In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service ) ) ) To: The Commission )
FURTHER COMMENTS OF
THE NATIONAL CABLE TELEVISION ASSOCIATION, INC.
Richard L. Cimerman Daniel L. Brenner Teresa A. Pitts Neal M. Goldberg Directors, State Telecommunications David L. Nicoll Policy 1724 Massachusetts Avenue, N.W. Washington, D.C. 20036 National Cable Television (202) 775-3664 Association, Inc. Counsel for the National Cable Television Association, Inc.
August 2, 1996
TABLE OF CONTENTS
While some "non-rate" factors may be considered in determining the affordability and reasonable comparability of rates, as a general matter, it is appropriate for the FCC to find that current rates for services included within the definition of universal service are affordable, given the 93% penetration rate for basic service across the country. If NCTA's proposed list of "core" services is adopted, it is difficult to see how it would be technically infeasible for any carrier to provide the requisite services. It is not appropriate to assign 100% of loop costs to universal service, because local loops are used not only for the provision of core services but also to provide toll services and optional services such as CLASS features.
Only specifically defined services should be available at reduced rates to schools, libraries and healthcare providers, i.e., those that are necessary for the provision of health care services or for educational purposes, as required by the 1996 Act. Inside wire and other internal connections should not be included in the USF because inside wire services are not telecommunications services subject to the USF and are competitive services which have been deregulated. The provision of advanced services to schools will be most effectively accomplished through regulatory policies which stimulate infrastructure investment and facilities-based competition, including appropriate incentives pursuant to Section 706 of the Act. NCTA supports the use of competitive bidding rather than the imposition of discounts in order to insure that schools, libraries and healthcare providers will receive the most economical rate for core and advanced services. However, if the Joint Board determines that discounts are appropriate, NCTA supports the use of direct billing credits to ensure that funds are used for their intended purposes.
NCTA does not believe that additional discounts to schools and libraries in rural, insular and high-cost areas are necessary. Rural and insular areas are not synonymous with high cost areas. Indeed, in some instances, rural school districts may be better funded than urban districts. Thus it is not clear that rural and high cost areas require greater discounts in order to be able to purchase already discounted services. Separate funding mechanisms should be used for schools and libraries on the one hand and health care providers on the other, both for ease of administration and because the requirements for provision of service differ between schools, libraries and healthcare providers.
The existing USF mechanism cannot be retained because it does not meet the requirements of the Act to be competitively neutral, either in the method in which funding is derived or disbursed. If the existing USF is kept in place for rural areas, funding must be made available immediately to any eligible telecommunications carrier serving the geographic area in which the incumbent receives funding. The use of a proxy model would preclude the use of book costs to determine the funding level for incumbents or new LECs. Book costs would only be useful if the proxy model showed costs higher than the book costs of the incumbent. In such an instance, the book costs could be used as a cap to limit the level of funding. The Joint Board should consider denying price cap carriers, which have the ability to retain earnings above cost, eligibility for high cost support, particularly in areas where the LEC faces little competition and where any subsidy is based on book costs. NCTA opposes the use of a bifurcated plan for rural companies. If a bifurcated approach is used, carriers should be required to transition to a proxy system over at most a three year period, and competitors should be eligible to receive the same amount and level of funding, on a per customer basis, as the incumbent carrier, both in the initial phase and during a transition period.
Competitive bidding should only be used if the subsidy will be available to multiple carriers, but should not be used to establish the initial subsidy level. Rather a proxy model should determine the initial subsidy amount, which may then be bid down. In no instance should the subsidy amount exceed that available in an area today.
The FCC should adopt a forward-looking cost proxy model that relies on non-proprietary data in order to (1) compute the economic cost of providing basic, single-line, residential local exchange service and (2) compute the level of high cost funding, if any, that is necessary in specific areas of the country. A well-designed cost proxy model will ensure that high cost funds are targeted where they are needed, and will prevent high cost funds from being used to subsidize excess network capacity that incumbent carriers will use in their pursuit of competitive ventures. In order to make informed decisions as to the various critical aspects of a model, the FCC should direct incumbent local exchange carriers to submit comprehensive and timely data on inputs to the cost proxy model.
Model proponents should be directed to submit complete supporting documentation that explains the sources of and logic for the numbers and algorithms used in any proposed cost proxy model. In its evaluation of key assumptions, such as the fill factor used in the deployment of theoretical outside plant, the FCC should limit the scope of the service being modelled to that of only the defined universal service core service, and thus should eliminate from any cost proxy model costs associated with strategic and competitive reasons.
The Benchmark Cost Model ("BCM") overstates the universal service funding requirement because it determines need based upon an evaluation of the cost per line separately for each of the approximate 220,000 census block groups ("CBG"). Under the BCM, any CBG that is high cost automatically receives support, even if it is surrounded by low-cost exchanges which are likely served by the same ILEC. The use of CBGs is inappropriate because CBGs have nothing to do with the design of a telecommunications network and thus there is no reason to expect that networks will be designed around the properties of a CBG.
While costs can be computed at the CBG level, any determination of the need for and level of high cost support should be made at the wire center level. Alternatively the need for universal service funding can be assessed at the wire center level (by averaging the costs across all the CBGs encompassed by the given wire center) and if the average cost were less than the price support, no universal service support would be provided. If the average cost were greater than the price support, high cost support would be granted only to the high cost CBGs within that wire center.
The original version of the Pacific Telesis Cost Proxy Model ("CPM") relied on actual customer addresses, however these data were considered proprietary, thus limiting public review of the model. The current version of the CPM allows the use of commercially available census data which are mapped to the CPM's grid cells. However, Pacific Telesis has yet to provide information concerning the design of the CPM, including information on how the CBG data has been mapped to grid cells. Refining the BCM to the grid level appears to be a costly and complex exercise which is not warranted, and which, in some instances, creates a misleading sense of precision.
The FCC should not adopt the CPM for use on a national basis. The CPM relies extensively on company-specific proprietary databases which reflect the characteristics of Pacific Bell's embedded network. In order to apply the CPM to other states, one must either assume that all of the cost characteristics of Pacific Bell's network are correct for the area under study or develop a full set of replacement costs, neither of which is a satisfactory option.
Furthermore, the CPM is not a fully self-contained model, but instead relies on numerous external data sources, calculations, and models. Also, the CPM relies on unit cost values and network parameters that must be derived from internal company databases, and, for switching costs, it relies upon Bellcore's Switching Cost Information System, a model that Bellcore considers proprietary. Finally, the basis of the operating expenses are extensive data that are considered proprietary.
In many states it has been determined that local rates cover the cost of the local loop thus calling into question the need for the CCLC and SLC. In any event, any resolution of the CCLC issue should be accomplished in a competitively-neutral manner which does not discriminate against new facilities-based entrants. A CLEC that utilizes facilities other than those of an ILEC to provide exchange access should not be required to pay any carrier common line charge or transport interconnection charge to the ILEC. To the extent an IXC obtains exchange access from such a CLEC, measured in minutes switched by the CLEC, the IXC should not be required to pay such charges to the ILEC as part of a "bulk billing" arrangement or otherwise.
The Life Line and Link Up programs should retain their separate and distinct role as a "means based" direct subsidy to low income customers. These programs should be de-coupled from the jurisdictional separations rules, thus easily transferable to new providers with a variety of technology.
In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service ) ) ) To: The Commission )
FURTHER COMMENTS OF
THE NATIONAL CABLE TELEVISION ASSOCIATION, INC.
The National Cable Television Association, Inc. ("NCTA"), by its attorneys, hereby files its Further Comments in response to the Public Notice[1] seeking further comment on specific questions in the above-captioned proceeding.[2] NCTA is the principal trade association of the cable television industry in the United States and represents cable television operators serving over 80 percent of the nation's television households. NCTA has filed comments and reply comments in this proceeding which address in detail many of the issues raised in the Public Notice. In this regard, we incorporate by reference those previous pleadings and the responses in these Further Comments should be read in conjunction with our previous submissions in this docket.
Definitions Issues
1. Is it appropriate to assume that current rates for services included within the definition of universal service are affordable, despite variations among companies and service areas?
Yes. Current rates for services included within the definition of universal service are affordable given the 93% penetration rate for basic service across the country. There may be some very limited areas with particularly low penetration rates (e.g., Native American reservations) that require further examination. However, there may be factors other than price which affect those subscribership levels.
2. To what extent should non-rate factors, such as subscribership level, telephone expenditures as a percentage of income, cost of living, or local calling area size be considered in determining the affordability and reasonable comparability of rates?
All of the named factors can be considered in determining the affordability and reasonable comparability of rates.
3. When making the "affordability" determination required by Section 254(i) of the Act, what are the advantages and disadvantages of using a specific national benchmark rate for core services in a proxy model?
NCTA has previously stated that existing rates should be considered affordable. NCTA has also suggested the use of a national benchmark rate for determining universal service subsidies based on a proxy model. A benchmark rate would be used at the federal level to determine the federal support level (for example, if a benchmark rate of $30 were chosen [$30 is for illustrative purposes only - NCTA has not advocated a specific benchmark rate] then companies serving those areas in which benchmark costs are higher than $30 would receive funding for the difference between the benchmark costs and the benchmark rate.) If a state chooses to cap rates at less than the chosen national benchmark rate then that state could create its own funding mechanism to provide for the difference between the benchmark rate and the actual rate.
4. What are the effects on competition if a carrier is denied universal service support because it is technically infeasible for that carrier to provide one or more of the core services?
If NCTA's proposed list of core services is adopted, it is difficult to see how it would be technically infeasible for any carrier to provide the requisite services. Switched local exchange service is the critical core service, which by definition must be provided by any entity purporting to be a local exchange carrier. Similarly, the ability to provide touch-tone service is built-in to every local switch available today. Access to operator services and emergency services may be provided through connection with the existing facilities of the incumbent local exchange company. If it is technically infeasible to connect to these existing facilities then the new entrant must provide such services itself as a competitive necessity. Few customers will subscribe to local exchange service if access to 911 is unavailable. Therefore, since every local exchange carrier should be providing the core services, there should be no effect on competition if a carrier which does not provide core services is denied support.
5. A number of commenters proposed various services to be included on the list of supported services, including access to directory assistance, emergency assistance, and advanced services. Although the delivery of these services may require a local loop, do loop costs accurately represent the actual cost of providing core services? To the extent that loop costs do not fully represent the costs associated with including a service in the definition of core services, identify and quantify other costs to be considered.
While loop costs, in and of themselves, would not be the only costs incurred in providing universal service, it must also be remembered that not all of the loop costs are attributable to the provision of universal service. Local loops are used not only for the provision of core services but also to provide toll services and optional services such as CLASS features. Therefore, it would not be appropriate to assign 100% of loop costs to universal service and then add in other costs such as switching, software, and additional overheads. Rather the appropriate cost drivers are those outlined in NCTA's Attachment A to our initial comments filed in this docket.
Schools, Libraries, Health Care Providers
6. Should the services or functionalities eligible for discounts be specifically limited and identified, or should the discount apply to all available services?
Only specifically defined services should be available at a discount. The Act requires support for telecommunications services which are necessary for the provision of health care services to health care providers and, in the case of schools and libraries, the provision at a discount of telecommunications services for educational purposes. Not all available telecommunication services meet these requirements.
7. Does Section 254(h) contemplate that inside wiring or other internal connections to classrooms may be eligible for universal service support of telecommunications services provided to schools and libraries? If so, what is the estimated cost of the inside wiring and other internal connections?
No. Section 254(h) applies to telecommunications services which are defined as the offering of telecommunications (i.e., transmission) not the equipment or wiring associated with those services. Moreover, inside wire services were deregulated under Part 68 rules and the provision of inside wire services is competitive. Wireless technologies may also offer the ability to access advanced services without the necessity of installing potentially costly inside wiring.
8. To what extent should the provisions of Sections 706 and 708 be considered by the Joint Board and be relied upon to provide advanced services to schools, libraries and health care providers?
Only facilities-based competition can ultimately be relied upon to provide advanced services in a cost effective manner. However, the Commission and the Joint Board can encourage adoption of incentives, such as those provided for in Section 706 (regulatory forbearance, etc.), to stimulate infrastructure investment and facilities-based competition. They can also make recommendations to the National Education Technology Funding Corporation (recognized in Section 708) regarding how it might best fulfill its purposes.
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?
Universal service support for schools, libraries, and health care providers can best be structured to promote competition by ensuring that universal service support is available to all telecommunications carriers providing services to schools, libraries, and health care providers in a competitively neutral fashion. This includes ensuring that, even in areas where rural companies have been exempted from interconnection requirements, other telecommunications carriers are eligible to receive funding for services provided to schools, libraries, and health care providers. In addition, policies which encourage the building of facilities, such as low resale discounts and competitive bidding, should be adopted.
10. Should the resale prohibition in Section 254(h)(3) be construed to prohibit only the resale of services to the public for profit, and should it be construed so as to permit end user cost based fees for services? Would construction in this manner facilitate community networks and/or aggregation of purchasing power?
Section 254(h)(3) should be construed to prohibit any resale of services to the general public for profit. However, cost-based charges to end-users of the services provided by the educational or health institutions should be allowed.
11. If the answer to the first question in number 10 is "yes," should the discounts be available only for the traffic or network usage attributable to the educational entities that qualify for the Section 254 discounts?
The discounts required for schools and libraries should be available only for the traffic or network usage attributable to the educational purposes that qualify for the Section 254 discounts, even if the educational entities are permitted to resell telecommunications services at "cost."
12. Should discounts be directed to the states in the form of block grants?
No. Any required funding for discounts -- which may not be required if a competitive bidding approach is adopted -- should be directed to companies, as required by the statute.
13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions?
Yes. Direct billing credits will greatly enhance the ability to ensure that funds are used for their intended purposes, since the credits would only be granted when the schools, libraries and health care providers order the services to which discounts may be applied (as previously noted, only a selected list of services should be available at a discount).
14. If the discounts are disbursed as block grants to states or as direct billing credits for schools, libraries, and health care providers, what, if any, measures should be implemented to assure that the funds allocated for discounts are used for their intended purposes?
As noted in the response to Question 13, the use of direct billing credits helps ensure that funds are used only for eligible services. In addition, the school or library proposing to receive discounted services should certify in writing that the services will be used only for purposes permitted by the Act. If a requesting entity violates the terms of the certification, the service provider should be permitted to discontinue the service or discount.
15. What is the least administratively burdensome requirement that could be used to ensure that requests for supported telecommunications services are bona fide requests within the intent of section 254(h)?
As stated in our initial comments, self-certification that the requirements have been met would be the least administratively burdensome method.
16. What should be the base service prices to which discounts for schools and libraries are applied: (a) total service long-run incremental cost; (b) short-run incremental cost; (c) best commercially-available rate; (d) tariffed rate; (e) rate established through a competitively-bid contract in which schools and libraries participate; (f) lowest of some group of the above; or (g) some other benchmark? How could the best commercially-available rate be ascertained, in light of the fact that many such rates may be established pursuant to confidential contractual arrangements?
As a general matter, the rates for services for schools and libraries should be determined through a competitively-bid contract process in which the schools and libraries participate and which is accomplished in a non-discriminatory, competitively-neutral manner. In such circumstances, no "discount" off of the derived rate is necessary.
17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?
If the discounted price results in a lower rate for an entity currently receiving a special rate, then the lower rate should apply. Conversely, if the special rate continues to be lower, the telecommunications carrier should continue to provide service at that rate.
18. What states have established discount programs for telecommunications services provided to schools, libraries, and health care providers? Describe the programs, including the measurable outcomes and the associated costs. NCTA has no information to respond to this question.
19. Should an additional discount be given to schools and libraries located in rural, insular, high-cost and economically disadvantaged areas? What percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas are or require toll calls?
There is no necessary rationale for additional discounts to schools and libraries in rural, insular, and high-cost areas. This is because rural and insular areas are not synonymous with high cost areas. High cost areas today, and into the foreseeable future, will receive universal service funding. And, in some instances, rural school districts may be better funded than urban districts. Thus it is not clear that rural and high cost areas require greater discounts in order to be able to purchase discounted services. NCTA has no information as to what percentage of telecommunications services used by schools and libraries in such areas require toll calls.
20. Should the Commission use some existing model to determine the degree to which a school is disadvantaged (e.g., Title I or the national school lunch program)? Which one? What, if any, modifications should the Commission make to that model?
Under a competitive bidding process, the ability of a school to pay will be one of the critical factors in the bid process. Therefore it would be unnecessary to make specific determinations as to whether a school is disadvantaged.
21. Should the Commission use a sliding scale approach (i.e., along a continuum of need) or a step approach (e.g., the Lifeline assistance program or the national school lunch program) to allocate any additional consideration given to schools and libraries located in rural, insular, high-cost, and economically disadvantaged areas?
See response to question #19.
22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
Yes. Separate funding mechanisms should be used, both for ease of administration and because the requirements for provision of service differ between schools and libraries and health care providers. The Act requires that services provided to health care providers be treated as part of a carrier's universal service obligation, while discounts for schools and libraries are to be either treated as an offset or reimbursed directly.
23. Are the cost estimates contained in the McKinsey Report and NII KickStart Initiative an accurate funding estimate for the discount provisions for schools and libraries, assuming that tariffed rates are used as the base prices?
NCTA has no information to respond to this question.
24. Are there other cost estimates available that can serve as the basis for establishing a funding estimate for the discount provisions applicable to schools and libraries and to rural health care providers?
NCTA has no information to respond to this question.
25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
NCTA has no information to respond to this question.
High Cost Fund
General Questions
26. If the existing high-cost support mechanism remains in place (on either a permanent or temporary basis), what modifications, if any, are required to comply with the Telecommunications Act of 1996?
NCTA does not believe the existing mechanism can be retained because it does not meet the requirements of the Act to be competitively neutral, either in the method in which funding is derived or disbursed. At best, a phase-out of the existing program over a three year period may be used to ameliorate the impact of a switch to a proxy methodology on certain companies. Even during the phase-out, however, funds must be made available to any eligible carrier serving a particular high cost area.
27. If the high-cost support system is kept in place for rural areas, how should it be modified to target the fund better and consistently with the Telecommunications Act of 1996?
As noted above, if the high cost fund is kept in place for rural areas, funding must immediately be made available to any eligible telecommunications carrier serving the geographic area in which an incumbent receives funding.
28. What are the potential advantages and disadvantages of basing the payments to competitive carriers on the book costs of the incumbent local exchange carrier operating in the same service area?
The book costs of the incumbent are unrelated in any way to the cost of providing service by a new entrant. Use of a proxy model as recommended by NCTA would preclude the use of book costs to determine the funding level for incumbent or new LECs. The only circumstance in which the use of book costs may be worthwhile would be in the unlikely instance in which the proxy model showed costs higher than the book costs of the incumbent. In such an instance, the book costs could be used as a cap to limit the level of funding.
29. Should price cap companies be eligible for high-cost support, and if not, how would the exclusion of price cap carriers be consistent with the provisions of Section 214(e) of the Communications Act? In the alternative, should high-cost support be structured differently for price cap carriers than for other carriers?
The Joint Board should consider denying price cap carriers, which have the ability to retain earnings above cost, eligibility for high cost support, particularly in areas where the LEC faces little competition and where any subsidy is based on book costs.
30. If price cap companies are not eligible for support or receive high-cost support on a different basis than other carriers, what should be the definition of a "price cap" company? Would companies participating in a state, but not a federal, price cap plan be deemed price cap companies? Should there be a distinction between carriers operating under price caps and carriers that have agreed, for a specified period of time, to limit increases in some or all rates as part of a "social contract" regulatory approach?
Any company which has been granted the ability to earn profits substantially above what would be permitted under cost of service regulation, at either the state or federal level, should be considered a "price-cap" company for the purposes of universal service funding.
31. If a bifurcated plan that would allow the use of book costs (instead of proxy costs) were used for rural companies, how should rural companies be defined?
NCTA would oppose the use of such a bifurcated plan. Nevertheless, if one were adopted, rural companies should be defined as they are in the 1996 Act.
32. If such a bifurcated approach is used, should those carriers initially allowed to use book costs eventually transition to a proxy system or a system of competitive bidding? If these companies are transitioned from book costs, how long should the transition be? What would be the basis for high-cost assistance to competitors under a bifurcated approach, both initially and during a transition period?
If a bifurcated approach is used, carriers initially using book costs should transition to a proxy system over a period no longer than three years. Competitors should be eligible to receive the same amount and level of funding, on a per customer basis, as the incumbent carrier, both in the initial phase and during the transition period.
33. If a proxy model is used, should carriers serving areas with subscription below a certain level continue to receive assistance at levels currently produced under the HCF and DEM weighting subsidies?
No. This question incorrectly assumes that the level of subscribership is necessarily related to the required level of High Cost Funding and DEM funding. While other factors such as the availability of toll limiting service, general income levels, etc., are relevant to subscribership levels, HCF and DEM levels are not. Therefore, a proxy model should be used to determine the funding level in all areas of the country regardless of particular subscribership levels.
Proxy Models
34. What, if any, programs (in addition to those aimed at high-cost areas) are needed to ensure that insular areas have affordable telecommunications service?
The present "Lifeline" and "Link Up" programs in concert with a properly targeted "High Cost Assistance" program are adequate to meet the universal service requirements of the 1996 Act. (See also the response below to question 59 regarding the possible need to enhance the BCM so that it accurately reflects the cost of serving areas that may have unique natural resource characteristics, such as islands, that present atypical network requirements). However, before the FCC can make a determination as to the particular universal service funding needs for any such areas, it is critical that complete information be submitted to the FCC as to the particular extenuating circumstances of such locations that could possibly justify a departure from the results of the "standard" cost proxy model that the FCC adopts. The burden is appropriately placed on the incumbent LECs (who are the likely beneficiaries of any high-cost support in such areas) to demonstrate that the cost proxy model fails to accurately reflect any unique costs of serving a particular insular area.
35. US West has stated that an industry task force "could develop a final model process utilizing consensus model assumptions and input data," US West comments at 10. Comment on US West's statement, discussing potential legal issues and practical considerations in light of the requirement under the 1996 Act that the Commission take final action in this proceeding within six months of the Joint's Board's recommended decision.
In light of the limited time frame within which the Commission must take final action in this proceeding in order to comply with the 1996 Act, it is critical for the FCC to identify the major sources of differences among the various models being proposed and to require local exchange carriers to submit the information and data that are critical to enable the FCC to resolve remaining areas of controversy. Controversy has arisen (and is not likely to be resolved within the industry) as to two general categories of attributes of cost proxy models: (1) the algorithms and logic of the model (e.g., the way in which a cost proxy model should decide when to "deploy" fiber rather than copper in the feeder plant; the objective fill factors that should be used in the theoretical outside plant; whether the model should reflect the cost of providing single-line residential service, etc.) and (2) the assumptions about the input values (the carrying cost factor that should be used, the cost of switches, etc.) Because there is unlikely to be consensus on all of these areas, the FCC should require that incumbent LECs immediately provide all data necessary to develop accurate cost input data for such important network elements as host and remote digital switches and digital loop carrier equipment. The prices paid for these and other network components are among the most fundamental inputs to an effective cost proxy model and should therefore be based upon the most up-to-date, accurate information available. Also, the key components of the cost factor (which is used to translate investment cost into monthly costs) should be investigated by the FCC, and the FCC should require complete and comprehensive back-up and supporting documentation by all model proponents regarding the development of the cost factors being proposed for use in a cost proxy model. As the FCC makes decisions regarding the various individual aspects of a cost proxy model, it should be guided by the overarching goal to model the cost of providing basic local exchange service. For example, the depreciation rates that the FCC uses in its computation of a reasonable cost factor should reflect the expected lives of technology necessary for basic local exchange service, and not the expected lives of technology that is associated with incumbent LECs' strategic business plans. Ultimately, the FCC (and at the state level, PUCs) will need to decide the economic, relevant components of the cost factor (e.g., the appropriate depreciation rates to assume for the various components of the theoretical network, the appropriate forward-looking expense factors, etc.). It is essential that the FCC seek and obtain the necessary information to make the many individual decisions involved in designing and implementing an accurate, competitively neutral cost proxy model. Because of the improbability of consensus on some of these more controversial aspects of a cost proxy model, this approach of gathering relevant critical data is likely to be a more fruitful avenue than US West's proposed industry task force to eliminate any uncertainties involving the inputs to a workable and publicly open cost proxy model. NCTA certainly supports efforts within the industry to harmonize differences and to attempt to develop areas of consensus (and indeed has attempted to contribute to such efforts), but believes nonetheless that, ultimately, some significant areas of difference will remain that the FCC will need to be prepared to referee.
36. What proposals, if any, have been considered by interested parties to harmonize the differences among the various proxy cost proposals? What results have been achieved?
As discussed in greater detail in response to question 58, NCTA has recommended that the need for high-cost support should be determined at the wire center as opposed to the Census Block Group ("CBG") level. The wire center, rather than the CBG, reflects the current architecture of the public switched network and is therefore the appropriate geographic level at which to consider the scale and scope economies arising from the provision of local exchange service. The Joint Sponsors of the BCM did not incorporate this recommendation into the revised "BCM2." However, they did acknowledge in an ex parte filing that "an interested user of the BCM could perform an aggregation of all CBGs in a wire center to obtain an approximation of cost at the wire center level."33 Ex Parte Filing of the Joint Sponsors, February 21, 1996. As an alternate approach, and in an effort to harmonize differences of opinion on this issue, ETI has recommended that a "combined CBG/wire center" method be used to assess the need for and to quantify the level of high-cost support. Under this approach, proxy costs would be averaged for each wire center and compared to the adopted threshold for high cost support. If the average proxy cost for the wire center does not exceed the adopted support threshold level, the entire wire center is excluded from receiving high cost support. Alternatively, for those wire centers whose average cost is above the support threshold, high cost support would be determined at the CBG level and distributed only to those CBGs in the wire center which have average costs above the prescribed benchmark for support. 37. How does a proxy model determine costs for providing only the defined universal service core services?
In their July 3 release of the BCM2, the remaining Joint Sponsors, US West and Sprint, indicated that they "made every attempt in developing [the] model to accurately reflect the current cost of building a telephone network capable of providing service of the high quality demanded by [their] customers and [their] regulators." In doing so, however, the Joint Sponsors repeated the same fundamental error of the BCM1, namely the failure to estimate the cost of providing only the defined universal service core services. To be useful as a policymaking tool, a cost proxy model must calculate the forward-looking cost of providing basic, single line, residential local exchange service. In addition, the model must quantify the economies of scale and scope that arise from the actual, full service business and residential telecommunications network and then properly attribute a portion of those economies to the stand-alone cost of providing services under the scope of universal service. In its analysis of the BCM1 on behalf of NCTA, ETI attempted to adjust user specified inputs so as to estimate the cost of providing single line residential local exchange service. Among the cost drivers examined by ETI were the selection of copper vs. fiber outside plant and the use of high cable and switch fill factors to properly reflect the provision of single line residential service. These analyses conducted on behalf of NCTA have been intended to contribute to the question of how best to model the provision of only the defined universal service core services. More importantly, the developers of cost proxy models must recognize this goal as the proper function of a cost proxy models and develop their models accordingly.
38. How should a proxy model evolve to account for changes in the definition of core services or in the technical capabilities of various types of facilities?
As stated in Section 254(c)(1) of the 1996 Act, "universal service is an evolving level of telecommunications services that the Commission shall establish periodically under this section, taking into account advances in telecommunications and information services." Coincident with its evaluation and determination of the definition of core universal services, the Commission should undertake periodic evaluations of any cost proxy model adopted for universal service funding requirements to assess (1) whether the forward-looking costs of deploying basic telecommunications services to residential households has significantly changed and (2) to assess the feasibility of modifying the cost proxy model to reflect any FCC-mandated changes in the definition of the basic service being modeled. The FCC should establish timetables in this proceeding for conducting periodic evaluations of any cost proxy model it adopts, and it should also identify the major attributes that should be re-evaluated, e.g., the cost of money, the cost of switches, CBG-based data (such as numbers of households), significant changes in state-of-the-art technology (such as technological break-throughs in wireless services), etc. so that the FCC need not necessarily re-investigate each and every aspect of the cost proxy model in its periodic investigations. The goal of administrative simplicity needs to be balanced with that of accuracy. It would simply not be feasible to update the model on a daily, monthly, or arguably even annual basis, and thus the FCC should consider carefully the frequency with which it is appropriate to revise the model to reflect significant changes that have occurred in the telecommunications industry.
39. Should a proxy model account for the cost of access to advanced telecommunications and information services, as referenced in section 254(b) of the Act? If so, how should this occur?
NCTA recommends that the FCC focus its efforts first on the challenge of adopting and implementing a cost proxy model for the purpose of ensuring the availability of affordable single-line residential service. Only after such time should the FCC consider the feasibility and desirability of developing a proxy model to account for the cost of access to advanced telecommunications and information services.
40. If a proxy model is used, what, if any, measures are necessary to assure that urban rates and rates in rural, insular, and high-cost areas are reasonably comparable, as required in Section 254(b)(3) of the 1996 Act.
The purpose of the cost proxy model -- to provide an objective measure of the economic, forward-looking cost of providing single-line basic residential service - is critical in order to assess which areas of the country may require high cost support. The model can then be used by federal and state policy makers to distribute high cost support with the goal of establishing rates that are comparable between urban and rural, insular and high cost areas. A cost proxy model such as the BCM can inform, but does not specifically address, the important question as to how to set interstate and intrastate rates for individual telecommunications services.
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
It is NCTA's understanding that BCM2 does include Alaska. In any event, the same principles that are guiding the design of cost proxy models should guide any assessment of need for insular areas, i.e., objective cost characteristics should be identified, the least-cost technology (that satisfies quality of service requirements) should be assumed, and those incumbent carriers with experience serving such areas should provide comprehensive information as to the cost characteristics of deploying telecommunications in these regions. Furthermore, it may be appropriate to establish different criteria for those islands that are privately owned from those that are public and/or to establish different criteria for those residences that are second homes rather than primary homes.
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
Although the 1996 Act sets forth a blueprint for making a transition to a competitive telecommunications market, ubiquitous local competition is many years off. High cost support, even if structured (as it should be) in a competitively neutral fashion, will not in and of itself make any given geographic market competitive. Therefore, until such time as effective local competition has been established, regulatory oversight is likely to be needed to ensure that the levels of infrastructure development and quality that policy makers seek are achieved. Competitively neutral sources of high cost support are critical to ensure that competition can develop (yielding infrastructure development, low costs, and quality service), but the mere availability of high cost support will not in and of itself cause competition to flourish. Certainly if high cost funds are designed in a competitively neutral fashion, there is a much greater possibility of competition developing sooner rather than later in remote and high cost areas.
43. Should there be recourse for companies whose book costs are substantially above the costs projected for them under a proxy model? If so, under what conditions (for example, at what cost levels above the proxy amount) should carriers be granted a waiver allowing alternative treatment? What standards should be used when considering such requests?
As discussed in response to questions 34 and 59, should any incumbent LECs be aware of particular, unique areas (e.g., islands) that face extraordinary and atypical cost characteristics that the BCM fails to reflect, it may be appropriate for the FCC to permit such ILECs to identify and describe such instances so that the BCM can be adjusted to reflect the fact that a more costly type of technology is needed in order to provide these remote areas with the same quality of service as is provided elsewhere. The preferred solution is to modify the BCM to reflect the objective characteristics that cause the extenuating circumstance. Should that not be feasible, the burden should rest with the LEC to request and justify a waiver. Furthermore such a waiver process should simply entail a right to seek an exemption but by no means entail a guarantee of such a waiver.
44. How can a proxy model be modified to accommodate technological neutrality?
There are several potential modifications to existing proxy models that might more adequately address the need to accommodate technological neutrality in the design of an optimal network based on forward-looking costs. Accommodation of alternative technologies for certain geographic areas is important because, for instance, the investment costs of wireless equipment generally do not vary with the customer's distance from the serving area interfaces (SAI), such that for areas requiring long loops and/or having unusually expensive loop construction characteristics (e.g., mountainous terrain and/or extremely low population density), wireless technologies may well represent an economically viable alternative to wireline loops. While the BCM2 model addresses this issue at least in part, other models fail to incorporate a cap on wireline investment levels for implementation of wireless and/or other technological solutions in situations where they represent the least cost alternative. The approach to the issue of technological neutrality varies significantly from model to model. The original BCM computed the cost of constructing a wireline telephone network to all households, regardless of the distance from the wire center or the relative density of the area being modeled. BCM2 represents an improvement from the original BCM, addressing the issue of technological neutrality by recognizing the possibility that some customers may be more reasonably served by emerging "wireless loop" technologies. BCM2 assumes that an alternative wireless loop technology is utilized for loops requiring wireline investment levels in excess of the cost of an alternative wireless technology; BCM2 therefore assumes a value of $10,000 per loop as the cutover point for wireless, a figure purported to be based upon ongoing trials. (See also response to Question 57 for additional detail concerning BCM2's actual calculations regarding the wireline investment cap.) From a more generic standpoint, changes to the benchmark models that seek to address the issue of technological neutrality should take into account only those technologies whose cost and performance characteristics are substantially proven. Furthermore, to the extent that costs related to newer technologies are declining as they gain acceptance in the marketplace, such reductions should be incorporated into any model that is adopted and implemented for universal service funding purposes.
45. Is it appropriate for a proxy model adopted by the Commission in this proceeding to be subject to proprietary restriction, or must such a model be a public document?
The Commission should adopt a public model so that the model can be subject to open, complete, comprehensive, and rigorous examination by all interested parties. Reliance on databases such as the Local Exchange Routing Guide, which must be purchased from a third party, is acceptable so long as the purchase price is not set at an unreasonable level. Similarly a requirement to use models under a licensing agreement is acceptable. Otherwise, the model should be public and accessible to complete scrutiny by affected and interested parties.
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
No. A proxy model that is being adopted for public policy decisions should be available for complete public review. Incumbent LECs will be the initial primary beneficiaries of any universal service funding that is established by the FCC in this docket and therefore it is entirely inexcusable for them to cloak their efforts to shield critical information from scrutiny in assertions that such data is proprietary. There is absolutely no reason that the FCC should accept the implied trade-off between quality (i.e., accurate) data and public data. The FCC should insist upon public, accurate data. Ultimately, it is the regulator, not a local exchange carrier, that must make judgment calls about critical input assumptions and network engineering characteristics. Public, accurate data is essential and the FCC should require incumbent local exchange carriers to be forthcoming and comprehensive in their submission of relevant data.
47. If it is determined that proprietary data should not be employed in the proxy model, are there adequate data publicly available on current book costs to develop a proxy model? If so, identify the source(s) of such data.
No. As stated in response to question 35, NCTA recommends that the FCC direct incumbent LECs to provide documented, detailed up-to-date cost data on items such as equipment costs so that the FCC can make fully informed decisions as to the appropriate input values to select when the FCC runs a cost proxy model in order to compute the level and geographic distribution of high cost funds. Ultimately, regulators, not local exchange carriers, will need to run and refine any cost proxy model that is adopted for universal service funding requirements, and therefore it is essential that regulators be provided with the best available data on the forward-looking costs of key model components such as switches and digital loop carrier equipment. Proprietary claims made by LECs about critical data should be questioned and investigated by the FCC.
48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
As stated in response to question 46, the FCC should explicitly reject the "either-or" approach to information that incumbent local exchange carriers seem to be presenting to regulators (i.e., regulators can have access either to unreliable public information or to accurate proprietary information). Well in advance of the legislated time frame for rendering a decision in this proceeding, the Commission should direct incumbent local exchange carriers (those which advocate a proxy model as well as those which do not) to submit public, accurate data on the critical attributes of a cost proxy model (e.g., switch costs and digital loop carrier equipment costs).
Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
As stated in NCTA's initial comments, where there is no existing competition, competitive bidding will likely be infeasible. If however a competitive bid process is adopted in an effort to encourage competition, in no event should the subsidy amount exceed the subsidy amount distributed today for serving a particular area. Rather, assuming a national benchmark rate has been adopted, as recommended by NCTA in the context of a proxy model, high cost payments should be determined based on the difference between the benchmark rate and the lowest bid. If no bids are received, the incumbent should receive the difference between the benchmark rate and the benchmark cost flowing from the proxy model.
50. How should a bidding system be structured in order to provide incentives for carriers to compete to submit the low bid for universal service support?
The bidding system should not be structured in a manner which would allow an increase in the funding level over that of today. Carriers should have a sufficient incentive to offer lower bids because the total level of funding will be reduced for all parties, not just the low bidder.
51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?
The lowest possible bid would of course be for a zero subsidy level. It is unlikely that such a low bid will drive out competition since most new entrants will not base their business plans on whether or not a subsidy (which can be further reduced through competitive bidding, and may be transitory at best) is available. In any case, low bids are preferable since they will minimize the total universal service funding requirement. Even so, if there is a basis for concern that an incumbent LEC has engaged in predatory pricing in a particular case, then the Commission, the state PUCs and the courts should be available to address such concerns.
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
Most states have adequate quality of service standards in place today. Those same standards should be applied under a system of competitive bidding.
53. How is collusion avoided when using a competitive bid?
The Commission has experience in preventing collusive activity in the context of spectrum lotteries and auctions. Similar restrictions should be adopted in the context of a universal service competitive bid process.
54. Should the structure of the auction differ if there are few bidders? If so, how?
No. NCTA would expect that for otherwise unserved areas, the general case would be that there are few (less than 4 or 5) bidders.
55. How should the Commission determine the size of the areas within which eligible carriers bid for universal service support? What is the optimal basis for determining the size of those areas, in order to avoid unfair advantage for either the incumbent local exchange carriers or competitive carriers?
Because the recommended proxy model approach would use wire center boundaries to determine the level of support, competitive bidding should also take place at the wire center level. This should not be interpreted to mean, however, that any carrier should be required to serve an entire wire center area, or that any geographic restrictions on service boundaries are appropriate.
Benchmark Cost Model (BCM)
56. How do the book costs of incumbent local exchange carriers compare with the calculated proxy costs of the Benchmark Cost Model (BCM) for the same areas?
NCTA and other proponents of cost proxy models have repeatedly stated that in the context of universal service, the proper goal of cost proxy models is to estimate the forward-looking cost of providing basic, single line, residential telecommunications service using today's technology. As such, it should not be expected that the cost estimates of a properly designed cost proxy model would match the book cost of incumbent local exchange carriers. Such a comparison is fundamentally flawed by the fact that what is being modeled is intended to represent different costs from what is reported. The book costs of an individual carrier necessarily reflect that carrier's actual network design and therefore engineering goals associated with services other than basic residential local exchange service. Book costs not only reflect past LEC investment decisions and operating inefficiencies, but they are also rooted in rate of return regulation -- a regulatory paradigm that LECs have sought to discredit and that the FCC and many state commissions have since replaced with price caps or other forms of "incentive" regulation. Basing the distribution of universal service support on a company's reported costs would be entirely inconsistent with the competition goals of the 1996 Act and would ignore the need for a properly designed, forward-looking cost proxy model.
57. Should the BCM be modified to include non-wireline services? If wireless technology proves less costly than wireline facilities, should projected costs be capped at the level predicted for use of wireless technology?
Yes. To the extent that non-wireline services demonstrate an economic advantage over the use of more traditional wireline technologies, any reasonable forward-looking cost model should include algorithms that cap wireline costs. This is precisely the approach adopted in the BCM2, where a maximum investment per wireline loop has been established. BCM2 assumes that an alternative wireless loop technology is utilized for loops requiring investment levels in excess of the cost of an alternative wireless technology; in BCM2, this value is set at $10,000 per loop as the cutover point for wireless, a figure purportedly based upon ongoing trials.
58. What are the advantages and disadvantages of using a wire center instead of a Census Block Group as the appropriate geographic area in projecting costs?
The Census Block Group is a construct of the U.S. Census Bureau and has nothing whatever to do with the manner in which the telecommunications network would be designed, either in the past or in the future. Consequently, there is no basis whatsoever to expect that, on a forward-looking basis, any network would be constructed around the geographic properties of a CBG. The public switched network is, however, structured around the wire center as the basic network unit. Within the area served by a wire center there are extensive scale and scope economies arising from the ability of subscribers in all parts of the wire center serving area to share certain resources in common. Assessment of costs at a level below the wire center (e.g., at the CBG) necessarily requires an arbitrary assignment of such shared switching and distribution network costs as among the various CBGs and should therefore be rejected. In contrast, wire center locations and their associated feeder and distribution networks have been optimized to cover most efficiently the entire area that each serves.
Furthermore, determining cost proxies and cost support requirements at the wire center level does not preclude one from utilizing data that is disaggregated at the CBG level, as does the BCM. Wire center costs can be determined by simply aggregating the per-CBG costs that are derived by the BCM for all of the CBGs within each wire center. ETI has demonstrated that the BCM can be readily used to develop such wire center level cost proxy estimates. Thus, the issue at hand is not constrained by the available proxy modeling tools, but is simply one of determining which approach better achieves an economically efficient and competitively fair result. 59. The Maine PUC and several other State commissions proposed inclusion in the BCM of the costs of connecting exchanges to the public switched network through the use of microwave, trunk or satellite technologies. Those commenters also proposed the use [of] an additional extra-high-cost variable for remote areas not accessible by road. What is the feasibility and the advisability of incorporating these changes into the BCM? Should any incumbent LECs be aware of particular, unique areas (e.g., islands) that face extraordinary and atypical cost characteristics that the BCM fails to reflect, it may be appropriate for the FCC to permit such ILECs to identify and describe such instances so that the BCM can be adjusted to reflect the fact that a different type of technology is needed in order to provide these remote areas with the same quality of service as is provided elsewhere. The feasibility of such changes depends largely on the ability of the ILECs to specify which CBGs cannot be served by a landline network and what forward-looking, available technology would be used to serve such CBGs.
60. The National Cable Television Association proposed a number of modifications to the BCM related to switching cost, fill factors, digital loop carrier subscribers equipment, penetration assumptions, deployment of fiber versus copper technology assumptions, and service area interface costs. Which, if any, of these changes would be feasible and advisable to incorporate into the BCM?
NCTA has focused its efforts on identifying feasible ways in which the BCM can be revised in order to more accurately reflect the forward-looking economic costs of providing single-line basic local exchange service. The two Joint Sponsors of BCM2 have adopted or partially adopted several of the recommendations that ETI put forward in its April 1996 report which was submitted with NCTA's initial comments.44 Baldwin, Susan M. and Selwyn, Lee L., The Cost of Universal Service: A Critical Assessment of the Benchmark Cost Model, April 1996. Other important recommendations, however, still need to be addressed. ETI recommended that the fill factors for feeder and distribution be increased to 95 percent for all density zones to account for the relative stability inherent in the provision of primary residential access lines. While the Joint Sponsors have raised the fill factors slightly,55 Feeder fill in BCM-1 ranged from 65 percent for the least dense areas to 80 percent in urban density zones versus 75-85 percent in BCM-2. Similarly, for Distribution fill, while BCM-1 ranged from 25-75 percent, BCM-2 modifies the range to be from 40-80 percent. they are still far below the levels needed to properly model the potential universal service requirement, and thus, if adopted, would burden universal service funding with the recovery of costs associated with LECs' excess spare capacity -- spare capacity that exists for strategic reasons and not for the purpose of providing single-line basic residence service. The recommendation that the copper/fiber crossover point should be a user specified input has been partially addressed; the BCM2 allows for the user to choose from among four crossover points at 9,000, 12,000, 15,000 and 18,000 feet, respectively. There is no evidence, however, that the Sponsors have attempted to identify which of these crossovers represents the most economic option. Furthermore, unlike other user-specified variables which allow any figure to be used, the BCM2 limits the selection of the cross-over point to four options. NCTA intends to address these and other issues more comprehensively in its comments on the BCM2 that will submitted on August 9.
61. Should the support calculated using the Benchmark Cost Model also reflect subscriber income levels, as suggested by the Puerto Rico Telephone Company in its comments?
No. The purpose of the BCM should continue to be to model the forward-looking cost of providing single-line basic residential service and, based upon the results of the model, to then compute the high cost/universal service funding requirement that is necessary to support a given price threshold. The important question as to the appropriate level of support that should be provided to ensure that service is affordable for all households, regardless of income, should continue to be addressed through distinct programs such as Lifeline and Link Up. Although there is merit to the concept that some relatively high-cost areas may include households with high incomes (and thus the households may be able to pay higher monthly rates, eliminating the need for high-cost support) or alternatively some areas with costs that are just below the qualifying price support level may include low-income households (and thus need support where other areas of average income would not), it would be unwieldy to modify the BCM to overlay the dual goals of targeting assistance based upon (1) income and (2) the cost characteristics of serving given areas. Issues of universal service support needed in order to target assistance to low-income households should continue to be addressed separately. After a cost proxy model has been successfully adopted and implemented, it could be appropriate in a future and separate proceeding for the FCC to seek to enhance the cost proxy model so that high cost support is considered in tandem with current income levels.
62. The BCM appears to compare unseparated costs, calculated using a proxy methodology, with a nationwide local benchmark rate. Does use of the BCM suggest that the costs calculated by the model would be recovered only through services included in the benchmark rate? Does the BCM require changes to existing separations and access charge rules? Is the model designed to change as those rules are changed? Does the comparison of model costs with a local rate affordability benchmark create an opportunity for over-recovery from universal service support mechanisms?
Question 62 raises many related issues, among them that of rate rebalancing. The BCM yields an unseparated cost for basic local exchange service and compares that theoretical cost to a desired price support. Without a comprehensive evaluation of the existing sources of support for universal service support (e.g., high cost and income-based assistance) and for basic local exchange service, there is certainly a possibility for over-recovery by incumbent local exchange carriers. For a comprehensive discussion of this and related issues, refer to Chapter 7 of the ETI report submitted with NCTA's initial comments in this proceeding.66 See The Cost of Universal Service: A Critical Assessment of the Benchmark Cost Model, Baldwin, Susan M. and Selwyn, Lee L., April 1996 at 123-138.
63. Is it feasible and/or advisable to integrate the grid cell structure used in the Cost Proxy Model (CPM) proposed by Pacific Telesis into the BCM for identifying terrain and population in areas where population density is low?
Based on our understanding of the CPM and its grid cell structure, we do not recommend attempting to add a similar degree-based grid structure to the BCM (or BCM2). As explained below, the CPM's grid does not in itself improve the accuracy with which customer locations and terrain variables are known, and may in fact create spurious precision in terrain and location data and the resulting estimates of local loop costs. For all the cost proxy models under study, the accuracy of their loop cost estimates will reflect, among other things, the accuracy of the source data on customer locations. The original version of the CPM -- which Pacific Bell submitted in the California Public Utility Commission's (CPUC's) universal service proceeding -- had an advantage in this particular respect, since it used actual customer addresses drawn from Pacific Bell's billing databases. However, a serious drawback to this approach is that Pacific Bell and other LECs consider such address data confidential and proprietary, thereby limiting the ability to review related portions of the model. INDETEC and Pacific Bell have now modified the CPM so that it can accept commercially-available census data on households and daytime population, mapped to the CPM's grid cells.77 CC Docket 96-98, Reply Comments of Pacific Telesis Group, May 30, 1996, Appendix C ("Declaration of Richard D. Emmerson") at 17. While this approach mitigates the latter problem, it also means that the CPM now has the same dependency upon census-based data as do the BCM/BCM2 and the Hatfield Model, with no better prospects for accurately determining customer locations. To date, Pacific Telesis has supplied scant public information to the parties in this proceeding concerning the design of the CPM, including details on how census data has been mapped to grid cells. Unless the mapping process begins with location data below the CBG level (e.g., specific customer addresses), mapping customers to grid cells rather than CBGs produces a spurious "precision" and will not improve the actual precision with which customer locations are modeled. The same issue applies when modeling terrain factors at a grid cell level. However, even if terrain data could be accurately disaggregated to the grid cell level, it would be insufficient to simply evaluate terrain conditions at the customer location. Terrain conditions impact the cost of installing loop facilities at all points along the facilities route, not just at the customer locations. Developing grid cell-level terrain data would do little to improve loop cost estimates unless the loop costing algorithms were modified to separately apply the terrain factors for each grid cell traversed by a loop facility segment to that segment. For example, simply assuming that a customer assigned to a grid cell identified as having sandy soil (low cost) terrain will have a relatively low loop cost may be incorrect if the route to that customer's serving central office must traverse other grid cells identified as having bedrock or subsurface water (high cost) terrain. Refining the model further in this direction would appear to be a complex and costly exercise, which is not warranted at this time.
Cost Proxy Model Proposed by Pacific Telesis
64. Can the grid cell structure used in the CPM reasonably identify population distribution in sparsely-populated areas?
Please see the response to Question 63.
65. Can the CPM be modified to identify terrain and soil type by grid cell?
Please see the response to Question 63.
66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
The CPM is generally not a suitable model for estimating the costs of basic residential service outside of Pacific Bell's service territory, for which it was originally designed. In contrast to the BCM/BCM2 and the Hatfield Model, the CPM is not strictly a bottoms-up engineering/planning model, that builds up a simulated network from underlying components as required to meet the total specified demand level. Instead, the CPM costs out individual customer loops using pre-determined unit cost data stored in numerous tables in the CPM, which have been drawn from Pacific Bell company-proprietary databases and therefore strongly reflect the particular characteristics of Pacific Bell's embedded network. These individual loop costs are then simply summed together to estimate the total outside plant investment costs for the network, without any explicit sizing and costing of many of the network components that would actually be required to serve those customers. In essence, the CPM's overall approach to costing outside plant is to: (1) analyze the LEC's existing, embedded local distribution network into a series of tables of unitized costs and network parameters,88 Examples of the network parameters that must be specified in the CPM are: average cable sizes for feeder and distribution, mix of SAI vs. cross-connects by density zone, percentages of copper feeder that is underground, buried, and aerial, and ratio of route miles to airline miles, and ratio of feeder to distribution lengths. and (2) reconstitute the network by applying those values to individual customer loops. This basic structure creates a dilemma for those who would apply the CPM beyond Pacific Bell's service territory: one must either assume that all of the characteristics of Pacific Bell's network that are enshrined in the CPM are correct, from a forward-looking perspective, for the LEC under study, or develop a full set of replacement values based on a forward-looking analysis of that particular LEC's network. Either choice is clearly problematic. The drawbacks presented by the CPM's basic structure have also been recognized by GTE-California. In testimony submitted in the CPUC's universal service proceeding, GTE-California observed that: ...[t]he CPM is a heavily table-driven model. The CPM contains extensive tables of unit costs, which are developed outside the model. These unit costs are then multiplied by unit demands based on the model's grid square date. The BCM, in contrast, takes in fewer unit cost elements as inputs, and develops more information through its own simulation of the network. These CPM unit cost inputs raise a number of concerns.99 CPUC R.95-01-020/I.95-01-021, Reply Testimony of Dennis Weller (GTE-California), April 24, 1996 at 2-3. The specific concerns identified by GTE-California included the CPM's reliance on unit costs that reflect only Pacific Bell's experience, and the lack of "internal controls in the model which assure that the assumptions used in developing these different unit cost inputs are fully consistent with one another, with the size of the wire center being evaluated, or with a specific network design for that wire center."1010 Id. at 3. While GTE-California proposed a separate "outboard" model to address these problems, our view is that the Commission and state regulators outside California should look to the other cost proxy models that have already been devised (namely, the BCM/BCM2 and the Hatfield Model) rather than focus on how to correct the basic structural shortcomings of the CPM.
67. Using the CPM, what costs would be calculated by Census Block Group and by wire center for serving a rural, high-cost state (e.g., Arkansas)?
Given the nature of the CPM, at this time parties other than Pacific Bell cannot respond meaningfully to this question.
68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?
The CPM is not a fully self-contained model, and instead relies upon numerous external data sources, calculations, and models, all of which would have to be replicated in some manner if the CPM were adopted for use in a jurisdiction outside of California. As explained in response to Question 66, the CPM relies upon unit cost values and network parameters that must be developed from internal company databases, in some cases requiring considerable analysis.1111 For example, INDETEC indicates that the ratios for air-to-route mileage and feeder vs. distribution length both require statistical analysis. CC Docket No. 96-98, Reply Comments of Pacific Telesis Group, May 30, 1996, Appendix C ("Declaration of Richard D. Emmerson") at 18. In addition, the CPM does not independently develop costs for switching investments. Instead, the CPM relies upon Bellcore's Switching Cost Information System (SCIS),1212 Id. at 17. another complex model that Bellcore considers proprietary and which has not been made generally available for public review. A third area in which the CPM is not self-contained is the development of operating expenses. In fact, the California version of CPM does not develop Pacific Bell's operating expenses at all, but instead obtains these costs from Pacific Bell's OAND Cost Studies, which contain thousands of pages of highly disaggregated expense data and calculations, virtually all of which are considered proprietary and not publicly reviewable and which are based on outputs from Pacific Bell's internal accounting system. For other LECs, the CPM estimates operating expenses by applying ratios derived from ARMIS data to those Pacific Bell-specific expense levels. Consequently, in order to adopt the CPM outside of California, a regulator would need to accept Pacific Bell's expense calculations "on faith," or pursue development of an alternative approach to estimating operating expenses that did not rely on Pacific Bell's data.
SLC/CCLC
69. If a portion of the CCL charge represents a subsidy to support universal service, what is the total amount of the subsidy? Please provide supporting evidence to substantiate such estimates. Supporting evidence should indicate the cost methodology used to estimate the magnitude of the subsidy (e.g., long-run incremental, short-run incremental, fully-distributed).
In many states it has been determined that local rates cover the cost of the local loop thus calling into question the need for the CCLC and SLC. In any event, any resolution of the CCLC issue should be accomplished in a competitively-neutral manner which does not discriminate against new facilities-based entrants.
70. If a portion of the CCL charge represents a contribution to the recovery of loop costs, please identify and discuss alternatives to the CCL charge for recovery of those costs from all interstate telecommunications service providers (e.g., bulk billing, flat rate/per-line charge).
Any resolution of the CCL issue should be accomplished in a competitively-neutral manner which does not discriminate against new facilities-based entrants. With these caveats, it may be rational to transition the recovery of loop costs from a per minute to a per line, bulk billed method of recovery. For ease of administration, non-facilities-based local and long distance service providers could be assessed on bulk billed basis, determined by the number of a lines they serve. A CLEC that utilizes facilities other than those of an ILEC to provide exchange access should not be required to pay any carrier common line charge or transport interconnection charge to the ILEC. To the extent an IXC obtains exchange access from such a CLEC, measured in minutes switched by the CLEC, the IXC should not be required to pay such charges to the ILEC as part of a "bulk billing" arrangement or otherwise.
Low-Income Consumers
71. Should the new universal service fund provide support for the Lifeline and Linkup programs, in order to make those subsidies technologically and competitively neutral? If so, should the amount of the lifeline subsidy still be tied, as it is now, to the amount of the subscriber line charge?
No, the Life Line and Link Up programs should retain their separate and distinct role as a "means based" direct subsidy to low income customers. The Life Line and Link Up programs stand alone as the best example of an explicit, targeted subsidy. The "direct customer credit" nature of these programs, unlike the Universal Service Fund, have avoided accusations of company manipulation and gamesmanship. The existing Life Line and Link Up programs can easily be transferred to new providers with a variety of technology. The Link Up program should be de-coupled from the jurisdictional separations rules, since not all eligible carriers will be subject to separations, but it is critical that the support mechanisms remain competitively neutral. The Lifeline subsidy should continue to be tied to the amount of the subscriber line charge as long as that charge exists on customers' bills and represents a local charge to customers for an interstate service.
Administration of Universal Service Support
72. Section 254(d) of the 1996 Act provides that the Commission may exempt carriers from contributing to the support of universal service if their contribution would be "de minimis." The conference report indicates that "[t]he conferees intend that this authority would only be used in cases where the administrative cost of collecting contributions from a carrier or carriers would exceed the contribution that carrier would otherwise have to make under the formula for contributions selected by the Commission." What levels of administrative costs should be expected per carrier under the various methods that have been proposed for funding (e.g., gross revenues, revenues net of payments to other carriers, retail revenues, etc.)?
Minimal. The type of information proposed by the various methods of funding are easily extracted from the accounting records of all providers. The Commission should simply set a level, perhaps $1000, at which the required contribution could be considered "de minimis" and carriers would be exempted from payment.
Respectfully submitted,
Richard L. Cimerman Daniel L. Brenner Teresa A. Pitts Neal M. Goldberg Directors, State Telecommunications David L. Nicoll Policy 1724 Massachusetts Avenue, N.W. Washington, D.C. 20036 National Cable Television (202) 775-3664 Association, Inc. Counsel for the National Cable Television Association, Inc.
August 2, 1996