In the Matter of
Federal-State Joint Board
on Universal Service
CC Docket 95-45
Reply Comments of Cathey, Hutton & Associates
Cathey, Hutton and Associates (CHA) hereby files these reply comments to the March, 8, 1996 Notice Of Proposed Rulemaking (NPRM) and the comments filed in that proceeding by over 250 commentors on April 12, 1996. CHA is a full service consulting firm providing services to small telephone companies throughout the US, assisting our clients with, among other services, jurisdictional separations cost studies and reporting of Universal Service Fund data to the NECA.
CHA observed that no party came forward with a comprehensive plan for a USF which satisfies both the Telecommunications Act of 1996 (The Act) and the needs of our clients and other small LECs. In these reply comments, we provide a framework for a comprehensive support mechanism and transition plan which we believe meets the requirements of The Telecommunications Act of 1996 (The Act). CHA believes this proposal should be implemented in its entirety to insure that customers in rural, insular and high cost areas will continue to receive quality services at just, reasonable and affordable rates.
1. Actual LEC costs are the only reasonable starting position for the new USF (NUSF).
The current levels of support being received by the small LECs are based upon actual costs as defined by the Commission's jurisdictional cost rules in Parts 32 and 36. Each year, the USF tariff which results from the cost identified pursuant to these rules is deemed lawful. When, AT&T, the RBOCS and other LECs converted from rate of return regulation to price cap regulation, the Commission determined that the initial price cap rates set on the basis of the then current accounting and separations rules, were "just and reasonable" and therefore lawful. CHA believes the Commission can also rule the current levels of USF support to be "just and reasonable" as the correct, lawful starting point for NUSF.
2. The Commission should establish an affordability benchmark rate for small LECs based upon the current state residual revenue requirement.
In the CHA proposal filed on October 10, 1995 in CC Docket 80-286, a description of the effect of the Commission's current USF rules for small LECs demonstrated the resulting assignment of residual loop revenue requirement to the intrastate jurisdiction no greater than approximately $18.55.[1] For small LECs, the state residual revenue requirement may be the correct initial "affordability benchmark" which the commission should establish as the
____________________
1 The total unseparated loop revenue requirement (for LECs of less than 200,000 loops), less USF revenues and less the 25% interstate BAF-assigned revenues yields an amount, the State Residual Loop Revenue Requirement, which can not exceed approximately $18.55 per loop per month, based upon current USF averages. State Commissions set local service, optional service, intraLATA toll and access rates and state support fund levels to recover the residual intrastate revenue requirement.
2
maximum intrastate cost level, above which small LECs should receive support from the NUSF.[2] When the interstate SLC, local switching costs and smaller calling scope for rural areas is considered, this "affordability benchmark" is comparable to many of the proposals filed in this docket.[3]
3. The Commission should set a reasonable range around an affordability benchmark to provide an incentive to reduce loop costs and a "safety net" to protect against unforeseen or mandated cost increases.
The combination of "locking in" the existing support levels and setting a "reasonable range" for calculating future NUSF amounts will provide an incentive for each company to identify opportunities to manage universal service costs. Under this proposal, the Commission could determine that a reasonable range for affordability is 20% above or below the current state residual revenue requirement. The range within which existing frozen interstate revenues would be deemed reasonable would therefore be set between approximately $14.80 to $22.20 per loop per month. If an individual company's residual state cost per loop falls below $14.80,
____________________
2 As described later, the Commission may determine that end user or carrier common line revenue requirements and/or portions of local switching costs may also be an appropriate addition to the funding mechanisms of an NUSF. CHA believes the principle described in step #1 of these reply comments - revenue neutrality based upon the price cap model - would also apply to any existing revenue streams converted from implicit universal support within access charges to an explicit support mechanism within (N)USF.
3 SWB suggests an affordability benchmark as "l% of the median income", approximately $24.00 per month. US West believes $30.00 a month may be considered affordable.
3
interstate USF support would be reduced by an amount necessary to bring the calculated state residual up to $14.80. Should an individual company's state residual loop costs increase, it could only receive increased USF support for costs in excess of $22.20. Under this proposal, the initial formula for high cost loop recovery would be:
Unseparated loop cost (as currently defined), less State residual revenue requirement ($18.55 Benchmark x 12 months x Number of Loops) less Common Line revenue requirement[4] equals the USF revenue requirement.
Subsequent calculations shall be made at least annually to determine the maintenance of the reasonable range. The formula would be:
Unseparated loop cost (as currently defined), less "frozen" USF and Common Line revenues equals State Residual divided by 12 months divided by Loops.
The resulting monthly amount is compared to the range of reasonableness, in this example between $14.80 and $22.20, to determine if an adjustment to the USF revenue as outlined above is warranted.
____________________
4 Although CHA takes no strong position regarding the continued viability of CCL access charges and the Long Term Support mechanism, we agree with those parties who believe it could be more efficient to eliminate those cost recovery mechanisms only if the revenue requirement represented by the 25% BAF assigned to the interstate jurisdiction was included in the NUSF. If the status quo is maintained, the CCL portion of the Common Line revenue requirement would be credited along with the EUCL (SLC) revenues noted in determining the resulting NUSF.
4
4. Any affordability benchmark set for small LECs must recognize the smaller scope of calling areas and limited access to a community of interest compared to urban areas.
Several commentors proposed establishing a benchmark rate based upon the nationwide average rate for basic residential service in urban areas or the average RBOC rate. The inequity of a benchmark local rate based upon urban rates is that it fails to consider the much smaller calling scopes of the rural ratepayers CHA believes any benchmark universal service rate must include the recognition of calling scopes and their effect on local rates.
5. All LECs should be permitted to geographically deaverage costs to prepare for or respond to mandated local competition.
If rural markets are going to be opened to competitive entry to more than one supplier, then the incumbent LECs serving those areas should have an opportunity to disaggregate their loop costs into smaller geographical areas as an option in response to competitive entry. If a new entrant is allowed to become eligible for USF serving an area less than the current study area definition for rural LECs, the USF support of that study area must be correctly targeted. Today, study area average loop costs contain implicit subsidies wherein customers in low cost areas pay rates higher than their individual cost to support the higher costs inherent to other parts of the study area. Under study area averaging, a hypothetical $2.00 per loop per month average USF revenue may actually represent $0 USF in the center of town and $15, $25 or
5
more for the loops in the outlying areas.[5] A portable USF that allows a new entrant to receive $2.00 per loop while serving only a portion of the rural incumbent's study area, in this example the center of town, will result in a public policy which could threaten the capability of the incumbent to provide universal service. CHA believes that costs need to be deaveraged to the extent that there is harmony between the minimum geographic service area a new entrant is permitted to serve and the loop costs which are identified for USF purposes. This is especially necessary if the incumbent LEC's USF revenue per loop is used as the basis for a new entrant's USF support. Only through coordinated disaggregation of costs resulting in properly targeted USF will incumbent LECs and new entrants each have an opportunity to compete fairly while still providing Universal Service as required by the Act.
6. Proxy costs, such as those described in the Benchmark Costs Model (BCM) may be useful in allocating the actual costs described in #1 above into smaller geographic areas
Since most commentors correctly observe that proxy cost models are incapable of accurately identifying costs by study area for a real company, the Commission should reject their use as the determinant of universal service support. The Commission itself recognizes this problem with the BCM in its NPRM. The Act requires that the Commission design USF rules which will result in Universal Service support funds which will be "specific, predictable and sufficient". CHA believes reliance upon a proxy method to base USF support levels could be
____________________
5 Indeed, this phenomenon is what drives the efforts to identify costs at the detailed level of a Census Block Group or wire center as compared to the current broad averaging of a study area. CHA believes these models can be shown to demonstrate relative costs but are substantially lacking in their use as a determinant of actual costs.
6
a violation of the intent of the Act's sufficiency requirement.
CHA believes a proxy model may be useful in disaggregating actual study area level costs into smaller geographical service areas. Few LECS maintain accounting data at less than a study area level, and identifying actual costs at a wire center or CBG level could prove to be very costly and time consuming. A theoretical model could be useful in allocating actual study area costs into wire center, CBG or other service area. While this application would still be incapable of identifying actual costs by service area, all service areas within a study area would at least sum up to the actual study area costs.
7. Combine certain local switching costs into the NUSF. DEM weighing is an appropriate recognition of small LEC costs and should be included in the base for USF. Traffic sensitive access rates will need to be set consistent with unbundled network elements the Commission is considering in the interconnect docket.
CHA believes the current interstate local switching revenue requirements should be continued to be supported. To the extent a new access and/or interconnection pricing plan is developed for incumbent LECs, CHA suggests that the difference between the revenues generated from access or interconnection and the current revenue requirement be added to the NUSF for recovery. As stated earlier in these comments, allowing small LECs to proceed into the future with the same benefit accorded large LECS and AT&T via price caps, specifically revenue neutrality at inception, is critical to the transition toward a competitive environment.
7
As has been demonstrated in the record in CC Docket 80-286, and the comments filed in this docket, DEM Weighing is an appropriate recognition that central office switching costs for very small central offices are significantly higher than they are in large central offices. AT&T, in their comments in this docket, recommends that DEM Weighing should be recovered "based upon IXC revenues and not TS rates." CHA agrees with AT&T that the impact of DEM Weighing should be removed from the small LECs' interstate traffic sensitive rates and made part of NUSF. This is especially important in light of the Acts' requirement that long distance rates must continue to be averaged and the requirements that LEC network access components should be unbundled to provide competitive access to various elements of the network. As the Commission states in CC Docket 96-98, "Radically different pricing rules for interconnection and unbundled elements, on the one hand, and levels of interstate access charges, on the other, may create economic inefficiencies and other anomalies. Indeed, under a long-term competitive paradigm, it is not clear that there can be a sustainable distinction between access for the provision of local service and access for the provision of long distance service." CHA believes these goals will require Commission intervention in incumbent LEC pricing policies where the resulting access rates may no longer support universal service. CHA believes the interconnection issue(s) cited above, combined with the Commission's stated intent to review its access charge rules, necessitates an assurance that any portion of traffic sensitive access rates which implicitly support universal service also be made explicit on a revenue neutral basis.
8. NECA should continue to administer the Universal Service Fund.
The Commission must recognize the expertise represented by NECA in administering the
8
current USF. Any new USF will require substantial technical and human resources. NECA is the only organization with the facilities and personnel in place to implement and maintain a Universal Service Fund. Criticism of NECA's administration of the USF should be discounted and any legitimate issues regarding new entrants, to the extent those issues in fact exist, can be addressed by the Commission as needed. The Commission's existing rules and oversight of NECA assure any entity with an obligation to support universal service ample opportunity to voice its concern or complaint.
Respectfully Submitted
By: Kent Larsen
Cathey, Hutton & Associates
2711 LBJ Freeway, Suite 560
Dallas, Texas 75234
(214)484-2323
May 7, 1996
9