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VIII. FEDERAL SUBSIDY PROGRAMS
Universal telecommunications service has been supported by a number of federal and state programs. Two low-income programs currently exist under federal auspices Lifeline and Link-Up America. The Lifeline program consists of two plans, but only California participates in Plan 1, which is not discussed herein. Plan 2, in which over 30 states have elected to participate but not including New Jersey, provides that a subscriber's bill could be reduced by twice the $3.50 monthly Subscriber Line Charge, or more, if the state more than matches the value of the federal waiver. The state contribution can come from any source including connection charges, customer deposit requirements and state assistance for basic local telephone service.
The Link-Up America program provides assistance by reducing the service connection charges paid by eligible customers, up to one-half of the carrier's customary connection charge or $30.00, whichever is less.
Other programs, such as the Carrier Common Line Charge ("CCLC"), were intended to provide overall cost support for local exchange services without being targeted either to high cost areas or low income customers. Finally, New Jersey historically has adopted the practice of charging relatively low rates for basic local exchange service, with the hope that this would encourage subscribership. Due to the extremely small local calling areas in New Jersey, low exchange rates may not be as important for purposes of universal service as in other jurisdictions where local calling areas are larger. Since local calling areas are small in New Jersey, every residential subscriber must necessarily rely more heavily on toll services for much of their calling needs. In recognition of this anomaly in New Jersey, universal services must make some allowance for local toll as part of what is available for low income subscribers.
The following graph shows that telephone unit penetration in the U.S. has tended to increase from 1983 through 1995. New Jersey's penetration, which exceeded the national average in 1983, dropped dramatically 140 basis points in 1994 and continued to fall in 1995. Thus, New Jersey's penetration fell below the national average in 1994 and has stayed there.
In the past, New Jersey's participation in the federal programs intended to promote subscription by low income customers has been minimal. Just as the failure of any group seeking funding to take advantage of any economy available to them should be unacceptable, so should it be unacceptable to not take advantage of any form of federal assistance. New Jersey must not continue to allow its citizens to be denied the benefits of these programs, particularly in light of the declining penetration rate. As previously discussed, the Joint Board in its Recommended Decision noted that the recommendations for modification of the Lifeline program were based in part upon the disadvantage placed upon citizens in those states that did not participate in the Lifeline program.
The Commission's current Lifeline program requires states to provide support from intrastate sources to reduce Lifeline subscribers' bills by an amount at least equal to the amount of federal support. As a result, low-income consumers in states choosing not to provide such matching support lack the opportunity to benefit from the Lifeline program. We recommend that the Commission modify the lifeline program to ensure that low-income consumers may receive Lifeline support without regard to the state in which they reside.
Recommended Decision at ¶418 (emphasis added).
Bell Atlantic - New Jersey has long proclaimed the fact that its residential exchange rates are among the lowest in the nation. Given the general validity of that claim, the Board must address the factors that have caused New Jersey's telephone penetration to lag that of the United States as a whole and of the nearby states. The Ratepayer Advocate maintains that New Jersey's low penetration is the result of two primary systemic failures. First, New Jersey has had an abysmal performance with regard to utilizing the existing federal programs designed to promote subscribership Link-Up and Lifeline. Second, New Jersey's low basic service rates have given a false sense that telephone subscribership is affordable in this state, when it is in fact not affordable to a significant percentage of the population.
Table 3 (see page 62) shows that New Jersey's utilization of Link-Up America, a program designed to assist low income persons in obtaining telephone service, is low relative to surrounding states. With regard to participation in Link-Up America, New Jersey trails every state except Alabama, California, Delaware, North and South Dakota, Kansas, Nebraska, and Wyoming.
Table 4 (see page 63) reflects the fact that New Jersey does not participate in the Federal Lifeline program. Of the surrounding states, New York is the leader in participation in the Lifeline program and was the second-largest recipient of Lifeline assistance in 1995.
While Lifeline and increased Link-Up participation would benefit New Jersey's subscribership rate, the Board should not conclude that participation in these programs is all that is necessary to materially affect subscribership among low income customers. These are appropriate steps towards universal service, but they do not complete the task. Thus, New Jersey should no longer deny its low income citizens who are eligible to receive all Federal support which is available to them.
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IX. THE "AFFORDABILITY BENCHMARK"
In comments filed before the Federal-State Joint Board on Universal Service, some parties asked that Board to determine that service is affordable on the basis of existing subscribership levels. The Joint Board determined that affordability involves two concepts: (1) "to have enough or the means for" and (2) "bear the cost of without serious inconvenience." (Recommended Decision at ¶ 119). The Joint Board decided that a high level of subscribership was insufficient to establish that service is affordable, since high subscribership indicates only that many customers actually do pay for service, without measuring the degree to which the cost of service creates a serious inconvenience.
At this juncture, New Jersey does not have a sufficiently high subscribership level, among all segments of the population, either to establish that service is afforded or affordable. It may be appropriate, at a later date, to consider affordability separate from subscribership. However, at this time, the Ratepayer Advocate recommends that the Board make telephone service affordable by implementing toll-blocking, taking full advantage of the Federal low income support mechanisms and implementing a low income fund. Affordability should be measured by a reversal of the decline in New Jersey's subscribership rate.
As discussed earlier, the Board in the past has assumed that low basic exchange rates would result
in high subscribership. That has not occurred and, consequently, there is no basis for assuming or
finding that service is affordable at this time. For the NJLIF, "cost" or "price" of basic exchange
service should be irrelevant because (1) we already know that numerous customers cannot afford
service at today's rates, (2) what is relevant is subscribership and (3) there is the potential that local
exchange rates may rise in the future. Instead of having an "affordability benchmark," the Board
should adopt a "Subscribership Benchmark." The appropriate Benchmark should be that
subscribership among low income residents must begin to increase and would not be acceptable
until it reaches at least 94%. Even at that level of subscribership, we would be merely equaling the
national average, which is substantially below our historic penetration rates what have usually been
higher than the national average.
The following table clearly establishes the strong correlation between income and telephone subscribership:
1995 Average Telecommunications 1989 New Jersey Households by Data by Income Income Range (2) Range (1) ----------------------------- -------------------- Cumulative Unit Avail Percent Percent Households ----- ----- ------- ---------- ---------- TOTAL 93.9 95.2 100.0% 2,794,316
UNDER $5,000 75.3 80.5 3.8% 3.8% 105,777 $5,000 - $7,499 82.8 86.3 3.2% 7.0% 90,672 $7,500 - $9,999 87.3 89.6 3.2% 10.3% 90,672 $10,000 - $12,499 89.8 92.1 3.2% 13.4% 88,549 $12,500 - $14,999 91.7 93.5 2.8% 16.2% 76,962 $15,000 - $19,999 93.1 95.0 6.1% 22.3% 170,716 $20,000 - $24,999 95.4 96.4 6.5% 28.8% 180,343 $25,000 - $29,999 96.6 97.6 6.6% 35.3% 183,790 $30,000 - $34,999 97.6 98.0 6.8% 42.2% 190,456 $35,000 - $39,999 98.3 98.7 6.5% 48.6% 180,942 $40,000 - $49,999 98.6 98.9 12.1% 60.8% 338,940 $50,000 - $59,999 98.8 99.1 10.0% 70.8% 280,736 $60,000 - $74,999 99.2 99.3 10.9% 81.7% 303,679 $75,000 + 99.0 99.2 18.3% 100.0% 512,082
(1) FCC Monitoring Report, CC Docket No. 87-339, Table 1.4 (FCC, May 1996).
(2) Table based on 1990 Census of Population & Housing, Summary Tape File 3, obtained from Internet address: http://www.wnjpin.state.nj.us/OneStopCareerCenter/Labor /MarketInformation/lmi01/njinct2.htm
The table shows that average unit penetration in 1995 nationwide was 93.9%. Among various income groups, however, penetration at that level does not occur until income exceeds $20,000. In income groups above $20,000, penetration averages 97.9%.
The table also shows that 22.3% of New Jersey's households (623,348) had household income below the critical $20,000 level in 1989. Since 1989, per capita personal income in New Jersey has increased. However, so has the number or residents that have exhausted their unemployment insurance benefits. It would be unreasonable to conclude anything other than that a substantial portion of households in New Jersey continue to be on the critical list with regard to telecommunications availability. Certainly, that must be true with regard to the 10.3% of households with incomes below $10,000.
While increasing the penetration among high income customers would benefit overall penetration, the Board should not be concerned with this segment of the population as this group is not disenfranchised due to financial exigency. Making telephone service affordable for the low income groups that have lower penetration levels will more rapidly and equitably increase overall participation in this age of telecommunications. Preliminary computations indicate that increasing the penetration to 99% among households with income above $20,000 where the penetration is below 99% would increase the statewide average by 0.5 percentage points. Conversely, increasing the penetration to 94% for households with income below $14,999 would increase overall penetration by 1.4 percentage points.
With regard to affordability, the Joint Board stated:
Subscribership levels, while not dispositive on the issue of affordability, provide an objective criterion to assess the overall success of state and federal universal service policies in maintaining affordable rates. Therefore, we recommend that, to the extent that subscribership levels fall from the current levels on a statewide basis, the Commission and affected state work together informally to determine the cause of the decrease and the implications for rate affordability in that state.
Recommended Decision at ¶ 132.
The Board should adopt those same principles in New Jersey, recognizing that affordability of telephone service varies over time and reflects variations in personal income, telephone rates, size of local calling areas, and other variables. The earlier discussion concerning the reduction in subscribership in New Jersey suggests that the existing mechanism reliance solely on low residential exchange rates is no longer effective in assuring telephone subscribership in New Jersey. It is time to try other means to ensure that the greatest number of our citizens have access to telecommunications services.
As shown by New Jersey's declining penetration, it is not sufficient to conclude that the job is done once a decision is reached on a universal service fund. It is clear that what is needed, instead of determinations of permanent absolute rates or levels of support, is a program that involves close and careful monitoring of subscribership levels throughout the state and also within sub-areas of the state. If subscribership fails to increase as a result of the present federal and state policies or increases and then begins to fall, then the Board must re-examine its policies and take new or additional steps to promote subscribership.
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X. RATE REBALANCING
In every telecommunications proceeding in which the Ratepayer Advocate has been involved in the past two years, the LECs have argued that their basic exchange rates are below the cost of service. The LECs raised that same contention in earlier phases of this docket and should be expected to make that same claim in this proceeding. The Board's policies with regard to rate rebalancing and, in general, requests to increase rates as a result of explicit subsidies should be: (1) the ILECs should not be allowed to change their rates as a result of implementing explicit universal service funds; (2) no change in rates should be allowed unless an ILEC shows that it is both underearning and that residential basic exchange service is priced below incremental cost; (3) any appropriate computation of the incremental cost of residential basic exchange service for the purpose of rate rebalancing must include an appropriate allocation of the costs of the local loop to interstate toll and other intrastate services including toll, access and vertical services. Finally, the Board should declare that, until proof has been provided that local exchange markets are subject to real competition, the type of regulation that exists today should continue for the foreseeable future.
It is ironic that, at a time when customers hear frequent reports about the "benefits of competition," the most frequent claim in this record is that, with the initiation of competition, the Board is required to increase exchange rates. These claims are even more ironic in view of the substantial period of time that has elapsed since the ILECs' earnings were last evaluated under classical utility regulatory analysis . The Board should respond to these arguments with the same principle that was applied by the Joint Board: that some revenue from vertical services should pay the cost of providing service in high cost areas and for low income customers:
Non-LEC carriers will make contributions based on the value of the services that they add to the PSTN, measured in terms of gross telecommunications revenues net of payments to other carriers. LECs will also make contributions based on the value of the services that they add to the PSTN. If the value of ILEC-added services generally equates to their gross revenues, this is not inequitable or discriminatory, because all contributing carriers will base their contributions in the same manner.
Recommended Decision at ¶ 809.
The Board should acknowledge that LECs have been allowed to charge rates that are far in excess of cost for vertical services. They must not be allowed to retain the implicit collected subsidy from vertical services and, at the same time, raise end-user rates to recover the explicit paid subsidies to be implemented in this proceeding. That should occur only through a careful examination of rates and costs. The position of the Advocate, that vertical services should be allocated some portion of local loop costs, is consistent, if not identical to the position espoused by the Joint Board.
In any such examination, the Board should determine that the cost of local loops is appropriately recoverable and in fact recovered through the rates charged for a number of services. That is because the loop is a joint or shared cost, not a direct cost of just one service. Joint costs occur when two or more services use or share the same facilities. The loop provides multiple services, including custom calling, switched access, toll, local exchange, Internet access and vertical services. As competition develops, it is certainly to be expected that the number of services making use of the loop will increase, and perhaps increase dramatically. All such services should be assessed a portion of the local loop. For present purposes the Board should determine that one-half of the wire center costs should be allocated to interstate toll and other intrastate services, including toll, vertical services and access. Accordingly, for purposes of computing the high cost fund, only one-half of the costs in each wire center should be compared to the average state-wide rate for basic service. Only those wire centers where the exchange allocation of local loop costs (i.e., 50%) exceeds the existing Statewide average rate for residential exchange service should qualify for high cost assistance.
The Board should also recognize that the above recommendation, to include one-half of the cost of the local loop as a cost of local exchange service, is more than is absolutely necessary. The FCC has stated and economic principles prescribe that the most appropriate approach to pricing under competition is incremental cost. Incremental cost is the cost of adding a service to a fully functioning network already providing other services using the most cost effective technology currently available. Incremental cost is generally less than average cost. Average cost reflects only an average level of economies of scope, whereas incremental cost reflects all of the economies able to be brought to bear on producing the next increment of service. Joint costs such as the local loop are excluded when measuring the incremental cost of the next unit of service. The only service that is measured by the local loop cost is access, which is not basic exchange service.
The Board should also be aware that Congress has permitted the inclusion of less than the cost of the local loop in the measurement of Universal Service. Section 254(k) of the 1996 Act requires the states to establish any necessary cost allocation rules to ensure that services included within the definition of Universal Service "bear no more than a reasonable share of the joint and common costs of facilities used to provide those services." The Congressional Joint Explanatory Statement of the Committee of Conference states that universal service "may bear less than a reasonable share of the joint and common costs of facilities used to provide both competitive and noncompetitive services."
The clear Congressional intent was, as a maximum, to require universal service to bear no more than a reasonable share of joint and common costs, and possibly even less than a reasonable share. Other state regulatory bodies have found that local exchange service should bear less than 100% of the costs of the loop. In the state of Washington, the commission stated:
[The Company] argues that allocation of any loop costs to access and toll service violates the principle of incremental costing, because the entire loop cost would exist even if no carrier access or toll services were provided. This argument addresses why loop costs should not be included in the incremental cost of toll and access, but it does not explain why they belong in the incremental cost of local service. The argument applies equally well in application of the costs to local exchange service. Indeed [the Company's] brief supports the principle that the loop is a shared cost rather than the direct cost of any one service.
Washington Utilities and Transportation Commission v. U.S. West Communications, Inc., Decision and Order Rejecting Tariff Revisions, Docket No. UT-950200, at 78 (April 11, 1996) [emphasis added].
The incremental cost determined by Washington was very low, measured as the Hatfield total cost of local service less the Hatfield result for loop cost.
The New Hampshire commission said:
The commission is well aware of the claim that basic local exchange services has been and continues to be subsidized by toll. . . . These studies have served to mislead due to the company's decision to assign [dial tone] costs to local exchange services despite the fact that both interstate and state toll services are provided over local NTS facilities.
New England Telephone Generic Rate Structure Investigation, New Hampshire Public Utilities Commission, DR89010, slip. op., March 11, 1991 at 39-40 [emphasis added].
Commissions have reached similar conclusions in at least the states of Colorado, Florida, Louisiana, Pennsylvania and Minnesota. Additionally, the FCC has reached a similar conclusion regarding the reasonable allocation of costs, in In the Matter of MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board,where it held that payment of 50% of common line costs by the IXCs through the CCLC would represent a fair share' of common line cost recovery. The National Association of State Utility Consumer Advocates (NASUCA) also passed a resolution at its annual meeting in November 1996 in response to the Joint Board Recommendations, which calls for a reduction in the residential and single line business SLCs and a subsequent increase in Lifeline assistance. The Resolution noted that the CCLC had experienced reductions, but their had been no reductions in the SLC since it was increased to $3.50 in 1989. NASUCA argues that a proper allocation calls for a reduction in the SLC to facilitate reductions in basic exchange rates, similar to the reduction experienced in toll rates due to the reduction of the CCLC.
In summary, including all of the cost of the loop in the cost of universal service is contrary to the Telecommunications Act. Not only did Congress provide only for recovery of a reasonable allocation, with the possibility of a less-than-reasonable allocation, it intended that customers would receive benefits from competition and that universal service would be promoted. Raising the price of basic service is clearly not the direction that the Board should go in implementing universal service.
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To summarize, the three types of funding support proposed by the Ratepayer Advocate are as follows: a high cost fund to levelize the playing field and bring the benefits of competition to all areas of the state; a low income fund to provide additional assistance to customers who cannot afford service; and a school and library fund to provide needed assistance to schools and libraries so that advanced educational opportunities and access to the Information Superhighway is provided to all. This proceeding appropriately must address all of these three critical forms of assistance in order for there to be true Universal Service in New Jersey. They are not separate all three are required.
The Ratepayer Advocate also notes that this brief consists of our initial proposal in this phase of the proceedings. We are eager to examine the proposals put forward by other parties, and we will be providing supplemental cost information in our reply brief on the funding mechanisms herein proposed. We also look forward to examining more fully the costs of such proposals in the filings to be made in February 1997, and to make adjustments to our proposal, as may be appropriate.
The determinations made by the Board on these exceedingly important societal concerns, is not just a one-time decision, engraved in stone. Quite to the contrary, the Board is encouraged by the Ratepayer Advocate to revisit the issues considered in this docket on a regular basis to review progress, and to consider additional programs that may be necessary to advance universal service to determine whether and how more advanced services should be included within the definition of universal service, both in terms of geography and in terms of affordability, and fine tune the assistance program for schools and libraries.
Blossom A. Peretz Ratepayer Advocate
Dated: December 9, 1996
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