In the Matter of Federal-State Joint Board on CC Docket No. 96-45 Universal Service
COMMENTS OF PACIFIC TELESIS GROUP
MARLIN D. ARD R. MICHAEL SENKOWSKI RANDALL E. CAPE ROBERT BUTLER NANCY C. WOOLF SARAH R. THOMAS WILEY REIN & FIELDING 1776 `K' Street, N.W. 140 New Montgomery Street, Rm. 1523 Washington, DC 20006 San Francisco, California 94105 (415) 542-7657
MARGARET E. GARBER
1275 Pennsylvania Avenue, NW
Washington, DC 20004
(202) 383-6472
Attorneys for Pacific Telesis Group
Date: August 2, 1996
TABLE OF CONTENTS Page Summary ............................................................ 3 Definitions Issues ............................................................ 5 Schools, Libraries, Health Care Providers ............................................................ 14 High Cost Fund ............................................................ 28 General Questions ............................................................ 28 Proxy Models ............................................................ 33 Competitive Bidding ............................................................ 44 Benchmark Cost Model (BCM) ............................................................ 46 Cost Model Proposed by Pacific Telesis ............................................................ 55 SLC/CCLC ............................................................ 58 Low-Income Consumers ............................................................ 59 Administration of Universal Service Support ............................................................ 60
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
In the Matter of Federal-State Joint Board on CC Docket No. 96-45 Universal Service
COMMENTS OF PACIFIC TELESIS GROUP
Pacific Telesis Group files these responses to the 72 questions posed by the Federal Communications Commission ("FCC" or "Commission") in its Public Notice dated July 3, 1996 (DA 96-1078).
Summary
Our responses to these questions reinforce the arguments made in our Comments and Reply Comments. A new high cost fund must be established to, at a minimum compensate carriers for serving areas in which basic service rates do not cover the costs of providing service.
The Commission should require all carriers serving a particular geographic area to provide the same core set of universal services, so that true competition can develop.
We believe that proxy models such a Pacific's Cost Proxy Model can develop the appropriate level of projected costs across small geographic units. The smaller the geographic unit used the more precise and accurate the subsidy will be. An appropriately sized subsidy will meet the requirements of the Telecommunications Act and, more importantly, will ensure that companies will continue to serve high cost areas while recovering their costs.
We support a further proceeding on competitive bidding so that market forces will produce an appropriate subsidy level. However, initially, the subsidy should be set using a Cost Proxy Model. We believe that any model which sets the appropriate level of subsidy can be used for Universal Service. We support our own Cost Proxy Model, which is designed to accurately predict the costs of serving an area.
Since filing comments in this proceeding we have had the opportunity to work with other companies, as well as members of the education, library and health care communities on developing on a proposal for funding Universal Service to schools, libraries and health care providers. We have sought to develop and refine a mechanism that places purchasing power in the hands of those who need the services, enhances competition, and minimizes regulation and administrative overhead. We believe the following proposal, in which eligible schools, libraries and health care providers will receive purchase credits from the Universal Service Federal Education Fund which they may use to purchase eligible telecommunications services, satisfies these goals.
We acknowledge that this proposal is somewhat different from what we advocated in our comments. There, we urged the Commission to adopt Universal Service policies for education, libraries and the health care sector by specifying a baseline package of services, based on the ISDN product. We still believe that proposal is valid, as witnessed by our Education First campaign which also centers around ISDN. However, we have learned in the past months that schools, libraries and health care providers want to be able to choose a mix of services. Those choices may -- and most likely will -- include ISDN, but may also extend to other services. Our proposal affords schools, libraries and health care providers maximum purchasing flexibility, while maintaining controls against "gold-plating" by limiting the available purchase credits to a formula tied to the number of students served, and supplemented in appropriate cases to account for economic disadvantage and high cost geography.
With the "purchase credits" proposal in mind, we respond to the Commission's questions.
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. The FCC is contributing to the affordability of basic rates today. Through the mechanism of separations, the FCC covers 25% of the cost of the loop by allocating it to the Federal jurisdiction and covering that portion of every LEC's revenue requirement for the local loop through the CCLC and the EUCL. To continue the affordability of telephone service, the FCC should first see that the subsidy system in place today is brought into the world of competition by making it explicit, sufficient, predictable, funded with a competitively neutral mechanism, and made available to all providers. This is in accordance with Section 254(i) which provides that affordability is to be determined by "the Commission and the States."
Affordability may vary among regions. Variations in prices for local service do not necessarily indicate an affordability crisis. Affordability is dependent on many factors, many of which are unrelated to the price for local service. Local service is a small part of the total dollars paid for telephone service. Our studies have shown that the local service portion of the telephone bill is normally not the part of the bill that causes consumers to not be able to afford telephone service[1].
The Commission should look to present prices to determine affordability. Current rates have been set by 51 different Commissions looking at a variety of consumer input, feature trade-offs, price trade-offs, etc. The results of that process have produced universally available, affordable telecommunications services as proven by overall subscribership levels of 95% nationwide. The FCC and the States must ensure that such affordability is preserved when setting the rules for universal service.
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?
States, in making the determination of what local phone service rates are appropriate, should and probably do consider many of these factors. However, the FCC does not need to take those into account. Doing so would be a duplication of resources and of efforts already undertaken at the state level. Instead, the FCC can address factors such as affordability by targeting specific efforts through Lifeline service and other programs. Reasonable comparability of rates does not mean that rates need to be identical within each state or throughout the country. Reasonable comparability simply should mean that the rates across the country be set in accordance with the requirements of the local state commissions, taking into account costs, income levels and willingness and ability to pay.
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?
First, the "affordability" determination under Section 254(i) is a joint state and federal obligation. The language of the Act leaves no room for discussion on this point:
"Consumer Protection. The Commission and the States should ensure that universal service is available at rates that are just, reasonable, and affordable." Section 251(i) (emphasis added).
In part, we note this matter because it has a direct bearing on the answer to question 1 above (are current rates affordable), in that affordability is largely a state determination that will vary from state to state. Moreover, the plain language of the Act would immediately call into question any effort to proclaim a "national affordability" standard.
Second, its not clear to us what "using a specific national benchmark rate for core services in a proxy model" means. If the notion is to compare a national affordability benchmark rate to cost proxy results for purposes of determining how much interstate funding a company should receive, there could be some jurisdictional separation difficulties.
To understand why, it is necessary to start with current jurisdictional assignments and current interstate universal service funding. Today, the End User Common Line (EUCL) and the Carrier Common Line (CCL) rates of the interstate access charge structure is an integral part of the interstate universal funding mechanism.[2] It is enlarged, for certain high cost companies, with funding from the Universal Service Fund. The level of the funding is a function of two formulas adopted by a Joint Board pursuant to Section 410(c) of the act and approved by the Commission. The first formula, the "25% allocator" assigns 25% of loop costs to the interstate jurisdiction, and those costs are recovered through the EUCL and the CCL charges imposed on end users and interexchange carriers, respectively. The second formula provides extra interstate funding for high cost companies with loop costs well above the national average.
Funding determined by comparing a "national benchmark rate" with proxy costs would require either (1) a change in jurisdictional separations; (2) a true-up of other interstate prices or (3) a restriction in a company's high cost federal funding to current levels of federal CCL and USF. This is because the interstate amounts now received are tied to existing formulas (e.g., the 25% allocator), and the new amounts would be different. For instance, under a "national benchmark rate" (whether an affordability benchmark or a benchmark establishing the threshold for high cost funding) some companies would receive more interstate funds to support universal service, while other would receive less.[3]
If a separations change were used to correct this shift, a new jurisdictional formula would have to be developed, adopted by the Joint Board and approved by the Commission, setting new interstate funding levels for each company and, most likely, each company's study area (state). The size of the change, of course, would be a function of what national benchmark were adopted, what current levels of funding exist by company, and what costs are predicted (by a cost proxy model or otherwise).
Changes in jurisdictional revenue requirements should, to the extent possible, be avoided, particularly for the near term. The focus of the Commission should be on implementing the Act to make consumers better off, not applying pressure on basic rates through jurisdictional separation changes.
If a true-up were used to correct this shift, a company would need to adjust interstate rates to account for the net increase or decrease in interstate recovery due to the creation of this fund.
For example, a company that currently receives $100 million from the interstate jurisdiction (e.g. CCLC and USF) and serves high cost areas resulting in funding from the new fund of $110 million, would need to reduce its interstate price(s) by $10 million so that no jurisdictional shift occurs.
The third method restricts federal funding under the new program to current levels of CCL and USF. Cost proxies could then be used to distribute current interstate funding to high cost areas within a state on a per line basis. For example, cost proxies could be the basis for establishing how much interstate funding, on a per line basis, could be recovered by qualified carriers in discrete geographic areas. The total amount of interstate funding for any company would not change, but it would vary between high cost and low cost areas based on the cost proxy and company-specific benchmark rates. This would mean that qualified carriers could receive per line funding at a higher level in high cost areas, yet much lower levels in dense, urban areas where costs are much lower. Over time, the company-specific benchmark rates could transition to a single nationwide value.
Compatible state mechanisms can fund high cost areas below the national benchmark. In California, the state universal service fund can fund the difference between basic exchange rates (including EUCL) and costs established through a cost proxy. The difference is determined on the basis of discrete (Census Block areas) geographic areas. Qualified carriers can then claim against this fund for customers they win in each specific geographic area. Any funding received from the interstate jurisdiction is acknowledged and accounted for in this state process, to avoid double recovery.
A key disadvantage to a specific national benchmark rate is if a state were forced to bring its local rates up to the national benchmark in order to qualify for federal universal service support. Such a requirement would undermine states' efforts to keep local rates lower for various reasons particular to that state, and would penalize the LEC for complying with state mandates.
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?
The Commission should determine the quality of service standards, the definition of core universal service and the additional services that must be made available by a qualified universal service provider. In order to avoid creating a competitive advantage, it should do so without regard to the carriers involved.
Competition will be harmed if carriers operating in the same geographic area are allowed to deviate in the core services they provide to their customers for universal service. This definition could, however vary from geography to geography. If a rural area exists in which it is difficult to provide some core service, then the Commission could issue different standards for that area. But to keep competition fair and even, the same core services should be required of all competitors in that geographic area.
Alternately, in a specific situation, a carrier could apply to the Commission for a waiver under section 1.4 of the Commission's Rules based on the specific facts and circumstances of the case. This should take care of the very few circumstances in which all of the core services would not be available. Generally, though, competitors should be competing on the same terms, with the same list of core services that they are required to provide.
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.
Loop costs are simply one of the costs involved in providing core services. They are the costs that vary the most significantly geography-by-geography. The components of loop costs other than distribution and feeder facilities are: Accounting, Advertising and Marketing, Billing, Common Costs, Directory Assistance, Employee Support, Engineering and Motor Vehicle, General Purpose Computer, Information Systems, Miscellaneous (including utilities, repair, operating rents, etc.), installation, Nonvolume Sensitive Expense, Nonvolume Sensitive Investment, Official Company Services, Operator Services, Repair and Maintenance, Sales, Secondary Investment (furniture, office equip, land, bldg.), Shared Expenses, Testing, and White page listing.
However, other costs related to loop costs also need to be included in determining the actual cost (or proxy cost) of providing core services. Each state jurisdiction should be free to define Universal Service in a way consistent with the best interests of its consumers. When it does so, however, it must find a mechanism to support the increased costs of the additional services. For example, California includes five free directory assistance calls in its definition of basic residential access but Ohio does not. The Cost Proxy Model can be applied to estimate these types of cost differences. In California, the CPM determined the cost of five DA calls to be $1.02. Other non-loop cost differences that could be included in universal service and their respective costs are:
Local Usage $1.85/line/month
Service Establishment 0.37
Operator Assistance 0.12
White Page Listing 0.34
(Service establishment is also called non-recurring or installation charges which are not fully recovered in the service connection charge.) The Cost Proxy Model has calculated the total loop costs for universal service as defined in California to be on average $26.81 including a reasonable portion of shared and common costs. As noted above, the loop costs may vary widely in different geographic areas.
Each state should be free to require carriers to provide different core services, e.g. some states have only measured local service whereas others like California require both a measured and flat-rated local service alternative. Pacific's Cost Proxy Model can accommodate these differences if the core universal services vary state-by-state.
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 services?
Service providers should be allowed voluntarily to discount all services they wish to market to schools, libraries and health care providers. However, the use by schools, libraries and health care providers of purchase credits received from the Universal Service/Federal Education Fund should be restricted to telecommunications transport services. Such services consist of those services whose revenue is subject to the Commission's education/library/health care levy or surcharge, and are, in the main, services with recurring charges, rather than infrastructure.[4] In limiting the services/functionalities eligible for discounts to the services subject to this levy or surcharge, the Commission will obviate cross-subsidization of other services which are not subject to either the levy/surcharge or active regulation. Thus, schools, libraries and health care providers[5] may not use funding credits to purchase such services as inside wire or enhanced/information services such as Internet service because they are unregulated services and thus not subject to Commission levy or surcharge.
7. Does Sect. 254(h) contemplate that inside wire or other internal connections to classrooms may be eligible for universal service support of telecom services provided to schools and libraries? If so, what is the estimated cost of the inside wiring and other internal connections?
No, because inside wire is deregulated. Section 254(e) states that only "eligible telecommunications carriers" may receive support from the fund. Accordingly, it does not appear that the drafters of the Act contemplated that telecommunications revenue levies or surcharges would be applied to non-telecommunications services notwithstanding the importance of infrastructure and other elements of a total system solution. The Commission does not regulate inside wire, and has made it a competitive service open to provision by anyone (subject to local building codes) by defining the terminus of telecom services at a specific Minimum Point of Entry ("MPOE"). System elements on the customer's side of the MPOE are not regulated, and thus no longer are considered telecommunications services. If inside wire were included in the definition of universal service, arguably all vendors of inside wire -- including electricians and others -- would have to be subject to universal service obligations in order for the program to be fair. Because this result is untenable, inside wire must be excluded. We have no estimate of the cost of providing inside wire to all classrooms in the nation, but observe that the total cost includes numerous elements not considered by anyone to be associated with telecommunications per se; e.g., placement of conduit into building walls, asbestos removal and clean-up, and the like.
8. To what extent should the provision of 706 and 708 be considered by the Joint Board and be relied upon to provide advanced services to schools, libraries and health care providers?
The Joint Board may "consider" and "rely upon" both Section 706 (relating to advanced telecommunications incentives) and Section 708 (recognizing the National Education Technology Funding Corporation), although neither provision appears to confer jurisdiction -- e.g., over unregulated services -- where none otherwise exists. The National Education Technology Funding Corporation, as described in the Act, could best provide funding assistance to schools and libraries by establishing and administering a system of purchase credits, funded by a surcharge on retail interstate telecommunications revenue and other sources suggested in Section 706(c)(1), via which all eligible institutions could receive direct purchasing power for use in the purchase/lease of any actively regulated telecommunications service. To the degree the Corporation receives funding from sources other than a surcharge against interstate retail revenues, such funding could be used for grants directed at other (unregulated) service components, including infrastructure such as inside wire, staff development and training.
9. How can universal service support for schools, libraries and health care providers be structured to promote competition?
Universal service for schools, libraries and health care providers can be structured to best promote competition by using the Universal Service/Federal Education Fund to place purchasing power, in the form of purchase credits, directly into the hands of individual schools, libraries and health care providers. With these credits, schools, libraries and health care providers can exercise maximum freedom to purchase/lease what they want, when they want it, and from whom they want it. Since the purchase credits represent a claim on the Education Fund, the providers will compete for the purchase credits just as they do for cash. Placing purchasing power in the hands of users will attract market entrants, and allow open competition market dynamics to "govern" the flow of commercial interchange. Other suggested methodologies, such as setting up a schedule of specific discounts, may stifle market entry and possibly even produce prices that are higher than a free market approach might ultimately produce. Moreover, a traditional regulatory approach will exact a heavy administrative overhead cost on both the Commission and the carriers due to the need for complex proceedings regarding cost formulae, discount schedules and allowable services -- none of which would be required if our recommendation is adopted. The simplicity of our proposal is even more evident when one examines another program in which Pacific is engaged which facilitates the provision of discounted service to schools. Pacific and another LEC, by agreement, split the cost of the discount the latter gives to schools. The arrangement is fairly complicated even though it only involves two carriers and a fairly small number of schools: Pacific receives all of the LEC's toll revenues, in exchange for access payments. Pacific then splits with the LEC the toll revenues that the LEC loses by virtue of providing discounted toll service to schools in its area. This requires that the LEC 1) track the number of toll calls the covered schools place, 2) calculate the revenues from these calls at the discounted rate, 3) calculate the revenues it would have derived from these calls at the non-discounted rate, 4) determine the difference between items 2 and 3. If such a plan were continued under a new universal service/education plan which required discounting and compensation from a fund, a carrier would have to engage in the foregoing steps, and also 5) file for compensation from the fund for the difference between items 2 and 3, and 6) maintain audible records reflecting toll volumes, costs, and actual prices at given points in time. While workable on a small scale as in our example, if required of every carrier in the nation, and for every school in the nation, this effort would produce a level of administrative burden that might cause the system to collapse of its own weight. Our purchase credits model, on the other hand, does not require any of the foregoing steps. Rather, an eligible institution is allowed credits based on a formula which varies only by number of students (or patients), high cost geography, and economic disadvantage. The institutions themselves, with purchase credits in hand, "calculate" the amount of services they can afford given their allocation. The carriers simply redeem the credits from the fund for cash. This arrangement diffuses administrative responsibility out among a multitude of players, rather than centralizing it, and creates far less overall burden.
In addition, we propose that eligible instructions be allowed to "bank" their purchase credits for up to one year, so that institutions without the infrastructure, hardware, software, training or support to make use of telecommunications transport services have time to implement these necessary components to an overall technology plan.
10. Should the resale prohibition in Section 254(h)(3) be construed to prohibit only the resale of service 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?
While it may be difficult, if not impossible, to police a system of complex use prohibitions, we believe the rules, at a minimum, should specify that for-profit sales are prohibited. We support community network aggregation for internal uses and not-for-profit sharing of services, and believe the Commission should interpret Section 254(h)(3) to permit such not-for-profit activity that may help "leverage" an institution's resources in the community. We also support the charging of end-user fees, as long as they are used to maintain, support or improve the facilities/services purchased through the Universal Service/Federal Education Fund, and not to generate profits.
11. If the answer to the first question in "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?
Yes, but there is no easy way to police such a limitation.
12. Should discounts be directed to the states in the form of block grants
No. They should be directed to schools on an "a+bx" basis, where "a" equals a minimum allotment per school and library, and "b" represents a variable amount dependent of the number of "x" -- students (Average Daily Attendance) -- in the school. We defer to the library and health care communities to determine the appropriate methodologies for applying the "bx" formula to their respective constituencies. For eligible health care providers, the "bx" portion of the formula might be based on average daily bed census or capitated patient population.
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. As described above, the credits could take the form of electronic credits or coupons which could be used to purchase services. The telecommunications service provider would then redeem these credits from the Fund for cash.
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 requests for discounts are used for their intended purposes?
The Commission should require that entities redeeming the credits (i.e., schools, libraries or health care providers) submit a sworn statement by a person with authority to bind the institution itemizing the services purchased using the credits. Then, if it is later determined that the credits were used improperly, the Fund administrator can determine what actions to take, e.g. impose fines, forfeitures or penalties. The Universal Service/Federal Education Fund administrator should be or some responsibility in verifying that the credits are being redeemed for eligible telecommunications transport services, but the overall responsibility for ensuring that institutions use their credits appropriately should rest with the institutions -- and their local governing bodies-themselves.
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 254(h)?
See response to question 14.
16. What should be the base services prices to which discounts to schools and libraries are applied: (a) TSLRIC; (b) SRIC; (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 should the best commercially-available rate be ascertained, in light of the fact that many such rates may be established pursuant to confidential contractual arrangements?
First, neither "a" nor "b" are appropriate because these cost methodologies are used to determine costs, not prices. The Telecommunications Act requires discounts on prices charged to educational institutions. Thus the appropriate basis of a discount is the difference between the compensation provided by the institution and the tariffed rate, not the cost or a cost substitute for the service. Second, in some areas, the tariffed price ("d") may be the only way in which certain services are available, so it must always be taken into consideration where it applies. Third, use of competitively-bid contracts ("e" above) could yield low prices which are not in fact the best value, in terms of the combination of price, service, quality and other intangibles. We propose that the institutions themselves be allowed to judge whether or not the discounted price offered by prospective providers is the best available considering all relevant "value" factors. In most cases, they could use as the benchmarks the pricing available via state master purchasing agreements, which -- in many cases -- is probably at or near the "best commercially-available rate." The competitive market will produce the best rate, which will then be reduced by the amount of the purchase credit to produce the effective cost to the purchaser. The Commission could easily audit or resolve disputes, using whatever benchmark seems most appropriate in the specific situation.
17. How should discounts be applied, if at all, for schools, libraries and rural health care providers that are currently receiving special rates?
If the Commission implements our proposal to allocate purchasing credits directly to eligible institutions, those already receiving special rates could use the credits as payment for their existing services or to purchase additional services at the existing, discounted rates. Where the institutions use purchase credits to pay for existing services, the carriers receiving the credits should be allowed to redeem the credits for cash, just as they would if the purchase credits were used to fund new purchases.
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.
At a broad level, the State of California facilitates discounted pricing to schools by allowing customized contracts to be offered at a lower rate of return above cost than is required of commercial contracts in general. Beyond that, it has approved a (provisional) Pacific Bell tariffed discount to libraries and educational institutions called Knowledge Network ISDN (KN-ISDN). This service allows up to five lines of ISDN service at any eligible institution to receive unlimited local usage for a fixed price. The tariff has only been in effect for a few months, hence no measurable outcomes have been discerned.
Pacific Bell also has in effect a master purchasing contract with the State of California which offers exceptional pricing on a wide array of services. All public library and educational institutions (as well as governmental agencies) are able to purchase services from Pacific Bell under the aegis of this agreement.
Pacific Bell also offered a 100% discount on non-recurring and recurring charges for high speed digital transport services used by health care and educational institutions engaged in special applications research, for a period of up to three years. The program, called the California Research and Education Network (CalREN) program, enabled 385 educational institutions to experiment with the value of ISDN, Frame Relay, SMDS and other high speed information transport technologies. The program has now expired, but consumed $25 million. The flagship of Pacific Bell's education discount programs is called Education First. This program offers public and not-for-profit private K-12 institutions, libraries and community colleges a 100% discount on the installation and twelve months of recurring service rates and usage for up to five lines of ISDN used for telelearning or telecomputing applications (including Internet access). In effect since December of 1994, approximately fourteen hundred eligible institutions in Pacific Bell's operating area have installed ISDN service under the terms of this program, and another 1000-odd applications are currently being processed. Enhancements planned for this program include (1) an extension of the application deadline from 12/31/96 to 12/31/97 (filed July 8, 1996), and (2) an expansion of the available technologies to include Frame Relay and Primary Rate ISDN (PRI). It is still premature to suggest statistically significant measurable outcomes, but users of the program -- which includes free training seminars on both technology and learning applications -- report improved student interest as well as strong community support of opportunities for children to develop new, information age skills needed for modern careers. Pacific estimated the value of its Education First program to be $100 million. Thus far about $15 million dollars of that total have been consumed.
19. Should an additional discount be given to schools and libraries located in rural, insular, high cost and economically disadvantaged areas? What percent of telecommunications services (e.g., Internet services) used by schools and libraries are or require toll calls?
We would support the concept of providing additional purchasing credits to schools which would otherwise have a significantly higher net cost (actual price less credits) to procure a minimum critical mass of telecommunication services. In terms of our proposed "a+bx" fund allocation algorithm, we suggest that the "a" portion for such schools be set at a somewhat higher level for institutions located in areas in which the cost of network access is substantially higher. For economically disadvantaged schools, the "b" portion might be set slightly higher. We have no empirical data regarding the percentage of institutions which might require a toll call to reach the Internet. Such information would be better assessed from either the institutions themselves, or possibly Internet providers. Even so, we unofficially estimate that less than 10% of the schools in California will require a toll call to reach the nearest Internet provider. While we do not have an estimate for health care providers, we suspect the percentage is quite low since most of California's health care providers are concentrated in urban areas. Traditionally health care providers' calling patterns have been heavily weighted towards intraLATA calling, suggesting the providers generally are not located in remote areas. We also note, however, that Internet access services (as opposed to the underlying transport an Internet customer uses to dial up to his access provider) are not now subject to active regulatory oversight and the revenues associated with such services are not clearly subject to levy or surcharge for purposes of the Universal Service/Federal Education Fund. Accordingly, we do not believe Internet access per se should be on the list of credit-eligible services, unless the Commission determines a means to include Internet access providers among those services over which it has jurisdiction and which are thus subject to levy or surcharge.
20. Should the Commission use some existing model to determine the degree to which a school is disadvantaged? Which one? What, if any, modifications should the Commission make to that model.
We defer to the education community the task of defining what constitutes being "disadvantaged." The specific determinant could also be drawn from existing federal or state programs, where they exist.
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?
Step approaches are much easier to apply and administer than sliding scale approaches. A step approach has fewer "break points," thus allowing customers to be grouped into bands. Sliding scales with a smooth continuum have infinite "break points," leading to the need for customized "per school" and "per library" handling, which usually is a more labor-intensive operation. Therefore, we recommend the "step" approach.
22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
We are indifferent to whether or not the Federal Education Fund is funded separately. We do believe, however, that the collected funds should be divided into discrete "buckets" to facilitate separate allocation, tracking and accounting.
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?
Not having thoroughly reviewed either McKinsey estimate themselves, nor assumptions on which they are based, Pacific has no opinion as to its degree of accuracy. We accept the KickStart Initiative as a well-reasoned approximation of the costs associated with providing technology in schools, but defer to the KickStart authors any questions as to their report's degree of accuracy. As we stated in our comments, we do agree with the general premise of the KickStart Initiative that telecommunications services represent but a small percentage of the total technology needs of schools. Other costs for hardware, software, content, professional development and systems support must be incurred in order for schools to make meaningful use of technology. However, we strongly believe that any services that can be purchased with "credits" should require the providers of those services to contribute to the Universal Service/Federal Education Fund on a basis similar to that invoked for telecommunication's service providers.
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?
We have no direct knowledge of other cost estimates.
25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
Pacific has no knowledge of any such estimates.
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?
The Telecommunications Act's requirements are inconsistent with the existing high cost fund. Section 214(e) of the Telecommunications Act states that all eligible telecommunications carriers as designated by the state commissions shall be eligible to receive universal service support. Also, support mechanisms must be specific, predictable, and competitively neutral (Section 254(b)). If the existing high-cost fund were to be permanently retained as the only source of universal service support, the eligibility would need to be expanded to all eligible carriers and all telecommunications carriers would need to be made responsible for participating in the fund (as opposed to today's fund which is supported by interexchange carriers). Section 254 also states that support should be sufficient. The current high-cost fund in its current configuration could not be deemed sufficient since it largely ignores high cost areas which are served by providers also serving low cost areas that are within the same study area. Overall the current high-cost fund cannot be considered to be meeting the intent of the Telecommunications Act and must, at a minimum, be supplemented with a program that makes all existing subsidies explicit, funded on a competitively neutral basis, and available to all eligible providers.
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?
We believe that the current high-cost support system is meeting the needs of companies serving study areas which are uniformly high cost. It should be modified, however, to fund high cost areas regardless of the other areas served by the incumbent provider. Again, since the Telecommunications Act requires the high-cost support system to be competitively neutral as well as available to all eligible telecommunications carriers, a better solution is to use a proxy model to determine the cost to provide service on a geography by geography basis.
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?
Carriers are entitled to recover their full book costs for the provision of services. However, basing universal service subsidy on the book costs of the incumbent will overcompensate competing carriers for the provision of service. Book costs of the incumbent LEC contain, among other things, depreciation reserve amounts which are a legacy from regulated depreciation rates. Basing subsidy payments to other carriers on this legacy would allow them to gain an advantage to recover costs they haven't incurred.
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?
It would not be consistent with the provisions of section 214(e) to exclude price cap carriers from universal service support. Section 214(e) refers to all eligible telecommunications providers. Further, section 254 of the Act requires competitively neutral funding which, if price cap companies were excluded from universal service support, would still require them to contribute to the fund. Thus price cap carriers would suffer the burdens of universal service by serving high cost areas, would need to contribute to the fund, yet would be unable to receive any support from the fund. This is not competitively neutral.
Also, subsidies must be made explicit under section 254. Therefore all subsidies, even those implicit in our rates, should be identified and made explicit, whether from price cap or non price cap companies.
Further, the price cap mechanism is merely a rate regulating mechanism. Participation or non-participation in price caps is not related to whether a company is able to recover the cost of basic services through basic service rates, or from other services that company provides. Criteria for participation in universal service should be applied equally for all eligible telecommunications companies. If a different system were set up for price cap carriers and non-price cap carriers, those companies could not compete equally with one another in one anothers' territories, contrary to the intent of the Telecommunications Act. Such a different structure may also be unreasonably discriminatory, contrary to Section 202 of the Communications Act.
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?
We have chosen not to answer this question since we believe it is improper to single out price cap carriers for non-participation in the universal service fund. See answer to Question 29 above. For competitive neutrality, as well as for fairness, whatever system is put in place should not be dependent on the regulatory scheme under which the carrier operates.
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?
A bifurcation may be the most practical way to proceed to get the new fund operational. If such a plan were implemented, the definition of "rural" companies should only include those that are truly rural in character. Traditionally, a rural company is defined as one with under 50,000 lines (at the operating level) that is not operating in an urbanized area, as defined by the Bureau of the Census.
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?
Yes, a transition period may be appropriate to ensure that proxy methodology is adequately covering discrete costs and issues of a rural company over some period.
The CPM can take into account the differences in buying power and economics of scale and scope between large and small LECs. The CPM can use a ratio derived from ARMIS data on expenses per access line. This ratio is based upon the relative operating expenses of the company compared to an average, either statewide or nationwide. In that way, efficiencies of large LECs are not assumed for smaller companies.
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?
A properly targeted universal service subsidy system will resolve the issues where a carrier is not serving an area well. As long as the subsidy is targeted, sufficient, and portable, other carriers will compete in that geographic area and use better service as a competitive advantage. If particular subscribership issues are present in a particular area, targeted programs for that subscribership issue should be imposed. This does not necessarily have to be in conjunction with universal service support. In fact, low subscribership levels should be addressed by Lifeline and link-up programs. If companies are penalized for low subscribership, they will tend to avoid serving in areas where subscribership is an issue.
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?
If funding for universal service is adequate, carriers will be attracted to serve, insular areas as well as any other high cost areas. Current proxy models do not have specific cost components for insular areas, however. Pacific's CPM, using actual central office serving configurations, should account for the natural geologic boundaries that have forced a given configuration whether those boundaries are mountains, rivers or seas.
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 Board's recommended decision.
With a directive from the Commission, we believe that an industry task force could be given a discrete time period in which to come up with the best proxy model available. The six-month period of time between the Joint Board decision and the Commission's action under the Telecommunications Act should be able to accommodate this step in the process. The LEC industry has begun this process informally. However, if that does not work, a directive of this sort by the Commission may be quite helpful. We supported this approach in our reply comments and believe that the Commission could issue principles within which a proxy model must operate, while directing the parties to try to reach agreement on models based on those principles. In our reply comments, we proposed the following attributes of a proxy model: 1) it must accurately include all network elements; 2) it must be based on the most modern technology currently being deployed, not on technologies not yet deployed for universal services; 3) it must recognize efficiencies and differences between large and small carriers so that appropriate costs are included; 4) it must model a realistic distribution of population; 5) it must include a reasonable amount of shared and common costs; and 6) it must be verifiable.
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?
Pacific Bell, as the sponsor of the Cost Proxy Model, and the authors of the original Benchmark Cost Model (Sprint and USWest), plus GTE began meeting over the last three months in an attempt to reconcile their models. The BCM-2 includes changes suggested by many parties and includes some aspects of the CPM. While the results are not conclusive, we are very much encouraged by the issuance of BCM-2. The CPM and the BCM-2 are now producing similar results (at least for California). We have recently invited other LECs to join these authors in producing an amalgamated model.
37. How does a proxy model determine costs for providing only the defined universal service core services?
A Proxy Model should estimate the cost of the services that meet the definition of core universal services that the Act requires to be made available at an affordable rate. From this foundation, additional elements that others consider as a necessary part of universal service can be costed and added to the core as discussed in our response to question 5. As long as a model distinguishes and separately states the cost of each element of universal service, it can be used to price any combination of the services.
The Cost Proxy Model develops costs of the loop, which is the essential element of any basic service package. It is also the part of the service that varies most significantly area by area. Fixed costs of access to a switch and the basic network must also be calculated by the model. Finally, the model should add a reasonable portion of the firm's joint and common costs.
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?
The most fundamental purpose of a Proxy Model is to estimate the market price of the core service. Then, in areas where that market price exceeds universal affordability, the market price is subsidized by a universal service fund. If the fund is adequately sized, there will be competition for all services. Changes in the funding mechanism should occur with an eye to that competitive environment. The Commission should determine how action of the market, not action of the regulators should govern prices, services offered, and quality options.
If the fund provides compensation for core services based upon how many customers select a given provider's services, providers will find what makes customers choose them. If it is a low price, providers will become lowest cost. If it is additional or advanced services, providers will be innovative in bringing those services to the market. The next step in developing model evolution should be careful observation. If providers flock to meet the needs of a given geographic, demographic or economic classification and ignore others, the model should be revised. Accordingly, the Commission should focus on when and how to review and get relevant information to make these assessments.
Periodic reviews of the definition of core services appear workable within the context of regulatory proceedings. A proceeding on auctioning support should be opened immediately after the fund is implemented.
As alternative technologies are found to be useful in the provision of universal service, those technologies should also be included into proxy modeling, as the best available technology for each given geography. The CPM is flexible enough to accommodate changes over time, since the inputs are fully adjustable.
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?
Once access to advanced services is part of the definition of universal service, then the proxy model can be revised to include the cost of this access into the proxy costs available in the computation of universal service support dollars. Until that time, by providing full support for telecommunications services that are part of the definition of core services, the Commission will create the incentive necessary for providers to experiment with what other services are desired by customers.
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.
A proxy model is used to disaggregate costs in a small geographic area in order to geographically deaverage any subsidy. Therefore, with a proxy model the rates an end user pays do not need to be different, but the support an eligible telecommunications carrier receives will differ from geography to geography as costs differ. Thus, under section 254(b)(3) of the Act, rates may be established at levels that are reasonably comparable even though subsidy amounts may differ markedly. Currently rates vary widely and yet can still be considered "reasonably comparable" since they are based on a state commission's assessment of the costs incurred and the ability of end users to bear those costs. As we stated in our comments, even within California rates vary widely, with Pacific charging $11.25, and GTE charging $16.85
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
The CPM can include areas such as Alaska, Hawaii and possibly Puerto Rico. The CPM can calculate costs in these areas; the limiting factor is in what granularity data is available to disaggregage the populations. It may be that for insular areas, Census Block Group may be the most discrete unit available (grid level data does not seem to be available for these areas).
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
Yes, as long as the support that is calculated from a proxy model is sufficient. Whether support is calculated from a model or from some other technique, if it is too low, it will discourage investment in particular areas. An undersized fund will not support infrastructure development. Every business invests only where it can expect to realize a profit. If the fund is undersized, then no profits would be expected and infrastructure investment would be jeopardized. To maintain quality of service among all participants, it is important that minimum quality of service obligations should be established as a condition of obtaining universal service support.
Conversely if the fund were oversized, one would expect an overbuilding of investment. This is arguably occurring today in dense urban areas for business services, where profits are high due to the current price structure that provides the universal service subsidy through averaging of prices.
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?
Yes, there should be recourse. ARMIS reports for companies in California reveal tremendous variation in individual company's cost structures. These variations seem related to the line size of the companies, and could reflect fixed cost recovery and equipment purchasing power. Our proposed proxy model recognizes these differences and can incorporate some of these differences into its results.
There should be a recourse built into the universal service system so that if the proxy model does not accurately project costs for that area, carriers serving that area have some ability to obtain an increased subsidy. The Commission should construct a methodology for doing that. One method is for carriers to have the right to make a cost showing that would justify its costs. The individual company would be allowed to argue and justify a cost level it believes accurately reflects its cost structure. Another method is, in further proceedings, to set up a bidding mechanism so that carriers that believe their subsidy amount is insufficient invoke an auction alternative to determine the correct market level of subsidy for a given area.
44. How can a proxy model be modified to accommodate technological neutrality?
A proxy model should only accommodate the technology widely in use that results in the most efficient service to that area. A proxy model should not be blind to the technology used to serve an area, but it should not be so forward looking that it calculates subsidy based on some imagined network, as opposed to a network currently in use today. However, as the mix of technology used to provide service evolves over time the model should be periodically updated to reflect that technology. As long as the model incorporates costs of technology actually available and in use, it should not be seen as either encouraging or discouraging any particular technology, but will encourage the most efficient and cost effective network.
In the periodic reviews of the universal service core services, new or innovative technologies actually in use can be examined. The proxy model could then be adjusted, if appropriate, to account for any cost differentials as a result of the new technology. The CPM can accommodate these sorts of changes.
Following implementation of the new universal service fund, the marketplace will provide the most significant information regarding technology change. If wireless becomes used for universal service, changes should be made to accommodate that technology.
45. Is it appropriate for a proxy model adopted by the Commission in this proceeding to be subject to proprietary restrictions, or must such a model be a public document?
In order for a proxy model to accurately reflect the costs of providing service, it must have the best and most accurate information input into it. That may include vendor pricing and installation costs, which are proprietary. Requiring such information to be public may compromise a company's ability to negotiate the best prices with its vendors. However, that concern can be mitigated by appropriate use of nondisclosure agreements so that accurate information is input into the model, yet other parties or regulators have the opportunity to review that information to ensure accuracy. If such information were not used, the proper subsidy fund amount could be miscalculated.
As we have stated in recent ex parte filings all of the information in the Cost Proxy Model can be, and has been, made available to the Commission and to other parties. We have made efforts to protect the intellectual property of the software code which comprises the CPM. However, the software diskette is available at no charge as long as a recipient signs a software licensing agreement agreeing not to use the software for purposes other than examining the model in connection with this Docket, Docket No. 96-98 and related state proceedings.
The back up material underlying Pacific's inputs (such as fill factor, and engineering assumptions) is also available. If anyone wants the individual cost data upon which those factors are based, it is available upon execution of a nondisclosure agreement so that the sensitive cost data can't be used for an improper purpose (e.g. marketing) by the recipient. Many parties to the state and federal proceeding have examined the inputs using this process.
By using inputs to the model derived from actual costs incurred for switches, or actual fill factors from wire centers, parties can be assured that the costs predicted by the CPM will be appropriate and sufficient.
Therefore if the Commission's intentions are to institute a universal service system which yields a subsidy sufficient to appropriately fund service providers in high cost areas, it should not shy away from a model because certain restrictions are put on underlying information. As long as reasonable review can take place, the Commission can adopt a model which has some proprietary restrictions.
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
As we stated in above in our response to question 45, a proxy model can be adopted if it contains proprietary data as long as underlying data can be made available for review. The proprietary data supporting calculations of a model should be available, subject to appropriate restrictions on use, to any party to this proceeding. The output of the model should be entirely public. The Commission's most important goal in this proceeding should be to set up the correct subsidy dollars so that competition can develop. If the best system is one which requires use of proprietary data, it should be ordered, as long as the competing interest of public review can be satisfied by reasonable restrictions on review or by audit by responsible fund administrator.
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.
We are not aware of any publicly available cost studies to provide all the cost inputs for a proxy model. The use of publicly available cost studies may not be appropriate due to specific unique serving conditions. For example two cost studies mentioned in the California proceeding and elsewhere are the New England Telephone Study and the Centel-Nevada Cost Study. In the New England study the costs include a 10% service volume increase, making it an incremental cost study therefore violating TSLRIC costing principles.
The Centel-Nevada study covers the Las Vegas/Henderson region. This area is 95% urban with an extremely flat even geography. This study is not relevant to the costs of providing universal service in other regions which may be less urbanized, more rural with uneven population distribution and with more varied, possibly even mountainous, terrain.
Publicly available ARMIS reports are accounting data. They do not include product costs. For ARMIS data to be used in a proxy model a breakout would be required because cable and wire facilities are combined in loop and interoffice facilities.
A similar breakout would have to be performed for switching investments which support local and long distance calling, vertical services and signaling. Additionally a different expense assignment would need to be developed from the ARMIS report for a tops down approach. However this would still not provide the forward looking cost structure essential to equitably distribute Universal Service Funds.
48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
Yes, it should be considered because the proprietary costs could have significant impact on the subsidy fund. Proprietary costs may give rise to the most accurate proxy costs. So proprietary information may be the most relevant cost information that exists. As long as some way exists to protect that information (See answer to 45, above) the Commission should not shy away from a model that uses these accurate inputs.
Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
Pacific believes that competitive bidding could be used to adjust the level of subsidy support to any given area once the initial subsidy has been set using the Cost Proxy Model. The Commission should open a further proceeding to answer these and other questions as to how competitive bidding could be structured fairly and appropriately.
50. How should a bidding system be structured in order to provide incentives for carriers to compete to submit the low bid for universal sales support?
See answer to #49.
51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?
See answer to #49.
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
See answer to #49.
53. How is collusion avoided when using a competitive bid?
See answer to #49.
54. Should the structure of the auction differ if there are few bidders? If so, how?
See answer to #49.
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?
See answer to #49.
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?
In 1993 Pacific conducted a tops down, direct embedded cost (DEC) analysis (using book depreciation rates) of its wire centers. The results showed that residential loop operating expenses and capital costs were $2.7 billion. According to our calculations, the BCM-2 estimates our residential loop at $2.6 billion. The CPM (using TSLRIC principles agreed to in the CPUC's Local Competition proceeding) estimated Pacific's residential loop at $2.9 billion (using economic depreciation rates). Therefore despite some conceptual differences, the results are close. Differences between Pacific's DEC analysis and its CPM estimates are primarily due to increasing costs for copper plant and installation and decreasing costs for fiber and electronics.
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?
No. Wireless technology has not yet proven to be a more practical universal service technology than wireline service and therefore should not be included in the BCM (or CPM) at the present time. In today's modeling efforts, the current technology should be used for three reasons:
First, the current technology is what is being used to provide universal service today. Other technologies, while promising, are not in use on a wide scale basis and the costs of those networks are not even estimable with any certainty. In some cases the technology is not ripe for commercial deployment.
The second reason that the future technologies cannot be used to set the price of universal service on the networks of today is that the providers of the existing technology are entitled to their costs until actually displaced by the alternative technology. They should not be forced to remain the carrier of last resort at a price that is significantly below their costs. Once the wireless alternatives are deployed, the incumbent LECs can discontinue service.
The third reason is that incorrect market signals will be sent by using future technologies, resulting in overall investment that is inefficient. The providers of the alternative network technology will not have incentive to find the areas where their network is particularly efficient. For example, if there are two areas, in area A wireless technology beats wireline by 50% and in area B wireless and wireline technology are a push. If the subsidy for area A is cut in half, the wireless provider will be indifferent as to which area to serve. Society will be better served, however, by the provider entering area A.
If a more efficient technology is found, then the new technology should be deployed and then the incumbent providers should be allowed to exit the market rather than continue to lose money while being required to provide service. This cannot happen unless the subsidy for a given area is lowered to match a new technology only at the time that the incumbent is given an opportunity to exit that market.
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 advantage to using wire center data is that the data (especially actual data) is available on a wire center basis. The disadvantage of wire center data is that a wire center is an average of geographic areas that have enormous differences in costs. Each rural wire center typically includes a relatively dense core surrounded by increasingly rural areas at greater and greater distances from the core. This averaging of low cost and high costs within a wire center will provide incentive for carriers to serve only customers in low cost areas, while high cost areas will be underserved. This invites cream skimming. Generally, the more discrete the geographic unit, the more accurate the subsidy will be. The CPM uses a grid (1/100 of a degree of latitude and 1/100 of a degree of longitude) and targets costs to that small geography. This better targets the subsidy in areas (such as in rural areas) where census block groups cover very large areas. The CPM takes the grid costs and can roll them up to a Census Block Group (CBG) or other discrete unit.
An example of how using wire center averaging will hurt competition is if a competitive provider chooses to provide the local service within a wire center that has a variety of different costs CBGs. If the competitor chooses only to serve those customers close to its facilities (lower costs) and ignores those customers farther away which are costlier to serve, the provider will receive a subsidy based on the average cost of service to that wire center, even though its costs are below the average because the customers it chooses to serve are lower cost. In this scenario, the competitor gains an unfair competitive advantage over the incumbent LEC which is required to serve customers in the outlying areas as the carrier of last resort.
The LEC only receives the average amount of subsidy based on the wire center average, but its costs to serve those customers in the outlying areas is greater than the wire center average. This puts the incumbent LEC at a competitive disadvantage and denies the benefits of multiple providers to the high cost consumers within the wire center. Thus deaveraging the subsidy to a greater extent is more advantageous.
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?
As we stated in answer to question 57, the emerging alternative technologies should be incented to find the geographies of their most efficient application. The current models calculate typical network configurations. The extreme remote areas should be separately examined or an alternative model developed.
60. The National Cable Television Association proposed a number of modifications to the BCM related to switching cost, fill factors, digital loop carrier subscriber 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?
None of the changes suggested by NCTA should be incorporated into the BCM or any other model. The NCTA position is based on the assumption that proprietary costs are bad, but in fact they are the only real costs that any carrier incurs in building a telephone network.
Switching costs advocated by NCTA and ETI are based on the current best price to purchase digital switches for a specific set of switching offices which did not represent switch prices in high cost areas. Offices not included under the purchase contracts have higher prices. This is especially true for the smaller carriers who are unable to purchase switches at the current best price. Hence the switching costs are underestimated on the whole.
Fill factors should be based on actual fill factors because this is how an actual network is built. Further, the concept of design fill factors, with higher fill factors than are realistic, will result in very costly additions or reinforcement at an earlier date than presently anticipated. Engineering at a level that causes premature exhaust is more expensive. It is less expensive to put additional cables into the ground or up on poles at the first installation, than it is to put in just enough cables this year and then reinforce at regular intervals. ETI argues that residential demand is stable, but offers no proof. In fact if the population of the United States grows (as it does consistently) then so does the demand for residential phone lines. Even in the high density urban areas, new housing units get added requiring new phone lines.
The majority of investment costs are associated with structure and placement costs rather than cost of the wire itself. If fill factors are changed, care should be given to see that only the cost of additional wires are reduced. Otherwise the change of fill factors will erroneously result in the assumption that only one-half (1/2) a trench is needed.
Digital loop carrier subscriber equipment prices should be based on the actual purchase prices from the actual vendors. ETI's DLC costs are unsubstantiated.
Service area interface (cross connect boxes and b-boxes) costs again should be based on what is currently purchased, currently deployed and currently used. The actual purchase prices from vendors should be used as a starting point, adding appropriate engineering and installation costs. Capacity of the interface also needs to be realistically reflected. ETI is in error when it sizes SAI's based on number of dwelling units expected within a serving area rather than based on the number of lines. Feeder cables serving the SAI's are not sized for 2 lines per dwelling but are sized based on best forecasting practices of demand. Only distribution cables are sized per dwelling.
ETI's analysis uses copper/analog systems at longer feeder lengths than is realistic, excluding the load coils needed to amplify the signal. ETI also ignores the fact that longer copper feeder cables would require 24 and 22 gauge cable which is more expensive to purchase and install. Also 24 and 22 gauge cables are heavier and therefore require more poles and larger conduit.
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. There is no correlation between subscriber income levels and the cost of providing basic telephone service. Issues regarding subscriber income and universal service are properly addressed in proceedings on low income support programs, such as Lifeline and Link-Up.
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?
Each of the models appropriately calculates the total unseparated cost of basic service. These costs ignore jurisdictional boundaries. These are the correct costs that must be covered by one jurisdiction or the other in order to fairly and completely compensate carriers for the service they render.
The revenues, however, must also be viewed on a total company basis. All of the revenues directly associated with the provision of basic service should be compared against those unseparated costs. Basic local service, the EUCL, any state universal service funds, federal universal service funds, lifeline and link-up plans, service connection fees and any other revenues paid to a carrier for the provision of local service should be considered as compensation for the provision of basic service.
Use of the BCM, BCM-2 or CPM does not require changes to existing separations and access charge rules although a restructure of the existing high cost support mechanisms (USF, CCLC, DEM weighting) would require changes to current Part 36, 69 and perhaps 61 Rules. Revenues can be tracked to the appropriate jurisdiction and counted against separated costs just as they are today. Any increase in the jurisdictional funding should result in a corresponding decrease in rates in that jurisdiction. For example, if a federal fund is established which compensates for basic service, the CCLC should be reduced or eliminated as the Universal Service funding replaces it. As a state funding mechanism is established, toll rates should be reduced to eliminate the implicit subsidy in those prices.
Use of a model should not create overrecovery opportunities for incumbents in the provision of basic service since BCM (and CPM) are built to reflect forward looking costs of existing networks. Implementation of a fund will not create an overrecovery opportunity in other services because any increase in universal support should result in a corresponding decrease in the rates for services that are providing the subsidy.
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?
The grid cell structure is a much finer level of geographic detail than the CBG, wirecenter and study area. Therefore it allows a much finer geographic cost deaveraging and eliminates cost averaging in large rural CBGs. Also the grid cell is the most uniform geographic unit proposed.
The CPM is based on a consistent, flexible unit of geography called the grid (1/100 of degree Longitude by Latitude or ~3000ft x ~3000ft). Currently, the CPM derives the household information at the grid using Census Block data that is apportioned to the grids they fall over.
By splitting the country into 1/100 of degree Latitude and Longitude, the CPM is granular enough to accurately capture distances, serving wire centers, etc. In addition, this flexible grid unit is able to be summarized into any unit of geography that a user may be interested in. These units may include Wire center, Census Block Group, City, County, or Political Boundary. The grid can also be rolled up into a number of demographic levels such as ethnicity, age, sex, income and home ownership.
The use of this grid along with the use of Wire Center boundaries (available from commercial databases) minimizes the problem of misassigning customers to the wrong wire center and ultimately to the wrong companies. The CPM assigns a Grid to a wire center based upon which wire center boundary the centroid of the grid falls in. In fact, this methodology will guarantee that as long as there is grid information available, all of the Wire centers in the Commercial database will be represented in the CPM results.
The grid cells are populated based on data in the census block, the subunit of the census block group. (The census blocks are added together to obtain the census block group. In California there are approximately 350,000 census blocks and only 22,000 CBGs).
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?
See answer to 63, above. Validation of the grid cell population data with Pacific's actual individual customer locations resulted in correlation greater than 90%, meaning the grid cell structure reasonably identified population distribution.
65. Can the CPM be modified to identify terrain and soil type by grid cell?
Yes, the CPM can be modified to identify terrain and soil type by grid cell. Pacific & US West are currently evaluating the best unit of measurement for terrain and soil type. The degree of soil and terrain variation will determine if this geographic level of detail is required. If terrain/soil were measured that this level of detail similar grids could be rolled up into zones of like territory.
66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
Yes. The CPM has successfully modeled the cost of basic residential service and universal service in California based upon an actual network, with actual vendor equipment purchase prices. Furthermore it is the only model that costs a network as an engineer would when building such a network, using the a+bx cost formula. As most existing loop networks are similar, transitioning to a nationwide basis is just a matter of obtaining the customer location data. We are in the process of doing that now, and have six states completed.
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)?
The CPM was designed to calculate the subsidy requirement for numerous geographies: state, company, wirecenter, census block group, grid or political unit. The CPM can include or exclude specific companies from statewide results. This would enable a Commission to exempt small companies from proxy modeling.
The CPM uses the same cost elements for rural or urban, high or low cost locations. However, the network design and therefore the total costs will vary by geography. Using the basic geographic unit of the grid, the CPM provides greater accuracy and deaveraged costs than either the census block group (CBG) or wire center.
68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?
The CPM is a self-contained model. It relies upon a complete set of engineering data inputs that Pacific uses when making engineering design decisions. Operating expenses are based upon Pacific's cost studies, some of which employ other economic models.
Any user of the CPM can modify the cost inputs to reflect their own cost assumptions. With any costing method it is critical to obtain the most accurate inputs to produce the best results.
Those costing assumptions could be based upon cost studies, other economic models, educated guesses, vendor prices, ARMIS results or other sources. Each company can select the inputs that best represent their cost structure. GTE-C developed a simple input model to run the CPM with company specific 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).
The CCLC recovers the portion of the loop costs allocated to the federal jurisdiction that is not recovered through the EUCL charge.[6] It is one of the implicit support mechanisms that is a direct subsidy supporting universal service. As such, this subsidy mechanism should be made explicit, recovered from a competitively neutral funding mechanism and made available to any provider of Basic Service. After that occurs, it should be considered a part of universal service funding.
The amount of the CCLC collected by Pacific Bell in the interstate jurisdiction is $177M million annually, based on figures filed with the 1996 annual federal Access Tariff Filing. These figures are based on fully distributed costs, adjusted for growth, productivity, and inflation.
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).
We suggested in our comments that the new high cost fund should equal the amount currently recovered through the CCLC and the existing USF. The CCLC is a subsidy for the local loop. It, added to the EUCL, and together they are designed to recover 25% of the loop costs. We do not support maintaining the CCLC on other than on interim basis since we do not believe the CCLC meets the requirements of the Act that subsidy recovery mechanisms be competitively neutral. The CCLC could either be added to the universal service fund, as we have proposed, or it could bulk-billed to all interstate providers based on a flat rate per line basis.
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?
The current funding structure for the Lifeline and Linkup programs should be left as they are today. Both programs are explicit support mechanisms for individual subscribers. All Lifeline and Linkup providers should be potential recipients of funds.
In California all new competitive LECs are required to offer the Lifeline/Linkup programs. Therefore payments from the fund should be available to all LECs, both ILECs and CLECs.
Rather than tying the subsidy to the size of the SLC a flexible credit that could apply to a call control/spending limits feature may be of greater value to the customer. In a competitive environment low income customers will see new products and services designed for fit their needs and enable them to remain connected to the network.
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.)?
To be competitively neutral, all providers should participate. We expect administrative costs would be fairly small, even if the amount is "de minimis". We support some minimum level of contribution (e.g. $100) for administrative costs involved in the funding process. Under any suggested collection mechanism gross revenues, access charges from which to net revenues and retail revenues are all numbers easily available to any business with an accounting system suitable for income taxes. Under these methods of collection, no carriers should be exempt.
Respectfully submitted,
PACIFIC TELESIS GROUP
MARLIN D. ARD R. MICHAEL SENKOWSKI RANDALL E. CAPE ROBERT BUTLER NANCY C. WOOLF SARAH R. THOMAS WILEY REIN & FIELDING 1776 `K' Street, N.W. 140 New Montgomery Street, Rm. 1523 Washington, DC 20006 San Francisco, California 94105 (415) 542-7657
MARGARET E. GARBER
1275 Pennsylvania Avenue, NW
Washington, DC 20004
(202) 383-6472
Its Attorneys
Date: August 2, 1996
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