ADOPTED RULES
An agency may take final action on a section 30 days after a proposal has been 
published in the Texas Register. The section becomes effective 20 days after the 
agency files the correct document with the Texas Register, unless a later date 
is specified or unless a federal statute or regulation requires implementation 
of the action on shorter notice.
If an agency adopts the section without any changes to the proposed text, only 
the preamble of the notice and statement of legal authority will be published. 
If an agency adopts the section with changes to the proposed text, the proposal 
will be republished with the changes.

TITLE 1. ADMINISTRATION
PART I. Office of the Governor
CHAPTER 5.Budget and Planning Office
SUBCHAPTER A.Federal and Intergovernmental Coordination
Uniform Grant Management Standards
1 TAC sec.sec.5.141-5.147, 5.150, 5.151, 5.167
The Governor's Office adopts amendments to sec.sec.5.141-5.147, 5.150, 5.151, 
and 5.167, concerning Uniform Grant and Contract Management Standards, with 
changes to the proposed text as published in the September 19, 1997, issue of 
the Texas Register (22 TexReg 9397). These changes are necessary to conform the 
standards to changes in OMB Circular A-87, clarify the state annotations to OMB 
Circular A-102 to reduce confusion and to substitute OMB Circular A-133, with 
state annotations, for OMB Circular A-128, which has been rescinded. 
Comments were received from state agencies (Governor's Office, Texas Natural 
Resource Conservation Commission, Texas Work Force Commission, Texas Department 
of Transportation, Texas Department of Mental Health-Mental Retardation and the 
State Auditor's Office); councils of governments (Houston- Galveston Area 
Council, Nortex Regional Planning Commission and the North Central Texas Council 
of Governments) and from the Texas Association of Regional Councils (TARC). 
Concerns voiced included opposition to requiring prior awarding agency approval 
of certain actions by grantees; questions on definitions; the role of the state 
single audit coordinating agency; indirect cost plan approval procedures and 
audits of such plans; and the need for greater specificity in certain terms, 
such as "reasonable" and "adequately documented". Three meetings were held with 
representatives of all commenting entities to discuss and resolve the issues 
raised in the comments. The final rule, as proposed, reflects agreements reached 
in those meetings. 
The amendments are adopted under Chapter 783, Texas Government Code, which 
directs the Governor's Office to develop uniform grant and contract management 
standards to promote the efficient use of public funds.

sec.5.141 Introduction. 
The Governor's Budget and Planning Office proposes adoption of revisions to 
sec.sec.5.141-5.167 published in the September 19, 1997, issue of the Texas 
Register (22 TexReg 9398). This rule is being revised to conform the standards 
to changes in OMB Circular A-87, clarify the state annotations to OMB Circular 
A-102 as necessary and to substitute OMB Circular A-133, with state annotations, 
for OMB Circular A-128, which was rescinded effective June 30, 1997, with the 
adoption by the federal government of the revised OMB Circular A-133. To reduce 
confusion as to the applicability of the standards, they have been renamed "The 
Uniform Grant Management Standards" (UGMS). The Uniform Grant Management 
Standards were developed under the authority of Chapter 783 of the Texas 
Government Code, which codifies the Uniform Grant and Contract Management Act of 
1981. The federal circulars have been renamed and extensively modified to 
reflect state law, policies and practices. Pursuant to the Act and Chapter 2105, 
Texas Government Code, the prescribed standard financial management conditions 
and uniform assurances are applicable to all grants and contracts executed 
between state agencies, local governments and other affected entities, as 
described in sec.5.142(b). 

sec.5.142.Purpose, Applicability, and Scope. 
(a) Purpose. The Uniform Grant and Contract Management Act of 1981 directed the 
governor's office to establish uniform grant and contract administration 
procedures " to promote the efficient use of public funds in local government 
and in programs requiring cooperation among local, state, and federal agencies." 
These standards further that objective by providing awarding agencies and 
grantees a standardized set of financial management procedures and definitions, 
by requiring consistency among grantor agencies in their dealings with grantees, 
and by ensuring accountability for the expenditure of public funds. State 
agencies are required to adhere to these standards when administering grants and 
other financial assistance agreements with cities, counties and other political 
subdivisions of the state. 
(b) Applicability. Chapter 783 of the Texas Government Code specifically applies 
the standards only to state and local governments. School districts, state 
colleges and universities and special districts are specifically excluded by law 
from having to comply with these standards. However, to further consistency and 
accountability, some state agencies have applied these standards by rule or 
contract to all of their grantees. In addition, Chapter 2105, Texas Government 
Code (1 TAC 5.167(c)) subjects all subrecipients of federal block grants to the 
standards. Therefore, recipients and subrecipients other than state and local 
governments, including nonprofit organizations, should ascertain from their 
awarding agencies whether or to what extent they are subject to these standards. 
In the event of a conflict between UGMS and applicable federal law, the 
provisions of federal law shall apply. 
(c) Scope. These standard financial management conditions and uniform assurances 
are applicable to all grants, cooperative agreements, contracts and other 
financial assistance arrangements executed between state agencies, local 
governments and any other subrecipient not specifically excluded by state or 
federal law. Contracts for the sole purpose of procuring goods or services on a 
competitive basis, in which there is a clear purchaser-vendor relationship, as 
opposed to a grantor-recipient relationship, are excluded from the requirements 
of these standards (see Uniform Assurances and Standard Conditions Required: 
Variations (See "State Uniform Administrative Requirements for Grants and 
Cooperative Agreements, Subpart A(3) definition of "grantee"). State agencies 
may deviate from these standards only if the agency has complied with Texas 
Government Code, sec. 783.007(c), Uniform Assurances and Standard Conditions 
Required: Variations (See "State Uniform Administrative Requirements for Grants 
and Cooperative Agreements", Subpart A(6)(a)).

sec.5.143.Effective Date.
The effective date of the uniform cost principles and administrative 
requirements is 20 days following final adoption in the Texas Register. Grants, 
contracts and other financial assistance agreements entered into prior to the 
adoption date of these standards will be subject to the provisions of the 
Uniform Grant and Contract Management Standards dated February 22, 1990. The 
State of Texas Single Audit Circular is effective for single audits of fiscal 
years beginning after June 30, 1996. However, if an awarding state agency has 
already adopted rules in codified regulations governing single audits of non-
state entities for fiscal years beginning after June 30, 1996, the agency shall 
apply the standards set forth in this single audit circular for audits of fiscal 
years beginning after June 30, 1997. 

sec.5.144.Adoption by Reference.
As directed by the Act, the Governor's Budget and Planning Office adopts by 
reference Office of Management and Budget Circular A-87, as annotated and 
revised; the Common Rule of OMB Circular A- 102, as annotated and revised; and 
Office of Management and Budget Circular A-133, as annotated and revised. These 
circulars have been renamed, respectively, "Cost Principles for State and Local 
Governments and Other Affected Entities", "State Uniform Administrative 
Requirements for Grants and Cooperative Agreements", and "State of Texas Single 
Audit Circular".

sec.5.145.Grants and Contracts.
The terms "grants" and "contracts" as used in the Uniform Grant Management 
Standards are synonymous only when used to describe a financial agreement 
involving an awarding agency and a recipient or subrecipient. Procurement 
contracts or agreements in which there is a clear purchaser- vendor relationship 
are not covered by the Uniform Grant Management Standards.

sec.5.146.Standard Assurances.
A listing of major state assurances which may apply to federal pass-through and 
state-appropriated funds may be found in the State Uniform Administrative 
Requirements for Grants and Cooperative Agreements, Subpart B, sec.___.14. Many 
of these assurances apply only to state agencies, and in most cases, only some 
will apply to a given grant. This list is subject to change, and it is the 
applicant's responsibility to determine which assurances are required and that 
all those required by the awarding agency are submitted. 

sec.5.147.Variance from Standards.
State agencies may vary from the Uniform Grant Management Standards (UGMS) only 
when required to do so by federal legislation or regulations or by specific 
state statute. State agencies are required to publish the variance in the Texas 
Register and to notify the Governor's Budget and Planning Office. State 
agencies' rules or self-regulation are not sufficient to authorize variance from 
the provisions contained in the UGMS. 

sec.5.150.Uniform Cost Principles and Cost Allocation Plans. 
(a) The Uniform Grant Management Standards (UGMS), Chapter II, "Cost Principles 
for State and Local Governments and Other Affected Entities" sets out the basic 
cost principles applicable to all grants administered by a state agency which 
are awarded to cities, counties, other political subdivisions of the state and 
entities receiving state-administered funds from federal block grants. This 
chapter specifically includes, therefore, all federal categorical grants, 
federal block grants, and state grants. 
(b) The basis of Chapter II is OMB Circular A-87, which designates the 
Department of Health and Human Services (HHS) as the federal agency responsible 
for issuing instructions for use by grantees in the preparation of cost 
allocation plans. OMB Circular A-87 is included in its entirety, with 
annotations showing differences between federal and state law and practices. 
(c) Cities, counties, and other political subdivisions of the state seeking to 
establish a cost allocation plan and indirect cost rate should contact the 
federal Office of Management and Budget to request an assignment of a cognizant 
federal agency to review and approve any such plan. In those cases in which 
funds are received from two or more state agencies, recipients should contact 
the Governor's Budget and Planning Office to receive an assignment of a state 
single audit coordinating agency. This agency may, but is not required, to 
review and approve the cost allocation plan. 

sec.5.151. Uniform Administrative, Accounting and Reporting Standards. 
The basis of the Uniform Grant Management Standards (UGMS) Chapter III, "State 
Uniform Administrative Requirements for Grants and Cooperative Agreements", is 
the Common Rule of OMB Circular A-102, which has been adopted by reference in 
sec.5.144 of this title (relating to Adoption by Reference). Applicable 
provisions of the Common Rule have been reprinted in UGMS, with annotations 
showing where state law and practices differ from the Common Rule. (See "State 
Uniform Administrative Requirements for Grants and Cooperative Agreements", 
Subpart A---General, sec.___.4 for applicability to state and federal funds.) 

sec.5.167. State of Texas Single Audit Circular.
(a) The basis of the Uniform Grant Management Standards (UGMS) Chapter IV, 
"State of Texas Single Audit Circular", is Office of Management and Budget (OMB) 
Circular A-133. This state audit circular is to be used in conducting single 
audits of state financial assistance to recipients and subrecipients. All 
awarding agencies are responsible for ensuring compliance with OMB Circular A-
133 when federal funds are involved and for coordinating the single audit of 
state funds with affected federal agencies when both federal and state funds are 
awarded. 
(b) The concept of single audit is designed to maximize the efficient and 
effective use of public resources, to minimize work flow disruptions for grant 
recipients and to provide state awarding agencies consistent audit procedures 
and assurances. Under these rules, a designated state single audit coordinating 
agency will assure that the single audit effort is well-coordinated among state 
funding agencies and with the federal cognizant agency. The federal cognizant 
agency is responsible for assuring that the independent audit is performed for 
federal funds in accordance with the provisions of OMB Circular A-133. No 
attempt is made to emulate the federal cognizant agency by the designation of 
the state single audit coordinating agency. Rather, the purpose is to provide an 
audit coordination effort at the state level to bolster the single audit 
concept. It must be thoroughly understood that the single audit process is 
available but will not replace state agency program monitoring and review of 
subrecipients' compliance with contractual terms and conditions throughout the 
grant period. As indicated by Circular A-133 and this state single audit 
circular, any supplemental audit work should build upon the audit accomplished 
by the single audit. 
(c) Chapter 2105, Texas Government Code, requires that all subrecipients of 
federal block grants be included under provisions of the Uniform Grant and 
Contract Management Standards. 
(1) When a single audit is needed and two or more state agencies provide funds 
to a recipient covered by this circular, the subrecipient may request the 
designation of a state single audit coordinating agency from the Governor's 
Budget and Planning Office. If only one state agency provides funds, no state 
single audit coordinating agency will be necessary and the grant recipient 
should work directly with its state funding agency. 
(2) To have a state single audit coordinating agency designated, a recipient 
must submit a written request to the Governor's Budget and Planning Office, P.O. 
Box 12428, Austin, Texas 78711. This request must list the state agencies 
providing financial assistance with the grant amounts for the year to be audited 
and indicate that the governing body has authorized the initiation of the single 
audit. 
(3) Within 30 days after the receipt of the request, the Governor's Budget and 
Planning Office, after consultation with the state auditor, will designate a 
state single audit coordinating agency. The following criteria will be used in 
selecting the appropriate state single audit coordinating agency: 
(A) state agency request or agreement to be the coordinating agency; 
(B) state agency capability; 
(C) amount and source of funds awarded to the grantee; and
(D) state agency workload. 
(E) Request for change. A state agency or a recipient may request a change in 
the designation of the state single audit coordinating agency. The designation 
of a state single audit coordinating agency will remain in force until 
eliminated or revised by the Governor's Budget and Planning Office. All previous 
state single audit coordinating agency designations by the Governor's Budget and 
Planning Office will become the state single audit coordinating agencies upon 
the effective date of these rules. 
(d) At the earliest practical date, but not later than 60 days prior to 
beginning a single audit, the recipient shall notify the state grantor agencies 
and the state single audit coordinating agency that the audit plan is being 
formulated. Each state grantor agency should assure that special audit issues 
are identified and transmitted to the recipient during this early warning 
period. Any subsequent additional costs of compliance which are outside the 
scope of OMB Circular A-133 or the State of Texas Single Audit Circular are 
allowable expenses to the contract being audited, as long as they are paid from 
nonfederal funds. The state single audit coordinating agency shall have an 
opportunity to review the scope of the audit and, at its option, participate in 
an engagement conference with the independent auditor prior to commencement of 
the single audit. The state single audit coordinating agency shall contact the 
federal cognizant agency at the earliest practicable point as necessary to 
coordinate when federal and state funds are involved. 
(e) The state single audit coordinating agency must be provided a completed 
audit report by the recipient. A desk review will be accomplished by the state 
single audit coordinating agency to determine that the audit report covers the 
major elements of the State of Texas Single Audit Circular. Upon receipt of the 
audit report, the state single audit coordinating agency is responsible for 
carrying out the duties described in sec.___400(a)(1)-(8), Uniform Grant 
Management Standards. 
(f) When the state single audit coordinating agency determines that the audit 
report meets the report requirements of this audit circular, the recipient will 
be so notified by letter and instructed to distribute the audit report to all 
state funding agencies for their review. A copy of the notification letter 
should accompany the distributed reports. 
(g) Each state funding agency is responsible for reviewing the portion of the 
audit dealing with its programs and is also responsible for the necessary 
follow-up and resolution of audit findings that relate to its individual 
programs. Each affected state funding agency must notify the state single audit 
coordinating agency after the audit findings have been resolved as required by 
the appropriate funding agencies. 
(h) The recipient must notify the state single audit coordinating agency and the 
state grantor agencies when cross-cutting audit findings have been resolved. 
(i) If assigned, the federal cognizant agency is responsible for negotiating, 
approving and auditing indirect cost allocation plans. In the absence of a 
signed negotiation agreement from the federal cognizant agency, the state single 
audit coordinating agency, may, at its discretion, perform these duties as they 
pertain to state funds. In the event that neither the federal cognizant agency 
nor the state single audit coordinating agency performs these duties, the major 
state funding agency or another state agency designated by the governor's office 
may perform these duties as they pertain to state funds. 
This agency hereby certifies that the adoption has been reviewed by legal 
counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on January 23, 1998.
TRD-9801056
Pete Wassdorf
Deputy General Counsel
Office of the Governor
Effective date: February 12, 1998
Proposal publication date: September 19, 1997
For further information, please call: (512) 463-1788

TITLE 16. ECONOMIC REGULATION
PART II. Public Utility Commission of Texas
CHAPTER 23.Substantive Rules
Universal Service Fund
16 TAC sec.sec.23.131, 23.133, 23.134, 23.136, 23.138, 23.142, 23.143, 23.147, 
23.148, 23.150
The Public Utility Commission of Texas (commission) adopts new sec.sec.23.131 
(relating to Texas Universal Service Fund (TUSF)), 23.133 (relating to Texas 
High Cost Universal Service Plan (THCUSP)), 23.134 (relating to Small and Rural 
Incumbent Local Exchange Carrier (ILEC) Universal Service Plan), 23.136 
(relating to Implementation of the Public Utility Regulatory Act sec.56.025), 
23.138 (relating to Additional Financial Assistance), 23.142 (relating to 
Service and Link Up Service Programs), 23.143 (relating to Tel-Assistance 
Service), 23.147 (relating to Designation of Local Exchange Carriers as Eligible 
Telecommunications Providers to Receive Texas Universal Service Funds), 23.148 
(relating to Designation of Common Carriers as Eligible Telecommunications 
Carriers to Receive Federal Universal Service Funds), and 23.150 (relating to 
Administration of Texas Universal Service Fund) with changes to the proposed 
text published in the August 26, 1997 Texas Register (22 TexReg 8494). These 
rules are adopted under Project Number 14929. The following parties filed 
initial comments in response to the proposed rules published on August 26, 1997, 
in the Texas Register: AT & T Communications of the Southwest, Inc. (AT & T); 
the Center for Economic Justice (CEJ); Consumers Union (CU); GTE Southwest 
Incorporated (GTE); MCI Telecommunications Corporation (MCI); the Office of 
Public Utility Counsel (OPC); PrimeCo Personal Communications, L.P. (PrimeCo); 
Southwestern Bell Telephone Company (SWBT); Sprint Communications Company, L.P., 
United Telephone Company of Texas, Inc. d/b/a Sprint and Central Telephone 
Company of Texas d/b/a Sprint (Sprint); John Staurulakis, Inc. (JSI); Teleport 
Communications Houston, Inc. and TCG Dallas (TCG); the Texas Statewide Telephone 
Cooperative, Inc. (TSTCI); the Texas Telephone Association (TTA); and Sprint 
Spectrum L.P. d/b/a Sprint PCS (Sprint PCS). 
The Advisory Commission on State Emergency Communications (ACSEC), AT & T, CU, 
GTE, OPC, SWBT, MCI, PrimeCo, Sprint, TCG, the Texas Association of Long 
Distance Telephone Companies (TEXALTEL), TSTCI, and TTA filed reply comments.
All of the parties providing comments generally supported the proposed rules; 
however, as summarized herein, they offered certain revisions and modifications 
to the proposal. 
Prior to the publication of the proposed rules, the commission staff held 
workshops on the following dates: October 22, 1996, February 24, 1997, April 14, 
1997, May 20, 1997, and June 24, 1997. In addition a commissioners' work session 
on Project No. 14929 was held on November 12, 1997. 
A public hearing on the proposed rules was held at the commission offices on 
October 15, 1997, at 9:00 a.m. Representatives from GTE and TTA attended the 
hearing and provided comments. To the extent that these comments differ from the 
submitted written comments, such comments are summarized herein. The new rules 
are responsive to the state and federal goals of ensuring that basic local 
telecommunications service can be provided at reasonable rates and in a 
competitively neutral manner while fostering a free competitive market in the 
telecommunications industry. The purpose of the Texas Universal Service Fund 
(TUSF) is to implement a competitively neutral mechanism that enables all 
residents of the state to obtain the basic telecommunications services needed to 
communicate with other residents, businesses, and governmental entities. As a 
result of changes in pricing policies in the transition to a competitive 
marketplace, targeted financial support may be needed in order to provide and 
price basic telecommunications services in a manner to allow universal 
accessibility by consumers. The TUSF will assist local exchange companies (LECs) 
in providing basic local telecommunications services at reasonable rates in high 
cost rural areas and to qualifying low-income consumers. 
The Public Utility Regulatory Act (PURA) sec.51.001 prescribes the policies of 
Texas with respect to telecommunications. Pursuant to sec.51.001, the state 
shall promote diversity of telecommunications providers and interconnectivity, 
encourage a fully competitive telecommunications marketplace, and maintain a 
wide availability of high quality, interoperable, standards-based 
telecommunications services at affordable rates. PURA sec.51.001 further states 
that the goals outlined above are best achieved by legislation that modernizes 
telecommunications regulation by guaranteeing the affordability of basic 
telephone service in a competitively neutral manner and by fostering free market 
competition in the telecommunications industry. 
PURA, Chapter 56, specifically provides for Telecommunications Assistance and 
the Universal Service Fund. Subchapter B of Chapter 56 establishes the TUSF. 
PURA requires that the TUSF assist LECs in providing basic local 
telecommunications service, including Lifeline service, at reasonable rates in 
high cost rural areas; reimburse qualifying entities for revenues lost as a 
result of providing Tel-Assistance services to qualifying low-income consumers; 
reimburse telecommunications carriers providing statewide telecommunications 
relay access service and qualified vendors providing specialized 
telecommunications device distribution service for the hearing-impaired and 
speech-impaired; and reimburse the Texas Department of Human Services (TDHS), 
the Texas Department for the Deaf and Hard of Hearing, the TUSF administrator, 
and the commission for costs incurred in implementing the provisions of PURA 
Chapters 56 and 57.
The federal Telecommunications Act of 1996 (FTA) sec.254 sets forth federal 
universal service requirements and principles and allows a state to adopt 
regulations not inconsistent with the Federal Communication Commission's (FCC's) 
rules to preserve and advance universal service.
The FCC's Report and Order, In the Matter of Federal-State Joint Board on 
Universal Service in CC Docket Number 96-45, FCC 97-157 (May 7, 1997) (Report 
and Order), implemented FTA sec.254 and adopted a federal universal service 
support mechanism to ensure that all consumers have access to quality 
telecommunications services at affordable rates. In its Report and Order, the 
FCC added the principle of competitive neutrality to the principles prescribed 
by FTA sec.254. The FCC further noted in paragraphs 9 and 10 of the Report and 
Order that Congress specified that universal service support "should be 
explicit," and that as explained in the Joint Explanatory Statement of the 
Committee of the Conference, Congress intended that, to the extent possible, 
"any support mechanisms continued or created under the new section 254 should be 
explicit, rather than implicit as many of the support mechanisms are today." The 
FCC stated that universal service is currently achieved largely through implicit 
subsidies, and that, with the procedures and policies set forth in its Report 
and Order, these implicit subsidies will begin to be replaced with explicit 
subsidies. The existing implicit support mechanisms may not be sustainable in a 
competitive market because ILEC rates currently providing implicit support may 
be subject to competitive pressures. By "implicit subsidies" the FCC means that 
a single company is expected to obtain revenues from sources at levels above 
cost and to price other services allegedly below cost. 
In paragraph 14 of the Report and Order, the FCC stated its belief that as 
competition develops states will be compelled by marketplace forces to move 
existing implicit support toward more explicit, sustainable mechanisms 
consistent with FTA sec.254(f). The commission agrees that it is appropriate 
state telecommunications policy to move existing implicit support toward more 
explicit, sustainable mechanisms. Explicit support mechanisms must be 
established to maintain reasonable rates. The commission also finds that in 
order for the rules to be competitively neutral, and that for customers of rural 
and high cost areas to receive the benefits of competition, the rules must move 
toward making all support mechanisms available to any service provider. 
Section 23.133, the Texas High Cost Universal Service Plan (THCUSP), implements 
PURA sec.56.021(1) by establishing guidelines for financial assistance to 
Eligible Telecommunications Providers (ETPs), which are LECs certified eligible 
under sec.23.147 for TUSF, serving high cost rural areas of the state, other 
than study areas of small and rural incumbent local exchange companies (ILECs), 
so that basic local telecommunications service may be provided at reasonable 
rates in a competitively neutral manner. 
Section 23.133 provides that the THCUSP will support basic local 
telecommunications service provided by an ETP over an eligible line in high cost 
rural areas of the state and is limited to those services carried on all flat 
rate residential lines and the first five flat rate single-line business lines 
at a business customer's location. The section also provides the definition of 
basic local telecommunications services. 
In addition, the section establishes the criteria for determining the amount of 
support available under the THCUSP. The section provides that the commission 
shall calculate the amount of support by comparing the forward-looking economic 
cost for providing basic local telecommunications service to the applicable 
benchmark as determined by the commission for residential or single-line 
business service. Under this section, this support is available to an ETP for 
serving an eligible line whether such ETP is an ILEC or a competitive local 
exchange carrier (CLEC). 
The section provides that, within 30 days of the effective date of the section, 
the commission shall initiate a proceeding to determine the support amounts. It 
also requires that the commission review the support amounts not less than every 
three years from the effective date of the section to determine, among other 
issues, whether there is additional or remaining implicit support that should be 
made explicit. 
Section 23.134, the Small and Rural Incumbent Local Exchange Carrier Universal 
Service Plan, also implements PURA sec.56.021(1) by establishing guidelines for 
financial assistance to ETPs that provide service in the study areas of rural 
ILECs' areas and small ILECs' areas in the state so that basic local 
telecommunications service may be provided at reasonable rates in a 
competitively neutral manner. 
Section 23.134 provides that this plan will support basic local 
telecommunications service provided by an ETP over an eligible line in high cost 
rural areas of the state and is limited to those services carried on all flat 
rate residential lines and the first five flat rate single-line business lines 
at a business customer's location. 
In recognition that PURA and the FTA in many respects place small and rural 
ILECs on a different competitive footing from other ILECs, the commission, in 
adopting this section, establishes a support mechanism that will enable small 
and rural ILECs to prepare for the advent of competition and the eventual 
transition to the THCUSP. 
The section sets forth the manner in which the amount of support shall be 
calculated for each small or rural ILEC study area. This support calculation is 
based upon existing revenue streams of small and rural ILECs and does not rely 
upon the calculation of forward-looking economic costs. However, this support is 
available to an ETP for serving an eligible line whether the ETP is an ILEC or a 
CLEC. 
The section provides that, within 30 days of the effective date of the section, 
the commission shall initiate a proceeding to determine the support amounts. It 
also requires the commission, within 90 days of an FCC order implementing new 
federal universal service support rules for rural, insular, and high cost areas, 
to initiate a project to investigate a mechanism by which ETPs receiving support 
pursuant to this section would transition to receiving support pursuant to 
sec.23.133. 
Section 23.136 implements the provisions of PURA sec.56.025. This section 
enables ILECs serving fewer than five million access lines to receive universal 
service support, if an increase in rates would adversely affect universal 
service, in order to offset certain governmental agency actions. In order to 
harmonize PURA sec.56.025 with the pro-competitive intent of the FTA, this 
section places the burden of proof on the claimant to demonstrate the adverse 
financial impact the government order, rule or policy had on the carrier seeking 
assistance under the provision of PURA sec.56.025(c), (d), and/or (e). Although 
PURA sec.56.025 does not require a proceeding regarding a company's revenue 
requirements with respect to the universal service distributions made pursuant 
to PURA sec.56.025, it does not prohibit the commission from concurrently 
exercising its authority to examine the overall revenue or earnings position of 
the ILEC seeking PURA sec.56.025 support if the ILEC has not elected under PURA 
Chapter 58, Incentive Regulation, or Chapter 59, Infrastructure Plan. 
Furthermore, the commission believes that it is charged with considering both 
increases and decreases in revenues caused by a governmental action. Section 
23.136 also sets forth the requirements of the ILEC seeking to recover funds 
from the TUSF under this section and the guidelines for commission processing of 
the applications. 
Section 23.138, Additional Financial Assistance, ensures that ILECs that have 
been designated as ETPs, other than those regulated under PURA Chapters 58 or 
59, needing funds in addition to those received under sec.sec.23.133, 23.134, or 
23.136 this title, may upon a revenue requirement showing receive additional 
financial assistance from the TUSF. 
The section also sets forth the requirements of the ILEC requesting to recover 
funds from the TUSF and the guidelines for the commission to use in approving 
the requests under this section. 
Section 23.142, Lifeline Service and Link Up Service Programs, is adopted in 
order to provide targeted assistance to qualifying low-income customers. This 
section is consistent with the FCC rules regarding these programs and with the 
definition of basic local telecommunications services as provided in PURA 
sec.51.001(1), which includes Lifeline service. 
This section defines the Lifeline and Link Up Service Programs, the Lifeline 
support amounts, and the obligations of the consumer, TDHS, and the eligible 
telecommunications carrier. It also sets forth tariff filing requirements. 
Section 23.143 implements Tel-Assistance Service pursuant to PURA, Chapter 56, 
Subchapter B. It sets forth the requirements for the provision of Tel-
Assistance, the obligations of the consumer, TDHS, and the LEC, along with 
tariff filing requirements. 
The commission believes that the programs prescribed by sec.23.142 and 
sec.23.143 will help to defray the costs of telephone service for qualifying 
low-income subscribers and thereby promote universal service. 
Section 23.147 provides the requirements for the commission to designate LECs as 
ETPs to receive funds from the TUSF pursuant to PURA sec.56.023. The section 
sets forth the requirements for establishing ETP service areas, the criteria for 
designation of ETPs, and the designation of more than one ETP in a service area. 
The section also provides requirements for the application for ETP designation 
and commission processing of the application. Under the section, an ETP may seek 
to relinquish its ETP designation, and an auction procedure for replacing the 
sole ETP in an area is outlined. 
Section 23.147 requires that for an ILEC to be designated as an ETP to receive 
THCUSP support, it must reduce existing revenues by an amount equal to the 
amount it will receive from the THCUSP or it must agree to reduce its THCUSP 
receipts by certain existing revenue streams. If the ETP selects the first 
alternative, in order to accomplish this revenue reduction, the ILEC must reduce 
rates, as determined appropriate by the commission. This requirement prevents an 
ILEC from receiving a windfall due to receipt of funds from the new THCUSP and 
from the revenues generated by existing rates. Also, if the ILEC chooses to 
reduce its rates, rather than reduce its THCUSP receipts, the rule serves to 
remove implicit subsidies from existing ILEC rates and make support for USF 
explicit. 
Section 23.148 provides the requirements for the commission to designate common 
carriers as eligible telecommunications carriers to receive federal universal 
service funds. The Communications Act of 1934, as amended, 47 U.S.C. sec.214(e) 
(West Supp. 1997) (the Act), sec.214(e)(2) requires that state commissions 
designate a common carrier that meets the requirements of the Act sec.214(e)(1), 
as amended, as an eligible telecommunications carrier for a service area 
designated by the state commission. This section sets forth the requirements for 
establishing service areas, the criteria for determining eligible 
telecommunications carrier status, the criteria for determining an eligible 
telecommunications carrier's federal universal service support, and the 
designation of more than one eligible telecommunications carrier in a service 
area. The section also provides the requirements for commission proceedings and 
applications to designate eligible telecommunications carrier status. Under the 
section, the commission may designate an eligible telecommunications carrier for 
unserved areas, and an eligible telecommunications carrier may relinquish its 
designation. 
Section 23.150 establishes the administration of the TUSF in compliance with 
PURA sec.sec.56.021, 56.022, 56.023, 56.024, and 56.026. 
The section defines the programs to be included in the TUSF. It establishes the 
responsibilities of the commission and the requirements for and the duties of 
the TUSF Administrator. It provides for a transition from the existing USF 
programs to the TUSF and sets forth the requirements to determine the amount 
needed by the TUSF. 
The section provides the requirements for the assessments to the TUSF and 
disbursements from the TUSF. In addition, it addresses the recovery of TUSF 
assessments. Under this section, a telecommunications provider may assess a 
percentage-based surcharge on all of its retail customers, except Lifeline, Link 
Up, and Tel-Assistance service customers. 
The adopted sections also specify various reporting requirements. 
The commission finds that the rules adopted prescribe a TUSF that complies with 
and implements the goals of PURA, the FTA, and the FCC's Report and Order. The 
commission finds that these rules ensure that basic local telecommunications 
service can be provided at reasonable rates and in a competitively neutral 
manner while fostering a free competitive market in the telecommunications 
industry. 
In adopting these rules, the commission makes other minor modifications for the 
purposes of clarifying its intent. The commission also revises the references to 
PURA 1995 so that they conform to the recently adopted Texas Utilities Code. All 
comments including any not specifically referenced herein, were fully considered 
by the commission. 
Section 23.133 establishes guidelines for financial assistance to eligible 
telecommunications providers (ETPs) serving high cost areas of the state that 
are not in the study areas of small and rural ILECs. 
SWBT opined that PURA sec.56.021 limits the commission's authority to establish 
a universal service fund to those areas that are both high cost and rural. SWBT 
suggested that the commission include a qualification in the TUSF plan that 
should the plan be held unlawful, participating companies could revert to their 
pre-TUSF plan access and toll rates. SWBT explained that the companies would 
then be protected against the risk that the commission's proposed language may 
be unlawful. 
PURA sec.56.021 provides universal service support for "high cost rural areas." 
The commission interprets PURA sec.56.021 as allowing TUSF support for all high 
cost areas in Texas. FTA sec.254(b)(3) provides universal support for "rural and 
high cost areas." The commission revises sec.23.133(a) so that it parallels the 
language in PURA sec.56.021, and declines SWBT's suggestion to qualify the rules 
with regard to the commission's authority. The commission modifies sec.23.133(d) 
and sec.23.147(b)(2) by inserting the term "rural" so that they are consistent 
with sec.23.133(a). The commission will determine which areas of the state 
constitute "high cost rural areas" in the compliance proceeding held pursuant to 
sec.23.133. 
Section 23.133(b) establishes definitions of words and terms used in sec.23.133. 
As proposed, sec.23.133(b)(2) defined business lines and sec.23.133(b)(9) 
defined residential lines. 
TTA recommended revising sec.23.133(b)(2) and (9) to redefine "residence line" 
and "business line" as lines which "do not have multi-line hunting, trunking or 
other special capabilities." TTA explained that this change would avoid a 
situation where a carrier might seek funding for lines that have these 
capabilities, but where the carrier does not apply a separate charge for that 
capability. 
The commission modifies the definition of business line in sec.23.133(b)(2) and 
the definition of residential line in renumbered sec.23.133(b)(10) by replacing 
the term "charges" with the term "capabilities" to eliminate the possibility of 
the situation described by TTA. 
The commission also clarifies that an eligible line is a residential or single-
line business line that an ETP serves using its own facilities, the purchase of 
unbundled network elements (UNEs), or a combination of its own facilities and 
purchase of UNEs. The commission adds this definition of eligible line as the 
renumbered sec.23.133(b)(5). In addition, the commission clarifies that the ETP 
providing service to an end user through total service resale will not receive 
support for that line. Rather, the underlying ETP will receive the support if 
such line is an eligible line. 
As proposed, sec.23.133(d) established THCUSP support for basic local 
telecommunications service (BLTS) for all flat rate residential lines and all 
flat rate single-line business lines. The commission requested comment on 
whether to restrict support payments to primary flat rate lines serving 
residential and business customers. 
AT & T, MCI, TCG and PrimeCo advocated restricting support payments to primary 
lines. AT & T took the position that businesses should not be subsidized because 
they are for-profit ventures and that telephone service is simply a cost of 
doing business. AT & T argued that a subsidy for businesses without a line 
limitation is not good policy for the state. AT & T suggested that the 
commission limit the subsidy to one line per business and only for businesses 
that are "truly small" so as to meet the goal of promoting economic development. 
AT & T stated that the limitation of the subsidy to one line per residence is 
sound policy because it ensures that every household has access to 
telecommunications, but also limits the overall size of the fund. In its reply 
comments, TCG advised limiting support to primary single line residential 
service, indicating that such a limitation is enforceable. TCG's recommended 
enforcement for the restriction includes customer certification, a database of 
support-eligible locations, and periodic audits of statistically significant 
samples of support recipients. 
PrimeCo also urged the commission to restrict support payments to primary flat-
rate lines serving residential and business customers, at least at the outset. 
PrimeCo argued that it seemed inappropriate to increase the bills of middle and 
low income Texans simply to support secondary lines used by people and 
businesses who were capable of paying the full cost of that secondary service. 
MCI asserted that the commission should only provide TUSF support for primary 
residential lines because all other lines are not "basic telecommunications 
services." PrimeCo also argued that at this time "basic" should not include 
secondary residential lines for teen-agers, computers and fax machines. PrimeCo 
advised beginning with a narrow definition of other services that will receive 
support in order to minimize the impact on consumers' bills. PrimeCo indicated 
that if the planned re-examination of the TUSF reveals that additional lines or 
services merit support, the support could be broadened. PrimeCo concluded that 
the commission has the authority to begin an investigation at any time to 
examine whether rural Texans need support for secondary residential lines to 
participate in the information age. 
GTE, TTA, PrimeCo, SWBT, and Sprint discussed the pricing implications of 
restricting support to primary lines. GTE argued that such a restriction would 
introduce an artificial distortion in the relative prices of primary and 
secondary lines and result in a situation that is not competitively neutral. TTA 
stated that restricting support payments to primary lines would result in the 
imposition of unfunded mandates on all ETPs, and insufficient and unpredictable 
support for universal service. TTA argued that ILECs that have elected 
regulation under PURA Chapters 58 and 59 would be restricted from increasing 
BLTS rates but would be required to provide high- cost additional lines at a 
below-cost rate. TTA also argued that non-electing ILECs would be required to 
file rate cases in order to recover costs. TTA stated that the remaining ETPs 
would also be restricted from increasing rates in a competitive market. TTA 
advised the commission to approve universal service support for all eligible 
residential and single-line business lines. 
In its reply comments, PrimeCo stated that the benefits to all 
telecommunications customers of keeping the TUSF contribution down outweigh the 
extra cost borne by some ratepayers for second lines. SWBT stated that there is 
no reason to restrict support from second and additional lines because basic 
rates for these lines are subject to regulatory constraints. 
Sprint argued that providing support for business lines and second residential 
lines widens the application of subsidies, perhaps beyond what is required to 
achieve universal service. Nevertheless, Sprint stated that as long as there is 
a disparity between the prices and the costs of providing business and 
additional residential lines in high cost areas, the fund must be sized to 
include these lines. 
OPC stated that restricting support payments to primary lines would contravene 
two express goals of FTA: ensuring the availability of reasonably comparable 
services at reasonably comparable rates, and promoting use of the 
telecommunications network for advanced services. OPC used the same argument in 
its reply comments, urging that the commission reject AT & T's proposal to 
restrict support to the first line for both residences and businesses. 
Sprint indicated that it recognizes the practical need for support payments for 
business lines and additional residential lines. GTE, TTA, and SWBT discussed 
specific practical issues related to restricting support to primary lines. GTE 
argued that there is no effective means to prevent customers from evading the 
primary/secondary distinction through the selection of a second carrier to 
provide another "primary" line. TTA and SWBT opined that there would be strong 
incentive to subscribe to multiple first lines, either under different names or 
from multiple ETPs, in order to avoid the higher charges. 
GTE pointed out that neither MCI, AT & T, nor PrimeCo discussed how a 
restriction to primary residential lines could be realistically implemented, 
administered, or monitored in a competitive local exchange telecommunications 
environment. GTE urged the commission to reject their position and maintain the 
rule as proposed. OPC stated that determining which line is primary presents an 
administrative nightmare, conceivably requiring scrutiny of family relationships 
or living arrangements. OPC stated in its reply comments that the arbitrary 
determination that only one line is necessary per household undermines the 
ability of multi-family households to receive basic service. OPC opined that the 
practical difficulty of administering a one household-one line rule would make 
such an approach extremely burdensome. TTA concluded that customers would be 
confused and not understand or willingly accept the higher rates for additional 
lines. SWBT warned that enforcement of such a restriction would likely be 
impossible. SWBT stated that LECs do not have the tools to monitor their 
customers' living and other arrangements. SWBT stated that customers will likely 
not understand the reasons for a differential between their first and subsequent 
lines. SWBT stated that it is naive to think that business office personnel will 
be able to explain adequately and intelligently the intricacies of telephone 
pricing and costing when customers ask about them. SWBT opined that as 
competition develops, prices will be more rational and customers will grow 
accustomed to more local pricing plans. SWBT concluded that perhaps the issue 
can be addressed more easily in the future. 
The commission declines to modify sec.23.133(d) with respect to providing 
support to all residential lines. The commission shares the concerns raised by 
AT & T, MCI, TCG, and PrimeCo that providing universal service support in high 
cost areas for second residential connections and businesses with multiple 
connections is not necessary to fulfill the goal of universal service which is 
to ensure that every household has access to BLTS. The commission is also 
mindful that overly expansive universal service support mechanisms may 
potentially harm all consumers by increasing the expense of telecommunications 
services for all. From a pragmatic perspective, however, the commission agrees 
that the administrative and practical problems the parties have identified with 
restricting support to primary flat rate lines serving residential customers 
constitutes a compelling argument against modification of the rule at this time. 
Further development of the competitive telecommunications marketplace may 
address some of the problems associated with customer confusion, price signals, 
and practical administration of restricted residential support described by the 
parties. The commission will revisit these issues when it reviews TUSF rules in 
three years. 
Since the number of business lines is significantly smaller than that of 
residential lines, it is the commission's opinion that LECs can more easily 
overcome the practical problems associated with restricting the number of 
single-line business lines supported. Therefore, the commission revises 
sec.23.133(d) so that an ETP shall receive THCUSP support for the first five 
single-line business lines it serves at a business customer's premises. It is 
the commission's opinion that this restriction will appropriately limit the 
scope of TUSF support while ensuring that rates for BLTS are reasonable for all 
small businesses. Section 23.133(d)(1) sets forth the initial definition of 
BLTS. Section 23.133(d)(1)(E) itemized access to 911 service and dual party 
relay service as part of BLTS. 
TCG recommended that sec.23.133(d)(1)(E) be broken into separate elements, so 
that access to 911 services is listed separately from dual party relay service. 
TCG wanted to modify language regarding the criteria to be mandatory by 
inserting the word "shall" in the introductory language to the list of criteria. 
The commission notes TCG's comment regarding sec.23.133(d)(1)(E) and separates 
access to 911 service from dual party relay service by creating a new 
subparagraph (F) in sec.23.133(d)(1). Lifeline and Tel-Assistance are included 
in the definition of BLTS in PURA sec.51.002. Therefore, for clarification, the 
commission also adds a new subparagraph (J) to sec.23.133(d)(1) to conform to 
the statutory definition of BLTS. 
The commission declines TCG's suggestion to insert "shall" in the introductory 
language of the list of criteria. The commission finds it redundant to modify 
the language so that the criteria are mandatory because LECs are required to 
provide the services listed in sec.23.133(d)(1)(E) as part of the criteria for 
designation as ETPs listed in sec.23.147(d)(1)(B). 
Section 23.133(e) establishes the criteria for determining the amount of support 
an ETP can receive under THCUSP. Section 23.133(e)(1)(B) establishes residential 
and business revenue benchmarks using statewide average revenues per line. The 
commission invited comment on whether a revenue benchmark should be used to 
calculate the level of support ETPs will receive for serving rural and high cost 
areas under sec.23.133. 
AT & T, CU, TCG, OPC, TTA, SWBT, and Sprint all supported the use of a revenue 
benchmark. Some parties suggested modification to the proposed rules. GTE 
recommended use of company- specific rates. MCI recommended that the commission 
should determine the benchmark during the compliance proceeding. 
AT & T argued that the benchmark must include the appropriate access revenue 
that would include any contribution above the cost of access. AT & T claimed 
that otherwise, interexchange carriers (IXCs) will be double-paying for 
universal service; first through access rates that still contain an implicit 
subsidy; and second through the USF assessment itself. 
CU commented that the calculation of residential revenues per line appeared to 
ignore the revenue generated by ELCS surcharges, which, because they are 
revenues generated by the access lines, should be included. CU noted that the 
phrase "reasonable portion of toll and access services" was undefined. CU 
recommended re-writing the rule to ensure that revenues from toll and access 
that are associated with the local loop in the cost model are included in the 
revenue calculation in the same proportion. CU asserted that, if toll and access 
are adjusted, ELCS surcharges should be similarly recalculated. SWBT responded 
to CU's assertion in its reply comments, indicating that ELCS surcharges are 
included in its local service revenue. SWBT stated that CU's argument that the 
plan fails to take into account ELCS surcharges is simply wrong. SWBT contended 
that there is no statutory authority for the argument that ELCS surcharges 
should be recalculated based on any reductions made to access and intraLATA toll 
rates. SWBT argued that PURA sec.55.048 has no provision for recalculation of 
the charges under any circumstances. CU alleged that if all sources of revenue 
are not taken into consideration, the LECs will be earning excess profit. In its 
reply comments, SWBT opined that CU's argument about excess profits is a red 
herring. SWBT argued that participation in the universal service plan should be 
revenue neutral, but only at the inception of the plan. SWBT explained that the 
plan does not guarantee continued revenue streams in the face of competition and 
that if CLECs acquire more and more customers in high cost areas, ILECs will 
lose the universal service contribution attributable to those customers, and the 
new entrant will receive them. 
In its reply comments, TCG strongly supported the commission's recommendation to 
calculate the subsidy requirement as the difference between the total revenue 
per line and the forward-looking cost of those services, rather than the 
difference between basic service rates and the cost of basic service. TCG argued 
that this approach recognizes the fact that telephone subscribers buy more than 
basic service and the subscriber line charge (SLC). TCG contended that any 
shortfall due to basic service rates, not covering the basic service cost 
(forward-looking or otherwise), may be erased by the sale of discretionary 
services. TCG opined that the basic service rates are a device to gain customers 
for other more profitable products and services. TCG argued that the revenue 
from discretionary services should be included in the benchmark for determining 
the support requirement. TCG remarked that a windfall would be prevented because 
the benchmark would take into account discretionary service revenue that would 
lead to a smaller universal service fund. TCG reasoned that cost-based rates 
will result from competition among local service providers for the entire 
package of discretionary services. 
OPC emphasized that all sources of revenue, including enhanced services, be 
considered in establishing the amount an ETP may draw from the TUSF. OPC argued 
that the cross-subsidy and joint cost language of 47 U.S.C. 254(k) recognizes 
two distinct steps that are necessary to have fair and efficient pricing in the 
emerging, competitive environment - a strict prohibition on below-cost pricing 
and a reasonable recovery of joint and common costs across services that share 
facilities. OPC opined that arguments that try to ignore the fact that the loop 
is a joint and common facility used by many services are wrong on the economics, 
wrong on the judicial interpretation and wrong on the meaning of the new law. 
OPC stated that those who argue for allocation of the loop to basic service 
assert that the consumer's decision to buy local services causes the loop cost. 
OPC explained that a customer's intent could not be determined because customers 
may just as well think they are getting local, long distance and vertical 
services when they buy telephone service. OPC opined that assigning costs on the 
basis of a guess about the intention of ratepayers when they make a purchase is 
not a sound basis for economic analysis. OPC reasoned that a sound basis is to 
analyze the facilities and functionalities necessary and actually used in the 
production of goods and services. As an example, OPC stated that in order to 
produce a long distance call, one needs distribution plant, as well as switching 
plant and transportation. OPC explained that services that use facilities should 
be considered to cause or benefit from the deployment of those facilities. OPC 
also explained that every service that uses a facility should help pay for it 
and that costs for joint and common facilities should be recovered on the basis 
of the nature and quality of use that each service makes of those facilities. 
OPC argued that efforts to set the threshold on the basis of basic service 
revenues will create an extremely large state USF and is contrary to the 
approach being taken by the FCC. OPC explained that proposals that fail to take 
other revenues into account in estimating the extent of support needed 
unnecessarily shift costs onto basic service. OPC concluded that such an 
approach would result in a USF that would be far larger than needed and/or the 
cost of basic service will be higher than necessary. 
In its reply comments, GTE disagreed with OPC's identification of the problem 
involved with setting the revenue benchmark as one of cost allocation. GTE 
strongly disagreed that the loop is a common cost that must be allocated to all 
services, but noted that adding toll and access to a revenue benchmark does not 
even accomplish this unwarranted goal. GTE argued that the inflation of the 
benchmark simply serves to minimize the level of explicit supports and cause the 
carrier to continue to bear negative margins on its basic services, as well as 
maintain implicit supports in its other revenue streams. GTE restated that its 
local residential service is currently priced at a level that results in a loss 
of approximately $310 million annually, and that local business services lose 
over $33 million annually. GTE argued that only a revenue benchmark that 
generates a funding level that makes these subsidies explicit will approach the 
sufficiency requirement of FTA sec.254(b)(5). GTE indicated that OPC's 
"misdirected fear" of under-contribution from other revenues towards the costs 
of the loop could never materialize. GTE commented that under-contribution could 
only occur if the revenue benchmark was set excessively low. GTE also remarked 
that an excessively high revenue benchmark will result in an unlawful 
suppression of the TUSF by failing to make all supports explicit. In addition, 
GTE recommended that the revenue benchmark be reviewed more frequently than 
every three years. GTE concluded that an expedited review process is crucial if 
toll and access are included in the benchmark as the universal service 
reductions must be rolled into the calculation to compute universal service 
support. 
GTE opposed the use of "arbitrarily selected" statewide average revenues to 
calculate the benchmark to which costs will be compared to determine the per-
line universal service support. GTE argued that the inclusion of discretionary 
services and a reasonable portion of toll and access services in a revenue 
benchmark runs counter to the goals of universal service. 
In its reply comments, OPC indicated that the proposed rule makes it clear that 
the commission understands that revenues and costs must be matched. OPC stated 
that by including "reasonable share of revenues" the commission has clearly 
recognized that the costs and revenues must be analyzed. OPC indicated that the 
matching of costs and revenues could be accomplished in one of two ways under 
the proposed rule: (1) the commission may conclude that it is necessary to pull 
incremental costs of the other services into the universal service analysis as 
well as into the other cost proceedings that it is undertaking; and (2) the 
commission may decide that it is necessary to leave a reasonable share of 
revenues from other services out of the universal service analysis to cover 
costs left out of the universal service analysis. In either event, OPC concluded 
the commission will have avoided the mistake of mismatching that the companies 
erroneously accuse it of having made. 
TTA advised the commission to adopt a revenue benchmark consisting of all of the 
non- optional charges that an ILEC's customer pays when subscribing to BLTS. TTA 
suggested that the benchmark equal the sum of the applicable flat rate for local 
service, the non-optional charges for extended area service (EAS) and expanded 
local calling service (ELCS), any separate touch call charges, and the 
applicable interstate SLC. TTA asserted that an interim THCUSP mechanism should 
be implemented to support the difference between the actual tariffed rate and 
the statewide average revenue benchmark. TTA reasoned that the interim mechanism 
would terminate once all regulated BLTS rates are allowed to equal the average 
revenue benchmark. TTA concluded that this interim plan would ensure that 
adequate THCUSP support would be available to any ETP serving a rural or high 
cost area of the State. 
TTA also argued that the revenue benchmark proposed in the rule is a 
continuation of the implicit support mechanisms embedded in the ILECs' rates. 
TTA opined that including toll and access revenues in the revenue benchmark 
would not be appropriate in a competitive marketplace because an ETP can not 
rely on the access and toll revenues generated from customers in one area to 
support its cost of providing BLTS to customers residing in another area. TTA 
asserted that as markets become more and more competitive, similar problems will 
occur with inclusion of discretionary services in the benchmark. TTA further 
argued that the proposed revenue benchmark fails to meet the FTA objectives to 
provide specific, predictable, and efficient support for universal service. 
TTA recommended amending sec.23.133(e)(1)(B)(i) and (ii) by deleting the phrase 
"as well as a reasonable portion of toll and access services." Alternatively, 
TTA suggested that the commission amend the rule to (1) clarify that interstate 
toll and access revenues are excluded; (2) require recalculation of the 
benchmark every six months; and (3) ensure that the benchmark is established 
after the toll and access rate reductions associated with the USF. Additionally, 
TTA recommended that if the benchmark includes toll and access revenues then the 
commission should simultaneously adopt an order increasing all interconnection 
rates, unbundled loop rates and resold loop rates by an amount equivalent to the 
subsidy included in the benchmark. 
SWBT argued that the commission should use a revenue benchmark to calculate the 
level of support, but indicated that the most appropriate revenue benchmark 
would be the statewide average residential rate (estimated by SWBT to be $13.50 
for all ILECs in Texas). SWBT indicated that a $13.50 benchmark would result in 
$1.090 billion in support for SWBT and $1.798 billion in support for the 
industry. SWBT indicated that it would agree to a smaller fund based on a 
revenue benchmark that would at least identify and deal with the implicit 
support contained in access and intraLATA toll rates. SWBT opined that such a 
revenue benchmark would include average residential/business end user common 
line (EUCL) and vertical services revenue. SWBT estimated these to be $23.58 for 
residence and $38.78 for business. These benchmarks would result in $482 million 
in support for SWBT and $983 million in support for the industry. SWBT asserted 
that access and toll revenues should not be included in the benchmark. 
In its reply comments, AT & T found TTA's and SWBT's arguments for the exclusion 
of discretionary, toll, and access services in the calculation of the revenue 
benchmark to be flawed. AT & T explained that the only instance when such a rule 
would be appropriate would be when the retail prices for those services were 
simultaneously brought to cost, so no subsidy would exist in those rates. AT & T 
stated that this would not be possible absent a complete rate restructuring 
case, which could not be completed before the commencement of the TUSF. AT & T 
also opposed a dual standard, as proposed by TTA, because this would cause an 
unquantified increase of the TUSF with no concrete proposal on timing or phase-
out of such a plan. 
In its reply comments OPC opined that the ILECs had gone to great lengths to 
argue that there is a federal mandate for rate rebalancing or for the creation 
of a massive universal service fund. OPC argued that SWBT's proposal violates 
the conditions of the FTA because the same facilities are necessary for 
providing basic service and to complete a toll call: loop, transport, and 
switching. OPC indicated that IXCs have kept up their efforts to get a free ride 
on the loop by increasing the cost burden placed on basic service. OPC stated 
that MCI's creative use of FTA sec.254(k) would be much more credible if it did 
not immediately contradict that section by seeking to allocate 100% of common 
loop costs to basic service, thereby violating the cost allocation safeguards. 
OPC further argued that because of the misallocation of loop costs, the 
estimates of universal service funding requirements presented by GTE and SWBT 
involve a gross overestimation of the size of the fund. OPC concluded that 
because other services use common facilities, the charge for those facilities is 
not a subsidy, it is a recovery of costs. OPC declared that the claim that this 
violates the law is baseless. 
Sprint opined that since basic services do not include toll and access services, 
their inclusion in the benchmark would not be consistent with the purpose of the 
fund. Sprint reiterated its position in its reply comments. Sprint objected to 
including any portion of toll and access services in the revenue benchmark 
calculation. Sprint argued that the inclusion of a "reasonable portion" of toll 
and access services would only result in a continuation of an implicit subsidy 
mechanism that is not sustainable in a competitive marketplace and clearly 
contrary to the FTA. 
Sprint recommended that the revenue benchmark be set at the national average 
urban rate for basic local service including surcharges and taxes, SLC and 
touch-tone. Sprint also argued that ILECs with local rates below the national 
urban rate ($20 by Sprint estimates) be allowed to transition to this benchmark 
over time. 
TTA indicated in its reply comments that if the Benchmark Cost Proxy Model 
(BCPM) cost model is used, Sprint's proposal of a revenue benchmark at the 
national average urban rate of $20 might be workable. 
In its reply comments, SWBT discussed Sprint's recommended use of the national 
average revenue rate of $20. SWBT urged the commission to use Texas figures 
where available, as the adoption of universal service principles is for use in 
this state, not nationally. 
GTE championed the comparison of company-specific costs to company-specific 
tariffed rates charged in each census block group (CBG). GTE argued that such a 
comparison would include the monthly recurring rate, SLC, and any other 
mandatory charge such as non-optional EAS. GTE objected to the inclusion of 
revenues from toll, access and vertical services in the statewide average 
benchmark. However, as long as the rules include toll, access, and vertical 
service revenues in the benchmark, GTE agreed that it is necessary to include 
these costs. 
In its reply comments, GTE restated its opinion that in order to work properly, 
the revenue benchmark must include only those rates or revenues that are 
currently subsidized. GTE cited TTA's enumeration of practical problems caused 
by the inclusion of toll and access revenues in the benchmark. GTE opined that 
the inclusion would require an increase to wholesale rates so that alternatives 
to toll and access contribute an equivalent subsidy. GTE asserted that an 
insufficient fund will continue the current disparity between interstate and 
intrastate long-distance rates. GTE argued that the inclusion is anti-
competitive as other toll and access providers will support only the net of 
universal service cost less the "reasonable portion of toll and access" while 
the ILEC must support the entire cost structure. 
In response to GTE's comment that support flows from other services cannot be 
sustained in a competitive environment, especially when competitors can buy UNEs 
from the ILECs at cost-based rates, OPC stated that claims that the costs cannot 
be recovered are incorrect. OPC opined that the price for those services must 
reflect those costs and recovery of legitimate joint and common costs will not 
be competed away. To the extent that competitors are more efficient and provide 
these joint and common facilities at lower costs, the cost of service will 
decline. OPC continued that the claim that these costs cannot be figured into 
the estimation of the universal service fund on economic grounds is undermined, 
once the fact that they are joint and common costs is recognized. OPC argued 
that since they must be incurred by all who provide the services, they must be 
included in the final price of the service. OPC stated that allowing incumbents 
to recover joint and common costs excessively from basic service would not 
promote efficiency and would frustrate competition, allowing incumbents to price 
more competitive services at an artificially low level. 
OPC argued that advocates of recovering all loop costs from basic local service 
often apply inconsistent cost recovery principles, confusing the question of 
fixed versus variable cost recovery with the question of the recovery of joint 
and common costs. The fact that loop costs are more fixed and that switching 
costs are more variable should not dictate whether or not joint costs are 
recovered from the services that use a facility. OPC opined that this confuses 
the issue of who should pay with the separate question of how they should pay 
and that it may be just as efficient to recover the costs through a fixed IXC 
charge as a fixed end user charge. OPC claimed that the incumbents continue to 
confuse the question of fixed versus variable recovery of costs with the 
question of joint costs. OPC stated that GTE's complaint is about variable 
charges recovering fixed costs, not whether joint and common costs should be 
recovered. The solution is a careful analysis of what costs and revenue 
opportunities are fixed and which are variable and a fixed recovery of fixed 
joint and common costs. OPC opined that there are significant questions about 
the "fixed" nature of the loop cost, especially if cost causation is taken into 
account. OPC concluded that the costs of the loop vary with respect to the 
services for which it will be used and that while the costs may be fixed once 
the technology is deployed, the revenue opportunity is variable. 
MCI cautioned the commission not to commit to any benchmark calculation until 
the cost results by CBG had been determined. In its reply comments, MCI 
suggested that the determination of the proper benchmark and the access/toll 
split be decided in a contested proceeding because these are fact-specific 
issues. 
The commission notes CU's concern regarding ILECs and will strive to create a 
fund of the appropriate size. The commission shall establish benchmarks that 
will include revenues from basic and discretionary services, and a reasonable 
portion of access and toll revenues. The commission notes OPC's cost allocation 
arguments and declines TTA, Sprint, and GTE's suggestion to exclude toll and 
access revenues from the benchmark. By including revenues from discretionary 
services and a reasonable portion of access and toll revenue, the commission 
acknowledges that part of the costs of providing BLTS are recovered through the 
provision of non-basic services. This is consistent with historical rate design 
principles. The commission also recognizes that toll and access service provide 
contribution to support loop costs. The commission rejects CU's suggestion to 
define in this rulemaking proceeding what constitutes a "reasonable portion of 
toll and access" because the commission will establish that amount during the 
compliance proceeding. The commission recognizes that its actions in this 
rulemaking and related federal actions may impact toll and access revenues. The 
commission intends to reflect such action in its decision regarding the 
reasonable amounts of toll and access included in the benchmark.
The commission declines to adopt the alternative benchmarks proposed by Sprint, 
SWBT, GTE, and TTA. None of these alternatives would be competitively neutral 
while at the same time recognizing the revenues received by Texas LECs. Since 
the commission will select a forward- looking economic cost methodology that 
will accommodate Texas-specific inputs, as determined by the commission, to 
estimate the cost of providing BLTS in Texas, Sprint's proposal to use a 
national average rate is simply inappropriate for the TUSF. SWBT's proposal to 
use the statewide average residential rate ignores revenues generated by 
vertical services, and would seemingly place the entire cost burden of the loop 
and local switch on basic service. GTE's recommended use of company-specific 
tariffed rates would result in a benchmark that is not competitively neutral 
because payments to CLECs would be based on ILEC rates. TTA asserted that the 
benchmark should only include revenues associated with basic services and non-
optional charges such as ELCS, EAS and SLC. Using TTA's benchmark would place 
the full burden of the loop and switch cost on those services.
The commission declines TTA's suggestion to implement an interim THCUSP 
mechanism to support the difference between the actual tariffed rate and the 
statewide average revenue benchmark. THCUSP support is designed to aid ETPs in 
keeping rates for BLTS reasonable. The commission has concluded that an ETP's 
need for support will be determined by the difference between the forward 
looking economic cost of serving a specific high cost area and the statewide 
average benchmark. If an ILEC determines that this support is inadequate, an 
ILEC may request additional support from the TUSF pursuant to sec.23.136 and 
sec.23.138. ILECs that have not elected to regulation under PURA Chapters 58 or 
59 may also file rate cases to increase rates. 
The commission also declines to adopt TTA's suggestion that interconnection 
rates, unbundled loop rates, and resold loop rates be increased by the amount 
equivalent to the subsidy included in the benchmark. The commission finds that 
providers of local exchange service using interconnection, UNEs and resale will 
be contributing to the overall cost of service. UNEs purchasers in particular 
are bearing the full cost of the loop, switch, and transport elements that they 
buy. Therefore if the commission raised those rates, the ILECs would be over-
recovering their costs. Further, the interconnection rates were not set in this 
proceeding and are applicable to specific agreements between ILECs and CLECs. 
The commission concludes that it is inappropriate to address those rates in this 
broader rulemaking proceeding. 
The commission declines to implement TTA and GTE's suggestion to modify the rule 
so that the benchmark is recalculated more frequently because sec.23.133(g) and 
sec.23.150(g) provide for sufficient review of the TUSF. Pursuant to subsection 
(g) the commission shall review the THCUSP within 90 days of the FCC's adoption 
of an order implementing new or amended federal universal service support rules 
for rural, insular, and high cost areas. Pursuant to sec.23.150(f)(2)(B), the 
TUSF administrator shall determine, on a periodic basis approved by the 
commission, the amount needed to fund the TUSF. The commission makes no 
revisions to sec.23.133(e)(1)(B) based upon the parties' comments. 
Sprint stated that it is unclear if the statewide average is on an ETP by ETP 
basis, resulting in a unique revenue benchmark for each LEC, or whether there is 
one revenue benchmark for the entire state that will be used by all ETPs. Sprint 
argued that if there is a statewide benchmark that is to be used by all LECs 
then those companies with revenues above the benchmark should only be able to 
receive support based on the difference in cost and their own particular revenue 
amount. Sprint continued that LECs that have revenues below the benchmark should 
be allowed to raise their rates to the revenue benchmark amount. Sprint 
concluded that if this solution is not acceptable, then the revenue benchmark 
should be calculated on a statewide, company-specific level. 
The commission declines Sprint's suggestion to use a benchmark calculated on a 
company- specific basis. The commission clarifies that it will establish one 
statewide residential benchmark and one statewide business benchmark based on 
the statewide average revenues of all the ETPs seeking support from the THCUSP. 
The commission concludes that use of statewide benchmarks, rather than use of 
company-specific benchmarks, will create a more predictable fund size and make 
support payments more uniform across the state. The commission also notes that 
one statewide residential benchmark and one statewide business benchmark will 
make the fund less complicated to administer. While the benchmark remains the 
same for all ETPs, the amount of support received for eligible lines may vary 
because of the differing forward-looking costs calculated for the geographic 
areas in which the ETPs provide service. The commission notes that ILECs that 
have elected to regulation under PURA Chapters 58 or 59 are operating under a 
rate cap and cannot raise the rates for BLTS until the end of the election 
period. Non-electing ILECs may file rate cases to raise rates for BLTS. 
Section 23.133(e)(1)(B)(ii) contained the calculation for the statewide business 
revenue benchmark. 
The commission modifies sec.23.133(e)(1)(B)(ii) to clarify that only single-line 
business lines will be included in the calculation. 
Section 23.133(e)(1)(C) stated that support under the THCUSP is portable with 
the consumer. 
The commission modifies sec.23.133(e)(1)(C) to clarify that an ETP shall only 
receive support for residential lines and the first five single-line business 
lines at a business customer's premises that the ETP is serving over eligible 
lines. 
Proposed sec.23.133(e)(2)(A) stated that the commission would use the BCPM to 
determine the per-line cost, on a CBG basis, of providing supported services. 
The commission invited parties to comment on the use of the BCPM, as opposed to 
the Hatfield Model (HM), to calculate the cost of providing universal service 
under proposed sec.23.133. The parties discussed various issues generally 
related to the use of cost proxy models and specific aspects of the BCPM and HM 
models. 
GTE, SWBT, and TTA advocated using actual costs instead of a cost proxy model. 
GTE detailed its entitlement to recover all its costs including forward looking 
costs, the costs incurred to support universal service. GTE proposed that 
universal service support be made explicit through a calculation that compares 
an estimate of the price the market would set for basic local service in a 
particular CBG with the tariffed rate in that CBG. GTE presented information 
showing the amount of implicit intrastate and interstate universal service 
support embedded in its current rates. GTE asserted that all of this implicit 
support should be made explicit and recovered through the TUSF. GTE indicated 
its intent to seek an interim universal service support surcharge to preserve 
the existing universal support levels because the commission requires GTE to 
provide UNEs or allow CLECs to engage in facilities-based competition prior to 
the adoption of a sufficient and explicit universal service mechanism. GTE also 
argued that it is inappropriate for the commission to use a single statewide 
model or "one size fits all" approach. GTE indicated that the commission should 
not adopt either BCPM or the HM, but use company-specific studies or models that 
aggregate the results consistently across the state. GTE further argued that its 
own cost model, the Integrated Cost Model (ICM), best reflects its network 
architecture and service area characteristics and therefore should ultimately be 
used to establish GTE's cost of providing universal service. GTE continued its 
discussion in its reply comments, outlining three fundamental issues that any 
universal service plan must address. First, GTE stated, ILECs have historically 
been mandated to increase rates for non-basic services such as toll, 
discretionary and various business offerings to offset below-cost provisioning 
of basic services statewide. Second, GTE noted, ILECs provide basic service to 
some customers in high density areas at rates higher than the cost of providing 
the services. GTE illustrated that it suffers a shortfall that cannot be 
recovered because statewide averaging of revenues leaves the support provided by 
"above-cost basic" service customers understated. GTE argued that only by 
deaveraging revenues as it has deaveraged costs can the commission make the 
"above-cost basic" support explicit. Third, GTE commented, there is a disparity 
in basic and non-basic rates between various ILECs. GTE argued that companies 
whose customers provide greater than average revenue per customer will benefit 
in comparison to those companies whose customers provide less than average 
revenue. GTE stated that if revenues are averaged between companies, the 
companies with lower basic revenues and thus higher non-basic support 
requirements, will receive insufficient funds to make all their support 
explicit. GTE asserted that companies with higher basic charges and lower non-
basic supports receive even greater funds than needed to make all supports 
explicit and that this result of inter-company averaging would be unfair and 
inconsistent with the FTA. GTE stated that the plan is clearly deficient in 
addressing the three problems it outlined and that the simple solution is to 
compare each company's cost to provide basic service to its tariffed basic rates 
for each company. 
MCI supported GTE's request for the commission to reduce access charges to cost-
based, market rates. MCI defended this statement by highlighting that 
artificially high access charges skew the market through improper pricing 
signals. MCI argued that the commission should reject GTE's request for an 
interim universal service surcharge because it will only increase GTE's already 
"exorbitant" returns. MCI said the commission should reject GTE's suggestion to 
base UNE prices on actual costs because it is inconsistent with the FTA, FCC 
regulations and commission arbitration decisions. Furthermore, MCI averred that 
this rulemaking is not the proper forum to address this issue. MCI stated that 
the commission should reject GTE's suggestion to compare company-specific costs 
with company-specific rates by CBG because to do so would not guarantee 
comparable rates between high cost areas and urban areas. 
SWBT and TTA also stated that actual costs of providing local exchange service 
should be used for the purpose of calculating the cost of universal service 
funding. TTA remarked that these book costs would provide the basis needed to 
enable the commission to identify and remove implicit support from the ILECs' 
current rates, as required by the FTA. In its reply comments, MCI stated that 
the commission should reject SWBT's suggestion to use actual costs for the same 
reasons it should reject GTE's embedded cost argument. 
In its reply comments, OPC discussed ILEC recovery of embedded costs. OPC stated 
that ILECs' claims that all of their costs and revenues must be replaced at 
embedded historical levels with no questions asked is an erroneous argument. OPC 
opined that this claim permeates the analysis both in the question of how to 
model costs and in the not-so-veiled threat of future court cases regarding 
stranded costs and constitutional taking. OPC argued that utilities have always 
been under an obligation to provide economic service and they have never been 
legally authorized to recover costs associated with inefficiencies, excess 
profits, or strategic investments. OPC asserted that the language in FTA that 
allows companies to recover their "costs" is not a blank check to claim 
guaranteed recovery of all costs that the companies incur, since the requirement 
that rates be just and reasonable still holds. OPC speculated that the growth of 
competition may only make the uneconomic nature of delivery of service obvious 
and palpable; it does not create the fundamental obligations of utilities. OPC 
stated that the fact that the commission approved some rates years ago does not 
mean that those rates were not reviewable. OPC contended that the fact that the 
commission (or the legislature) invokes competition as a more precise regulatory 
mechanism for determining what is economic, does not change or create the 
requirement that the utility provide economic service - that obligation has 
always been at the heart of traditional regulation. OPC contended that in a 
competitive market, investments that made sense at one time are frequently 
rendered uneconomic by technological progress or market change. Just because the 
investments made sense at one time does not ensure their soundness over time. 
OPC asserted that the claim for stranded cost recovery has no basis in the FTA. 
The commission declines to adopt the recommendations of GTE, SWBT and TTA to use 
embedded or actual costs to determine the level of THCUSP support. Use of 
embedded costs to determine the level of THCUSP support would reflect the cost 
structure of a specific ILEC and therefore would not be competitively neutral. 
The commission concludes that it would be poor policy to base support payments 
for THCUSP on the costs of an ILEC because an ILEC has a completely different 
physical network and financial structure from CLECs. Use of a forward-looking 
cost methodology is the best manner for the commission to ensure competitive 
neutrality when calculating THCUSP support. Through the compliance proceeding 
the commission and the parties will be able to openly examine, debate, and 
resolve costing issues. Use of a forward looking cost methodology will also 
allow for targeting of support to small geographic areas. The commission is 
confident that specific geographic targeting will create a smaller, more 
effective fund that provides support only where it is necessary. The commission 
notes that a final order was issued in SWBT's last rate case, Docket No. 8585, 
on November 29, 1990. The commission issued a final order in GTE's last rate 
case, Docket No. 5610, on February 23, 1989. If the commission were to use 
embedded costs, it is the commission's opinion that these two companies would 
need to file a rate case in order to develop up-to-date embedded cost 
information. GTE suggested that under PURA and the U.S. and Texas Constitutions 
it was entitled to recover stranded historical costs. While recognizing that the 
focus of this proceeding centers around a determination of the cost of universal 
service, GTE encouraged the commission to consider the role of the TUSF as it 
relates to setting prices for all of GTE's offerings, including retail services, 
unbundled network elements, and resold services. GTE stated that the 
commission's policy decisions regarding the TUSF would affect the level of ILEC 
stranded costs, but did not recommend that these costs be recovered through the 
TUSF. GTE also alleged that an unconstitutional taking of an ILEC's property may 
occur if a methodology other than an ILEC's actual costs were used to determine 
the cost of providing basic local telecommunications service. In support of its 
position, GTE cited Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989), FPC v. 
Hope Natural Gas Co., 320 U.S. 591 (1944), and Tenoco Oil Co. V. Department of 
Consumer Affs., 876 F.2d 1013 (1st Cir. 1989), for the proposition that utility 
rates must provide not only for a company's cost, but also for a fair return on 
investment. GTE also noted that the Eighth Circuit decision in Iowa Utilities 
Board, 1997 U.S. App. LEXIS 18183, recognized that compensatory prices were 
required in order to avoid a taking.
MCI objected to GTE's argument that it is legally entitled to recover all of its 
embedded costs. MCI argued that GTE gave up its entitlement to recover stranded 
costs when it elected into incentive regulation under PURA Chapter 58. 
The commission disagrees with the arguments presented by GTE. The use of a 
forward looking cost methodology to determine the cost of providing basic local 
telecommunications service will not result in a taking of private property in 
contravention of the Fifth and Fourteenth Amendments. 
The Supreme Court decisions applying the Takings Clause to public utility 
ratemaking do not support GTE's contention that regulators must consider 
historical costs in setting utility rates. See FPC, 417 U.S. at 390-90 
(acknowledging permissibility of multiple methods of calculating rate 
structures) and Duquesne, 488 U.S. at 316 ("The adoption of a single theory of 
valuation as a constitutional requirement would be inconsistent with the view of 
the Constitution this Court has taken since Hope Natural Gas ...."). Rather, the 
decisions cited by GTE require only that rates not be set at "confiscatory" 
levels, meaning that regulators must permit utilities to earn a rate of return 
on their investments that is commensurate with returns on investments in other 
enterprises having corresponding risks. See FPC and Duquesne. On this basis, the 
commission concludes that GTE's argument is without merit and declines to adopt 
the position that use of a costing standard which adopts a forward-looking 
rather than historical standard for cost determination violates the Takings 
Clause. 
With regard to GTE's entitlement argument, the commission concludes that 
confiscation case law supports a position that public utilities, including LECs, 
are not guaranteed the right to recover the full historical costs of their 
investments. Los Angeles Dep't of Airports v. United States Dep't of Transp., 
103 F.3d 1027, 1034 (D.C. Cir. 1997) (stating that computing actual cost does 
not always require using historical cost) and Illinois Bell Tel. Co. v. F.C.C., 
988 F.2d 1254, 1262 (D.C. Cir. 1993)(noting that "FCC has no obligation ... to 
include in the rate base all actual costs for investments"). Moreover, neither 
PURA nor the FTA provide any textual basis for establishing an unmistakable 
right to recover all prudent historical costs. Rather, these statutes speak in 
much broader generalities about the right to "just and reasonable rates."
PURA sec.53.003. As state and federal regulators continue to transition from 
traditional rate of return methods for setting maximum rates toward incentive 
regulations in the form of price caps, GTE's entitlement argument is further 
diminished. GTE has elected to be subject to incentive regulation under PURA 
Chapter 58. Under the terms of these provisions, an electing utility's rates, 
revenues, income, or return on investment are not subject to commission review. 
Prior to electing incentive regulation, GTE's rates were set using a historical 
rate of return methodology. This methodology determines rates based on a 
utility's actual costs. The telecommunications industry is a declining cost 
industry. For this reason, GTE will experience an increased rate of return on 
its investments during the period of incentive regulation. This factor, when 
coupled with the dollar for dollar recovery through the TUSF of any rate 
reductions that may occur upon implementation of the fund, suggests that GTE 
will fully recovery the costs associated with its provision of basic local 
telecommunications service. Consequently, the commission concludes that GTE's 
critique of the forward looking cost methodology is unjustified; GTE is fully 
recovering its historical costs through its current rates and to the extent that 
rate reductions occur upon implementation of the TUSF, these reductions will be 
recovered from the TUSF. These mechanisms ensure the recovery of an ILEC's 
historical investment. Therefore, the only practical effect of utilizing a 
forward looking cost methodology is to create an explicit cost recovery 
mechanism for universal service funding and remove implicit support for 
universal service. 
In the event that the forward looking cost methodology does not accurately 
determine the appropriate cost recovery for LECs that have not elected into 
incentive regulation under PURA Chapter 58 and 59, the commission has 
established a mechanism through which carriers may obtain compensation for 
regulatory actions that result in an alleged taking. Specifically, sec.23.138, 
relating to Additional Financial Assistance (AFA), enables ILECs that are not 
regulated under PURA Chapter 58 and 59 and that need funds in addition to those 
received under sec.sec.23.133, 23.134, or 23.136, to request AFA support in PURA 
sec.sec.53.105, 53.151, or 53.306 proceedings. 
Although the commission has considered GTE's concerns regarding the universal 
service plan, the commission notes that the goal of this rulemaking is specific 
to establishing a universal service fund for Texas and cannot address the rate 
issues raised by GTE. As a company electing regulation under Chapter 58, GTE 
must maintain a rate cap for basic services until the end of the election 
period. GTE may raise rates for discretionary and competitive services pursuant 
to the provisions of PURA Chapter 58. The commission acknowledges that revenues 
from non-basic services contribute to the cost of providing basic services. The 
commission notes GTE's concerns about the disparity in basic and non-basic rates 
between various ILECs, but, GTE's complaints cannot be addressed in this 
rulemaking because those rates were set in separate proceedings. The commission 
will establish benchmarks and calculate forward-looking economic costs for 
specific geographic areas that minimize the possibility of ETPs receiving 
greater support than is needed to make all supports explicit. 
AT & T and MCI argued in support of the HM, recommending that the commission 
reject the BCPM. AT & T stated its belief that the HM is the superior model 
based on construction of the model itself, ease of modifying inputs, and 
accuracy of data. AT & T alleged that the HM meets the ten criteria required by 
the FCC for any cost study used to calculate federal universal service fund 
(FUSF) support. 
MCI strongly urged the rejection of the BCPM. MCI indicated that the commission 
should reserve its decision regarding selection of a benchmark until the FCC has 
reviewed the cost model/study submissions. In its reply comments, MCI indicated 
that the commission should defer to the FCC's choice of a cost model. TCG also 
suggested that the commission delay choosing a cost model until the FCC has 
completed its investigation of proxy models. In its reply comments, TTA 
indicated that whatever the model chosen, its adoption should not be delayed, as 
MCI proposed, and it should reflect Texas-specific costs, such as ELCS, not 
mirror a federal cost model. 
In its reply comments, GTE indicated that MCI erred in urging the commission to 
reject BCPM for state purposes if the FCC rejects it for federal support 
purposes. GTE argued that since the commission has made the election to submit 
its own cost models for the purpose of calculating intrastate support, it need 
not wait on any further action by the FCC. GTE stated that even if the FCC 
adopts a different model, that FCC model will not be used for either interstate 
or intrastate purposes in Texas in light of this commission's election. GTE 
further argued that the FCC's general model will be used in those instances 
where the state fails to present its own model or its model is found to be 
deficient. GTE remarked that under these circumstances the commission would then 
be free to proceed with its own model for intrastate purposes. GTE opined that 
the commission must choose the most appropriate costing model for Texas 
regardless of the ultimate decision of the FCC as regards its general model. In 
its reply comments, SWBT stated that under no circumstances should the 
commission adopt use of the HM simply because the FCC may adopt the HM. In 
response to AT & T's argument that it is critical that the commission use a 
model that is consistent among jurisdictions for the application of the state 
federal universal funding mechanism, SWBT stated that while consistency is a 
worthy goal, it should not outweigh the commission's obligation to ensure 
adequate universal service support in Texas. SWBT stated that jurisdictional 
differences in costs which result in differing levels of USF's federal and state 
can be accommodated simply by crediting the LEC's state USF recovery by the net 
FUSF recovery. 
In its reply comments, GTE stated that the HM is erroneous and riddled with 
conceptual flaws that render it unacceptable. GTE opined that the HM models an 
incomplete and futuristic network that could not provide universal service at 
this time or in the foreseeable future. GTE remarked that apart from its 
conceptual and methodological shortcomings, the HM has been shown to be an 
untrustworthy, result-oriented device designed to produce artificially low costs 
and prices. GTE argued that the HM is more inaccurate in its measure of 
universal service cost than the BCPM and unfit for use in determining costs for 
USF under the FCC's ten cost model criteria. GTE argued that the HM should be 
rejected for several reasons: it builds a network that could exist only once the 
local exchange market becomes effectively competitive, something that may not 
occur in five or ten years; it produces network investment, general support 
investment, network expenses, support expenses, and corporate expenses that are 
only about 40% to 50% of current GTE costs; structure sharing assumptions won't 
be attainable for at least three to five years; it fails to include enough plant 
to serve customers because of unrealistic assumptions about customer locations; 
it does not produce accurate line counts; and it woefully underestimates 
switching costs. 
GTE, SWBT, and TTA suggested that the commission use an embedded cost 
methodology, but indicated a preference for BCPM in the event that the 
commission decided to use a forward looking economic cost model. If the 
commission must select a cost model to calculate universal support on an interim 
basis, GTE opined that BCPM is superior to the HM. SWBT concurred with GTE that 
the BCPM takes a much more reasonable approach to cost modeling than the HM. TTA 
also stated that BCPM is clearly the recommended choice, because it is based on 
a more reasonable approach to model construction, and employs more rational and 
reasonable assumptions throughout the process than HM. TTA attested that the 
BCPM is based on telecommunications engineering principles that would construct 
an operational network. TTA further recommended that Texas-specific input values 
be used in the BCPM in order to recognize the state's specific operating cost, 
geographic, demographic, and other characteristics. TTA advised that national 
average inputs should be used only in those instances where state specific 
values are not available. 
Sprint argued that the commission should retain the BCPM as the model for use in 
Texas. Sprint observed that the BCPM is the most accurate, user-friendly and 
detailed model available. Sprint listed three key factors that allow the BCPM to 
provide superior and more accurate cost estimates than HM: (1) BCPM identifies 
which customers are served by which wire center; (2) BCPM locates customers in 
order to build the network; and (3) BCPM constructs a workable network. Sprint 
identified problems that the HM has with these three areas. Sprint noted that HM 
assigns all of the customers in a CBG to a single wire center, the problem is 
that many times, the customers in a CBG are served by several different wire 
centers. Sprint commented that HM uses clustering in CBGs with densities under 
200 households per square mile, and assumes that 85% of the customers are 
located in towns on three-acre lots that are all adjacent to each other, 
although clustering is completely arbitrary and has no basis in reality. Sprint 
further commented that HM assumes that both CBGs and wire centers are square 
shaped, that the main feeders emanate from the wire center in either a 
north/south or east/west direction only and that sub-feeders split off at right 
angles and extend to individual CBGs. Sprint stated that no existing network is 
built this way, and no network that was actually constructed by an efficient 
provider would be built this way either. In its reply comments, Sprint restated 
its support of the BCPM and noted that SWBT, TTA, and GTE all recommended the 
BCPM if the commission chooses to use a forward-looking proxy cost model. 
AT & T compared the HM and BCPM models in its reply comments and stated that 
Sprint advocated adopting a cost model (BCPM 2.0) which is untested and is still 
an unproven work in progress. In addition, in AT & T's opinion, many elements of 
BCPM 2.0 are invisible to the end users and would make it exceedingly difficult 
to determine the accuracy of the program's calculations. AT & T stated that the 
HM version 4.0 is open to public scrutiny by utilizing public data sources for 
its inputs. AT & T contended that all concerns expressed by Sprint about the HM 
have been addressed in HM version 5.0. In renewing its support for the HM, AT & 
T also said that regardless of which model is used, it is critical that proper 
and consistent inputs are established. OPC opined that the BCPM remains 
fundamentally flawed, and does not, in its present state, produce reliable 
estimates of forward looking, efficient costs. OPC stated in its reply comments 
that the competitive model offered by the companies is one in which decisions on 
entry are made by taking only the revenues available on basic service into 
account. OPC declared that the incumbents seek to make basic service 
"profitable" on a stand alone basis, with 100% recovery of loop and other costs 
from basic services, while ignoring all of the revenues that can be earned on 
the sale of services that share the use of common facilities. 
TEXALTEL did not state a preference for either model, but noted that if 
portability of the subsidy is done right, the level of the subsidy is somewhat 
self policing. 
The commission agrees with MCI and TCG that it may be prudent to delay choosing 
a specific forward looking economic cost methodology since both BCPM and HM are 
undergoing revision. The updated versions of BCPM and HM provided in the next 
few months should address some of the specific concerns expressed by the 
parties. As part of the compliance proceeding, the commission will determine 
which forward looking economic cost methodology will be best for use in Texas 
and also determine the appropriate Texas-specific inputs. In that proceeding, 
the commission will consider the ten criteria specified in paragraph 250 of the 
Report and Order. The commission replaces the reference to BCPM in 
sec.23.133(e)(2)(A) with the term "forward-looking economic cost methodology." 
TTA opined that a proxy cost model was not applicable to the small and rural 
ILECs, and should not be adopted for these companies. 
The commission does not anticipate applying a forward looking economic cost 
methodology to determine TUSF support payments to any small or rural ILEC until 
the FCC adopts an order implementing new or amended FUSF rules for rural, 
insular, and high cost areas. At that time, as stated in sec.23.134(h), the 
commission shall initiate a project to investigate a mechanism by which ETPs 
receiving support pursuant to sec.23.134 would transition to receiving support 
pursuant to sec.23.133. 
In proposed sec.23.133(e)(2)(A) the commission stated its intent to use the BCPM 
on no greater than a CBG level. 
CU asserted that the CBG was too small a unit of analysis, and that it did not 
fairly represent the geographic deployment of network facilities or the areas 
used to market services. CU argued that use of CBGs would result in an 
overestimation of the need and a larger than necessary TUSF. Agreeing with CU, 
OPC recommended that the commission reconsider its choice of the CBG as the unit 
of analysis, and choose instead a larger unit such as the wire center or the 
exchange. OPC argued that the CBG does not represent a reasonable market segment 
for a new entrant, that the network architecture is not driven by the CBG, and 
that telecommunications services are not marketed at this level. OPC argued that 
using an excessively small unit of analysis like the CBG will create an 
unnecessarily large USF, since it eliminates the actual averaging of costs that 
inevitably goes on in a marketplace. Moreover, according to OPC, it will 
increase the role of joint and common costs since all costs outside the 
extremely small geographic area of the CBG must be considered joint and common 
between areas. 
In its reply comments, SWBT declared that OPC showed a misunderstanding of the 
purpose of the rule when it argued that it is virtually impossible to deploy 
facilities, to advertise, and to offer service by CBGs. SWBT opined that CBGs 
are merely a mechanism for administering USF. SWBT argued that use of CBGs 
allows the identification in a model of high costs associated with actually 
deploying facilities in such a geographic area and allows the universal service 
mechanisms to encourage providers to actually bring competition to customers 
residing in rural high cost areas. SWBT stated that OPC's argument that the CBG 
analysis eliminates actual averaging of costs is a benefit, not a detriment, of 
the TUSF plan. SWBT opined that use of CBGs does not reduce the economies of 
scale and scope. 
In its reply comments, GTE responded to OPC and CU, contending that their 
positions that the CBG is too small a geographic area are wholly without merit. 
GTE argued that OPC's subjective criteria for choosing the appropriate 
geographic area for universal service calculations, facilities deployment, and 
marketing activities confirm that CBGs or smaller areas would be preferable to 
wire centers for calculating costs for universal service purposes. GTE refuted 
OPC's argument that CBGs do not represent reasonable market segmentation for new 
entrants by stating that current experience indicates that new entrants are 
targeting clusters of consumers smaller than CBGs. GTE also took issue with 
OPC's statement that an excessively small unit of analysis will create an 
unnecessarily large universal service fund. GTE stated that the aggregation of 
customers into CBGs could not of itself ever overstate the fund requirement. GTE 
remarked that aggregation by CBGs does not eliminate the averaging of costs that 
occurs in the marketplace. GTE further argued that in the case of artificially 
suppressed prices the amount of suppression can only be calculated by 
deaveraging costs, if possible, down to the customer level. GTE found OPC's 
argument that CBGs increase the role of joint and common costs to be without 
merit. GTE responded that joint and common costs by definition cannot be 
directly segregated between services or geographic areas. GTE stated that the 
use of CBGs, wire centers, or the entire service territory will not change the 
pool of joint and common costs that must be borne by services. GTE urged the 
commission to adopt CBGs or smaller geographical areas for purposes of 
calculating the universal service requirement. 
TEXALTEL observed that a proxy model was inevitable. TEXALTEL stated that since 
SWBT and GTE do not keep cost records on a CBG or even an exchange basis there 
is no means to ascertain actual costs in small geographic areas. TEXALTEL stated 
that a proxy model that produces a reasonable approximation of forward looking 
costs for SWBT's or GTE's study area should be used to determine CBG costs. 
TEXALTEL strongly supported the concept that costs must be determined by small 
geographic areas; otherwise, totally unacceptable aberrations will occur. 
TEXALTEL contended that if geographic areas are too large, they will have the 
effect of averaging high cost and low cost consumers and that competitive 
providers will seek out those consumers with high subsidies and low costs and 
leave the carriers of last resort (COLRs) with the consumers whose costs are 
much higher than subsidies. 
In its reply comments, OPC disputed the incumbents' claim that the commission 
must only look to basic service plus universal service support on a very 
granular level of entry (the CBG) in order to meet the dictates of the FTA. OPC 
contended that potential entrants recognize the availability of revenues from 
the broad range of services as part of the fundamental decision to enter. OPC 
argued that the ability to market and achieve margins on the services which 
actually require the enhanced functionality of the modern network is a much 
firmer basis on which to build competition. OPC concluded that a firm that 
planned entry at the level of only basic service could never compete. 
TEXALTEL professed that as a group of access charge payers and potential 
competitors, it appears that the higher the rural subsidies are, the better off 
its members are. TEXALTEL remarked that as long as access charges are reduced by 
the amount of the subsidies net costs to IXCs would be a wash. TEXALTEL admitted 
that the higher the rural subsidies, the better the chances that its members 
would have of serving rural areas. TEXALTEL stated that it would be bad public 
policy for subsidies to create a false economy where firms are competing for 
subsidies, not consumers and revenues. TEXALTEL encouraged the commission to 
start the process conservatively and make adjustments later as experience is 
gained. 
The commission supports using a forward looking economic cost methodology on 
small geographic areas for the determination of TUSF support. The commission 
concludes that the use of small geographic areas allows for determination of 
high cost areas with the least amount of averaging, leading to a more accurate 
determination of the support amount. The commission also concludes that 
averaging costs over small geographic areas will lessen the ability of ETPs to 
selectively target relatively higher revenue/lower cost customers and receive 
THCUSP support. It is the commission's opinion that such targeting in areas that 
have average costs above the benchmark could leave the ILEC serving the lower 
revenue/higher cost customers. As stated previously, the forward looking 
economic cost methodologies are undergoing review and the extent and effect of 
the model changes is unknown at this time. Therefore, the commission in order to 
have flexibility in selecting a forward looking economic cost methodology, 
qualifies its statement that CBGs will be the geographic area of analysis in 
sec.23.133(e)(2)(A) with the phrase "or any other geographic area determined 
appropriate by the commission." In selecting a forward looking economic cost 
methodology, the commission shall address the question of whether to use wire 
centers, CBGs, or some other geographic area to model Texas costs in the 
compliance proceeding. 
SWBT indicated that it will seek to be an ETP for the CBGs or portions thereof 
in wire centers it serves in Texas. SWBT stated that this identification ensures 
that the current advertising by SWBT is sufficient to meet the requirement of 
the commission's universal service rules and the FTA. SWBT also indicated that 
establishing CBGs as the basis of the THCUSP is not a simple process. SWBT 
stated that it will be expensive and time consuming for ILECs to perform the 
mapping that the rule will require because current customers and exchanges are 
not mapped to CBGs. SWBT argued that the cost is not justified and an allocation 
procedure should be adopted. If manual development is required, SWBT argued that 
the rule should provide for recovery of costs associated with the process. 
SWBT continued its argument in its reply comments, claiming that in order to 
receive support for a line, an ETP will need to identify the CBG in which the 
customer is located. SWBT also stated that the CBG is a geographic area that has 
previously been totally unrelated to local exchange telephone business and 
consequently does not exist in telephone company records. SWBT reported that 2.2 
million lines in SWBT, GTE and Sprint records are not identified to a CBG by 
commercially available matching software. SWBT listed six limitations to its 
ability to identify the CBG of each line: (1) 198 Texas counties have not 
completed rural county addressing; (2) commercial databases will not be updated 
until the postal conversion of rural county addressing is complete; (3) 
standardized Census Topologically Integrated Geographic Encoding and Referencing 
(TIGER) street number, street name, and city or latitude and longitude may not 
be available; (4) billing addresses may be different from served addresses; (5) 
with each new census, some CBGs will change their physical boundaries; and (6) 
LEC customer addresses must also match addresses used by the applicable E-911 
agency. Considering these six limitations, SWBT argued that an allocation 
procedure is needed to assign the lines for which no CBG is identified. SWBT 
suggested that the procedure be based upon the identified lines by CBG compared 
to the BCPM projected lines within the CBG served by the ETP. SWBT asserted that 
to be eligible to utilize the allocation procedures, a LEC should be required to 
correctly identify at least 60% of the companies' TUSF eligible lines to a 
correct CBG. SWBT claimed that its allocation procedure appropriately spreads 
unidentified lines to the CBGs with the greatest deviation from the BCPM 
projected number of lines. SWBT recommended that the procedure be reviewed 18 
months after implementation to determine any needed modifications. 
In its reply comments, Sprint concurred with SWBT in its recommendation that 
ILECs should be able to recover the cost of mapping and identifying customers in 
a CBG. Sprint urged the commission to allow the recovery of reasonable expenses 
for implementation of TUSF on a CBG basis. Since the ILECs currently maintain 
the majority of the local exchange customer base, Sprint indicated that 
identifying customers into proper CBGs would best be accomplished by the ILECs. 
Sprint indicated its belief that if ILECs will be reimbursed for reasonable 
implementation costs that will be funded by other telecommunications providers, 
then other telecommunication providers must have access to customer CBG location 
information developed by the ILECs. 
GTE also agreed with SWBT in its reply comments. GTE supported SWBT's comments 
regarding the difficulties of determining exact customer locations for purposes 
of populating CBGs. GTE urged the commission to adopt an allocation procedure to 
be implemented after a reasonable threshold of customers has been mapped. 
Alternatively, GTE supported SWBT's request for recovery from the fund for 
expenses incurred to fully map these customers. 
The commission declines to make a decision at this time regarding the necessity 
of customer mapping and recovery of related costs through the TUSF. The 
commission notes that the ILECs do not currently maintain customer records on a 
CBG basis, but it is unclear how much, if any, mapping of actual customer 
locations by the ILECs will be necessary. The commission shall address these 
issues in the compliance proceeding. If, in that proceeding, the commission 
determines that customer mapping by ILECs is necessary, and that the ILECs 
should receive TUSF support for mapping customer locations, then all mapping 
information developed by the ILECs and paid for by the TUSF shall be made 
available to all ETPs. 
Section 23.133(e)(3)(B) establishes the criteria to be considered in subsequent 
determinations in THCUSP base support. 
SWBT indicated that it is unclear how growth patterns and income levels in low-
density areas can be used for future determinations. SWBT stated that the intent 
of the language in sec.23.133(e)(3)(B) is unclear. SWBT opined that the actual 
relevant factors are the costs to provide the service and the revenues that can 
be expected to be obtained in these areas. TTA asserted that none of the 
criteria proposed in sec.23.133(e)(3)(B) that trigger future review of the 
benchmark and cost methodology were inputs to either the benchmark calculation 
or the cost methodology. TTA recommended replacing them with more appropriate 
triggers, such as the need to remove additional subsidies; changes in the 
federal cost methodology and benchmark; changes in the technology used in the 
cost model; changes in prices for inputs to the cost model; and changes in 
population centers or other demographics used in the cost model. 
The commission declines to revise sec.23.133(e)(3)(B) as suggested by SWBT. 
These criteria will help determine whether the commission's TUSF plan is 
successful in achieving its USF goals. The commission notes TTA's triggers but 
also declines to replace the criteria with TTA's suggestions because the rules 
as drafted contain sufficient review provisions. Section 23.133(e)(3)(A)(ii) 
provides for commission review of the forward looking economic cost methodology, 
the benchmark levels, and/or the base support amount on its own motion at any 
time. Pursuant to sec.23.133(g) the commission shall initiate a project to 
review the THCUSP within 90 days of the FCC's adoption of an order implementing 
new or amended federal USF support rules fur rural, insular and high cost areas. 
Section 23.133(e)(4) establishes the calculation of the amount of THCUSP support 
payments to individual ETPs. 
Due to modifications made to sec.23.147(d)(2)(A)(i), the commission revises 
sec.23.133(e)(4)(A). 
Section 23.133(e)(4)(B) provides for an adjustment to TUSF support payments for 
federal USF support. 
MCI suggested that the commission should clarify the definition of the FUSF 
support offset in sec.23.133(e)(4)(B) or defer implementation of the THCUSP 
until January 1, 1999. TTA also recommended revising sec.23.133(e)(4)(B) to 
clarify that FUSF funds which are either targeted to specific programs such as 
Lifeline, Tel-Assistance, and education discounts, or provided as an offset to 
interstate costs, do not reduce the TUSF. In its reply comments, Sprint 
concurred with TTA. Sprint indicated its support of the reduction of TUSF 
support by the amount received from the FUSF. Sprint argued that since federal 
Lifeline and educational discount programs are in effect special discounts to 
services other than BLTS then it is appropriate not to reduce TUSF support by 
those amounts. 
The commission clarifies that the THCUSP support will be decreased by the amount 
of federal high cost assistance received by the ETP and revises 
sec.23.133(e)(4)(B) to reflect that clarification. 
Section 23.133(e)(4)(C) contains a provision for the sharing of THCUSP support 
payments between an ETP providing service using UNEs and the underlying carrier. 
The commission sought specific comment on three hypothetical examples: (a) If 
the forward looking economic cost ($80) is above the benchmark ($75), and the 
benchmark is above the sum of UNE prices ($60), how, if at all, should the 
support amount (the difference between the forward looking economic price and 
the benchmark) be divided? (b) If the forward looking economic cost ($90) is 
above the sum of UNE prices ($85), and the sum of UNE prices is above the 
benchmark ($75), how, if at all, should the support amount (the difference 
between the forward looking economic cost and the benchmark) be divided? (c) If 
the sum of UNE prices ($90) is above the forward looking economic cost ($80) and 
the forward looking economic cost is above the benchmark ($75), how, if at all, 
should the support amount (the difference between the forward looking economic 
cost and the benchmark) be divided? 
AT & T, GTE, and SWBT provided specific responses to the three hypothetical 
examples in the question posed by the commission. In response to (a), AT & T 
indicated that the CLEC would receive $5.00, GTE and SWBT answered that the ILEC 
would receive $5.00; in response to (b), all three companies indicated that the 
ILEC would receive $5.00 and the CLEC would receive $10; in response to (c), AT 
& T indicated that the ILEC would receive $10 while GTE and SWBT postulated that 
the CLEC would receive $5.00. 
AT & T suggested modifying sec.23.133(e)(4)(C) because it could be interpreted 
to mean that the forward-looking economic costs equal the sum of the UNE rates 
and the THCUSP. AT & T indicated that this was a potential problem since UNE 
costs may be different because they are developed through arbitrations or other 
proceedings on a statewide or zone basis. Another problem, according to AT & T, 
was that the rule could lead to discriminatory treatment between ILECs and 
CLECs. AT & T opined that if the USF cost was greater than UNE, the ILEC could 
still receive an additional subsidy. If the UNE was greater than USF cost, or a 
CLEC utilizes part of its facilities and has additional individual costs, AT & T 
speculated that then, the entrant was disadvantaged because there was no 
additional subsidy for it. AT & T proposed that the solution was to only 
evaluate the differential between USF cost and the benchmark price, and award 
the subsidy to the carrier providing the service to the customer. AT & T argued 
that only the carrier who wins the customer should get the support. AT & T 
declared that the carrier providing the underlying UNE should not get the 
subsidy because it will generally recover its costs if the UNEs are properly 
priced. 
In its reply comments, SWBT asserted that AT & T was wrong in its argument that 
the rule results in discriminatory treatment between the ILECs and CLECs because 
no additional subsidy is provided to a CLEC in cases where that new entrant 
provides services using partly its own facilities and partly UNEs. SWBT 
responded that no adjustment needs to be made to recognize this situation 
because the CLEC can select the lowest cost means of providing the service, 
either through UNEs or its own facilities. SWBT advised the commission to reject 
AT & T's suggestion that all of the subsidy be awarded to the carrier that 
provides the service because this may result in a windfall to carriers such as 
AT & T that do not intend to build facilities. SWBT disagreed with AT & T's 
argument that an ILEC's receipt of the UNE price means that it is fully 
compensated. SWBT argued that it was not recovering its actual costs but rather 
a modified hypothetical cost of service because for USF purposes the benchmark 
cost was determined on a different basis than is true for UNEs for which the 
costs are determined at a much more aggregated level. SWBT argued that because 
of these differences the USF cost in an area will likely be higher than the UNE 
price and the ILEC will not be properly compensated if the average UNE price is 
all that it can receive. SWBT further argued that there is no cost or any other 
basis for giving AT & T or other CLECs the difference between the USF cost and 
the UNE price, since they are not incurring costs the support is designed to 
recover. SWBT stated that if the UNE price is below the USF area cost, the 
differential in the UNE price and the USF cost, if above the benchmark, should 
flow to the underlying facilities provider. SWBT stated that this arrangement of 
support sharing creates no barrier to entry because UNE purchasers will receive 
up to the UNE cost all the support above the benchmark and this will be on an 
equivalent footing with any other provider of local service in that area. 
SWBT commented that the examples in the questions assume that the sum of UNE 
prices should be used to calculate the retail provider's cost. For that process 
to work, SWBT suggested that the TUSF administrator calculate the aggregate or 
sum of the UNE costs per line for each UNE provider in each universal service 
area, using the approved UNE rates and current quantities of the UNE provider's 
facilities in the USF area. 
AT & T, GTE and SWBT observed that the three examples did not consider a 
situation in which the CLEC uses a combination of UNEs and its own facilities to 
provide service. AT & T urged that when a CLEC uses a combination of UNEs and 
its own facilities, the CLEC should receive the full subsidy because the ILEC 
will recover its costs via UNEs. AT & T indicated that the proposed provision 
should only be applied where UNEs are used exclusively to provide service. 
GTE indicated that the rule must be expanded to address situations where only a 
portion of what is provisioned is supplied through the purchase of UNEs. GTE 
reiterated its concern that cost-based pricing may run counter to the goals of 
universal service and must be appropriately addressed in any universal service 
plan. GTE further asserted that whether or not a sharing mechanism was adopted, 
the entire support lost due to the purchasing of UNEs must be recovered. 
SWBT also commented that the commission should recognize the combined use of 
owned facilities and purchase of UNEs to provide end to end service by the 
retail provider. SWBT proposed a method that the TUSF administrator could use to 
calculate the UNE purchasers' costs when providing service through a combination 
of its own facilities and UNEs. SWBT also indicated that the administrator must 
determine the amount of FUSF support received and deduct it from the state 
support provided to the eligible carrier. As an alternative to what SWBT 
referred to as a complex and burdensome process, SWBT recommended that none of 
the support be paid to the UNE-using provider and instead that all the support 
be provided to the underlying carrier providing the facility utilized to provide 
service to the customer. SWBT stated that this approach was practically and 
theoretically correct because the UNE-using provider will receive (in high cost 
areas) a rate that should be lower than the commission's model universal service 
area