High Cost Area Universal Service Support Mechanisms

Appendix A
High Cost Area Universal Service Support Mechanisms

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1) High Cost Loop (HCL) Support -- which includes two sub-components -Safety Net Additive (SNA) Support and Safety Valve Support (SVS) -- provides support for the "last mile" of connection for rural incumbent local exchange carriers (ILECs) in service areas where the cost to provide this service exceeds 115% of the national average cost per line. HCL accounts for roughly one-third of all high-cost support.(Note 1)


2) Interstate Common Line Support (ICLS) helps to offset interstate access charges and is designed to permit each rate-of-return carrier to recover its common line revenue requirement, while ensuring that its subscriber line charges (SLCs) remain affordable to its customers. ICLS is available to competitive carriers providing service in the areas of rate-of-return incumbent carriers (mostly rural and some non-rural carriers) and designated as eligible telecommunications carriers (ETCs) by their state commissions or the FCC. ICLS accounts for roughly one-third of all high cost support.

3) Interstate Access Support (IAS) helps to offset interstate access charges to reduce long distance charges for customers. FCC rules target IAS to $650 million annually. IAS is targeted to the density zones that have the greatest need for it and is provided on a portable, per-line basis. IAS is available to competitive carriers operating in the service areas of price-cap incumbent carriers (mostly non-rural and some rural carriers) and designated as eligible telecommunications carriers (ETCs) by their state commissions or the FCC. IAS accounts for roughly 17% of all high cost support.

4) Local Switching Support (LSS) is designed to help carriers recoup some of the high fixed switching costs of providing service to fewer customers. LSS helps keep customer rates comparable to more densely populated urban areas. LSS is available to competitive carriers providing service in the areas of rural incumbent carriers serving 50,000 lines or fewer (mostly rate-of-return and some price-cap carriers) and designated as eligible telecommunications carriers (ETCs). LSS accounts for just over 10% of all high cost support.

5) High Cost Model (HCM) support keeps the cost for telephone service comparable in all areas (urban and rural) of a state. HCM support is distributed at the wire center level and is targeted to carriers serving wire centers with forward-looking costs that exceed the national benchmark. Also known as forward-looking support, HCM is available to competitive carriers providing service in the eligible wire centers of non-rural incumbent carriers (mostly price-cap carriers) and designated as eligible telecommunications carriers (ETCs). HCM accounts for less than 10% of all high cost support.



1. Competitive ETCs are paid HCL at the same per-line rate as the incumbent carrier. HCL support is currently subject to an annual indexed cap for ILECs. For rural ILECs, the cap is based on the prior year's rural ILEC HCL support and a Rural Growth Factor, which allows HCL support to change based on annual changes in the Gross Domestic Product-Chained Price Index (GDP-CPI) and the total number of working loops of rural incumbent carriers. HCL to competitive ETCs is not subject to the ILEC cap and is above the ILEC support.
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2. SVS is 50% of the difference between the index year HCL support amount and the HCL support amount in subsequent years. SVS is subject to an overall cap of no more than 5% of the rural HCL cap in any given year.
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3. ICLS is based on annual projected data submitted by incumbent carriers each March 31 and is subject to an annual true-up process based on actual data submitted by incumbent carriers each December 31 for the previous calendar year. Competitive carriers receive ICLS based on the incumbent carriers' data filings.
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4. After passage of the Telecommunications Act of 1996, the FCC removed implicit support from interstate access charges and established an explicit IAS component for price-cap carriers to replace the implicit support previously collected through interstate access charges. IAS is available to carriers serving lines in areas where they are unable to recover their permitted revenues from the newly revised subscriber line charges.
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5. LSS is subject to an annual "true-up" process to adjust support amounts based on actual incumbent carrier data submitted no later than 15 months after the end of the calendar year for which historical data are submitted.
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6. HCM support is based on a forward-looking economic cost model. The model generates the statewide average cost per line, which is then compared to the national average cost per line to determine eligibility for forward-looking support. If the statewide average cost per line exceeds two standard deviations of the national average cost per line (the "national cost benchmark"), the state qualifies for HCM support. Support is provided for all intrastate costs per line that exceed the national benchmark. Forward-looking intrastate costs per line equal 76% of the forward-looking costs generated by the model. The remaining 24% are recovered through the interstate jurisdiction. The most recent data used to calculate forward-looking HCM support indicates that non-rural carriers in ten states (Alabama, Kentucky, Maine, Mississippi, Montana, Nebraska, South Dakota, Vermont, West Virginia, and Wyoming) are eligible in 2007.
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