Federal-State Board on Universal Service and Forward-Looking Mechanism for High Cost Support for Non-Rural LECs

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 54 and 69

[CC Docket No. 96-45; 97-160; FCC 97-256]

Federal-State Board on Universal Service and Forward-Looking

Mechanism for High Cost Support for Non-Rural LECs

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: On July 18, 1997, the Commission adopted a Further Notice of

Proposed Rulemaking (FNPRM) to establish a forward-looking mechanism to

determine high cost support for non-rural local exchange carriers

(LECs). In the FNPRM, the Commission seeks further comment on the

platform design and input variables the Commission should adopt in a

forward-looking economic cost mechanism to estimate the costs of the

telephone network necessary to provide universal service to high cost

areas.

DATES: Interested parties may file comments concerning the platform

designs of the switching, interoffice trunking, signaling, and local

tandem components on or before August 8, 1997, and parties should

submit corresponding reply comments on or before August 18, 1997.

Comments concerning the platform design features determining customer

location, including the geographic unit for cost calculations and the

algorithm measuring customer distribution and line counts, should be

submitted on or before September 2, 1997, and reply comments regarding

these components should be submitted on or before September 10, 1997.

Comments discussing the platform-design issues relating to outside

plant investment, including the algorithms determining plant mix,

installation and cable costs, drop lengths, structure sharing, the

fiber-copper cross-over point, digital loop carriers, and the wireless

threshold must be submitted on or before September 24, 1997, with reply

comments submitted on or before October 3, 1997. Comments discussing

all platform issues not otherwise addressed, including the components

addressing general support facilities, expenses, and support areas, and

all input values issues must be submitted by October 17, 1997, with

reply comments due on or before October 27, 1997.

ADDRESSES: Parties should send their comments or reply comments to

Office of the Secretary, Federal Communications Commission, 1919 M

Street, N.W., Room 222, Washington, D.C. 20554. Parties should also

send copies of their comments to the individuals listed on the Service

List included as Attachment A. Parties should also file one copy of any

documents filed in this docket with the Commission's copy contractor,

International Transcription Services, Inc., 1231 20th Street, N.W.,

Washington, D.C. 20036. Comments and reply comments will be available

for public inspection during regular business hours in the FCC

Reference Center, 1919 M Street, N.W., Room 239, Washington, D.C.

20554. Commenters may also file informal comments or an exact copy of

formal comments electronically via the Internet at http://

gullfoss.fcc.gov/cgi-bin/websql/cgi-bin/comment/comment.hts>. Only one

copy of electronically-filed comments must be submitted. A commenter

must note whether an electronic submission is an exact copy of formal

comments on the subject line. A commenter also must include its full

name and Postal Service mailing address its submission.

Parties are also asked to submit their comments and reply comments

on diskette. Such diskette submissions are in addition to and not a

substitute for the formal filing requirements addressed above. See

section IV. C., paragraph 90, under Supplementary Information for

further details. Parties submitting diskettes should submit them to

Sheryl Todd of the Common Carrier Bureau, 2100 M Street, N.W., Room

8611, Washington, D.C. 20554.

FOR FURTHER INFORMATION CONTACT: Valerie Yates, Legal Counsel, Common

Carrier Bureau, (202) 418-1500, or Sheryl Todd, Common Carrier Bureau,

(202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the FNPRM adopted and

released by the Commission on July 18, 1997. The full text of this

FNPRM is available for inspection and copying during normal business

hours in the FCC Reference Center (Room 239), 1919 M St., NW,

Washington, DC.

The FNPRM divides the issues related to developing model platform

components and input values into four broad groups, and establishes a

series of comment and reply comment deadlines that, together, create a

staged approach to the model development process during which the

Common Carrier Bureau, acting pursuant to delegated authority, will

provide guidance to the model proponents.

The FNPRM requests comment on platform and input issues related to

the following groups of issues: switching, interoffice trunking,

signaling, and local tandem investment; customer location; outside

plant design and investment; and other miscellaneous issues including

general support facilities, depreciation, expenses, and support areas.

The FNPRM also requests comment on how the Commission should determine

the measure of local usage that should be included in the definition of

universal service.

Summary of Notice of Proposed Rulemaking

I. Modeling Forward-Looking Economic Cost

1. Introduction. In the May 1997 Report and Order on Universal

Service the Federal Communications Commission adopted a plan for

establishing universal service support mechanisms for rural, insular,

and high cost areas that will replace the current patchwork of implicit

subsidies with explicit support based on the forward-looking economic

cost of providing supported services. The Commission adopted a forward-

looking economic cost methodology that will calculate universal service

support in four steps. First, the Commission will estimate the forward-

looking economic costs of providing universal service in rural,

insular, and high cost areas. Second, the Commission established a

nationwide revenue benchmark calculated on the basis of average revenue

per line. Third, the Commission will calculate the difference between

the forward-looking economic cost and the benchmark. Fourth, federal

support will be 25 percent of that difference, corresponding to the

percentage of loop costs allocated to the interstate jurisdiction. The

Commission further decided to use forward-looking economic cost studies

conducted by state commissions that choose to submit such cost studies

to determine universal service support.

2. In the Universal Service Order, the Commission concluded that

support for universal service should be based on the forward-looking

economic cost of constructing and operating the network facilities and

functions used to provide the services. The Commission additionally

concluded that a state could elect to submit its own cost study to

calculate the level of universal service support available to carriers

in its state, if the state's study meets the criteria outlined in the

Order. That study must be based on forward-looking economic cost

principles, be supported by publicly available data and computations,

and be the same cost

[[Page 42458]]

study that is used by the state to determine intrastate universal

service support levels pursuant to section 254(f). In the Order, the

Commission asked states to elect, by August 15, 1997, whether they will

conduct their own forward-looking economic cost studies. States that

elect to conduct such studies must file them with the Commission on or

before February 6, 1998.

3. The Commission is currently considering two models, BCPM and

Hatfield, to use as a mechanism to calculate forward-looking economic

cost for providing universal service. The BCPM and Hatfield models

produce dramatically different results, even when modeling a network

over the same geographic area, because of differences in both their

platform design and their input values. Both models are composed of

modules representing the different components of an exchange network.

These components include customer location, outside plant investment,

switching, interoffice trunking, signaling, and local tandem

investment, general support facilities, depreciation, other expenses,

and the support area. Each module consists of related platform design

assumptions and input values. The Commission concluded in the Order

that the Commission would select a platform by the end of 1997, and

that the Commission would select a complete mechanism, including

inputs, by August 1998. The Commission's methodology will be

implemented on January 1, 1999. In the FNPRM, the Commission has

adopted specific procedures and documentation requirements to allow the

Commission, state regulators, and the parties to compare and validate

the models most effectively.

4. The Commission expects that all future submissions of the

platforms of the two models will be flexible enough to incorporate

revisions within the individual component algorithms. Because the

design features for the components vary in complexity, the Commission

concludes that a graduated submission and review process will permit

the Commission, the states, and the public, to evaluate all features

thoroughly. The Commission concludes that, besides affording the

Commission sufficient time to evaluate the more complex platform

components, requiring proponents to present individual components for

final submission in stages will prevent constant revisions of an entire

platform from disrupting the evaluation process.

A. Procedures for Revising the Models

5. Staged Platform Submission Schedule. The Commission requires

that comments concerning the platform design of the switching,

interoffice trunking, signaling, and local tandem components must be

submitted on or before August 8, 1997, and that parties should submit

corresponding reply comments on or before August 18, 1997. Comments

concerning the platform design features determining customer location,

including the geographic unit for cost calculations and the algorithm

measuring customer distribution and line counts, must be submitted to

the Commission on or before September 2, 1997 and reply comments

regarding these components must be submitted on or before September 10,

1997. Comments discussing the outside plant investment components,

including the algorithms determining plant mix, installation and cable

costs, drop lengths, structure sharing, the fiber-copper cross-over

point, digital loop carriers, and the wireless threshold must be

submitted on or before September 24, 1997, with reply comments

submitted on or before October 3, 1997. Comments discussing all

platform issues not otherwise addressed, including the components

addressing general support facilities, expenses, and support areas must

be submitted by October 17, 1997, with reply comments due on or before

October 27, 1997.

6. Commission Guidance. Before and during the initial comment and

reply comment periods, the Commission intends to hold one or more

public workshops on particular model platform components. Further,

prior to the Commission's adoption of a particular platform in December

1997, the Common Carrier Bureau will issue orders and public notices on

a regular basis explaining its analysis of the model submissions and

industry comments and selecting particular design features. The

Commission will work with the states throughout this process so that

the selected mechanism reflects the concerns of state regulatory

authorities in developing forward-looking economic cost methodologies

for state universal service programs or for cost studies to be

submitted in this proceeding.

7. Inputs Submission. Although the Commission has stated its

intention to select default input values by August 1998, it must

receive the proponents' input submissions in order to evaluate a

model's performance. The Commission requires that comments regarding

all input values be submitted by October 17, 1997. Reply comments must

be submitted by October 27, 1997. In addition, commenters should

provide explanation and documentation of their suggestions in order to

establish that their suggestions are reasonable, accurate, and reflect

forward-looking cost.

8. Additional Revision Procedures. The Commission requests that the

current models be modified, if necessary, to generate output reports

that: (a) Show costs by element of the network; (b) disaggregate study

area expenses, investments, taxes, and return according to USOA

accounts; and (c) calculate study area support as the difference

between CBG cost and the benchmark for every CBG in a study area.

Parties providing the models under consideration shall provide the

Commission with a clear and comprehensive programmers' flow chart

because the current models are unclear as to how the calculations are

being made. The Commission also requests that the models be revised, if

necessary, to employ the NECA telephone company study area names and

identification codes in all subsequent revisions. In addition, to

enable the Commission and commenters to manage their resources most

effectively, the Commission requests that the parties submitting models

give the Commission and commenters reasonable advance warning of the

approximate date when they expect to release a new version of a model.

Also, if a party intends to release a new version of a model that is

designed to work with a software or hardware product that differs from

the previous version, the Commission requests that party give the

Commission and others reasonable advance notice of what hardware and

software they must secure to operate and evaluate the new version of

the model. Finally, the Commission requests that a party that releases

a new version of a model clearly indicate the major changes that have

been made, and, in particular, any additions to the model. The

Commission requests that the model proponents file complete

documentation including all third-party information, studies, and

surveys used by the models. The Commission understands that some of

this information is proprietary and cannot be released to the public,

and encourages parties to use the Commission's procedures for

submitting proprietary information to the Commission wherever

necessary.

9. The models under consideration do not presently include any

information on Alaska and insular areas. In the Order, however, the

Commission

[[Page 42459]]

concluded that non-rural carriers in Alaska and the insular areas begin

receiving support based on a forward-looking mechanism at the same time

as other non-rural carriers (i.e., January 1, 1999). Accordingly, the

Commission asks that parties discuss the input values or model design

features that would allow the mechanism adopted in this proceeding to

determine support for non-rural carriers in Alaska and insular areas.

10. Hybrid Models. The Commission will determine the design

components of the platform and input values that will most accurately

estimate carriers' forward-looking economic costs for the mechanism

that it will adopt. Although they share some design features, BCPM and

Hatfield differ in many respects and possess different strengths and

weaknesses. The Commission encourages the proponents of Hatfield and

BCPM to refine their models by incorporating portions of the other's

model where appropriate. Whether the Commission chooses to create its

own model or whether it relies upon a model developed by the industry,

the Commission seeks comment on the ramifications of combining features

of the two models. The Commission seeks comment on whether alternative

platform components or assumptions, not currently included in either

Hatfield or BCPM, could be incorporated into Hatfield, BCPM, or a

hybrid model created by the Commission.

B. Platform Design Components and Input Values

i. Customer Location

11. Geographic Unit. A geographic unit is the size of the serving

area over which cost is calculated. The Commission seeks comment on

whether it should adopt an area smaller than a CBG as the geographic

unit for customer location and cost calculation in the platform design.

The Commission seeks comment on whether using CBGs, CBs, or grid cell

data would allow the Commission to calculate the cost of providing

universal service more accurately and would better target support.

Advocates of using geographic units smaller than CBGs should also

discuss the technical feasibility of their proposal and the

availability of relevant data at the proposed level of detail.

12. Distribution of Customers. Customers may be clustered in towns,

spread uniformly over regions, or otherwise distributed across CBGs. In

dealing with the distribution of customers, the models use algorithms

to project the customer distribution within a geographic unit in order

to estimate the cost of the outside cables required to serve customers.

In general, BCPM uses a uniform customer distribution algorithm, which

assumes that customers are spread evenly across an entire CBG. In rural

areas, BCPM eliminates areas from the CBG data that are more than 500

feet from any road, based on its assumption that households are located

within 500 feet of a road. Several commenters criticized the assumption

present in BCPM that households are evenly distributed across a

geographic unit. In contrast to BCPM, Hatfield uses a clustering

algorithm. The Hatfield algorithm first removes the empty space within

each CBG by removing CBs when census data indicates that they do not

contain any population. In low-population-density CBGs, the Hatfield

algorithm clusters 85 percent of the population within a town. For

dense areas, Hatfield uses a clustering algorithm that establishes two

clusters if more than fifty percent of the CBG is empty and four

clusters where 50 percent or less of the CBG is empty. Finally, in CBGs

where the line density is so high that customer locations must

necessarily be ``stacked,'' the Hatfield algorithm assumes that the

population lives in multi-unit dwellings.

13. The Commission tentatively concludes that a clustering

algorithm would more accurately distribute customers within some CBGs

and would consequently generate more accurate estimates of loop length

and, therefore, of the cost of the outside plant. Furthermore, the

Commission tentatively concludes that, if a model presumes that

customers are clustered, the accuracy of the position of the population

cluster relative to the wire center is important to an accurate

prediction of the necessary support amount. The Commission therefore

tentatively concludes that the selected mechanism should calculate

population clusters' proximity to wire centers with more precision that

the models currently permit. The Commission seeks comment on these

tentative conclusions and also seeks comment on how BCPM's uniform

distribution algorithm and Hatfield's clustering algorithm could be

modified to provide more accurate information regarding the locations

of customers. The Commission also seeks comment on how to improve both

models' accuracy in assigning CBGs to serving wire centers.

14. The Commission seeks comment on whether, instead of the methods

currently used by either Hatfield or BCPM, an alternate method should

be used to locate population in carrier serving areas. Generally, the

Commission seeks comment on whether loop lengths should be more closely

linked with actual loop statistics. The Commission seeks comment on

whether a method that combines actual geographical maps, census data,

and the location of the serving wire centers would estimate customer

location, and therefore costs, better than the algorithms currently

used by the models. The Commission specifically seeks comment on

whether the following proposal would be a more accurate method by which

to estimate the distribution of customers. In relation to locating

residential population, the Commission notes that census data provide

the number of households within a CB as well as internal point

coordinates and polygon vertex coordinates. The Commission seeks

comment on what currently available commercial mapping software, if

any, could be used to identify the location of customers in all CBs

within a service territory. The Commission further seeks comment on

whether a model should impose a uniform grid over an ILEC's service

territory in order to create subscriber population clusters,

determining the size of the cluster according to the technology

constraints of electronic systems that are used to provide universal

service, such as Asymmetric Digital Subscriber Line (ADSL) and High bit

rate Digital Subscriber Line (HDSL) technologies, rather than basing

cluster sizes on census data. The Commission seeks comment on whether

this approach is more representative of the engineering design of a

network because it does not rely on census-mapping conventions. The

Commission seeks comment on whether this proposal could be incorporated

into either Hatfield, BCPM, or any hybrid model that the Commission may

develop. The Commission also seeks comment on whether any alterations

in either BCPM or Hatfield would be necessary to incorporate this

proposal into either model or a potential hybrid model.

15. Line Count. The selected mechanism must estimate a line count

at the wire center, CBG, or CB level if the Commission concludes that

cost estimates should be developed at those levels. Both models use a

``closing factor,'' i.e. a ratio of line counts, as provided by the

NECA and ARMIS databases, compared to the models' estimates, to adjust

the estimates produced by their algorithms to reflect the actual ILEC

line counts. Neither model clearly discloses the closing factors for

all lines that are used in their line count calculations. Because

reliable line counts are necessary for

[[Page 42460]]

determining accurate cost estimates, it appears that reasonable

estimates of the number of lines in each CBG, CB, or grid cell are

necessary to calculate universal service support, even if the

Commission decides to provide support on a wire center basis. The

Commission tentatively concludes that the sizes and uses of models'

closing factors should be evident to the user so that they may be

evaluated. The Commission seeks comment on whether the selected

mechanism should adopt a maximum closing factor of 10 percent, as

suggested by the state members of the Joint Board. The Commission also

seeks comment on whether other data sources could be used to enhance

the models' algorithms or be used to create an alternative method for

determining line counts. The Commission seeks comment on whether, for

example, the Commission should assign business lines to geographic

units by using commercially produced maps that give the coordinates of

all businesses located in the U.S. along with their employment by

standard industrial classification (SIC) code. The Commission seeks

comment on whether such a method should use some multiple of the

employment data to estimate the number of business lines in each grid

block. Alternatively, the Commission seeks comment on whether there are

any databases that use zip code information or precise latitude and

longitude (geo-coding) information that could be used to improve the

line-count estimation process.

16. Interested parties may file comments on all issues regarding

customer location on or before September 2, 1997, and reply comments on

or before September 10, 1997.

ii. Outside Plant Investment

17. Outside plant investment includes every part of an ILEC's

network infrastructure connecting the wire center to customer

locations.

18. Plant Mix. The outside plant consists of a mix of aerial,

underground, and buried cable. It appears that while both models have

made many improvements, the failure of both BCPM and Hatfield to

incorporate terrain factors into their plant-mix tables seriously

undermines the accuracy of the outside plant costs predicted by each

model. The Commission finds that an efficient carrier will vary its

plant mix according to the population density of an area. The

Commission, therefore, tentatively concludes that the assignment of

plant mix defined by the selected mechanism should reflect both terrain

factors and line density zones. Specifically, the Commission

tentatively concludes that relatively more feeder and distribution

cable should be assigned to aerial installation for all population

density groups in wire centers characterized by ``hard rock''

conditions than those in wire centers with other terrain conditions.

The Commission seeks comment on these tentative conclusions. The

Commission also seeks comment on identifying the terrain that would

lead an efficient firm to minimize forward-looking costs by using

aerial plant and on whether climate conditions, such as the possibility

that a hurricane will destroy aerial plant, will affect an efficient

carrier's decision to deploy aerial plant.

19. The Commission directs the models' proponents to justify fully

the default values they selected for their outside-structure plant mix,

noting that recent installations of outside structure may more closely

meet forward-looking design criteria than do historical installations.

The Commission seeks comment on these issues and encourages parties to

file documentation supporting suggestions to alter either Hatfield or

BCPM's input values or default assumptions concerning plant mix. The

Commission also seeks comment on the input values that will accurately

reflect the level of impact that varying terrain conditions have on

costs.

20. Installation and Cable Costs. The forward-looking economic cost

mechanism must estimate the cost of installing wire and cable

facilities as part of the overall cost of building a network to provide

supported services. These costs can be expected to vary by soil type

and line density zone. The default values for installation costs

included in BCPM and Hatfield represent their proponents' estimates of

the total cost of installing wire and cable facilities. Both BCPM and

Hatfield make assumptions about soil conditions and population density

to estimate the cost of installing buried and underground cable.

Specifically, the models use different numbers of density zones. It

appears that a greater number of density zones helps identify high and

low cost areas more accurately; too many density zones, however, would

make the data calculations too complex. The Commission tentatively

concludes that the selected mechanism should specify costs for

installation of aerial cable, buried cable, and underground cable that

incorporate terrain factors and line density zones. The Commission

seeks comment on this tentative conclusion.

21. In the Majority State Members' Second Report, state members

expressed preference for BCPM's approach because they found that

Hatfield's approach did not adequately account for the effect of

different types of installation activity on outside plant costs, and

because using a multiplier will overestimate costs in some areas and

underestimate costs in other areas. Based on the majority state

member's recommendations, the Commission tentatively concludes that the

selected mechanism should adopt BCPM's approach of prescribing

additional costs to account for additional expenses caused by difficult

terrain, rather than Hatfield's approach of using cost multipliers. The

Commission seeks comment on this tentative conclusion, on how this

tentative conclusion would affect cost estimates, and on the

appropriate input values for such additional expenses. In addition, the

Commission seeks comment on the majority state members' conclusion that

it is not reasonable to assume, as Hatfield does, that an installer

could simply increase its use of distribution cable by 20 percent to

avoid burying cable in difficult soil conditions.

22. The Commission tentatively concludes that the selected

mechanism should specify costs per foot for conduit installation that

vary by line density zone, as proposed in both BCPM and Hatfield. The

Commission also tentatively concludes that the mechanism should define

density zones based on lines per square mile, as in Hatfield. The

Commission seeks comment on these tentative conclusions and on the

number of density zones that should be included in the selected

mechanism. The Commission invites comment on how to calculate forward-

looking economic costs of conduit installation and welcomes data on any

recent conduit installations, including conduit installed for purposes

other than the construction of telephone networks.

23. The Commission tentatively concludes that materials and

installation costs should be separately identified by both density zone

and terrain type. The Commission seeks comment on the default input

values that the selected mechanism should use, and asks parties to

present supporting cost data. The Commission seeks comment on the

accuracy of the values in BCPM's cost tables and of Hatfield's cost

multipliers, and encourages parties to submit company records or other

industrial data to support their position. The Commission also seeks

comment on the cost of installing aerial, buried, and underground

cable, regardless of whether it is used to provide telephone service,

and encourage parties to submit detailed cost data on any recent cable

installations. In addition, the Commission seeks comment on whether

[[Page 42461]]

it would be possible to use national statistical averages of contractor

construction prices and independent verification of the cost of

installation of distribution plant to verify these costs. The

Commission also seeks comment on whether a labor cost variable should

be incorporated into the selected mechanism.

24. Because the Commission has received no documentation confirming

that feeder and distribution cable installation costs should differ,

the Commission tentatively concludes that the selected mechanism will

adopt Hatfield's assumption that such costs are identical. The

Commission seeks comment on this tentative conclusion and encourage

parties to submit documentation in support of their positions.

25. Drops. A drop is the connection between a residence or business

and the distribution cable. In BCPM and Hatfield, several cost elements

are combined under the general heading of drops. These cost elements

include the cost of the copper or fiber loop that extends from the

distribution cable to the residence or business, the terminal and

splice investment, and the pedestal costs. BCPM estimates the drop

length as the distance from the corner of the residential lot to the

center of the residential lot. Hatfield assigns pre-determined loop

lengths for each of seven density zones. The lengths are longer in low

density areas than elsewhere. In general, the drop lengths are longer

in BCPM than in Hatfield.

26. The Commission seeks comment on whether the selected mechanism

should estimate drop lengths or should incorporate predetermined drop

length assumptions. The Commission also seeks comment on the accuracy

of Hatfield's assumed drop lengths. Because an efficient carrier's

network must include drops in order to provide the supported services,

the Commission tentatively concludes that the selected mechanism will

determine the forward-looking economic cost of drops, including

installation, terminal, splice, and pedestal costs. The Commission

invites comment on the accuracy of the estimated costs of these items

under the proposed models.

27. Structure Sharing. Structure sharing describes the practice of

sharing facilities such as poles, trenches, and conduits with other

utilities. BCPM assumes that an efficient telecommunications carrier

will not benefit very much from sharing. BCPM's default input values

assign between 50 and 100 percent of the costs of the poles and between

80 and 100 percent of the cost of trenches and conduits used by

telephone companies to those companies. The Hatfield model assumes

utilities will engage in substantial sharing; for the most part,

Hatfield's default input values assign between 25 percent and 50

percent of the costs of shared facilities to telephone companies. Both

models alter the percentages of costs they assume will be shared

depending on the type of structure (buried, conduit, or aerial) and on

the line density zone.

28. Because it appears that an efficient carrier would vary its

sharing levels according to installation activity and terrain, as BCPM

assumes, the Commission tentatively concludes that the selected

mechanism should adopt BCPM's categories for installation activities

and terrain conditions. The Commission seeks comment on BCPM's

estimates for the relative frequency for each type of installation

activity. The Commission tentatively concludes that the selected

mechanism should also include line density zones in its estimates of

sharing and the Commission seeks comment on whether, because it

tentatively concludes above that Hatfield's line density zones are

superior, the selected mechanism should use Hatfield's line density

zones to estimate sharing. The Commission seeks comment on how BCPM's

assumptions would need to be altered to accommodate Hatfield's line

density zones.

29. The Commission tentatively concludes that Hatfield incorrectly

assumes that carriers benefit from sharing for such cable and that the

selected mechanism will assign 100 percent of costs to the telephone

company for cable that is buried using a cable plow. The Commission

also tentatively concludes that Sprint's suggested value of 66 percent

is an acceptable aggregate default input value for the percent of costs

assigned to the telephone company for all other shared facilities. The

Commission also seeks comment on AT&T's contention that changes to the

regulatory climate will increase the extent to which carriers are

required or are willing to share structures.

30. Loop Design. The loop plant constitutes a significant part of

the network cost that the models calculate. The two models, however,

differ greatly in their assumptions regarding loop design and

standards. In selecting the loop design components for the selected

mechanism, the Commission seeks to implement its conclusion that the

mechanism employ the least-cost, most-efficient and reasonable

technology for providing the supported services and the Act's provision

that universal service support be sufficient. The Commission will

consider fiber-copper cross-over point, loop standards, and digital

loop carriers in its selection process.

31. Fiber-Copper Cross Over Point. The fiber-copper cross-over

point determines when carriers will use fiber cable instead of copper

cable in their feeder plant. In addition, a carrier's decision

regarding the fiber-copper cross-over point will affect whether that

carrier uses loading coils, because loading coils are used to extend

the viable length of copper cable.

32. The Joint Board recommended that the choice between fiber and

copper should reflect the least-cost method of placing loop facilities,

and the Commission agreed in the Order that ``the technology assumed

must be the least-cost, most-efficient, and reasonable technology'' and

that the ``model must include the capability to examine and modify the

critical assumptions and engineering principles * * * includ[ing] * * *

fiber-copper cross-over points * * * '' Neither the BCPM nor Hatfield

proponents have submitted studies showing whether their cross-over

points are designed to reflect the Commission's least-cost criterion.

33. The Commission tentatively concludes, based on the comments of

NCTA/ETI and the recommendation of the majority state members of the

Joint Board, that the BCPM maximum cross-over default value should be

set at 18,000 feet rather than 12,000 feet, and seek comment on this

tentative conclusion. The Commission seeks comment on whether the BCPM

fiber/copper cross-over point can also be set at 18,000 feet when the

copper loop length is extended to 18,000 feet. The Commission also

seeks comment on the impact on the costs for digital loop carriers of

their decision regarding the appropriate fiber-copper cross-over point.

34. Loop Standards. WorldCom contends that the Commission should

specify one of more loop design standards in order to create greater

certainty in loop modeling process. WorldCom states that the two loop

standards that the Commission should consider are the Revised

Resistance Design (RRD) and the Carrier Serving Area (CSA) Standards.

WorldCom contends that because the CSA standard will also enable LECs

to offer video dialtone services, which would have significant

commercial value, the universal service fund should not pay for LEC

entry into this new market against competitors that would not receive

universal service funding. The Commission seeks comment on whether

[[Page 42462]]

it should adopt any loop design standards in the forward-looking

economic cost mechanism, and if so, which standard should be adopted.

35. Digital Loop Carriers. Digital loop carriers (DLCs) connect

fiber feeder cables and copper loops. DLCs transform electric signals

carried on the copper loops into optical signals carried on fiber lines

and vice versa. Most large DLCs can assign multiple subscriber lines to

a single electronic channel rather than assigning one channel per

subscriber line. Both Hatfield and the BCPM assume that, when they are

to be used, DLCs would be one of two sizes, depending upon the number

of subscriber lines connected to them. BCPM assumes the larger DLC will

be used for more than 672 subscriber lines. Hatfield, by contrast,

switches to the larger DLC at 384 subscriber lines, but allows

adjustment of this level as a variable.

36. Although both Hatfield and BCPM assume extensive deployment of

DLCs, their cost estimates differ significantly. The Commission seeks

comment on the models' assumptions regarding the number of subscriber

lines that should trigger the use of a large DLC. The Commission also

requests comment on whether the models should consider use of DLCs of

more than two sizes; the Commission particularly seeks comment on

whether DLCs smaller than those used in the model are available and

under what circumstances such smaller DLCs might be used. The

Commission also requests comment on the impact of the fiber-copper

cross-over on the number and size of DLCs needed in the network.

37. The Commission seeks comment on whether the models should also

compare the cost of extending fiber to fewer points in the CBG, placing

larger DLCs at those points, and running copper to customers including

the possible additional cost of repeater electronics on the longer

copper loops. The Commission seeks discussion of how to calculate the

forward-looking economic cost of DLCs. Parties should discuss whether

the models' current inputs for these costs are reasonable, as well as

Sprint's proposed BCPM modification.

38. Wireless Threshold. Once the level of support a carrier will

receive is determined, the carrier may use whatever technology it

prefers to provide the supported services; the level of support it

receives is not dependent upon the technology it uses. Both BCPM and

Hatfield, however, estimate the costs of providing the supported

services using engineering assumptions based on wireline technology.

39. In light of the contention by RUS that wireless service does

not necessarily cost less than $10,000.00 per loop, the Commission

seeks comment on whether the cost of a loop should be capped at

$10,000.00 in all cases. The Commission agrees with the wireless

commenters that, to the extent practical, the selected mechanism should

estimate the cost of providing the supported services using wireless

technology in areas where wireless technology is likely to be the

least-cost, most efficient technology. The Commission notes, however,

that it has received almost no information regarding how to estimate

such costs, or the criteria that the selected mechanism should use to

determine whether wireline or wireless service is more economical.

Thus, the Commission seeks comment on the feasibility of including an

additional component in the mechanism that would compare the cost of

providing service via a wireless network with the cost of providing

service via a wireline network and would choose the lowest-cost

technology to calculate the costs of providing the supported services.

The Commission seeks comment on whether, because wireless companies

must currently determine whether it is economical for them to enter a

particular market, wireless companies have already developed such

models. The Commission strongly encourages commenters supporting the

inclusion of engineering assumptions regarding wireless technology in

the mechanism to submit models or other assumptions that they believe

should be included. The Commission further encourages commenters to

submit data about the cost and types of wireless networks and their

components in support of their suggestions, and reminds commenters that

any wireless component that might be added to the selected mechanism

must also meet the Commission's criteria.

40. The Commission notes that BCM was first filed with the

Commission in December 1995. The Commission seeks comment on the length

of time necessary to develop a mechanism that compares the cost of

wireless engineering with the cost or wireline engineering.

Specifically, the Commission seeks comment on whether modeling wireless

technology would be less complex than modeling wireline technology, and

therefore whether a wireless platform could be developed by December

1997, and a complete mechanism, including inputs, by August 1998, in

accordance with the Commission's schedule. In the alternative, the

Commission seeks comment on whether the development of a competitive

bidding mechanism would be a better way to capture the differing costs

between wireline and wireless technology.

41. Because the Commission is uncertain whether or not it will be

able to develop a mechanism that includes the cost of wireless

technology within their schedule, it seeks comment on whether basing

support amounts on the cost of wireline technology will be consistent

with section 254 and with the Commission's universal service goals. The

Commission tentatively concludes that providing support based on the

cost of a wireless network to provide the supported services would meet

the statutory directive that support be ``sufficient.'' The Commission

seeks comment on this tentative conclusion. The Commission also seeks

comment on whether basing support solely on wireline costs, when

wireless technology may offer a less expensive option, would be

consistent with the Commission's conclusion that the mechanism should

use the least-cost, most-efficient technology available. The Commission

additionally seeks comment on whether the models should include

assumptions that would consider microwave, satellite, or other non-

wireline technologies in situations where such technologies could allow

the provision of universal service more cost-effectively than wireline

technology.

42. Additional Outside Plant Input Value Issues. The Commission

must determine what input values it should use for the following

components of outside plant: manholes, poles, anchors, guys, aerial

cable, and building attachments, network interface devices, service

area interfaces, and fill factors. The Commission seeks data

demonstrating the forward-looking economic cost for each component,

including materials and installation, for inclusion in the selected

mechanism.

43. Poles, Anchors, Guys, Aerial Cable, and Building Attachments.

The Commission seeks comment on what the accurate input values should

be for the forward-looking economic cost of materials and installation

for poles. The Commission seeks comment on the reasonableness of the

type of materials chosen by each model. The Commission also seeks

comment on whether installation costs for poles should vary with

terrain. Commenters should submit cost documentation in support of

their suggested input values. The Commission also seeks comment on

whether BCPM's materials and installation cost estimates for anchors

and guys are accurate, and whether

[[Page 42463]]

Hatfield's pole materials and installation costs are sufficient to

cover the cost of anchors and guys. The Commission also seeks comment

on whether the selected mechanism should identify separately costs for

poles, guys, and anchors. Parties should submit cost data in support of

their suggested input values. Because both models include them, the

Commission tentatively concludes that the selected mechanism should

include pole spacing input values. The Commission seeks comment on this

tentative conclusion and on the pole spacing input values that we

should use. In light of the models' similar input values, the

Commission seeks comment on whether the models' input values for these

costs are accurate or on whether averaging the two sets of input values

would provide an accurate calculation of these costs. Commenters should

submit cost documentation in support of their suggested input values.

44. The Commission tentatively concludes that the selected

mechanism should include feeder and distribution cable costs for both

copper and fiber. The Commission seeks comment on the forward-looking

costs of copper and fiber cable. The Commission specifically seeks

comment on whether, as the BCPM proponents contend, buried cable and

underground cable are less expensive than aerial cable. Commenters

should submit cost documentation in support of their suggested input

values.

45. Network Interface Devices. A network interface device (NID) is

a device that connects the wiring that belongs to a customer, and is

located inside a customer's premises, to the loop facilities outside a

customer's premises. The Commission tentatively concludes that it

should prescribe NID costs in the selected mechanism. The Commission

tentatively concludes that Hatfield correctly separates the cost of

protection blocks from the cost of the NID, and correctly distinguishes

between the cost of a residential NID and a business NID, and that the

selected mechanism should incorporate these distinctions. The

Commission seeks comment on these tentative conclusions, and on the

correct input values that should be used for NID and related costs.

Such comments should be supported with cost data wherever possible.

46. Service Area Interfaces. The Service Area Interface (SAI) is

the physical interface between distribution and feeder cable. The SAI

is usually located outside buildings, but is located inside buildings

when the feeder plant terminates in the basement of a high-rise

building. The Commission tentatively concludes that the selected

mechanism should include the cost of SAI for various cable sizes, and

should assume different costs for indoor and outdoor cable as Hatfield

does. The Commission seeks comment on this tentative conclusion. In

light of the wide disparities in SAI costs assigned by the mechanisms,

the Commission seeks comment on the forward-looking economic costs of

SAIs, and encourages parties to submit additional data on these costs.

47. Fill Factors and Utilization. A cable fill factor is the

percentage of the total usable capacity of cable that is expected to be

used rather than the amount available in reserve. The Commission notes

that, over time, the models' estimates for fill factors have converged.

The Commission seeks comment on the fill factor that should be used for

the selected mechanism. In light of the similarities between the

models, the Commission seeks comment on whether their input values are

accurate and how the differences between the values may be reconciled.

The Commission encourages parties to submit engineering data or other

relevant documentation in support of the fill factor that they favor.

48. Dates for Comments on Outside Plant Investment. Interested

parties may file comments regarding the design of the outside plant

investment components, including the algorithms determining plant mix,

installation and cable costs, drop lengths, structure sharing, the

fiber-copper cross-over point, digital loop carriers, and the wireless

threshold on or before September 24, 1997, and reply comments on or

before October 3, 1997. Interested parties may file comments regarding

all input values regarding outside plant input investment on or before

October 17, 1997, and reply comments on or before October 27, 1997.

iii. Switching

49. Mix of Host, Stand-Alone, and Remote Switches. Switches can be

designated as either host switches, stand-alone switches, or remote

switches. Both a host switch and a stand-alone switch can provide a

full complement of switching services without relying on another

switch. A remote switch relies on a host switch to supply a complete

array of switching functions and for interconnection with other

switches. Proponents of both models claim that they detect no

difference in switching costs based on the type of switch used, and

therefore their models do not distinguish among the different switch

types. A review of 1996 depreciation filings, however, shows that large

ILECs are purchasing fewer host switches and more remote switches.

Suggesting that choices about switch type could affect the total cost

computed more than the models currently suggest, the Joint Board

expressed concern that the models did not distinguish among types of

switches. The Commission, therefore, tentatively concludes that the

selected mechanism should include an algorithm that will place host

switches in certain wire centers and remote switches in other wire

centers. Based on ILECs' decisions, as revealed in the depreciation

filings, to deploy more remote switches, the Commission tentatively

concludes that the host-remote arrangement is more cost-effective in

many cases than employing stand-alone switches. The Commission seeks

comment on this tentative conclusion, and urges parties to provide

engineering and cost data to demonstrate the most cost-effective

deployment of switches in general and host-remote switching

arrangements in particular. The Commission also seeks detailed comment

describing how to design an algorithm to predict this deployment

pattern. The Commission seeks comment on how to obtain information that

would verify or refute the assertion of the models' proponents that

there is no cost difference between host switches and remote switches.

50. Capacity Constraints. BCPM does not include any switch capacity

limitations, but Hatfield includes a number of switch capacity

constraints. The Commission tentatively concludes that the selected

mechanism should assign more than one switch to a wire center whenever

the mechanism predicts that any one of a set of capacity constraints

would be exceeded. The Commission seeks comment on this tentative

conclusion and on what capacity constraints the selected mechanism

should adopt. Parties are encouraged to provide technical data to

support any proposed capacity constraints.

51. Switch Costs. In the Order, the Commission agreed with the

state members of the Joint Board that estimating the switching

investment cost is a significant unresolved problem of the cost models.

Proponents of the models are apparently having difficulty acquiring

accurate estimates of switch costs because of the lack of public

information on those costs. The Joint Board concluded that the

convergence of the models' switch cost estimates should alleviate this

lack of information. They urged the Commission and its staff to perform

additional analysis and to

[[Page 42464]]

obtain more reliable switch cost information.

52. BCPM switching cost estimates are based on the results of a

survey of large ILECs that asked ILECs to report the switching costs

they use as inputs for ILEC Switching Cost Information System (SCIS)

model runs. BCPM model proponents estimated a switching curve based on

the answers to the survey. The Hatfield model combines public

information and information from other unnamed industry sources to

develop switching cost estimates. The model proponents fit a

logarithmic curve to three data points to determine the relationship

between switch-cost per line and switch-line size. Hatfield reduces the

per-line cost of the switch below the logarithmic curve by assuming

more efficient use of trunk and line cards.

53. Pursuant to the Joint Board's recommendation, Commission staff

examined information regarding switching costs from several sources.

The Commission's found data supports the models' assumptions, and imply

that the current switching costs of small companies should be higher

than the current switching costs of large companies. The Commission,

therefore, tentatively concludes that the selected mechanism should

incorporate the Commission staff's estimates of switching costs because

these estimates are based on filings with the Commission that record

actual ILEC switch purchases. The Commission seeks comment on this

tentative conclusion. The Commission also seeks comment on whether

there is an alternative data source for these costs that would provide

a better estimate of the current cost of switches. The Commission also

seeks comment on the reasonableness of using the default input values

from BCM2, as suggested by Sprint. In addition, the Commission seeks

comment on whether it should incorporate the cost of growth lines into

their switching cost estimate and, if so, how it should incorporate

these costs, and what data sources it should use for the cost of growth

lines.

54. Percent of Switch Assigned to Port and to Provision of

Universal Service. The models differ with respect to the percentage of

switch costs they assign to the port and the percentage of switch costs

that is assigned to the provision of universal service. The models

divide the switch investment between two basic functions: port and

usage. BCPM uses local-usage dial equipment minutes (DEM) to divide

switch costs between the costs of providing universal service and the

costs of providing all other services. In contrast, Hatfield assigns 30

percent of switch cost to port costs and assigns all of the port costs

to the cost of providing universal service. Hatfield further divides

the 70 percent of switch cost it assigns to usage between local traffic

and toll traffic on the basis of conversation minutes and includes the

cost of local traffic in the cost of universal service. The BCPM

proponents state that both models could be adjusted so that they assign

less than 100 percent of local usage to the provision of universal

service, and vary the portion of traffic sensitive access usage

assigned to the provision of universal service.

55. The Commission tentatively concludes that switch costs should

be divided between line-side port and usage costs. The Commission

tentatively concludes, however, not to adopt either of the models'

assumptions regarding the percentage of the switch investment that is

associated with the port. The Commission seeks comment on these

tentative conclusions and on whether it can use the information that

ILECs must file in response to their Access Charge Reform Order to

determine the percentage of the switch investment to be allocated to

the port function. The Commission also seeks comment on a reasonable

percentage of switch costs to include in the port function.

56. In light of the difficulty in obtaining information on

switching costs and the proportion of the switch to be included in the

port function, the Commission seeks comment on whether it should

undertake a detailed engineering study of several of the large host

switches currently being deployed by ILECs (such as the Nortel DMS-100

and the Lucent 5ESS) and associated remote switches and smaller

switches (such as the Nortel DMS-10) to ascertain what portions of the

switch equipment are associated with the port function. The Commission

seeks comment on whether such an engineering study could result in

useful information about the portions of switch that are associated

with the port function and the costs of that equipment. The Commission

also seeks comment on whether alternative data sources are available

for the purpose of estimating current switching cost. If so, the

Commission seeks comment on how to obtain and use that information. The

Commission tentatively concludes that all of the port cost and a

percentage of the usage cost are costs of providing universal service.

The Commission tentatively concludes that the percentage of the usage

cost that should be assigned to the cost of providing universal service

should be determined by the amount of local usage included in the

definition of supported services that it will adopt, as a percentage of

total usage that the model predicts on the network. The Commission

seeks comment on these tentative conclusions.

57. Interested parties may file comments on the platform design

relating to switching on or before August 8, 1997, and reply comments

on or before August 18, 1997. Interested parties may file comments on

the input values relating to switching on or before October 17, 1997,

and reply comments on or before October 27, 1997.

iv. Interoffice Trunking, Signaling, and Local Tandem Investment

58. The Commission recognizes two uses for interoffice trunking,

signaling, and local tandem facilities: (1) The completion of local

calls and (2) transport to an IXC point of presence (POP). Because

transport for interexchange service is not a supported service, the

selected mechanism will estimate only the cost of interoffice trunking,

signaling, and local tandem facilities used for the completion of local

calls. BCPM employs a simple multiplier to estimate the portion of

total interoffice trunking, signaling, and local tandem costs that

should be attributed to supported services. Hatfield treats these

facilities on a more disaggregated basis. Both models allow the user to

alter the input values to their transport equations. Because

interoffice trunking, signaling, and local tandem facilities are an

integral part of the network necessary to provide the supported

services, the Commission tentatively concludes that the selected

mechanism should calculate specific cost estimates for the interoffice

elements necessary to provide these functionalities. Because Hatfield's

platform design can generate cost estimates at this level of

specificity, but BCPM's cannot, the Commission tentatively concludes

that only Hatfield's platform is currently adequate in this regard. The

Commission seeks comment on this tentative conclusion and on the

accuracy of Hatfield's transport algorithm. The Commission also seeks

comment on the accuracy of the specific interoffice trunking,

signaling, and local tandem input values proposed by Hatfield.

59. Interested parties may file comments concerning design issues

on or before August 8, 1997, and reply comments on or before August 18,

1997. Interested parties may file comments on the issues relating to

input values on or before October 17, 1997, and reply comments on or

before October 27, 1997.

[[Page 42465]]

v. General Support Facilities

60. General support facilities (GSF) include the investment and

expenses related to vehicles, land, buildings, and general purpose

computers. General purpose computers comprise the largest share of the

investment and expenses in this category; buildings also comprise a

large share. BCPM computes investment in the GSF category for items

other than buildings as a percentage of all other plant investment.

Building investment is computed as a percentage of switching equipment

investment. BCPM sets GSF expenses at a fixed amount per line based on

data from its ILEC surveys. Hatfield also segregates some buildings

from the GSF category in computing GSF investment but, instead of

segregating all buildings as BCPM does, Hatfield only segregates

buildings that house switches (i.e., wire center buildings). To compute

GSF investment not related to wire center buildings that house

switches, Hatfield uses ARMIS data to compute a ratio of ILECs' GSF

investment to ILECs' total-plant-in-service investment. This ratio is

then applied to the total-plant-in-service investment that the model

computes to arrive at the amount of GSF investment not related to wire

center buildings. For investment in wire center buildings, Hatfield

uses a table of values based on a set number of square feet per switch

in use and number of lines served. For GSF expenses, Hatfield uses the

ARMIS ratios described above to reach an expense amount. The Commission

concluded in their Access Charge Reform Order that the current

allocation of GSF costs enables ILECs to recover through regulated

interstate access charges costs associated with the ILECs' nonregulated

billing and collecting functions.

61. The Commission requests comment on the appropriate platform

assumptions to compute GSF investment and expenses. The Commission

seeks comment on how it may remove costs for nonregulated activities

from costs for regulated activities to incorporate the appropriate

amount of GSF investment and expenses into a forward-looking mechanism.

The Commission also seeks comment on whether a more accurate GSF

computation would depend on factors tied to the cost of computers,

because much GSF investment and expense is for general purpose

computers. Assuming GSF investment is tied more closely to computer

costs, the Commission also seeks comment on whether the selected

mechanism should account for the increasing use of computers by

businesses generally. Also, because a large share of GSF expense is

attributable to the cost of land, the Commission tentatively concludes

that GSF expenses should vary by state with reference to differences in

land values. The Commission requests comment on this tentative

conclusion. Commenters should critique the assumptions regarding GSF

investment and expenses that are currently included in BCPM and

Hatfield. Commenters advocating a platform that requires an input ratio

to calculate GSF expenses should discuss what that input ratio level

should be, and provide supporting cost data if possible.

62. Interested parties may file comments regarding GSF issues on or

before October 17, 1997, and reply comments on or before October 27,

1997.

vi. Depreciation

63. Economic depreciation measures the periodic reduction in the

market value of an asset over time. When calculating depreciation

expenses, the models do not simulate the periodic reduction in the

market value of the assets. Rather, they use ``adjusted projected

lives'' to recover the current costs of the assets. Under this

approach, the annual depreciation charges associated with an asset are

computed by dividing the asset's current cost by its adjusted projected

life. A shorter life will increase the annual depreciation expense.

64. Commenters disagree on the depreciation rates to be used as

inputs to the models. In light of the Commission's conclusion that

depreciation should be computed within the range specified in their

rules, the Commission tentatively concludes that it should adopt, as an

input to their forward-looking cost mechanism, depreciation expenses

that reflect a weighted average of the rates authorized for carriers

that are required to submit their rates to us. The Commission requests

comment on this tentative conclusion. Further, the Commission seeks

comment on whether adjusted projected lives should reflect the asset

lives of facilities and equipment dedicated to providing only the

supported services or whether the asset lives should reflect a decision

to replace existing plant with plant that can provide broadband

services.

65. As noted in the Order, the Commission intends to issue a notice

of proposed rulemaking in the near future to consider changes to the

Commission's depreciation rules. The Commission cannot be certain,

however, that its new rules will be effective in time for states to

incorporate them in their cost studies, which they must file in

February 1998. Accordingly, the Commission tentatively concludes that

the Commission should use the range prescribed in the Commission's

current rules for purposes of this proceeding, with the understanding

that it could adjust the depreciation inputs to their mechanism in

light of the outcome of their depreciation rulemaking. The Commission

seeks comment on this tentative conclusion, and on whether the states

should also be permitted to adjust their cost studies to incorporate

any changes to the depreciation rules. In addition, the Commission asks

parties to discuss how the inclusion of depreciation rates in the

selected mechanism would be affected by changes in the Commission's

depreciation rules.

66. Interested parties may file comments on depreciation issues on

or before October 17, 1997, and reply comments on or before October 27,

1997.

vii. Expenses

67. BCPM estimates expenses on a per-line basis. These estimates

are derived from a survey of ILECs. BCPM permits users to vary expense

estimates for small, medium, and large companies, although the default

values for BCPM do not vary with company size. In general, Hatfield

estimates most expenses based on ARMIS data, expressed as ratios of

investment. BCPM estimates total expenses, as detailed above, at $11.34

per line per month. Hatfield's estimates of total expenses vary based

on investment or other costs.

68. The Commission seeks comment on how to establish forward-

looking expenses for the selected mechanism. The Commission seeks

comment on which expenses should be calculated on a per-line basis, as

BCPM does, and which should be calculated as a ratio of investment, as

Hatfield does. The Commission tentatively concludes that the selected

mechanism should provide the user with the capability to calculate each

category of expense based on either line count or other investment, at

the user's election, and request comment on this tentative conclusion.

The Commission also seeks comment on whether it should forecast

expenses and, if so, what forecasting technique it should use. The

Commission tentatively concludes that users should be able to use

different expense estimates for small, medium, and large companies, as

the BCPM allows. The Commission seeks comment on this tentative

conclusion. The Commission also seeks comment on whether there are

[[Page 42466]]

measures, other than lines and investment to which specific expenses

should be tied.

69. The Commission seeks comment on the accuracy of BCPM's default

input value of $11.34 per line, and urge the proponents of BCPM to

submit the survey upon which they base their expense inputs. The

Commission seeks comment on how this value should vary for small,

medium, and large companies. The Commission seeks comment on whether

the selected mechanism should use ARMIS data, data from a survey of

ILECs, or data from some other source.

70. Plant Specific Expenses. Plant specific expenses include such

expenses as maintenance of facilities and equipment expenses. BCPM

estimates the following plant specific expenses on a per-line basis:

network support (USOA Account 6110); general support (6120); Central

Office Equipment (COE) switching (6210); operator systems (6220); COE

transmission (6230); information origination/termination (6310); and

cable and wire facilities (6410). Hatfield estimates central office

switching expenses as a percentage of investment in digital switching

equipment, and circuit equipment expense as a percentage of investment

for all circuit equipment based on a New England Incremental Cost Study

rather than an ARMIS ratio of expenses to investment. Hatfield

estimates NID expense as a yearly per-line expense. Hatfield uses

separate expense ratios for aerial, buried, and underground cable,

while BCPM uses a per-line estimate for cable maintenance that does not

vary with the plant mix. Because the two models differ in their listing

of plant specific expenses, the two resulting expense estimates may not

be comparable. Neither model allows plant specific expenses to vary

with climate or soil type.

71. BCPM's default per-line per-month values for plant specific

expenses are: network support--$0.15; general support--$1.20; COE

switching--$0.34; operator systems--$0.01; COE transmission--$0.23;

information origination/termination--$0.07; and cable and wire

facilities--$2.76. Hatfield's default central office switching expense

factor is 2.69 percent of digital switching investment. Hatfield's

default circuit equipment expense factor is 0.015 percent of circuit

equipment investment. Hatfield's default for NID expenses is $1.00 per

line per year. The state Joint Board members recommend that plant

specific operating costs be calculated as a percentage of investment,

and suggest the following percentages: 3.5 percent for cable and wire;

2.8 percent for central office switching; and 2 percent for

transmission. The state members also recommend the use of nationwide

factors that do not vary by company.

72. The Commission seeks comment identifying and discussing the

complete set of forward-looking plant-specific expenses for which

universal service support should be available, and discussing whether

each of these expenses is best estimated on a per-line basis or by some

other method. The Commission seeks comment on whether the platforms of

BCPM and Hatfield are comparable with respect to their expense

assumptions, whether one of the two generates superior expense

calculations, or whether expense assumptions of the two should be

combined, either in one of the two existing models or in a hybrid

model, to estimate expenses most accurately. The Commission seeks

comment on what specific input values for each of these expenses should

be. In addition, the Commission seeks comment on whether maintenance

expense estimates should depend upon plant mix and, in particular,

whether an increase in the use of aerial cable also increases

maintenance expenses. The Commission also seeks comment on whether

plant specific expenses should vary with such characteristics as

climate or soil type.

73. Plant Non-Specific Expenses. Plant non-specific expenses

include such expenses as engineering, network operations, and power

expenses. BCPM estimates the following plant non-specific expenses on a

per-line basis: other property plant (USOA Account 6510); network

operations (6530); and access (6540). Hatfield calculates network

operations expense as a percentage of ARMIS-reported network operations

expense. BCPM's default per-line per-month plant non-specific expenses

are: other property plant--$0.03; network operations--$1.33; and access

$0.00. Hatfield's default value for network operations expense is 50

percent of ARMIS-reported network operations expense. Hatfield contends

that this percentage is reasonable because forward-looking network

operations expenses are significantly lower than ARMIS-reported

expenses for network operations. Hatfield asserts that ARMIS-reported

expenses reflect excessive staffing at end offices. The Commission

seeks comment on the complete set of forward-looking plant non-specific

expenses that should be covered by universal service support, and

whether the Commission should estimate each of these expenses on a per-

line basis or by some other method. The Commission also seeks comment

discussing what specific input values for each of these expenses should

be.

74. Customer Services. Customer services expenses include

marketing, billing, and directory listing expenses. BCPM estimates the

following customer services expenses on a per-line basis: marketing

(USOA Account 6610) and services (6620). Hatfield estimates the cost of

bill generation and billing inquiries for end users as a fixed, per-

line expense. Hatfield includes a per-line directory listing expense

and assigns local number portability expenses on a per-line basis.

Hatfield also assigns carrier-to-carrier customer service expenses

(associated with the provision of unbundled network elements) on a per-

line basis. Hatfield excludes marketing (USOA Account 6610) entirely.

BCPM's per-line per-month default values for customer services expenses

are: marketing--$0.35 and services--$2.42. State Joint Board members

suggest that BCPM's services expenses should be reduced 29 percent to

$1.75 to exclude operator services and directory assistance. They also

recommend excluding marketing expenses from the cost of supported

services. Hatfield's default per-line customer service expenses, which

are based on ARMIS data, are: billing--$1.22 per month; directory

listing--$0.15 per month; local number portability--$0.25 per month;

and carrier-carrier customer service--$1.69 per month. The Commission

seeks comment identifying and discussing the complete set of forward-

looking customer service expenses that should be covered by universal

service support, and whether each of these expenses is best estimated

on a per-line basis or by some other method. The Commission also seeks

comment on specific input values for each of these expenses.

75. Corporate Operations. Corporate operations expenses include

general, administrative, human resources, legal, and accounting

expenses. BCPM estimates the following corporate operations expenses on

a per-line basis: executive and planning (USOA Account 6710); general

and administrative (6720); and uncollectibles (6790). Hatfield

estimates corporate overhead expense as a percentage of total capital

costs and operations expenses. BCPM's per-line per-month default input

values for corporate operations expenses are: executive and planning--

$0.14; general and administrative--$2.15; and uncollectibles--$0.17.

Hatfield's default corporate overhead expense is 10.4 percent of the

total of capital costs and operations expenses. The Commission seeks

comment identifying and discussing the complete set of forward-

[[Page 42467]]

looking corporate operations expenses that should receive universal

service support, and whether each of these expenses is best estimated

on a per-line basis or by some other method. The Commission seeks

comment on what the specific input values for each of these expenses

should be.

viii. Other

76. Interested parties may file comments on the issues relating to

expenses on or before October 17, 1997, and reply comments on or before

October 27, 1997.

77. The Commission also seeks comment on any other issues related

to the platform and inputs to the forward-looking cost models that are

currently under consideration. Any such comments should be supported by

specific data and analysis of the models. The Commission seeks comment

on whether it should develop a method to adjust the costs estimated by

their cost mechanism on an annual basis, and if so how it should do so.

The Commission seeks comment on whether the adjustment mechanism should

be tied to inflation and include an offset similar to their price cap

mechanisms. Alternatively, the Commission seeks comment on whether it

should use the actual cost estimates provided by the selected mechanism

for a fixed number of years, and re-evaluate and modify the mechanism

at the end of that period. Interested parties may file comments on

these issues on or before October 17, 1997, and reply comments on or

before October 27, 1997.

C. Support Area

78. A support area is the geographic area used to determine

universal service support levels. The support area need not be the same

as the geographic area used by the selected mechanism to calculate the

cost of providing the supported services. The support area may be an

aggregation of those geographic areas used to determine cost. For

example, Hatfield uses CBGs to determine cost and density zones, which

are an aggregation of CBGs with similar line densities, to calculate

support. In the Order, the Commission concluded that support areas

should be no larger than wire centers. While the Commission agreed with

the Joint Board that the use of smaller support areas would allow for

better targeting of support and minimize the possibility of ``cream-

skimming,'' the Commission was uncertain that any mechanism that it

could adopt would accurately predict the number of customers in such

small areas.

79. To determine the level of support a particular carrier should

receive, the Commission must know the number of lines in the support

area. Carriers currently do not associate lines with a particular CBG,

CB, or grid cell. They do, however, keep records of the number of lines

served by each wire center. The Commission seeks comment on whether it

should provide support according to geographic areas other than the

geographic areas used to calculate cost. The Commission tentatively

concludes that the ability of carriers to associate lines with CBGs, or

other small areas will determine how the Commission defines support

areas in the future. The Commission seeks comment on the feasibility of

geo-coding households, as proposed by SBC and Sprint. Interested

parties may file comments on these issues on or before October 17,

1997, and reply comments on or before October 27, 1997.

II. Support for Local Usage

80. The Joint Board recommended that support for voice-grade access

to the public switched network should include a local usage component.

In the Order, the Commission agreed with the Joint Board that the

Commission should determine the measure of local usage to be supported

by federal universal service mechanisms. The Commission concluded that

``consumers might not receive the benefits of universal service support

unless we determine a minimum amount of local usage that must be

included within the supported services'' because carriers receiving

universal service support might charge high per-minute rates that

prevent service from being affordable. The Commission also observed

that, unless the definition of universal service includes a usage

component, carriers using technologies (such as wireless) that can

provide basic access relatively inexpensively but that entail higher

usage-based costs would have an artificial advantage over carriers

using technologies that have higher basic access costs and lower usage-

based costs.

81. The Commission tentatively concludes that a local usage

component should be included in the definition of universal service to

ensure that customers realize the benefits of universal service support

even if they cannot afford high per-minute charges. Failing to include

a local usage component in the definition of universal service would

create a bias in favor of carriers (such as wireless carriers) that

provide service with facilities that allow relatively inexpensive

access to the network but that have higher usage costs. This bias would

be exacerbated if the Commission later set support levels using

competitive bidding. Carriers able to provide relatively inexpensive

access could underbid competitors, yet customers might not receive

affordable service because of high usage-based charges.

82. The Commission seeks comment on the level of local usage that

should be included. The Commission could prescribe this level to be the

number of minutes per month used by the average customer subscribing to

flat-rate local service. Alternatively, the Commission could define the

level as the product of the average number of calls that are included

in carriers' measured-rate service and the average call length. The

Commission seeks comment on other potential ways to calculate the local

usage component. The Commission also seeks comment on whether it should

consider the impact of increased Internet usage on average call length

and, if so, how. Finally, the Commission requests comment on whether

the local usage component should differ for residential and business

service. Commenters submitting usage data are requested to segregate

those data between residential and business users.

83. The Commission also seeks comment on the connection, if any,

between the amount of usage that the models assume to determine

specifications such as switch size and average cost per minute, and the

amount of usage that should be supported as part of the definition of

universal service. The Commission tentatively concludes that no

necessary connection exists between these two measures of usage because

they serve different purposes within the support mechanisms. For

example, Hatfield currently determines per-minute switched cost based

on all usage (local and toll), but determines support based only on

local usage. Similarly, the Commission tentatively concludes that the

forward-looking economic cost methodology that it will employ should

consider all local usage to determine switching capacity and to compute

average cost per minute, and that it should determine the amount of

local service to include in the definition of universal service without

regard to these other measures of usage. Interested parties may file

comments on all of the issues relating to the level of local usage on

or before October 17, 1997, and reply comments on or before October 27,

1997.

[[Page 42468]]

Procedural Matters

III. Ex Parte Presentations

84. This is a non-restricted notice-and-comment rulemaking

proceeding. Ex parte presentations are permitted, except during the

Sunshine Agenda period, provided that they are disclosed as provided in

the Commission's rules. See generally 47 CFR 1.1202, 1.1203, 1.1206.

IV. Initial Regulatory Flexibility Act Certification

85. Section 603 of the Regulatory Flexibility Act (RFA)

1 requires an Initial Regulatory Flexibility Analysis (IRFA)

in notice and comment rulemaking proceedings, unless the Commission

certifies that ``the rule will not, if promulgated, have a significant

economic impact on a substantial number of small entities.''

2 It further requires that the IRFA describe the impact of

the proposed rule on small entities. The RFA generally defines ``small

entity'' as having the same meaning as the term ``small business

concern'' under the Small Business Act, 15 U.S.C. 632.3 The

Small Business Administration (SBA) defines a ``small business

concern'' as one that ``(1) is independently owned and operated; (2) is

not dominant in its field of operation; and (3) meets any additional

criteria established by the SBA.4 Section 121.201 of the

Small Business Administration regulations defines a small

telecommunications entity in SIC code 4813 (Telephone Companies Except

Radio Telephone) as any entity with 1,500 or fewer employees at the

holding company level.5 The Commission has determined that

the RFA is inapplicable to this FNPRM because the non-rural LECs

affected by the proceeding do not meet these criteria.

---------------------------------------------------------------------------

\1\ See 5 U.S.C. 601 et seq. The RFA was amended by the ``Small

Business Regulatory Enforcement Fairness Act of 1996'' (SBREFA),

Title II of the Contract with America Advancement Act of 1996,

Public Law 104-121, 110 Stat. 847 (1996) (CWAAA).

\2\ 5 U.S.C. 605(b).

\3\ 5 U.S.C. 601(3) (incorporating by reference the definition

of ``small business concern'' in 15 U.S.C. 632). Pursuant to 5

U.S.C. 601(3), the statutory definition of small business applies

``unless an agency after consultation with the Office of Advocacy of

the Small Business Administration and after opportunity for public

comment, establishes one or more definitions of such term which are

appropriate to the activities of the agency and publishes such

definitions in the Federal Register.''

\4\ 15 U.S.C. 632.

\5\ 13 CFR 121.201.

---------------------------------------------------------------------------

86. The Commission has not adopted a definition of a ``small LEC.''

Out of an abundance of caution, however, the Commission did include

rural LECs in the regulatory flexibility analysis accompanying the

Order as if rural LECs fell within the definition of ``small entity''

for regulatory flexibility purposes.6 The Commission notes

that the term ``rural'' LEC, which is statutorily defined, is based on

the population density of and number of access lines in the area

served.7 For purposes of this certification, however, the

Commission need not make a conclusive finding on whether the rural LECs

are small entities for purposes of the RFA, for even if rural LECs were

``small entities'' under the RFA, the Commission would still certify

that no regulatory flexibility analysis is necessary because none of

the proposals in the FNPRM, if adopted, would affect rural LECs. This

FNPRM seeks comment only on the mechanisms the Commission should use to

estimate the forward-looking economic costs that non-rural LECs would

incur to provide universal service in rural, high cost and insular

areas. In this FNPRM, the Commission does not consider or adopt a

forward-looking economic cost mechanism for rural LECs. As discussed in

the Final Regulatory Flexibility Analysis in the Order, the Commission

has permitted rural carriers to shift to a forward-looking economic

cost mechanism more gradually than larger carriers.8

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\6\ Order at paras. 885, 892, 944-50. See also 13 CFR

121.902(b)(4).

\7\ We define ``rural'' as those carriers that meet the

statutory definition of a ``rural telephone company'' set forth at

47 U.S.C. 153(37).

\8\ Order at paras. 885, 944-50.

---------------------------------------------------------------------------

87. The Commission therefore certifies, pursuant to section 605(b)

of the RFA, that these proposals would not have significant economic

impact on a substantial number of small entities.9 The

Commission will send a copy of this Certification, along with this

FNPRM, in a report to Congress pursuant to the Small Business

Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 801(a)(1)(A), and

to the Chief Counsel for Advocacy of The Small Business Administration,

5 U.S.C. 605(b). A copy of this initial certification will also be

published in the Federal Register.

---------------------------------------------------------------------------

\9\ 47 U.S.C. 605(b).

---------------------------------------------------------------------------

C. Deadlines and Instructions for Filing Comments

88. Pursuant to applicable procedures set forth in Secs. 1.415 and

1.419 of the Commission's rules, 47 CFR Secs. 1.415 and 1.419,

interested parties may file comments concerning the platform designs of

the switching, interoffice trunking, signaling, and local tandem

components must be submitted on or before August 8, 1997, and parties

should submit corresponding reply comments on or before August 18,

1997. Comments concerning the platform design features determining

customer location, including the geographic unit for cost calculations

and the algorithm measuring customer distribution and line counts, on

or before September 2, 1997, and reply comments regarding these

components should be submitted on or before September 10, 1997.

Comments discussing the platform-design issues relating to outside

plant investment, including the algorithms determining plant mix,

installation and cable costs, drop lengths, structure sharing, the

fiber-copper cross-over point, digital loop carriers, and the wireless

threshold must be submitted on or before September 24, 1997, with reply

comments submitted on or before October 3, 1997. Comments discussing

all platform issues not otherwise addressed, including the components

addressing general support facilities, expenses, and support areas, and

all input values issues must be submitted by October 17, 1997, with

reply comments due on or before October 27, 1997.

89. The Commission directs all interested parties to include the

name of the filing party and the date of the filing on each page of

their comments and reply comments. Comments and reply comments also

must clearly identify the specific portion of this Further Notice of

Proposed Rulemaking to which a particular comment or set of comments is

responsive. If a portion of a party's comments does not fall under a

particular topic listed in the outline of this Notice, such comments

must be included in a clearly labelled section at the beginning or end

of the filing. Irrespective of the length of their comments or reply

comments, parties shall include a table of contents in their

documents.10

---------------------------------------------------------------------------

\10\ Cf. 47 CFR Sec. 1.49(b).

---------------------------------------------------------------------------

90. Parties should send their comments or reply comments to Office

of the Secretary, Federal Communications Commission, 1919 M Street,

N.W., Room 222, Washington, D.C. 20554. Parties should also file one

copy of any documents filed in this docket with the Commission's copy

contractor, International Transcription Services, Inc., 1231 20th

Street, N.W., Washington, D.C. 20036. Comments and reply comments will

be available for public inspection during regular business hours in the

FCC Reference Center, 1919 M Street, N.W., Room 239, Washington, D.C.

20554. Commenters

[[Page 42469]]

may also file informal comments or an exact copy of formal comments

electronically via the Internet at http://gullfoss.fcc.gov/cgi-bin/

websql/cgi-bin/comment/comment.hts>. Only one copy of electronically-

filed comments must be submitted. A commenter must note whether an

electronic submission is an exact copy of formal comments on the

subject line. A commenter also must include its full name and Postal

Service mailing address in its submission. Parties are also asked to

submit their comments and reply comments on diskette. Such diskette

submissions are in addition to and not a substitute for the formal

filing requirements addressed above. Parties submitting diskettes

should submit them to Sheryl Todd of the Common Carrier Bureau, 2100 M

Street, N.W., Room 8611, Washington, D.C. 20554. Such a submission

should be on a 3.5 inch diskette formatted in an IBM compatible form

using WordPerfect 5.1 for Windows or compatible software. The diskette

should be submitted in ``read only'' mode. The diskette should be

clearly labelled with the party's name, proceeding, type of pleading

(comment or reply comments) and date of submission. Each diskette

should contain only one party's comments in a single electronic file.

The diskette should be accompanied by a cover letter.

Ordering Clauses

91. It is ordered, pursuant to Sections 1, 4(i) and (j), and 254 of

the Communications Act as amended, 47 U.S.C. Secs. 151, 154(i), 151(j),

and 254, that the Further Notice of Proposed Rulemaking is hereby

adopted and comments are requested as described above.

92. It is further ordered, pursuant to Secs. 0.91 and 0.291 of the

Commission's rules, 47 CFR 0.91, 0.291, that authority is delegated to

the Common Carrier Bureau to issue orders in this proceeding directing

model proponents to make certain changes in their models in order for

those models to remain under consideration in this proceeding.

List of Subjects

47 CFR Part 54

Universal service.

47 CFR Part 69

Communications common carriers.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

Attachment A, Service List

The Honorable Reed E. Hundt, Chairman, Federal Communications

Commission, 1919 M Street, NW., Room 814, Washington, DC 20554

The Honorable Rachelle B. Chong, Commissioner, Federal

Communications Commission, 1919 M Street, NW., Room 844, Washington,

DC 20554

The Honorable Susan Ness, Commissioner, Federal Communications

Commission, 1919 M Street, NW., Room 832, Washington, DC 20554

The Honorable James H. Quello, Commissioner, Federal Communications

Commission, 1919 M Street, NW., Room 802, Washington, DC 20554

The Honorable Julia Johnson, State Chair, Chairman, Florida Public

Service Commission, 2540 Shumard Oak Blvd., Gerald Gunter Building,

Tallahassee, FL 32399-0850

The Honorable David Baker, Commissioner, Georgia Public Service

Commission, 244 Washington Street, SW., Atlanta, GA 30334-5701

The Honorable Sharon L. Nelson, Chairman, Washington Utilities and

Transportation Commission, 1300 South Evergreen Park Dr. SW., P.O.

Box 47250, Olympia, WA 98504-7250

The Honorable Laska Schoenfelder, Commissioner, South Dakota Public

Utilities Commission, State Capitol, 500 East Capitol Street,

Pierre, SD 57501-5070

Martha S. Hogerty, Missouri Office of Public Council, 301 West High

Street, Suite 250, P.O. Box 7800, Jefferson City, MO 65102

Tom Boasberg, Federal Communications Commission, Office of the

Chairman, 1919 M Street, NW., Room 814, Washington, DC 20554

Charles Bolle, South Dakota Public Utilities Commission, State

Capitol, 500 East Capitol Street, Pierre, SD 57501-5070

Deonne Bruning, Nebraska Public Service Commission, 300 The Atrium,

1200 N Street, P.O. Box 94927, Lincoln, NE 68509-4927

James Casserly, Federal Communications Commission, Commissioner

Ness's Office, 1919 M Street, NW., Room 832, Washington, DC 20554

Rowland Curry, Texas Public Utility Commission, 1701 North Congress

Avenue, P.O. Box 13326, Austin, TX 78701

Bridget Duff, State Staff Chair, Florida Public Service Commission,

2540 Shumard Oak Blvd., Tallahassee, FL 32399-0866

Kathleen Franco, Federal Communications Commission, Commissioner

Chong's Office, 1919 M Street, NW., Room 844, Washington, DC 20554

Paul Gallant, Commissioner Quello's Office, Federal Communications

Commission, 1919 M Street, NW., Room 802, Washington, DC 20554

Emily Hoffnar, Federal Staff Chair, Federal Communications

Commission, Accounting and Audits Division, Universal Service

Branch, 2100 M Street, NW., Room 8617, Washington, DC 20554

Lori Kenyon, Alaska Public Utilities Commission, 1016 West Sixth

Avenue, Suite 400, Anchorage, AK 99501

Debra M. Kriete, Pennsylvania Public Utilities Commission, North

Office Building, Room 110, Commonwealth and North Avenues, P.O. Box

3265, Harrisburg, PA 17105-3265

Sandra Makeeff, Iowa Utilities Board, Lucas State Office Building,

Des Moines, IA 50319

Philip F. McClelland, Pennsylvania Office of Consumer Advocate, 1425

Strawberry Square, Harrisburg, PA 17120

Thor Nelson, Colorado Office of Consumer Counsel, 1580 Logan Street,

Suite 610, Denver, CO 80203

Barry Payne, Indiana Office of the Consumer Counsel, 100 North

Senate Avenue, Room N501, Indianapolis, IN 46204-2208

Timothy Peterson, Deputy Division Chief, Federal Communications

Commission, Accounting and Audits Division, 2100 M Street, NW., Room

8613, Washington, DC 20554

James Bradford Ramsay, National Association of Regulatory Utility

Commissioners, 1100 Pennsylvania Ave., NW., P.O. Box 684,

Washington, DC 20044-0684

Brian Roberts, California Public Utilities Commission, 505 Van Ness

Avenue, San Francisco, CA 94102

Kevin Schwenzfeier, NYS Dept of Public Service, 3 Empire State

Plaza, Albany, NY 12223

Tiane Sommer, Georgia Public Service Commission, 244 Washington

Street, SW., Atlanta, GA 30334-5701

Sheryl Todd (plus 8 copies), Federal Communications Commission,

Accounting and Audits Division, Universal Service Branch, 2100 M

Street, NW., Room 8611, Washington, DC 20554

[FR Doc. 97-20958 Filed 8-6-97; 8:45 am]

BILLING CODE 6712-01-P