choosing different basis is an effort
     to keep the fund manageable, rather than apply principles.  
                   I think we ought to do it the other way.  We ought
     to apply the principles of building a good analysis of the
     network, apply a hold harmless principle and apply the other
     -- the principle of supporting of core services.  And I
     think the responsibilities will jiggle out differently. 
     I've not supported or opposed any of the individual models.
                   MR. WELLER:  I think I would just like to add, GTE
     is certainly very sympathetic to the concerns that have been
     raised by the states in terms of achieving a reasonable
     distribution among them.  And I think that the approach that
     we proposed of using a series of benchmarks and different
     percentages in between them is essentially designed to give
     the Commission enough policy tools to hit the policy goals
     that it wants to achieve in terms of both the size of the
     fund and also the distribution of the fund among different
     states.
                   I think with respect to the state interstate
     division, the first thing to do is to ask yourself what
     portion of the support, both implicit and explicit is coming
     from interstate rates and/or mechanisms today.  And that
     provides a starting point as to what portion of the
     responsibility the Federal mechanisms would need to step up
     to in a new environment.
                   As Mr. Cooper says, there's a certain amount
     that's coming from the explicit funding today that's coming
     from the Federal side.  And that ought to be maintained. 
     So, that's one item.
                   The second thing is there's a very large amount
     coming from implicit sources through interstate access
     charges.  And there's no state program that's going to act
     to remove those implicit subsidies and replace them with
     explicit ones.  
                   So, the remedy for that has to be a Federal
     program.  When you add those together, I think that puts a
     floor underneath how large the Federal fund needs to be in
     order to accomplish goals that can only be accomplished
     through a Federal program.
                   Then, the third question is, in addition to that,
     how much funding does the Federal program supply the states
     that have particular distributions of costs.  And we've
     heard various discussions of those.  And again, I think
     that's a reasonable choice.  Once an amount has been
     determined that represents a reasonable balance between the
     interest of low and high cost states that you've been
     hearing from the in the last few weeks, than I think those
     three targets can be rolled together, and a set of
     benchmarks that could be chosen that hit those targets.
                   MR. WENDLING:  Just if I might, one or two
     clarification.  Under the variable approach, where there are
     benchmark support, it does use different measures
     differently.  It is a forward looking economic cost model. 
     First, the presumption for non-rural carriers.  And it is
     done by density zones or CBG's, something less than a wire
     center.  I think earlier someone took a -- made a comment
     about providing support for condos in Beaver Creek.
                   We're not interested in providing support for
     condos in Beaver Creek or the zillion dollar homes in Aspen. 
     The Colorado high cost fund that we just adopted doesn't
     support those things either.  And that's why targeting the
     USF is very important, and doing it by those areas smaller -
     - certainly smaller than study areas, certainly smaller than
     wire centers, down to truly high cost geographic areas the
     important way to target it.
                   The notion of using the average cost or the
     average revenue on a state was really to look at the states
     internal ability to generate an internal state high cost
     fund.  It wasn't an attempt to mish mash costs and revenues
     by another one of those factors of how do you vary the
     amount of, either the benchmark or the support.  Thank you.
                   COMMISSIONER TRISTANI:  I'm glad you brought up
     the condos in, I think, Beaver Creek and Aspen.  It reminds
     me of Commissioner Ness's question this morning about should
     we be funding lines out to Ted Turner's ranch?  And I saw
     very few hands that went up.  If we change the location and
     the owner of the piece of property, let's say, to the Navajo
     reservation and said -- we said, "Should we be funding lines
     out to the Hogan?"  I'd like to hear what the answers could
     be.  
                   But more importantly, do any of the plans here
     target underserved or unserved areas?  Mr. Cooper?
                   MR. COOPER:  Since I was one of the people who
     said I did believe Ted Turner's line should get support, let
     me explain that.  It's quite clear, and Joel has pointed
     this out that it's not that I want to support Ted Turner's
     line, but under Section 253(b) of the Act, I have to have
     reasonably comparable rates in areas that are rural and
     urban.  And so, Ted Turner is eligible for reasonably
     comparable rates.  He's eligible for just and reasonable
     rates even though I don't think he sets my cable rates that
     way.
                   But he is not eligible for the lifeline program. 
     He's not a low income consumer.  His rates are affordable,
     and I don't have to support him.
                   And the thing that concerns me about the effort to
     target assistance in rural areas, is we create a witch hunt
     for rich people or middle income people.  And we figure out,
     how much can they afford?  And that's not the way we
     designed some programs.  And our universal service program
     has, in fact, included everybody, including rural areas. 
     And I think that's an important public policy.  
                   But I assure you I will oppose Ted Turner's effort
     to get lifeline assistance.
                   COMMISSIONER TRISTANI:  Mr. Wendling?
                   MR. WENDLING:  Yes.  The notion of underserved or
     unserved customers, in the past in very rural high cost
     areas, there's been a thing called the line extension policy
     or construction charge the customer may be asked to pay. 
     And quite often when you're several miles away from the
     nearest facility, that can be very, very expensive.  
                   But currently in the models before the Commission,
     there are caps on the investment, a $15,000 per line or some
     kind of capital investment that might be capped there or
     wireless equivalent.  But we looked at on an intrastate
     side.  And I know New Mexico had a fund for customers who
     lived, met a specific income level that couldn't come up
     with the $40,000 or $50,000 of line extension charges that
     the utility may requested to get that back.  And that was
     only under a fairness test about what is an obligation of
     the general body of rate payers to support a very high cost
     line.
                   One of the things you might think about in
     developing a high cost fund like we've done, is the free
     construction allowance that a utility must offer or a common
     carrier must offer a new customer, is tied to the amount to
     the support they're getting from USF, so that the customer
     at least gets that amount of free construction.  If the
     model says it costs $100,000, they get $100,000 of free
     construction.
                   The next step that we haven't yet taken, is to
     address the issue that Arizona brings up.  And is, should
     there be a separate funding available for customers for that
     equivalent of a construction allowance support to get them
     into part of the network?  We didn't have enough information
     at that time to know how big a fund that would require, but
     we are continuing to investigate whether that should be part
     of our high cost fund.
                   COMMISSIONER TRISTANI:  Mr. Brown?
                   MR. BROWN:  We were impressed with the comments of
     the Arizona Commission and as a result of that, we included
     with our reply comments a copy of a paper we shared about a
     year ago with the FCC staff authored by Alfred Kahn,
     essentially looking a few years out when we really do have a
     competitive marketplace going.  And we've got the right
     level of monthly support for high cost lines.  
                   And the question is, if it costs $20,000 to extend
     the line and someone looks at that and says, "Okay.  I get
     $100 a month of support," which would support that line
     extension if I knew it was going to be in service for 20
     years.  
                   But we also have a competitive market, and the Act
     tell us that support must be portable.  So, we may have
     created a situation where we need to think about how, in the
     future, new line extensions in high cost areas, even for
     non-rural companies that today can cross-subsidize, need to
     be handled.
                   In talking with some of my friends from RUS, maybe
     there is a need to provide some financing or guarantee of
     financing.  And in that case, the loop or at least the loop
     above some benchmark investment level itself becomes a
     public good.  But otherwise -- and we've kind of put this on
     the backburner because we have some issues we got to work
     our way through here that are very important.  But we ought
     to think those next few steps of how in the future, we are
     going to fund the construction in high cost areas, because
     it's a different ballgame.
                   COMMISSIONER TRISTANI:  Mr. Shiffman?
                   MR. SHIFFMAN:  There are two attributes that the
     ad hoc plan objectively address the underserved areas.  And
     one, the embedded costs limitation -- the dynamic embedded
     cost limitation.  That being, that if a company invest
     dollars to provide service in underserved areas, and that
     raises their average investment per loop or per line, that
     that will raise the standard by which the limitation on the
     fund is measured.  So that, potentially, to the extent that
     there are embedded costs in those areas, don't get above the
     forward looking costs on the average throughout their
     territory.  That will provide them with the financial
     incentive to make those investments.
                   The second way that the ad hoc plan addresses that
     issue is the dynamic hold harmless.  The hold harmless is
     not a dollar value hold harmless but is a hold harmless
     which, for all companies, adopts the old high cost fund
     rules and gives them at least as much monies as they would
     have gotten under the operation of the old rules.  
                   And to that extent, that they place new loops in
     service, raise their average investment per loop under the
     operation of the old USF or old high cost fund.  They will
     get more money and therefore, they'll have at least some
     incentive to make those investments since they will be
     toward under the dynamic -- what I call the dynamic hold
     harmless provision of the ad hoc plan, the recovery of those
     dollars.
                   COMMISSIONER TRISTANI:  Ms. Baldwin?
                   MS. BALDWIN:  Yes.  After we finish discussing the
     unserved and underserved areas, I would appreciate an
     opportunity to respond to some of Dr. Cooper's concerns
     about the Time-Warner proposal?
                   COMMISSIONER TRISTANI:  Yes.
                   MS. SCOTT:  Our plan -- the Arizona Corporation's
     Commission plan, of course, is directed to the discreet
     issue of the unserved and underserved customers.  And that,
     in large part, is because it is such a big problem in
     Arizona.  I think as the Chairman's written comments
     indicates that just in Citizens Navajo service area alone,
     they estimate conservatively, that there are at least 18,000
     customers -- potential customers, living in areas without
     facilities.  Now, that's a conservative estimate.  That's
     just one service area of the state.
                   We also do not -- we do not believe that existing
     plans or any of the proposed plans are adequate to address
     this.  We found in Arizona, at least, that existing
     incentives under the existing high cost fund and other
     proposals before the Commission now are not enough.  And
     some additional incentive is needed now to get facilities
     into these areas, more in the nature of an up front
     incentive.
                   One other point I want to mention in this regard. 
     There's so much focus on comparably reasonable rates.  And
     there's another major element, I think, in the Federal Act
     that we're losing sight of.  And that if, if you look in the
     same provision of the Act, it also says there must be
     sufficient service or reasonably comparable access to
     services available in all areas of the country.
                   And this is what our plan focuses on.  Somehow
     these people -- this big group of people, have fallen
     through the cracks, and they can't get the services that --
                   COMMISSIONER TRISTANI:  At any price.  Right?
                   MS. SCOTT:  Right.  That other customers can. 
     Thank you.
                   COMMISSIONER TRISTANI:  Mr. Cooper?
                   MR. COOPER:  Within the past two weeks, our
     comments and obligations to serve in the State of
     Washington, I guess a U.S. state.  And we made the point,
     and it is consistent, actually, with the U.S. West statement
     here and Joel's.
                   Again, go back traditionally.  How have we handled
     unserved areas?  We've handled them in the averaging
     process.  If I had a line that cost me $10,000, and I
     incurred those costs, if my revenues weren't adequate, I
     came in and I averaged my rates.  I raised rates.  And as
     long as I had an obligation to serve, and as long as I had a
     monopoly, I could always make that stuff come out.  And more
     or less Joel said, we sort of incorporated that by if you
     have a lot of high cost loops you drive up the state costs.
                   U.S. West says, "But if there's competition, I
     can't do that anymore."  And the answer is when there's
     competition, we'll have to change the system.  And that's
     exactly the answer we gave them in Washington.  
                   We understand that a day is coming when we will
     not be able to engage in this averaging.  But it's not here
     yet.  We should think about it, and we have offered comments
     to think about it.  But until it's here, we don't have to do
     anything precipitously.
                   COMMISSIONER TRISTANI:  Ms. Baldwin -- and you'll
     be the last because I would like my fellow Commissioners to
     be able to ask questions.
                   MS. BALDWIN:  First, I do agree with Dr. Cooper on
     the last point about when competition arrives, than we can
     be concerned about the cost of obligation to serve.  But
     backtracking a little bit, Dr. Cooper referred to an income-
     based approach to distributing high cost fund as a potential
     witch hunt.  And I just would like to point out a few things
     that possibly respond to that.
                   One is, the fact that there's a variable discount
     that's based on community incomes for the schools and
     libraries program to insure that funds are appropriately
     targeted, where they're needed, I don't believe has been
     characterized as a witch hunt.
                   Secondly, perhaps I have more faith than Dr.
     Cooper does, in both state public utility commission and the
     FCC to establish objective guidelines.  I'm not saying it's
     easy.
                   And that's my third point.  Just because it's hard
     to do, I don't think it's necessarily a bad idea to engage
     in a plan whereby one considers affordability as well as
     comparability in designing a high cost program.
                   Thank you for the opportunity to respond.
                   COMMISSIONER TRISTANI:  Thank you.
                   CHAIRMAN KENNARD:  Thank you, Commissioner.  We'll
     go now to Commissioner Baker.
                   MR. BAKER:  Thank you, Mr. Chairman.  Mr. Reiman,
     I'm going to start with you on the end there.  
                   I saw your notes for your presentation really as
     you were making them, and certainly, you didn't see my notes
     before you made your speech this morning.  But suffice it to
     say, you made several points that I agree with.  And I want
     to go through some of those as a preface to my question.
                   If I misstate any of these, I'm sure you'll
     correct me.
                   MR. REIMAN:  Well, if you agreed with me, just go
     right ahead.
                   MR. BAKER:  I want to make sure we have them right
     here.
                   First, size does matter, and smaller is better. 
     Second, subsidies must be competitively neutral.  You stated
     the case a little more strongly that subsidies in free
     markets are natural enemies.  I don't know if I'd go quite
     that far, but we'll leave that for the moment.
                   Third, it is the public policy to keep telephone
     service affordable.  And of course, this is stated in
     Section 254(b)(1).  You also go on to say, and I also agree,
     that we would not design a system that subsidizes rates that
     have been kept far below any rational definition of
     reasonable, so, like $5 a month.  And that stating the
     obvious, customer rate increases are politically unpopular.
                   The issue I'd like to discuss with you, and I'll
     take your comments first and than anyone else on the panel
     who cares to comment.  I'd like to discuss the somewhat
     sensitive issue of rate rebalancing as it relates to reform
     of high cost fund support.
                   Section 254(b)(3) refers to rural services and
     rates which are reasonably comparable to those in urban
     areas.  But this is a two edge sword, because I don't think
     that section of the Act, nor I, nor anyone else would
     suggest that if you had a customer with a $7 rate and a $70
     cost, that the rates go all the way up to the costs.  But
     again, a reasonably comparable to urban rate, might suggest
     that that $7 go to $17.  That rural rate payers pay
     something more along the lines of a city rate, if you will,
     setting aside the question of what the costs are for those
     urban rate payers, which may be below what they're actually
     paying.
                   So, all of which is a pretty longwinded preface to
     the question of, how do we address rate rebalancing in this
     context, because while there -- if we want to set up an
     efficient -- sufficient and efficient fund to use Mr.
     Bluhm's characterization earlier, if that requires rate
     rebalancing, though, how are we going to avoid a situation
     where we see some people's rates rise dramatically all in
     the name of high cost fund support?
                   MR. REIMAN:  I forgot who this morning talked
     about that maybe what we need this first go around is a B
     minus.  Since I have two kids still in school, I'm not
     willing on public record, to say that a B minus is ever
     acceptable.  But I do think that that's a fair concept.  
                   In the spirit today of trying to find common
     ground, I've been listening to the question, trying to find
     something from each presentation that I would agree with,
     and I'm still working on some of it.  But one of the things
     that really stood out was Mr. Weller's chart this morning
     with all the yellow stuff ont the left, and that's where
     we're really concentrating on some solutions, and this huge
     gap of rate imbalance on the right.  
                   So, really the thrust of my comments this morning
     is we can't ignore that huge gap on the right, which I'll
     conveniently call the rate rebalancing question, because if
     we only concentrate on the left-hand side of his chart, than
     we get into engineering an answer that seems to come out
     with right numbers without having tried to fix the problem.
                   Now, specifically, to your question, I do think
     that there is a limitation on what we fixed in some
     locations because of the need for reasonable comparable
     rates.  But there's a lot that the states can do before you
     get to that location.  
                   And the example I use in my remarks about our
     Ameritech region, we have a number of companies --
     independent telephone companies that have rates not at $5
     but under $5.  I don't think that anyplace in the country
     should be subsidizing the difference between the $3.50 or $4
     a month rate and whatever either the statewide average is or
     whatever we could take it up to before we run into the
     problem of reasonably comparable.
                   I do think for almost all of the issues we've
     talked about, like it or not, rate rebalancing is a
     fundamental issue and it's best addressed, in fact, has to
     be addressed by the states.  We've talked -- I could argue
     with Mr. Lubin all day as to why we don't have more
     residential competition.  And he would say, "It's because
     I'm a bad monopolist making too much money."  Of course, in
     trying to find common ground, I'm assuming that all of his
     remarks were geared to RBOC's other than Ameritech because
     we don't receive high cost funds.
                   And I would say it's because his company is
     getting assistance, keep us out of long distance.  If I
     throw both of our arguments aside and just looked at it as
     an economist would, I'd say that in many of our areas, it
     would make no sense whatsoever for a company to come in and
     try to compete with such highly subsidized rates.  
                   So, the Commission's, state and federal, need -- I
     think, need to balance some of these principles that Mr.
     Cooper -- Dr. Cooper talks about, be guided by the
     principle, yet we want universal service support to keep
     rates affordable.  We want competition.  We want investment
     in infrastructure, but we have to balance all three.  So, I
     do think there is a limitation of how far we can go in rate
     rebalancing.
                   By the way, for Mr. Lubin, in our states, we see
     access charge reductions a key part of rate rebalancing. 
     It's not just rebalancing rates between res. and bus.  We
     think that's the place where access charges will be reduced
     as part of the three-legged school of access charges,
     business rates and residence rates.
                   And by the way, as an aside, since I haven't got
     to answer a question yet, I think Commissioner Johnson, your
     question about, can a Commission -- can a regulator insure
     that reductions are flowed through to end users?  I would
     maintain there's a much easier job doing that at the state
     commission level on a state by state basis, than it is for
     the FCC on a national level.
                   MR. COOPER:  Let me try the $7 rate, which is one
     that I frequently encounter.  When you look at that $7 rate,
     I want you to ask yourself, what do they get?  And the
     question is, if you live in a rural area and you incur
     extremely high intraladder long distance bill, than you
     ought to factor that in when you're comparing.  And so, if
     the average person in that $3 area ends up with a very large
     intraladder, than the argument can be made that when we look
     at those two things together, the $3 rate is misleading you. 
     And actually, the cost of telephone service to do the things
     that people do on a daily basis, is about the same.
                   Now, if you could look at that $7 rate and say,
     their intra -- their total is $10, and the urban bill is $25
     for that, than I can say, "Yes, maybe there's a
     justification for rebalancing."  But you can't just look at
     that $7.
                   MR. REIMAN:  Dr. Cooper, I would not disagree. 
     And I think Ameritech's point is we don't want to establish
     a large federal fund that tries to fix the whole problem,
     because you want the state commissions to continue to have
     the incentive to make that kind of investigation.  And then,
     after the states have had an opportunity and have done what
     they can, than if there's a shortfall, we'd look at it, but
     the Federal Government should not pick it up in the first
     instance.  The state should have the first shot at their
     responsibility.
                   MR. BAKER:  Mr. Sichter?
                   MR. SICHTER:  An example was given, and I think
     it's a good example of what's wrong with the system today is
     the way we do rate making today is sit down with a map, and
     we draw circles around it, and we tell the customer, "You
     call anybody within that circle, it's free.  You go outside
     that circle and the bottom drops off because we charge
     exorbitant toll rates because we build subsidies -- access
     subsidies into those toll rates."
                   Now, the answer -- the issue of the small calling
     scope in these areas is let's charge -- set up a regime in
     which these customers are charged cost-based toll rates, and
     it becomes much less of an issue.  Let's not devalue their
     service because we built the subsidies in the toll rates and
     than give them another subsidy because devalued their local
     service.  That makes no sense.
                   MR. BAKER:  Mr. Chairman, are you sure you want to
     get up while I've got the mike?  That might be a dangerous
     thing.  Mr. Weller?
                   MR. WELLER:  I think I am headed along the same
     lines as Mr. Sichter.  I think we get into a circle where we
     try to use toll and access rates to raise subsidies, and
     than find that those high toll and access rates hurt a lot
     of the very people that we're most trying to help, people in
     rural areas and people with low incomes, who, as I said,
     spend half their bills on toll calls.  
                   So, then we, according to Mr. Cooper, we go and
     make a further adjustment in their local rate to compensate
     them for the subsidies we're requiring them to pay to these
     toll rates.  It would seem to be -- make much more sense to
     attack the problem more systematically and get the subsidies
     out of the toll and access rates than those customers
     wouldn't be hurt by them and everybody can pay on a much
     more uniform basis for subsidies instead of having these
     pockets of harm that we do with these out of line rates.
                   I'd also observe that the FCC doesn't have
     jurisdiction over local rates.  And so, we can't really take
     specific actions to direct states as to what to do about
     their local rate making.  But it does have control over some
     portion of the implicit subsidy flow, the part that comes
     from interstate.  
                   And if we were to take a significant action to
     reduce that flow and lower interstate charges dramatically,
     I think that would create a significant incentive for states
     to address their own subsidy flows because they would be
     concerned about arbitrage between the relatively high access
     and toll rates, they would still be relying on, and the very
     low ones that the FCC would have been put in place.
                   So, I think this is a positive step that the FCC
     can take that's good in an of itself, and that also creates
     good incentives for the states and doesn't rely on any sort
     of plan that tries to direct states to do anything.
                   And the final thing I'd say is, in addition to
     these sort of incentives that could be built into a cost-
     based plan, one of the things I like about ultimately
     transitioning to a competitive bidding process, is that I
     think it makes any regulator face up to the costs of the
     requirements that that regulator establishes.  So, if a
     given Commission says, "I want to have $7 rates," that
     Commission knows that it's going to get higher bids from the
     carriers that could possibly supply that service as a
     result.
                   If it's willing to have higher rates as part of
     its universal service requirement, you will get lower bids. 
     I think that moves the determination of universal service
     support levels out of the hearing room and into the
     marketplace.  The Commission still has control about what
     it's asking for.  It doesn't have control about what it
     costs anymore.  
                   If you think about it, it's a very funny process
     where you're doing public procurement, which is really what
     this is.  You're asking for a function to be performed.  And
     you have one agency that has control of what's being bought
     and also what's being paid for that.  And that wouldn't like
     right in any sort of other procurement that you might do,
     and I think the incentive system is not very good.  
                   I think that a bidding system corrects those
     incentives.  It allows the Commission to have any sort of
     universal service that it's willing to pay for.  And I think
     that's helpful.
                   MR. BAKER:  Mr. Bush?
                   MR. BUSH:  Yes, Commissioner.  I think I would
     agree with a lot of what was said here, but you made a good
     point early on.  In the final analysis, it's a political
     problem.  I mean, as we talk about the difference or the
     size of the universal service fund determined based on the
     differential between the price that is paid for that service
     and the forward looking cost model to charge the service --
     to offer the service, that is, at least in our opinion, the
     root implicit universal service fund obligation.  That's
     where the funding need is created.
                   Clearly, steps in reducing costs and/or increasing
     the price that's paid by the universal service subscriber,
     can address that fund.  Rate rebalancing is a way and one
     that we certainly don't object to.  But it is certainly a
     difficult process to go through.  And it is just the reality
     of the situation.  So, to the extent that you've got the
     political problem in front of you, we need to also move
     forward with a funding mechanism that deals with the entire
     implicit subsidy absent any action to rebalance rates.  The
     two solutions to the same problem.
                   MR. BAKER:  If I could just make a little response
     to that, see, I think Dr. Cooper made a very good point of a
     few moments ago, that you sort of have to compare apples to
     apples and look at the, you know, total bottom line on the
     bill.  And if a higher local rate goes hand in hand with
     access charge reductions to get flow-through, which means
     lower toll rates and at the end of the month, the customer's
     got, you know, better service for a lower price, than
     obviously, we've done the right thing.  
                   And you know, I hope I'm not wavering on my
     commitment to free markets but I think that if we end up
     with a situation where we say, "Well, we've got a much more
     economically efficient model, and oh, by the way, your
     average consumer is paying, you know, 10 or 20 percent more
     on his bill every month, and that's something that would
     appear a victory."  Hopefully, we're not headed in that
     direction.
                   Mr. Shiffman?
                   MR. SHIFFMAN:  That's exactly the reason why the
     ad hoc plan moved off of revenues from any specific bucket
     of services and back to costs, because we struggled,
     actually, with the idea of trying to look at what amount of
     shortfall toll was comparable with big EAS areas.  And after
     struggling with it and looking around the country to
     determine there was no real way of creating a standard
     benchmark, so we were forced back to looking at the
     divergence of costs.  
                   And that is, that costs is -- because the
     aggregation of costs equals the total amount of revenues, in
     aggregate, that the only good surrogate for creating equal
     calling areas or equal rate packages was to compare the same
     bucket of costs from one jurisdiction -- from one company to
     another and between jurisdictions.
                   MR. BAKER:  Thank you all very much.
                   COMMISSIONER NESS:  Chairman Wood?
                   MR. WOOD:  One of the down sides about going last
     is I think Gloria you asked all my questions about how do
     you turn the volumes up and down for Mr. Wendling's plan,
     and I was really intrigued by the answers.  And we'll just
     kind of go on the record saying I think that an interesting
     way we ought to maybe conserve going forward.  
                   But let's move from methodology and allocation to
     the end point, which is how do you collect, or do you
     collect it?  Do you absorb it as a cost of doing business or
     as a carrier, you're being assessed your payments here, or
     not?  And I think I speak from, I think, Dave Baker's answer
     just right there at the end it's free mark credentials for
     all of us little young bucks that came with the '94
     elections or at question in light of recent events in the
     industry, that have attempted to increase costs to consumers
     -- to customers.  
                   And in Texas, we tried to make this transfer of
     the subsidy from implicit to explicit a user-friendly type
     thing, but that had a shelf life of about a hot cup of
     coffee.  I wonder if you folks who are smart enough to think
     this stuff through, have a better way than what we've
     experienced.  Certainly, my colleagues at the Federal and
     we, at the state level, probably on around the bend, about
     letting the customer know where the rates went down so that
     they're not so unhappy with where the rates are going up.
                   And let me just start with Mr. Lubin here on AT&T
     IXC, and Mr. Sichter, if you have a Sprint answer on that,
     as well.  It seems to me from putting the bill together,
     that it's just as easy to show a revenue credit for access
     going down as it is to show a revenue increase for a pixie
     or for SLS assessment going up.  
                   Have any of the IXC's consider this idea?  Your
     access goes down a nickel, say.  Nickel times 500 minutes is
     a $25 credit on the consumer's bill.  Why don't you just
     leave your rate structure alone and show the credit?
                   MR. SICHTER:  If I understand what you're talking
     about, you'd have a uniform reduction for all customers.
                   MR. WOOD:  Is access not assessed in a uniform
     manner?
                   MR. SICHTER:  Yes, but there's -- there's,
     obviously, a lot of other factors that probably Joel is
     better able to explain than I am in the pricing of the
     interexchange services.  That we can, for example in our
     Sprint cents plan, it's 10 cents a minute.  I mean,
     consumers understand that.  
                   When we pass access reductions here, we don't pass
     them through uniformly to all customers.  We're not going to
     change our dime a minute, nine and a half cents a minute or
     whatever that might turn out to be.  You know, there's a lot
     of variables in the interchange market that require us to
     use more rates than others.
                   The answer is, no, we do not agree with a uniform,
     across the board, pass through of access reductions.  In
     aggregate, yes, we pass them through and more.  But it's a
     competitive market and pressure to reduce rates to
     particular customers and particular services varies quite a
     bit.  A uniform pass through makes no sense in a market
     context.
                   MR. WOOD:  Mr. Lubin, I assume you would agree?
                   MR. LUBIN:  Yes, but let me clarify at least in
     terms of AT&T's point of view.  And that is, once regulators
     restructure be it access, be it implicit to explicit
     subsidies, from my point of view the price structures that
     we put in the marketplace are going to follow that.
                   Now, let me spend a moment as to why that is. 
     Right now you see AT&T, other competitors marketing very
     heavily various marketing plans in terms of 10 cent minutes,
     15 cent minutes, nickel a minutes, whatever.  When we saw
     this coming in late '97, it was clear to us at the time that
     universal assessments are going to be changing over time,
     starting out one way, potentially changing July of '98,
     potentially changing of January of '99, potentially changing
     subsequent after that.
                   As those percentages change, that potentially has
     a significant impact if we just bury into the unit rates, as
     we are marketing.  And that's what was just said, is we're
     spending a lot of dollars in terms of marketing and
     campaigning particular plans.  We're going to continue to
     market those plans and don't want to create -- maybe this is
     tongue and check here, customer confusion in terms of
     changing those rates.
                   MR. WOOD:  I think you passed that.
                   MR. LUBIN:  Yeah.  That's probably the case.  But
     the fact is in January of 1998, we put a line item on the
     bill for business.  We publicly said we were going to do it
     for residents.  And again, the point was, as these things
     are becoming explicit, to make them explicit, whether that
     is the universal service recovery, whether that is a
     restructure of access into flat-rated charges or usage-
     related charges.  You know, my view is what's going to
     happen is however those structures come about, they are
     going to be driven into the marketplace.  
                   But then you raise another question.  I think it's
     a fair question.  Well, that's only half the equation.  That
     half of the equation is where there have been effective,
     moving of making things implicit to explicit, restructuring. 
     And as those things occurred, there were other access
     reductions such that -- in fact, I think the FCC wrote to
     the Hill, and had a nice chart.  And in that chart, showed
     the aggregate impacts of January 1998.  And I think the
     number was a minus number, maybe $35 million if put in all
     the puts and takes of it.  
                   And I think what was legitimately said associated
     with that, was that on average, customers are better off. 
     And I think that was the impact of that chart.  I think that
     was --
                   MR. WOOD:  And as a regulator, I've run the
     numbers, too.  But I think you guys have got to help these
     guys and me out here on the perceptions game, because we are
     losing that battle.  Customers think that rates are going
     up, when, in fact, they are not.
                   MR. LUBIN:  Right.
                   MR. WOOD:  Let me ask a question.  If an access
     charge is, say, reduced by -- well, interstate is -- I don't
     know, kind of low.  But just saying tax is reduced by a
     nickel.  Would it be possible in a LEC bill to just show a
     nickel credit on the LEC bill and keep billing these guys
     what you've been billing them, but show the customer that
     your rates have gone down by the amount that you're getting
     from the universal service fund?  Make the same question
     applicable to the interstate.  I think it's easier since
     that's what we're here -- interstate rates.  
                   Say, you get a hundred million bucks out of the
     interstate kitty.  You got to drop your rates a hundred
     million bucks somewhere.  Assume that equates to a two cent
     reduction in your total -- or just say, two cent reduction
     in CCL terminating.  Could you show that on your customer's
     bill as a credit to his LEC bill since it is, after all, LEC
     revenues that access represents?
                   MR. WELLER:  Commissioner, perhaps I'm not
     absorbing the idea, because often we're not the same people
     billing.  You know, in other words, if we --
                   MR. WOOD:  Same minutes.
                   MR. WELLER:  -- were seeing the same minutes and
     providing the customer the same bill for the same minutes,
     we might be able to do that.  But a lot of the IXC's for a
     lot of their customers have taken the billing to themselves
     and for higher use customers we may not use all of the
     minutes in a consistent way.  Or access billing system
     certainly aren't going to track those minutes on a per
     customer basis.  And it's certainly not designed to turn
     them into a end user bill.
                   MR. WOOD:  So, your switch does not count -- just
     assume inter and intra were irrelevant.  Anybody that dials
     a one plus, yours doesn't count the number of minutes that
     represents?
                   MR. WELLER:  We might be able to do that.  I would
     have to check, frankly.  But you know, you've got minutes
     going to different IXE's possibly.
                   MR. WOOD:  But you wouldn't care which IXE it went
     to because you're -- the rates you're charging them just
     went down by two cents.  So, whoever you're charging it to,
     that's a different part of the billing department than what
     you're -- the bill that you're sending your retail customer. 
     Isn't it?  I mean, you send him a billion minutes but you
     sent her -- you know, you spoke on the phone for 75 minutes
     this month.
                   MR. SICHTER:  A short answer here, and you're
     probably familiar with this one having been in industry for
     a few months anyways, is that it would require massive
     changes in our system.
                   MR. WOOD:  I was told that about adding something
     on a bill long ago, but if that happened real fast --
                   MR. SICHTER:  The way we capture minutes is we do
     not capture them.  We just capture them real time.  So, you
     make a call, he makes a call, and it's all in one tape.  The
     way you have to do this is, and we've done it to do studies,
     is you have to write special programs for your toll tapes
     off and associate with them with individual telephone
     numbers, and than you've got to, you know, have billing
     system modifications, too.
                   So, one, it's possible.  Two, it's expensive.  And
     three, it'll probably take our data people five years to do
     it.
                   MR. BROWN:  One of the things -- I've already said
     a number of times and I kind of quantified this morning how
     much implicit support we have in access.  Access is a big
     part of our revenue stream.  That revenue is very variable
     because Joel and Jim are -- have today and in the future,
     will have more sources of buying access.  So, I need to
     reduce my prices.
                   MR. WOOD:  I know you do.  You two have an
     incentive to solve this problem.
                   MR. BROWN:  And it's also unfortunate that our
     first experience in funding universal service with schools
     and libraries which was new money into the system.  That
     system was not there.  That money was not in the system
     before.  So, it is an increase on somebody's bill and that
     may be we why --
                   MR. WOOD:  Didn't your access drop at the same
     time?  Didn't you drop the access by a corresponding amount?
                   MR. BROWN:  Yeah, and unrelated, totally different
     thing.  You're absolutely right.  And I hate the part of my
     job where I have to explain all that, because it doesn't
     make any sense to the consumer.
                   On high cost, that is going to be a dollar for
     dollar swap.  And you know, one of the reasons we want the
     rebalancing as much as possible to go on the states, because
     I think you are in a better position to kind of match those
     up, so consumers can see. 
                   On the interstate side, I do see a problem.  We
     are regulated for our rates.  They are not regulated for
     their prices. It's a squishy system.
                   MR. LUBIN:  Chairman?
                   MR. WOOD:  Sure.  I'll let you have the last word.
                   MR. LUBIN:  I'm just curious in terms of, if
     people put on their bills that said, "Here's the amount of
     access that has come down over the last few years, and
     here's the benefits that have been flowed through," is that
     something that you view would be helpful or not?
                   MR. WOOD:  Generally, but -- yes, as informational
     matter.  But I think when people are writing a check each
     month, they don't want information.  They just want to know
     that their rates went down or at least held even.  And I'm
     not sure they're getting that message at all now based on
     the calls we get on our consumer hotline.  
                   I mean, I thought the pixie was supposed to drop
     minutes of use rate on access, but I think the other of the
     big three is not sitting on this panel, through a big charge
     in the first three months of this year on their consumer's
     bill but didn't adjust the MOU rate one penny.  So, you had
     a net increase of real dollars that real people had to pay
     with real dollars.  And that's not what I think this whole
     game is about.
                   So, I look forward to working with the Commission. 
     I appreciate Chairman Kennard your inclination and that on
     the part of your colleagues to involve the Joint Board in a
     formal way later on.  I hope by that time that all the
     bright minds in this room can work on a more effective way
     to let the customer know that this is something we're all
     doing on their behalf because I don't think they're getting
     that message yet.
                   CHAIRMAN KENNARD:  Thank you, Mr. Chairman.  Did
     you want to clarify something?
                   COMMISSIONER NESS:  I just wanted to clarify one
     point which I believe needs to be focused on at that moment. 
     Mr. Brown, you just mentioned that while schools and
     libraries with brand new funding, first time weren't doing
     anything for universal service.  We've been collecting and
     funding universal service for way many years now.  
                   We've been collecting and funding for high cost. 
     We've been -- your organization receives a portion of it
     all.  I'm sure you believe too low, but you've been
     receiving it nonetheless.  And we've been collecting for low
     income consumers for a long period time.  We've expanded
     that program, in fact -- and incorporated all of the states
     so that everybody has an opportunity to collect that if they
     are in low income.
                   The fact that we added the additional program to
     the mix does not detract from the fact that we've been doing
     this other fundings for a real long time.
                   MR. BROWN:  Well, perhaps my point was
     misunderstood.  New funding for high cost areas will be
     offset dollar for dollar by reductions elsewhere.  So, it's
     easier to show those --
                   COMMISSIONER NESS:  If we do it right.
                   MR. BROWN:  And I'm sure you will.
                   CHAIRMAN KENNARD:  Mr. Powell, I'm not sure if
     you've got into the mix here.
                   COMMISSIONER POWELL:  I'm just learning.
                   CHAIRMAN KENNARD:  You're just learning?  Okay.
                   COMMISSIONER POWELL:  I'll jump in when I need to.
                   CHAIRMAN KENNARD:  Okay.  Please go ahead.
                   MS. JOHNSON:  Mr. Brown, could you explain to me
     again when you were -- the last point that you made.  You
     said the high cost fund will be offset -- those universal
     service dollars will be offset dollar for dollar and that
     the other programs will not, or you didn't add that by I'm
     assuming --
                   MR. BROWN:  Yeah.  The point that I made to
     Chairman Wood, was that when the school and libraries
     program began, we had two and a quarter billion dollars of
     new discounts that were new to the system, that were not in
     the system before. 
                   MS. JOHNSON:  Right.
                   MR. BROWN:  And I'm contrasting that to take
     interstate high cost funding.  If that's increased by a
     hundred million dollars, we'll be able to decrease the
     interstate access by a hundred million.  So, the net should
     be zero.  
                   I think what happened at the same time the schools
     and libraries funding went in, the access charge reductions
     also kicked in about the same time for a different reason. 
     And there were -- I think that might have been part of what
     -- not being a long distance company, wanting to be one, but
     not being one, that explaining -- because here they had --
     they were expecting a cut on their bill, and instead they
     had this new funding for something that hadn't been there
     before.  
                   MS. JOHNSON:  But didn't they get the access
     reduction so they did get the cut in their bill?
                   MR. BROWN:  They did, but they were expecting
     that.  What -- the schools and libraries wasn't in the
     system prior to the beginning of the fund this year.
                   MS. JOHNSON:  And the reductions weren't either? 
     They both came on line at the same time, didn't they?  Maybe
     Mr. Lubin --
                   MR. LUBIN:  I'm probably using poor judgment to
     interject here, but -- I should let you handle this.
                   The observation that I want to make is that in
     terms of how competition has evolved, right or wrong, over
     the last several years, access charges have come about.  
                   MS. JOHNSON:  I said access charges have gone
     down.
                   MR. LUBIN:  Access charges -- every year that
     access charges go down.  I'm focused at the Federal level. 
     I mean, states are a lot more complicated with so many
     different issues going on.
                   All I'm saying here is that over the last five
     years and before that, access charges continued to go down. 
     We expect that.  We continue to advocate that it should be
     greater.  Sometimes it is, sometimes it isn't.  But bottom
     line is, we forecast that.  We build that into our plans. 
     We make decisions.  
                   And so, the point that was just being made is that
     a lot of that was expected.  A lot of that was flowed
     through in terms of promotions, in terms of all sort of
     different things, in terms of the way the competition works
     in the long distance marketplace.
                   There was also another point.
                   MS. JOHNSON:  Let me follow back on that one.  Did
     you receive -- and this is just for my edification.  Did you
     receive access reductions than you probably planned for in
     the last round?  I know you were saying traditionally access
     was going down, but did not the FCC reduce them by even more
     than had been anticipated?
                   MR. LUBIN:  I'm opening up another can of worms
     here in terms of at least what we forecasted in July and
     January.  And I would say no to you.  I mean, the Commission
     did a yeomen's job, but I'm saying to you in terms of what
     we were working for, what we were trying to get was less.
                   MS. JOHNSON:  Gotcha.
                   MR. LUBIN:  But there's a second point.  And the
     second point is the industry in aggregate, come January, was
     net a wash.  They were actually, according to the last chart
     I saw of the FCC is about $35 million to the good.  Meaning,
     access came down $35 million more than the USF went up.
                   MS. JOHNSON:  Even including the schools and
     libraries?
                   MR. LUBIN:  Yes.  Yes.  And I mean, that to me,
     when you think about it, was a huge, huge accomplishment in
     terms of a net -- you know, lot of new money $300 million on
     lifeline, you know, $600 million or whatever or however you
     want to annualize that.  I mean, that was a huge
     accomplishment to achieve that and still put in more money
     into the system.  
                   That being said, my point is, even though in the
     aggregate it was minus $35 million.  AT&T was not a net
     saver.  AT&T net was a positive number.  More to the point,
     though, you can't just say, "Well, AT&T whatever or business
     residents," because that relevant question is the residents
     portion of my business.  And the residents portion of my
     business had a net increase.  
                   And that's not to fault anybody.  That's just the
     fault of the numbers in terms of how the process worked, and
     it's not counterintuitive if you say in the most aggregate
     IXC is zero, you don't expect everyone to be at zero.  I
     don't think so.  
                   And all I'm saying to you is if I looked at my
     resident's business, I was not a net zero.  I was a net
     positive.  But that, in and of itself, is not the key point,
     either, even though I'm saying to you I had, you know,
     significant increase in terms of the residential market. 
     That's not the relevant point.
                   CHAIRMAN KENNARD:  Well, it may be the relative
     point from our perspective, Mr. Lubin, because those
     residential consumers happen to be the most vulnerable
     consumers in America.  And we have no assurances to this
     day, that those access charge reductions were passed through
     on a proportionate basis, so that those residential consumer
     have enjoyed the benefits of these access charge reductions.
                   Maybe the Commission made a mistake in
     deregulating your marketplace and relinquishing control over
     the basic scheduled customers, because from everything I've
     heard, those customers are still vulnerable today per your
     acknowledgment a few minutes ago.
                   MR. LUBIN:  When I said per my acknowledgment
     where I said that the residential market net had an
     increase, I'm not talking about the prices that I have set
     in the market.  What I was talking about was the net access
     savings versus USF obligation.  That was where there was a
     net increase.  It had nothing to do with my rate settings.
                   And the reason why that occurred is because the
     restructure of access disproportionately put the access
     benefit into the business side of the equation.  And I'm not
     saying that's bad or that's good.  All I'm saying is that
     was the fact of the situation.  
                   Why did that occur is because there was an
     originating, terminating rate differential.  The terminating
     rate went down significantly more than the originating rate. 
     And business has proportionately more terminating rate --
     minutes.  
                   So, I realize this is a very controversial issue,
     and I realize everybody's working trying to do the best they
     can, but I am saying that as a result of the restructure and
     the combination of everything else on January of 1998, the
     residential -- it has nothing to do with my prices.  And we
     can debate that and discuss that.  But I'm saying the net
     USF access obligation in the residential market that I have
     went up.  And all that is because of the nature of the
     restructure that caused terminating access minutes to go
     down in terms of the unit rate a lot more than residents.
                   CHAIRMAN KENNARD:  Okay, well, can you tell me
     whether that was a good thing or a bad thing for those
     residential consumers?
                   MR. LUBIN:  All I could say to you is that the net
     expense in terms of -- that I incur on behalf of the
     residential customers net went up.  Right now, I'm not
     making a judgment whether that was a good thing or a bad
     thing.  I'm just stating a fact is that because of the
     nature of the restructure, even though that the IXE in
     industry in aggregate had a net savings based on the last
     analysis that I saw from the Commission.
                   All I'm saying is if you looked at the
     residential, from what I see, our net expense was not down,
     but it was up.  And I'm also saying is, whether that's a
     good thing or a bad thing, we can debate.  All I'm saying is
     it was the net result of the combination of a lot of
     different facts.
                   CHAIRMAN KENNARD:  Okay.
                   COMMISSIONER NESS:  If we could get back to a
     point that Mr. Brown was making where we have explicit --
     where on the Federal level, we have explicit funding for
     universal service.  The point was, what should be reduced? 
     What correspondingly should be reduced?
                   MR. BROWN:  Well, in interstate service as you
     increase funding, for example, using the numbers I was using
     before.  If we have a $2.8 billion fund which is the
     interstate share of the 4.4, 1.125 of that would be
     reflected in interstate access reductions.
                   COMMISSIONER NESS:  Okay.  So, in other words to
     the extent that there's an increase in explicit funding -- 
                   MR. BROWN:  Yes.,
                   COMMISSIONER NESS:  From the interstate
     jurisdiction.
                   MR. BROWN:  Yes.
                   COMMISSIONER NESS:  That should result in a
     concomitant reduction in the interstate access charges.  Is
     that right?
                   MR. BROWN:  Yes.  
                   COMMISSIONER NESS:  Does everyone on the panel
     agree with that?  Is there anyone who disagrees with that
     concept?  Mr. Wendling?
                   MR. WENDLING:  Under the variable benchmark and
     the variable support method for certain states where their
     internal intrastate revenues are inadequate to support the
     super high costs of their high areas, the -- those extra
     dollars which would be, in our opinion, necessary to keep
     rates reasonably comparable, would be an offset to
     intrastate side.
                   COMMISSIONER NESS:  But basically, the concept is
     that if you pay in the interstate explicitly, that in order
     to avoid double counting, you would be reducing the
     interstate access unless you wanted to shift more burden to
     intrastate -- not burden, but benefit to the intrastate
     side.
                   MR. WENDLING:  Yes.
                   COMMISSIONER NESS:  But under a normal set of
     circumstances, you make explicit here, and then you reduce
     by a concomitant amount and then you're even as far as the
     funding's concerned.  Is that right?
                   MR. WENDLING:  Under the 25/75, yes.  Every dollar
     of every increased funding would be offset by a reduction in
     interstate access. 
                   COMMISSIONER NESS:  And it would also be logical
     than if we were to on the state side make explicit funding
     for universal service on the state intrastate side.  That
     that would result in a concomitant reduction of implicit
     subsidies or should result in a concomitant reduction of the
     implicit subsidies on the intrastate side.
                   Does everyone agree with that, or does anyone have
     a problem with that?  Would that be logical?  Again to avoid
     double counting?
                   MR. WENDLING:  Or windfall as we call it.
                   COMMISSIONER NESS:  Or windfall.  Okay.
                   MS. BALDWIN:  The only problem is that the rates
     are being readjusted if there's an elastic service for which
     the price is reduced and it's stimulating demand, that may
     need to be fed into the equation.
                   COMMISSIONER NESS:  That's a good one.
                   MR. WELLER:  Commissioner, I think what we've
     suggested is really sort of a cascading approach that's
     similar to what the Commission's already use with the SLC's
     and pixie charges.  
                   In other words, a company gets money from the new
     fund, first to the extent that it's getting money from the
     existing high cost fund today.  It simply replaces that. 
     There's money left over from that, which there should be. 
     It applies to reductions in interstate access.  Interstate
     access gets driven down to some objective rate that the
     Commission would set.  
                   And then, when you reach that level if you have
     additional funds left over and in the high cost states that
     some of these gentlemen are worried about, we would try to
     set the benchmarks so that that does happen.  The additional
     money would be flowed through the Part 36 process to the
     states, where I fully agree there would be a requirement
     that they wouldn't use that money on the state side that's
     sent there to make offsetting reductions in contributing
     state rates today.
                   CHAIRMAN KENNARD:  Let me just follow up on that
     for a moment.  How much money do you estimate is in implicit
     universal support today?
                   MR. WELLER:  On the interstate side, what I've
     estimated is $6.3 billion.  That's a fairly simple
     calculation, taking the reported revenue for switched access
     leaving the SLC's aside, and subtracting an estimated cost-
     based rate with a average amount of contribution at eight
     tenths of a cent.  
                   And that's a fairly robust number if you change
     eight tenths to seven tenths or nine tenths.  It's not going
     to change dramatically.  
                   So, that is the estate of what's in interstate
     access today.  Now, a certain portion of that is the
     recovery from the schools and library fund.  If there were
     another recover mechanism for that fund, and I know there's
     been discussion of that recently, than the number would come
     down correspondingly to five point something depending on --
                   CHAIRMAN KENNARD:  But that number doesn't include
     the explicit interstate support like DEM weighting and long
     term support in the high cost fund.  Correct?
                   MR. WELLER:  The explicit interstate support to
     non-rural companies, as Mr. Sichter said earlier today, just
     over $200 million, about $217 million.
                   So, if you put these pieces together, you have
     five point something billion dollars to get down to eight
     tenths of a cent for interstate access, plus $217 million to
     maintain the current level of high cost funding to non-rural
     companies, plus whatever it is that as a policy judgment,
     you decide represents a reasonable balance, the money that
     you should send to the high cost and/or low revenue based
     states to use for reducing intrastate subsidies.
                   CHAIRMAN KENNARD:  So, on top of that number,
     there's still some amount that would have to go to defray
     intrastate costs, as well.  Correct?
                   MR. WELLER:  Yes, depending on the amount that you
     choose to sent there.  I believe in Mr. Shiffman's plan that
     would be in a range of maybe $600 to $800 million, if you
     want to take his estimate as a guide.
                   CHAIRMAN KENNARD:  Okay.  Let's hold on Joel's
     estimate for a minute and add up the costs.  You said $6.3
     billion in implicit support plus the $600 million.  That's
     $6.9 billion.  If we were to recover that amount -- and
     plus, of course, than you have the explicit support, the
     high cost fund, DEM weighting and LTS.  If we were -- how
     much in addition is that?
                   MR. WELLER:  Again, it depends on what you do with
     the schools and libraries.
                   CHAIRMAN KENNARD:  Put that aside for a moment.
                   MR. WELLER:  If we put that aside, than we're
     starting from about 5.2 instead of 6.3, if we assume just
     over a billion dollars.  So, than add Mr. Shiffman's $600 or
     $700 million and gets us up to about six.  Add $200 million
     or so for the current high cost funding, and you're back to
     about 6.2, 6.3 percent.  I'm sorry $6.3 billion.
                   And I said earlier, a fund of that size could be
     financed with a uniform percentage surcharge on state and
     interstate revenues of about three percent, just over three
     percent.
                   CHAIRMAN KENNARD:  About three percent?
                   MR. WELLER:  Yes.
                   CHAIRMAN KENNARD:  So, you'd be talking about an
     end user charge of approximately three percent?
                   MR. WELLER:  Yes.  So, if you think about it this
     way, someone with an average amount of toll, would actually
     slightly benefit.  They'd start out by breaking even, but
     then there'd be stimulation as was suggested earlier.  So,
     actually, about half of what -- there would be significant
     stimulation, I think, that would produce an additional
     benefit.
                   If you think of a worse case scenario where
     somebody makes no toll and doesn't benefit at all, take
     someone with an $18 average residents rate, add a SLC, you
     get up to $21.50.  Take three percent of that, you're
     talking about 60 some cents.  That's the worse that anyone
     could be hurt by this program.  And most people would
     benefit.
                   CHAIRMAN KENNARD:  Okay.  Now, if we were to take
     that 60 cent amount, have you done any calculations on what
     the effect of competitive bidding would be on that amount of
     support, to the extent which it might go done?  Tough
     question.
                   MR. WELLER:  No, I haven't.  In fact, to my mind
     the whole point of competitive bidding is that we don't try
     to do calculations.  We let the bidders do the calculations. 
     So, no.  My presumption is that competitive bidding, and I
     think it's demonstrable logically, will give us the best --
     the right number.  Some places that may be more, and others
     it may be less.  But what we can say is that they'll be
     competitive pressure over time to the extent that it can be
     driven down.
                   CHAIRMAN KENNARD:  Okay.  Thank you.
                   COMMISSIONER NESS:  Just following up on your
     calculation, are you assuming that everything that is in
     access except the actual cost of access -- of interstate
     access, goes to subsidize universal service, or might there
     be included within that maybe some other funds slushing
     around?  Maybe it goes to the corporate bottom line.  Maybe
     it goes to other investments that GTE has abroad, whatever
     it might otherwise be.
                   MR. WELLER:  I'll go back to the picture.  And as
     I said before, you have to either imagine a leak in the
     system or a completely different cost level to say that that
     support isn't universal service funding.  All right?  So,
     there are no major flows in or out of the system that aren't
     depicted on this chart.  So, I've accounted for all of the
     local business.  So, there are major leaks, sinks or sources
     in the system that I haven't accounted for.
                   And as far as the cost level is concerned, as I
     said earlier, you know, if you assume a low enough cost
     level, I mean, I could make the Ford Foundation show a
     profit.  But I think you have to start with a reasonable
     assumption that if you've arrived at this rate level by your
     price cap system, that's the mode of regulation you're
     employing.  By the way, it's not dependent on embedded
     costs.  You've been off of an embedded cost system for the
     last seven or eight years now, as far as access is
     concerned.
                   So, either that's the right starting point or it's
     not.  But you have to make a heroic assumption that it's not
     in order to say that the margins above the normal margin
     that are in access are not contributing to universal
     service.  
                   And I think if you look at this chart, it seems
     fairly obvious where the money's going.
                   COMMISSIONER NESS:  I don't mean to be heroic, but
     I think one could make a very easy argument that when we
     went to price caps, we just switched over without really
     probing and testing what was in those numbers.  And we were
     told, certainly, by the local exchange carriers who were
     subject to price cap, "Don't worry about it, because it's
     price capped.  It doesn't matter what our costs are.  It
     doesn't matter how much we spend for the infrastructure. 
     We're going to the invest -- we're going to do all the rest
     of the stuff.  The price cap keeps it down, and you don't
     have to worry about how much profit is included within that
     level."
                   So, I'm not sure that I necessarily, therefore,
     reach your conclusion that everything that would be included
     on that side solely goes to support universal service within
     the system.
                   I don't know.  Mr. Lubin, do you have a viewpoint
     on this?  I can't imagine that you do, but perhaps you do.
                   MR. LUBIN:  Yeah.  I'll be brief because I just
     repeat what I've said is that from our point of view, we
     think that, in particular, there are some local companies
     that have rates of return and the interstate jurisdiction of
     20 percent in excess.  There are various audits that go on
     that try to search the rate base and whatever can identify
     it.
                   There's all sorts of questions.  And that's why
     the perception is if we took all of the access out and drove
     it to the costs -- Dennis's number was .8 cent, that it has
     to be zero sum, and it has to go somewhere else.  My point
     of view is challenging the point, does it have to go
     somewhere else?
                   Again, if you take a study area as the level of
     aggregation of the subsidy, we conclude from the analysis
     we've seen, it's not the case.  But I mean, that's the issue
     that will be debated.
                   I do have one question if I could just pose it to
     Dennis.  I'm just curious just so -- because I was trying to
     follow the numbers of the 5.2, the .6 and the .2, which
     added to roughly $6 billion or $6.2 billion.  Does that
     include the existing high cost subsidy of about, let's say,
     1.7 minus the $200 million?  So, say, 1.5 for the rural
     guide?  I was just trying to understand where that is.
                   MR. WELLER:  No.  We've been talking exclusively,
     I think, generally, in this session about support for non-
     rural companies.
                   MR. LUBIN:  So, these are non-rural companies. 
     Okay.  Thank you.
                   MS. JOHNSON:  I have a question for Mr. Lubin, and
     it goes to the paragraph 381 issue.  The issue being whether
     universal service dollars should be used to reduce
     interstate access, or at least that's how some people
     interpreted 381.  And maybe the FCC staff can help me here a
     bit.
                   But looking at the principles, one could interpret
     the principles to mean, well, at least for the $220 million
     that is currently recoverable, we will continue to let
     universal service dollars flow to that.  But whatever's left
     over will go to reduce interstate access.
                   Now, my question to you is, you have articulated
     that access dollars aren't used for universal service.  That
     the revenues cover the costs.  So, I know in a general way,
     we should always try to make sure that rates are as low as
     possible in looking at the market, of course.  But to the
     extent that we're in a universal service docket and we're
     dealing with universal service issues, and you tell me that
     those dollars -- those access dollars have nothing to do
     with local rates low, why should I be concerned?  Should
     that be a priority for using the dollars in that way?
                   MR. LUBIN:  Meaning the $220 million or what's
     included in access?
                   MS. JOHNSON:  Both.
                   MR. LUBIN:  Okay.  It's a complicated issue, but
     before I answer, I just want to take 20 seconds and thank
     the Commissioners and the Joint Board for having a session
     like this in terms of having the expertise on the panel to
     engage and listen to your questions and respond.  
                   I, personally, found it very helpful.  I,
     personally, learned things that I didn't know before, in
     particular, on Joel Shiffman's presentation, because it was
     always unclear.  And I'm going to relate it to your
     question, is that it was always unclear to me how you get to
     argue that you want a bigger fund and it shouldn't be used
     to lower access.  I mean, I just didn't understand that.
                   I don't agree with it, but at least now, for the
     first time, I appreciate and understand the logic.  And I'm
     one for trying to understand the logic of what's going on. 
     And what I did not understand before, is that they're
     looking at it from the point of view of comparability.  And
     so, that doesn't mean that it's a zero sum, meaning, "Hey,
     figure out the access and lower access prices."  They're
     saying that there's certain states or certain areas for
     which there needs to be more subsidy to lower the existing
     local rate.  
                   I didn't understand that before.  And so, we can
     debate whether the law, you know, wants that to occur.  But
     at least I, for the first time, understand how they get to
     argue, create more money, don't use this to lower access,
     use it to lower somebody's local rate.  I mean, it never
     dawned on me before.  At least now I understand that.  I
     mean, I don't agree with the point, but at least I
     understand the logic, whereas before I thought it was just
     being arbitrary.  Now, I see that they're saying that, you
     know, there are certain local rates that aren't comparable
     and need to be lower.
                   MS. JOHNSON:  And from a universal service
     standpoint, if the goal is to keep local rates low or
     comparable, you can follow that argument.  You still may not
     agree, but --
                   MR. LUBIN:  Right, right.  But again, to me, I
     always thought the Telecommunications Act was, "Okay.  We've
     got the subsidies somewhere."  Identify them and make them
     explicit to keep rates kind of where they were, which I
     always deemed as affordable rates.  I mean, they were --
     they exist.  You have some lifeline.  You have penetration
     94 percent, and you have other ways to get it up.  So,
     anyway, I don't want to belabor it, I just thought, at least
     I understood now the logic.  
                   But now I go to the heart of your question.  The
     $220 million or the 110 for which large companies get --
     okay?  So, the 200 is all non-rural.  Of that 220, roughly
     110 goes to the very largest companies.  There's about, you
     know, RBOC, GTE and SNET cover about 90 percent of the
     lines, and they get the money.
                   And from our point of view if revenues for local
     are covering costs, and you're at the study area level, our
     point of view was they shouldn't get the money.  There's no
     need for the money.  The money is simply going to the bottom
     line by virtue of looking at the interstate rates of return
     for GTE and other companies who are getting the money.
                   MS. JOHNSON:  Why should you get the money?
                   MR. LUBIN:  Okay.
                   MS. JOHNSON:  Because we're not -- a lot of
     states, we aren't looking at their rate of return, just like
     we're aren't looking at yours.  So, if the money isn't going
     -- I mean, why should you get the money?  How do we make the 
     policy decision that AT&T should get the money?  
                   MR. LUBIN:  I wish --
                   MS. JOHNSON:  Because typically you're not passing
     it through.
                   MR. LUBIN:  Right.  Well, I mean, that --
                   MS. JOHNSON:  But maybe you are.
                   MR. LUBIN:  Right, right.  The question here is,
     you know, and -- I mean, I understand the dilemma that the
     regulator has.  The regulator has, "Why should take billions
     of dollars out of access and trust the middleman or
     middlewomen to flow it through?"  
                   And certainly, that is the dilemma that I hear --
     the paradox I hear, because I keep coming back to the point
     that the reason you take these access down is the consumer
     is going to benefit, be it high cost.  That I say, there's
     $110 million too much.  Or be it that there's, you know, six
     billion, 10 billion, 12 billion.  Pick the number have the
     investigation.  From our point of view, that gets lowered
     and that flows back into the customer's hands.  
                   Now, one of the things I take it that people would
     like is, it should uniformly flow into all customers hands. 
     And unfortunately, that is an issue.  
                   My answer earlier was I sincerely believe that
     business and residents are getting their fair share.  That
     doesn't necessarily mean that every customer is getting
     their fair share as maybe you wish to define it.  And that
     is because there are some customers whose cost or margin is
     extremely thin.  And there are other customers whose margin
     is bigger.  
                   And so what you compete away is you compete away
     margin.  You compete away us trying to drive costs out of
     our businesses, such as our overheard, our sales, our
     marketing, our administration.  We try to drive those up. 
     But I'm hard pressed to drive out a USF assessment.  I'm
     hard pressed to drive out a pixie charge unless there was
     local competition.  And if there was local competition, I
     still can't drive out the USF line item, but maybe I have
     the opportunity to drive out the pixie.
                   Anyway, so I'm taking probably more time than is
     warranted here.  Thank you.
                   MS. JOHNSON:  Thank you.
                   MR. WOOD:  Consumer information is what lubricates
     the market period.  There are a number of areas that are not
     passing this through.  And I wonder if there's a role -- I
     know you all have access to a lot of resources as to what
     people are charging on tariffs.  But -- and we're trying to
     figure this out in Texas, too, is -- you know, in a market
     place, which the long distance market is arguably there in a
     competitive marketplace, consumer information is what really
     lubricates the market.  
                   And you know, there's still people in Texas who
     think there's only one phone company.  As Mr. Lubin's
     employer, it would be nice to let them know that there are
     companies who don't choose to pass these through.  We choose
     to internalize that in a minutes of use rate or in a flat
     structure that looks different than what they're charging.
                   And the truth shall set you free philosophy leads
     me to think maybe rather than, you know, beating these guys
     over the handbags and shoes, we ought to just out there and
     tell the public, "Hey, here's a 1-800 number company who
     doesn't charge all this stuff."  I mean, that's what I would
     like to do.  And I think in Texas, we might talk about doing
     that sometime later this month. 
                   But there are a lot of little companies out there.
     One of them found me one rainy night when I was mad at my
     carrier, who's not on this panel, but -- and I moved.  And I
     asked them every three months, "Are you going add
     surcharges?"  They said, "Federal excise tax, state sales,
     911 fee and that's it."  And as long as they kind of hold to
     that pledge, that's who I'm staying with.  
                   But I mean, I think that's an effort that maybe
     the consumer affairs division of the FCC can help us with is
     getting the word out to who these -- you know, make
     available information out there as to what these people, and
     the customer can decide if they want to do that or not.
                   CHAIRMAN KENNARD:  I think you make an excellent
     point, Pat.  Mr. Lubin argues passionately for the fact that
     all of the consumers that he serves are getting their fair
     share, but those consumers don't know that.  Indeed, we
     don't even know that.  And unless consumers get that
     information, one way or another either from us or from you
     in your billing disclosure, they'll have no confidence that
     they'll have that information.  And that is, information is
     power.  That's what they need to exercise the choice that
     Chairman Wood is talking about.
                   Commissioner Furchtgott-Roth?
                   COMMISSIONER FURCHTGOTT-ROTH:  Chairman Wood, with
     all due respect, there are millions of Americans who switch
     their long distance carrier every year without the benefit
     of a Federal regulator or a state regulator telling them who
     to go change to.  American consumers are the brightest, best
     informed consumers in the world.  And I think they do an
     awfully good job of sorting through this.
                   If they want to go to a carrier that embeds new
     Federal taxes in the rate, they'll go that one.  If they
     want to go to one that's going to make it an explicit line
     item, they'll do that.  If they want to go to one that's
     going to make it a line item somewhere else, they figure it
     out.  But I am completely unconvinced given the rate at
     which consumers churn in the market in one of the most
     competitive markets in the United States, that there's any
     shortage of customer information out there.  I find it,
     frankly -- I find it unfathomable that we could even have a
     discussion about this at this stage.  
                   But that's probably just a reflection of my
     concern about an earlier statement of possibly going back to
     regulating rates of long distance carriers.  I haven't quite
     recovered from that one yet.
                   CHAIRMAN KENNARD:  Fasten your seatbelt.
                   MS. JOHNSON:  Let me make one comment in response
     to the Commissioner's statement.  I agree that the consumers
     -- American consumers are some of the most informed.  Often
     times, they have the 1-800 number for the Florida Public
     Service Commission, and they call us to tell us how
     confusing this all is for them, how they don't understand
     the pixie, how they don't understand what's happening, how
     they do, in fact, need some help in sorting all of these
     issues out.  That's not to say that they aren't intelligent
     beings, but this is a very complicated process.  
                   And often times, there's a lot of churn, because
     there's a lot of slamming.  Now, that's another issue we
     need to deal with.  And I say that somewhat joking, but
     somewhat seriously, too.  I've been on the road show for
     several months meeting with consumers, consumers that we
     regulate, and the number one issue is customer confusion.
                   So, to the extent that we can come up with
     policies, and we've been working with our industries to --
     so that they can help develop policies, not necessarily
     Commission policies and Commission procedures to make sure
     that the users understand their bills, understand the
     issues, understand the increases and the savings that they
     may achieve.  But it is a difficult process and I deal with
     it every day.
                   CHAIRMAN KENNARD:  Commissioner Tristani?  Oh. 
     Ms. Hogerty?
                   MS. HOGERTY:  I had a question about the access
     reductions and the 381 question.  If my memory serves me,
     the universal service docket dealt with universal service. 
     There was a separate docket that dealt with access
     restructure.  And there were discussions today, and I 
     know -- I think Commissioner Ness if anybody disagreed that
     the fund should be used to lower access.  Well, I recall
     that Dr. Cooper, before he left, stated that it should not
     be used to reduce access.
                   And the question that keeps occurring to me is,
     how -- if the purpose of the fund is to maintain affordable
     rates in high cost areas, how does a general reduction in
     interstate access target affordable local rates, those rates
     that have defined as universal service rates in high cost
     areas?  Those reductions will go to -- I don't know where,
     wherever you decide to put them.  But how can that be
     consistent with the statute when the purpose is to support
     affordable basic local rates in certain designated high cost
     areas?
                   MR. SICHTER:  I would respond first.  I'll tell
     you the answer is that, as I said in my opening comments, we
     don't need new revenue to support USF in this country.  We
     need to move from the implicit subsidy structure we have to
     an explicit subsidy.  And that's all that's occurring. 
     You're moving the subsidy dollars out of the access charges
     where they create all kinds of distortions in the
     marketplace and eventually become competitively vulnerable
     to a competitively neutral universal service fund.  One that
     is both explicit and portable and available to CLEC as well
     as the ILEC's
                   MS. HOGERTY:  And what cost are you moving out of
     access and placing on the end user are you proposing?  What
     cost?
                   MR. SICHTER:  Well, we take a little bit different
     tact than, I think, others.  In sorting through this issue,
     there's really two things going on.  One is, the subsidies
     to support universal services as a result of historic rate
     making practices, as well as --
                   MS. HOGERTY:  I'm just asking, what particular
     costs are you moving from the access to the end user?
                   MR. SICHTER:  I'm trying to get to that.  I'm
     trying to differentiate the costs that were put into access
     to explicitly support universal service.  And those are
     primarily the non-traffic sensitive costs, as opposed to the
     above cost rates for access that are really a function, I
     believe, of the difference between forward looking costs and
     embedded costs.
                   MS. HOGERTY:  So, you are saying, essentially, the
     loop?
                   MR. SICHTER:  Yes.  The loop, the non-traffic --
                   MS. HOGERTY:  The carrier common line?
                   MR. SICHTER:  The carrier common line, and we
     would like to see the pix moved into universal service for,
     I think, obvious reasons.
                   MS. HOGERTY:  Okay.  When a person provides --
     when a company provides toll, is the loop part of the plan
     necessary to provide that service to the customer?
                   MR. SICHTER:  Oh, absolutely.  It's necessary. 
     It's not an issue of whether or not it's used or it's
     necessary.  It's a matter of how you recover those costs.
                   MS. HOGERTY:  If you were to provide long distance
     service on a stand alone basis, could you eliminate the cost
     of the loop?
                   MR. SICHTER:  No, absolutely not.  And again,
     we're not talking about an issue of whether it's used or
     useful or necessary for the provision of a toll service.  We
     are talking about a pricing issue on how those non-traffic
     sensitive costs did recover.
                   The issue, if I may be permitted, that we're
     dealing with today, is a recovery of those costs through a
     usage sensitive element, somewhat on the interstate side,
     but particularly, on the state side.  And we have this
     phenomena, and I can relate the numbers for Sprint local
     companies.  They're not dissimilar from other companies, as
     we find that for example, 40 percent of the revenues -- CCLC
     revenues generated just by our residential come from 10
     percent of the customers.
                   What's that translates into is that we've got
     customers that are paying nothing because they make no toll
     calls towards the contribution of those costs.  And we've
     got others that pay as much as $40 and $50 a month.  Now,
     people paying $40 and $50, if you're a smart competitor in a
     market, and there are smart competitors out there, figure
     out that if you can buy an unbundled loop for $20 to $25 and
     pull off to $40 to $45 in CCLC revenues, that's a pretty
     good start in the marketplace.  
                   That's the type of arbitrage that we have set up
     through the permanent recovery of the non-traffic sensitive
     costs.  Eventually, those costs have to be borne in a non-
     traffic sensitive manner, and indeed, they have to be borne
     by the customer who causes those costs to be created by
     subscribing to the network.
                   MS. HOGERTY:  That is the position you're in right
     now, deciding how you want to recover any of your costs as
     an interexchange carrier, but that's a different question as
     to whether the universal service fund should be collected
     and distributed to interexchange carriers to do with
     whatever they wish, as opposed to targeting high cost areas
     to insure that rates are affordable.
                   MR. SICHTER:  The subsidy that flows to the high
     cost areas today is via the mechanism of the interstate as
     well as intrastate subsidies such as the CCLC, and that's
     what we are trying to replace.  We're not trying to create
     new money.  We're trying to more specifically, identify how
     a cost area --
                   MS. HOGERTY:  Since you have stated that the loop
     is required to provide your service, I don't think that you
     can demonstrate a subsidy.  I think all this deals with is a
     question of how you're going to allocate a joint and common
     cost.  And I think we do need to pay attention to the
     statute that says joint and common costs must be reasonably
     allocated between universal service and other services.
                   MR. SICHTER:  You can allocate the costs all you
     want, but they have to come back on the consumer's bill. 
     Now, if you want to do it through a local service charge and
     pix and a SLC, we can divide it up and put it back on the
     bill.  But when the dust settles on this, if it costs $20 to
     provide a loop to a customer, you either get that $20 from
     the customer or you get it from somebody else.  If you get
     it from somebody else, you've got a cross-subsidy problem.
                   MS. HOGERTY:  Joel?
                   MR. SHIFFMAN:  For many ways I've listened to this
     argument, I find the discussion of differences of position
     between Mr. Sichter, Sprint, GTE and Bell-South, and myself,
     to be somewhat more semantic than substantive.  And your
     question, I think, raised that point very well.  And that is
     that, we -- I, personally, have no objection to removing
     from the common line charge and the pixie those costs and
     replacing them with a surcharge on carrier revenues.  But
     that's access reform.  That's something that may be
     desirable and is to be looked at as access reform.  It's not
     universal service reform.  And your question raised that.
                   Universal service reform is providing funds, as
     Mr. Lubin suggested, to make rates comparable, to make rates
     affordable.  And that there are different things that --
     don't object to what you are doing Mr. Sichter, but it's not
     -- but it is not -- it doesn't come under the rubric of
     Section 254 or universal service.  It probably is a
     desirable objective.  You can't continue to sustain per
     minute recovery of costs that are not incurred on a per
     minute basis.  
                   I don't disagree with you, but call it for what it
     is, a spade a spade.  Access reform hasn't got far enough,
     and access reform needs to be -- go further to recover those
     costs in a way that will not distort the marketplace.  But
     don't call it universal service reform and don't make -- and
     don't cheap out on universal service reform because you need
     both of them.  Fund both of them.
                   MR. SICHTER:  You misunderstand.  We either 
     move -- have to move those costs back to the end user, which
     I'm hearing you agree with in terms of a flat rate charge,
     or we're going to have to fund them through universal
     service.  And we need to get it out of the carrier charge.
                   MR. SHIFFMAN:  You need to pull it out of the
     carrier charge and either move them back to the end user
     through a surcharge on carriers, not dependent upon use or
     through an end user charge.  But that doesn't make that a
     universal service fund issue.  
                   MR. SICHTER:  It makes it a rate rebalancing
     issue, which is exactly the right answer.
                   MR. SHIFFMAN:  It is a rate rebalancing issue, but
     --
                   MR. SICHTER:  And that's fine.  I said at the
     opening, that the universal service subsidy implicit as well
     as explicit we have today is huge.  And the only way to
     reduce it is rate rebalancing, which we are in favor of. 
     So, I mean, that's fine.  That's --
                   MR. SHIFFMAN:  But those are not new dollars as
     you said.
                   MR. SICHTER:  Absolutely.  There aren't any new
     dollars, Joel.  We're shuffling existing dollars.  We don't
     need new dollars.  We don't need bills to go up in
     aggregate.  We need to reshuffle the dollars we have today.
                   MS. HOGERTY:  Can I ask another question?  This
     $200, that -- do I understand it to be the current high cost
     distribution to the large -- the non-rural companies?  Is
     that correct?
                   MR. WELLER:  $200 million.
                   MS. HOGERTY:  $200 million.  What'd I say?  $200? 
     Okay.  What is the 110 that you are referring to in your
     statement?
                   MR. LUBIN:  The number I was referring to was
     there's $110 million for what we call major LEC's.  These
     would be the RBOC's plus GTE and SNET.  That is $100 million
     that goes to that classification.
                   Then, there's another classification which is
     their -- we view as their non-major, but there also non-
     rural.  That number that we estimate, it's about $230
     million.  So, we believe that the high cost -- well, I'll
     say it this way.  The high cost plus LTS and DEM for that
     group, meaning non-rural, is approximately $330, $340
     million.  
                   So, again, it's $110 million for the major LEC's. 
     Those are the top, say, GTE, SNET and the RBOC.  It's $110
     million, $230 is the next rung down of non-rural.  And the
     total, if you added it all up in terms of what happened on
     January 1, 1998, is about $1.72 billion.
                   Am I confusing?
                   MS. HOGERTY:  Well, I'm familiar with -- I was
     just trying to compare the 200 and your 110.
                   MR. LUBIN:  Okay.  My 110 is purely the amount for
     major LEC's, the top seven companies.  The next rung, which
     is non-rural but not major is 230.  That's our estimate.
                   CHAIRMAN KENNARD:  Mr. Lubin, could I just get a
     point of information for the record?  How many basic
     schedule customers does AT&T have?  Roughly, ball park?
                   MR. LUBIN:  I mean, offhand, I don't know that
     number.  I'm sure we would be glad to find that and give it
     to you.  I'm not sure I would want to publicly state that to
     the world.
                   CHAIRMAN KENNARD:  Do you know what the churn rate
     is, in general, for your basic schedule customers?  That is,
     how many times they switch carriers?
                   MR. LUBIN:  No.  I know what the aggregate
     estimate is for the industry.  The last I heard it was about
     50 million for the industry.
                   COMMISSIONER TRISTANI:  How many?
                   MR. LUBIN:  Fifty million.
                   CHAIRMAN KENNARD:  I'm talking about for your
     lowest volume consumers, your basic schedules what I'm
     interested in.  You don't know that?
                   MR. LUBIN:  Don't know that.
                   COMMISSIONER TRISTANI:  That's 50 million total
     for all the industry.
                   MR. LUBIN:  Yes.  All the industry, the IXC
     industry.  That was the last number that I was familiar
     with.
                   CHAIRMAN KENNARD:  Okay.  I think we're going to
     have to wrap up soon.  Commissioner Tristani, did you have
     further questions?
                   COMMISSIONER TRISTANI:  No, I'd like to give this
     opportunity to the state commissioners if they have
     something to add or to discuss?
                   CHAIRMAN KENNARD:  That's a good idea.  Any other
     questions from the bench?  Okay.
                   I just had a couple of questions really in the
     nature of sort of housekeeping questions as we proceed from
     here.  We've talked about the process for proceeding from
     this point.  And I have talked about discussing with members
     of the Joint Board the possibility of a referral to the
     Joint Board if we can agree on the scope of the referral and
     the timing.  And if we are to take a referral of some of
     these issues to the Joint Board, it will implicate our
     schedule for resolving this matter.
                   I'd like to ask Mr. Weller from GTE if GTE would
     be amenable to pushing off the January 1 deadline to afford
     us more opportunity to get input from state members of the
     Joint Board.
                   MR. WELLER:  Mr. Chairman, I appreciate the
     dilemma here because you want to get input and yet on the
     other hand, we're all concerned about delay, because we
     realize the importance of moving ahead with the program. 
     I'd answer the question, I think, by drawing a distinction
     among the different purposes of the Federal fund or the
     different objectives for the Federal fund.  But I think
     several have talked about -- Mr. Bush, I think is listed, a
     similar set of objectives.
                   To my mind, the biggest single source of funding
     that the Federal fund has to deal with is the implicit
     support that is coming today from interstate access.  And I
     don't believe that you need -- that the FCC needs to refer
     questions about the magnitude of that funding source to the
     Joint Board.  It's really about rates that are within your
     jurisdiction.  And I think that it should be possible to
     arrive at a component of the fund that deals with that
     problem by the end of the year.
                   Similarly, I think we all know what the current
     amount is that's in the high cost fund today.  So, we don't
     really need to ask questions about that.  We know what those
     dollars are.
                   The third item that I've talked about is the
     amount that would -- of new funding over and above the
     current high cost fund that would be sent to the states to
     deal with states with high cost and/or low funding basis. 
     There, I recognize that there are different interests of
     different states around the table and that some Joint Board
     activity must be a way at arriving at some reasonable
     balance among these considerations.  
                   So, if we were to consider a delay, I would
     suggest that it would apply only to that portion of the
     funding.  In other words, you could adopt a fund that
     addresses most of the funding that the Federal fund needs to
     supply by the end of the year, and either defer that third
     item or put some sort of plug in place to say, basically,
     "Look, we're doing this much now.  We'll refer that amount
     to if we want it to be more or less.  Give us input back
     again."  
                   So, I think that a referral might be a useful
     process.  I understand the problem with scheduling.  But I
     think we ought to craft it so that it does the least
     possible harm in terms of delay of implementation to the
     fund.
                   CHAIRMAN KENNARD:  Mr. Brown, would you like to
     address that point?
                   MR. BROWN:  Yes, Mr. Chairman.  I spoke at the
     beginning about 200,000 customers that we serve that cost
     over $100 a month.  These are the most vulnerable customers
     in the system, another half a million that are over $50. 
     And competition is here in the business markets where we get
     most of the support.  
                   I go back to what Chairman Wood said earlier about
     we do not have to have the perfect solution initially.  And
     I'm not sure that we want the perfect solution to be the
     enemy of moving in the right direction.  
                   If -- I would make a couple suggestions to the
     Commission as perhaps a way to move this along.  One would
     be there's been a lot of debate on the cost models.  There's
     probably going to be more debate about the cost models, but
     both models indicate that there are a number of very high
     cost customers that are going to need, under any system that
     we come down with, support.  
                   The second suggestion I would make is maybe you
     address that high end first.  You set the high end benchmark
     high enough that you built a safety net under those
     customers.  And knowing that you've not solved the whole
     problem there, but that as you refine the models as they
     become more precise, as you find where the affordability or
     revenue or whatever benchmark is going to be firmly be put
     in place on the low end, you at least have begun to address,
     you know -- what I hear, you know, coming out of a number of
     the Congressional representatives from the area we serve,
     that we've just got to get moving to make sure that we don't
     lose this important thing we have of universal service.
                   So, my suggestion would be we find an interim cut
     of the models.  Maybe the staff common inputs.  Maybe that's
     a starting point.  We find a high level benchmark that
     addresses the needs of the states that face the most
     difficult problem, and than work on fine tuning the low end
     funding benchmark.  
                   That would be my suggestion.
                   COMMISSIONER NESS:  If your concern is the loss of
     some of the business customers, wouldn't that be a function
     of the intrastate implicit subsidy?  That is, the difference
     between business and residential or some of the other
     elements that go in there, rather than on the interstate
     side of the coin?
                   MR. BROWN:  Well, Commissioner Ness, these are --
     the states that are, you know, we've identified through the
     modeling processes are the ones that have a lot of the very
     high cost customers and don't have, you know, the large
     concentrations of low cost customers.
                   COMMISSIONER NESS:  Okay.  But I thought your
     concern had been that you're losing your business customers
     to competition, and therefore --
                   MR. BROWN:  And we're losing that implicit subsidy
     within that state, and we can't wrap the state subsidy up,
     or if we did, you get the kind of relationships we're
     showing here, where in Commissioner Schoenfelder's state,
     you've got a disproportionate --
                   COMMISSIONER NESS:  Is it your testimony that a
     six month delay would be extraordinarily detrimental?  That
     these people would -- that your highest cost customers would
     fall off of your system?  Are you suggesting that we would
     lose them as participants in our telephone system?
                   MR. BROWN:  I'm suggesting that we started
     draining out the implicit support back in August of '96 --
                   COMMISSIONER NESS:  But I'm asking you, if we were
     to delay from January -- the implementation date from
     January 1, to say, July 1, a six month period of time, in
     order to give all of us, and we have right now 60 percent of
     the Joint Board is new, or actually, not even the Joint
     Board.  Sixty percent of the folks here did not participate
     in the prior decisions.  Okay?
                   MR. BROWN:  Yes.
                   COMMISSIONER NESS:  Would it not make sense for us
     to take that extra six month period of time and get it
     right, rather than try to do something piecemeal in order to
     make a January 1 deadline?  Or is it such that if we delay
     by six months in implementing this, that there would be a
     whole bunch of folks in U.S. West territory that would fall
     off the face of telephony?  Is that your testimony?
                   MR. BROWN:  I'm not prophesying the end of the
     world.  However, I think beginning to address the problem
     this January, even though it's a B minus or even maybe a B
     solution to take care of the most needy customers is
     something that in six months, if the industry and the state
     and Federal regulators roll their sleeves up, we can make a
     good start at.  
                   I would hate to see that date go by.  I under your
     reasons for wanting to do a complete thing, but I'm --
                   COMMISSIONER NESS:  So, in other words, we should
     put into effect some pieces of it, than begin to change
     those pieces.  Don't you think that would result in a lot of
     confusion in the marketplaec?
                   MR. BROWN:  What I'm saying is take the high end
     where there's absolutely no question that these are
     customers that will need explicit support and begin
     providing that.
                   COMMISSIONER NESS:  Mr. Shiffman?
                   MR. SHIFFMAN:  Yes. I'm very concerned that we use
     even in the high end from the -- as suggested by Mr. Brown,
     because of the fact that we still don't believe that the
     models are reliable yet.  And we believe that moving forward
     on something that relies on those models, even taking the
     high ends of those models, there's some demonstrated
     reliability of the models would be premature.
                   At the same time, we believe -- I tend to agree
     with Mr. Brown that there are certain problems with the
     existing high cost fund.
                   And what we would ask that, it may be appropriate
     to let the Joint Board look at these issues.  It may be
     appropriate to wait until the models are more reliable.  But
     at the same time, where we know that the existing plan has
     certain deficiencies that are inconsistent -- that are
     discriminatory towards some outlying jurisdictions, that it
     may be -- that we would ask if you consider delaying the
     program, to perhaps put in place an interim fix to take care
     of these existing demonstrated anomalies in the existing
     high --
                   COMMISSIONER NESS:  So, in other words, we would
     place -- work to put in place a regime -- go through the
     regulatory process of putting in place a regime for January
     that we would then change in July.  Is that your
     recommendation?
                   MR. SHIFFMAN:  No.  What I'm suggesting is you
     modify what's in place, minimally, to take care of the
     manifest problems with it.  So, you don't put -- don't start
     from anew.  Start with the existing high cost fund program. 
     Make very, very minor changes with minimal as possible
     around the edges to building on the existing program before
     you move forward with something that replaces the whole
     thing.
                   COMMISSIONER NESS:  Ms. Baldwin?
                   MS. BALDWIN:  I simply don't think there's enough
     evidence to suggest that universal service is the least bit
     jeopardized.  And I don't think that there's -- I think it
     would be a big mistake to rush forward on such a complicated
     issue and would fully support the Commission's taking the
     ample -- the time that's necessary to allow for a deliberate
     decision, and thus giving the Joint Board opportunity to
     give feedback to the Commission on the various complicated
     proposals that are before it.
                   CHAIRMAN KENNARD:  Let's hear from Sprint on this,
     as well, from Mr. Sichter.
                   MR. SICHTER:  Obviously, it's more important to do
     it right and do it right the first time, than do it quickly. 
     We would support a limited extension till July of next year,
     an additional six months, simply because, you know, at this
     point, nobody can do any quantification because we don't
     have the models finished.  We don't have the inputs
     finished.  And that's only the beginning of that process of
     doing the tweaks to really size the fund.  The time is very
     short.
                   On the other hand, I would remind the Commission
     and the state members that, universal service fund is an
     important, critical element in the development of local
     competition.  We've got to fix the economics of entry into
     the local network.  And a six month delay in revising that
     system is a six month delay in creating the conditions that
     we need to create for the introduction of local competition.
                   But given that, we've got to do it right when we
     do it the first time.  And let's get on with it and get it
     done by July of next year at the latest.
                   CHAIRMAN KENNARD:  Would any of our state
     colleagues like to address this question?
                   MS. JOHNSON:  I can address it and I guess it
     addressed in my opening remarks.  I do believe that the
     deliberative process is necessary, that the Joint Board --
     the state commissioners and the public advocate that we have
     a lot to contribute to the process.  I'd like to see the
     process unfold in a very formal manner to allow more of this
     dialogue, debate, even a written recommended order that
     would allow those FCC Commissioners that are not on the
     Joint Board, an opportunity to be full participants and
     reflect on whatever might be recommended.
                   So, to the extent that -- and I understood, too,
     that the Joint Board process is a cumbersome process.  And
     that it will take additional time.  But at least, in my
     personal view, to have the opportunity to have the
     collective thought and the debate and the discussion with
     the state members and the state advocate is not only the
     best way to proceed, but it is consistent and proper under
     the Act.
                   CHAIRMAN KENNARD:  Yes?
                   MS. SCHOENFELDER:  I would just like to add that I
     really, really feel that referral to the Joint Board would
     be beneficial to everyone.  And let me tell you why. 
     Because as I sat here today and I go back a year and a half
     or almost two years to where we started to hear this debate
     originally, there have been -- a lot of us have learned a
     lot, on this side of the table, as well as on that side of
     the table.  And I can tell you that there's some positions
     on that table that have changed at least 180 degrees.  And
     some of them -- and I compliment you for that.  
                   I also believe that by referring it to the Joint
     Board, that I honestly do not believe anyone will be harmed. 
     We're not talking about suspending or taking way the support
     for the rural companies out there that now exist in
     extremely high cost areas.  I don't see consumers being
     harmed, which is my first criteria.
                   Secondly, even though Mr. Brown thinks that we
     should hurry along, I happen to come from a U.S. West state,
     and the RBOC in that state -- U.S. West in that state, does
     not receive any cost funds now.  I would tell you that we
     would not allow them to let anybody fall off the system. 
     And I'm a state regulator, and believe me, I'm not going to
     let you, Mr. Brown.
                   So, at this point in time, I believe everyone
     would benefit from the continued deliberation and from the
     continued input.  This isn't an easy business.  It's not an
     easy business for regulators or for some of you to
     understand.  And we're in a changing -- it's important to
     get it right.
                   I think Commissioner Powell told me that the first
     time I visited with him, it's more important to get it right
     than to do it quickly.  And I will guarantee you that we
     will move as quickly as we possibly can and still try to get
     it as right as possible.
                   CHAIRMAN KENNARD:  Thank you.  If there aren't any
     further comments from our side, I'd like to wrap up given
     the time.  Any other comments?  Hearing none -- Chairman
     Wood?
                   MR. WOOD:  As one from a state who hopes to get
     competition on the sooner rather than the later end, I do
     think the gentleman from Sprint made some good points about
     the need to get the structure in place as soon as possible
     so that the defensive part of the frame can be in place. 
     So, I would maybe urge that the state board, if you all move
     ahead, that the Joint Board do as soon as possible, get
     together and move forward on some of these things.  That
     would keep the heat on the model developers very hot to get
     that wrapped up.  
                   Again, the B minus is got to be the standard for
     us.  It's a defensive fund we're talking about at this stage
     of the game.  And that we try to get back in that, maybe
     rather than assume it's going to be July, say it's no later
     than July.  But as soon as we can get our work done from the
     Joint Board part up here, than we can get it back to you
     all.  And hopefully -- and Joel, you're in charge of that,
     so I'll leave that up to you.
                   CHAIRMAN KENNARD:  That's very helpful.  Hearing
     no further comments, I think, I would like to echo comments
     of a number of my colleagues today, to compliment this
     panel.  You've done a terrific job and have really shed some
     light on some very difficult issues.  And the proposals that
     you described today are very thoughtful, and I know a lot of
     work went into them, and we're very grateful to that,
     particularly to you, Mr. Lubin.  You certainly earned your
     pay today, on behalf of AT&T.  And I thank you for being a
     good sport here today.
                   I'd also like to thank a number of people who
     helped put this program together today.  Chuck Keller, Jane
     Wong, Martha Contee, Jeff Rudin, Cheryl Todd, Emily Hofner,
     Craig Brown, Lisa Gelb, and of course, Jim Schlichting from
     the Common Carrier Bureau.
                   And I look at this as sort of the end of the
     beginning.  We've got a lot of work to do.  I think we, by
     the spirit of our discussion today -- I think we've
     recommitted to making sure that we can work together to get
     these very difficult and vexing problems solved.  They are
     not easy.  I think that the little skirmish that we're
     seeing over schools and libraries foreshadows a lot of the
     difficulties that we're going to see as we move to resolve
     the high cost fund.  In order to get through this, we're all
     going to have roll up our sleeves and really work together
     to make this happen.
                   Thank you all very much.
                   (Whereupon, at 4:54 p.m., the meeting was
     concluded.)
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     //                        REPORTER'S CERTIFICATE
     
     
     FCC DOCKET NO.:      N/A
     
     CASE TITLE:   In Re: En Banc Hearing
     
     HEARING DATE: June 8, 1998
     
     LOCATION:            Washington, DC
     
         I hereby certify that the proceedings and evidence
     are contained fully and accurately on the tapes and notes
     reported by me at the hearing in the above case before the
     Federal Communications Commission.
     
     
     Date:   ___6-8-98_            ____Elaine Kim_______________
                                   Official Reporter
                                   Heritage Reporting Corporation
                                   1220 "L" Street, N.W.
                                   Washington, D.C. 20005
                                   
     
                       TRANSCRIBER'S CERTIFICATE
     
     
         I hereby certify that the proceedings and evidence
     were fully and accurately transcribed from the tapes and
     notes provided by the above named reporter in the above case
     before the Federal Communications Commission.
     
     
     Date:   __________            ______________________________
                                   Official Transcriber 
                                   Heritage Reporting Corporation
                                   
     
                       PROOFREADER'S CERTIFICATE
     
         I hereby certify that the transcript of the
     proceedings and evidence in the above referenced case that
     was held before the Federal Communications Commission was
     proofread on the date specified below.
     
     
     Date:   __________            ______________________________
                                   Official Proofreader
                                   Heritage Reporting Corporation