PUBLIC NOTICE Federal Communications Commission 1919 M St., N.W. Washington, D.C. 20554 [DA 96-2091] Released December 12, 1996 FEDERAL-STATE JOINT BOARD ON UNIVERSAL SERVICE: STAFF TO HOLD WORKSHOPS ON PROXY COST MODELS ON JANUARY 14-15, 1997 CC DOCKET 96-45 On November 7, 1996, the Federal-State Joint Board on universal service adopted the Recommended Decision, as required by Section 254 of the Telecommunications Act of 1996 ("1996 Act"). In its decision, the Joint Board recommended the use of a proxy cost model to calculate the cost of providing the services to be supported through the new universal service support mechanism. The Joint Board, however, did not recommend the use of a particular proxy model. Rather the Joint Board set forth eight criteria that the Commission should consider in evaluating the reasonableness of any proxy model. The Joint Board also recommended that the Commission conduct workshops to enable the federal and state staffs to work with industry participants to select a proxy model. Those workshops will be held on January 14 and 15, 1997, in the Commission's room 856 at 1919 M Street, N.W, Washington, D.C. The workshops will begin at 9 a.m. each day. The workshops will consist of round table discussions on issues relating to the selection of a proxy cost model for determining the cost of providing the service supported by the universal service support mechanism. It is anticipated that the workshops will start with a brief presentation by the proponents of the proxy models. Each proponent will highlight the characteristics of the current version of its model, any planned revisions to the model, and a time table for completing those revisions. The round table discussions will then follow. It is anticipated that the following issues may be discussed, including, for example: (1) modeling network investment, including loop plant, switching costs, and other investments (e.g., interoffice network); (2) modeling operating and support expenses, including plant specific operating expanses, non-plant specific expenses, and treatment of joint and common costs; (3) modeling capital expenses, including rate of return on capital and debt, depreciation, and taxes; and (4) validation of the models. The round table participants will include a broad representation of the telecommunications industry. Individuals interested in participating in one of the workshop round tables should submit their request in writing. Each request should include name, organization, address telephone number, fax number, and a brief description of the person's expertise in this area. Such requests should be sent by no later than December 20, 1996, to Astrid Carlson, Universal Service Branch, Accounting and Audits Division, Common Carrier Bureau, FCC, 2100 M Street, Room 8607, Washington, D.C. 20554. Parties that wish to have their proxy cost model considered by the Federal-State staff and discussed at the workshops must submit information about the model not later than January 7, 1997. Three models were already submitted in the record on this proceeding, CC Docket 96-45, prior to the Joint Board's adoption of the Recommended Decision: (1) the Benchmark Cost Model 2 (BCM2), submitted by U S West, Inc. and Sprint Corporation; (2) the Cost Proxy Model, submitted by Pacific Telesis; and (3) the Hatfield Model Version 2.2, Release 2, submitted by AT&T Corporation and MCI Telecommunications, Inc. Identical letters are being sent to the proponents of each of those models requesting further information about their models in writing prior to the workshops. A copy of one of those letters is attached to this Public Notice. Any party submitting a different model is requested to provide the same information about their model when the model is submitted to the Commission, no later than January 7, 1997. Proponents must follow the procedure set forth below for filing comments when submitting a proxy cost model. Interested parties may wish to comment on the questions posed to the model proponents in the attached letter. Commenters are requested to provide, as a preface to their comments, a brief summary not to exceed three single-spaced pages in total. The comments and comment summary should be filed on or before January 7, 1997. Commenters must file an original and four copies of their comments with the Office of the Secretary, Federal Communications Commission, Room 222, 1919 M Street, N.W., Washington, D.C. 20554. Comments should reference CC Docket No. 96-45. Commenters must also serve comments on the Federal-State Joint Board and Joint Board staff in accordance with the attached service list. Commenters should send one copy of their comments to the Commission's copy contractor, International Transcription Service, Inc., Room 140, 2100 M Street, N.W., Washington, D.C. 20037. Comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. 20554. Parties are also asked to submit comments on diskette. Such diskette submissions would be in addition to and not a substitute for the formal filing requirements addressed above. Parties submitting diskettes should submit them to Sheryl Todd, Universal Service Branch, Accounting an Audits Division, 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 in an IBM compatible format using WordPerfect 5.1 for Windows software in a "read only" mode. The diskette should be clearly labelled with the party's name, proceeding, and date of submission. The diskette should be accompanied by a cover letter. For further information contact: Emily Hoffnar, Federal Communications Commission, 202-530-6065, David Krech, Federal Communications Commission, 202-530-6051, William Sharkey, Federal Communications Commission, 202-418-2743, or Sandra Makeeff, Iowa Utilities Board, 515-281-4034. News media contact: Mindy Ginsburg, Federal Communications Commission, 202-418-1500. Attachment: Service List The Honorable Reed E. Hundt, Chairman Federal Communications Commission 1919 M Street, N.W., Room 814 Washington, D.C. 20554 The Honorable Rachelle B. Chong, Commissioner Federal Communications Commission 1919 M Street, N.W., Room 844 Washington, D.C. 20554 The Honorable Susan Ness, Commissioner Federal Communications Commission 1919 M Street, N.W., Room 832 Washington, D.C. 20554 The Honorable Julia Johnson, Commissioner Florida Public Service Commission 2540 Shumard Oak Blvd. Gerald Gunter Building Tallahassee, FL 32399-0850 The Honorable Kenneth McClure, Commissioner Missouri Public Service Commission 301 W. High Street, Suite 530 Jefferson City, MO 65101 The Honorable Sharon L. Nelson, Chairman Washington Utilities and Transportation Commission P.O. Box 47250 Olympia, WA 98504-7250 The Honorable Laska Schoenfelder, Commissioner South Dakota Public Utilities Commission State Capitol, 500 E. Capitol Street Pierre, SD 57501-5070 Martha S. Hogerty Public Counsel for the State of Missouri P.O. Box 7800 Jefferson City, MO 65102 Paul E. Pederson, State Staff Chair Missouri Public Service Commission P.O. Box 360 Jefferson City, MO 65102 Tom Boasberg Federal Communications Commission Office of the Chairman 1919 M Street, N.W., Room 814 Washington, D.C. 20554 Lisa Boehley Federal Communications Commission 2100 M Street, N.W., Room 8605 Washington, D.C. 20554 Charles Bolle South Dakota Public Utilities Commission State Capitol, 500 E. 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, Room 832 Washington, D.C. 20554 John Clark Federal Communications Commission 2100 M Street, N.W., Room 8619 Washington, D.C. 20554 Bryan Clopton Federal Communications Commission 2100 M Street, N.W., Room 8615 Washington, D.C. 20554 Rowland Curry Texas Public Utility Commission 1701 North Congress Avenue P.O. Box 13326 Austin, TX 78701 Bruce B. Ellsworth New Hampshire Public Utilities Commission 8 Old Suncook Road, Building No. 1 Concord, NH 03301-5185 Irene Flannery Federal Communications Commission 2100 M Street, N.W., Room 8922 Washington, D.C. 20554 Daniel Gonzalez Federal Communications Commission Commissioner Chong's Office 1919 M Street, N.W., Room 844 Washington, D.C. 20554 Emily Hoffnar, Federal Staff Chair Federal Communications Commission 2100 M Street, N.W., Room 8623 Washington, D.C. 20554 L. Charles Keller Federal Communications Commission 2100 M Street, N.W., Room 8918 Washington, D.C. 20554 Lori Kenyon Alaska Public Utilities Commission 1016 West Sixth Avenue, Suite 400 Anchorage, AK 99501 David Krech Federal Communications Commission 2025 M Street, N.W., Room 7130 Washington, D.C. 20554 Debra M. Kriete Pennsylvania Public Utilities Commission P.O. Box 3265 Harrisburg, PA 17105-3265 Diane Law Federal Communications Commission 2100 M Street, N.W., Room 8920 Washington, D.C. 20554 Mark Long Florida Public Service Commission 2540 Shumard Oak Blvd. Gerald Gunter Building Tallahassee, FL 32399 Robert Loube Federal Communications Commission 2100 M Street, N.W., Room 8914 Washington, D.C. 20554 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, Pennsylvania 17120 Michael A. McRae D.C. Office of the People's Counsel 1133 15th Street, N.W. -- Suite 500 Washington, D.C. 20005 Tejal Mehta Federal Communications Commission 2100 M Street, N.W., Room 8625 Washington, D.C. 20554 Terry Monroe New York Public Service Commission 3 Empire Plaza Albany, NY 12223 John Morabito Deputy Division Chief, Accounting and Audits Common Carrier Bureau Federal Communications Commission 2000 L Street, N.W., Suite 812 Washington, D.C. 20554 Mark Nadel Federal Communications Commission 2100 M Street, N.W., Room 8916 Washington, D.C. 20554 Lee Palagyi Washington Utilities and Transportation Commission 1300 South Evergreen Park Drive S.W. Olympia, WA 98504 Kimberly Parker Federal Communications Commission 2100 M Street, N.W., Room 8609 Washington, D.C. 20554 Barry Payne Indiana Office of the Consumer Counsel 100 North Senate Avenue, Room N501 Indianapolis, IN 46204-2208 Jeanine Poltronieri Federal Communications Commission 2100 M Street, N.W., Room 8924 Washington, D.C. 20554 James B. Ramsay National Association of Regulatory Utility Commissioners P.O. Box 684 Washington, D.C. 20044-0684 Brian Roberts California Public Utilities Commission 505 Van Ness Avenue San Francisco, CA 94102 Gary Seigel Federal Communications Commission 2000 L Street, N.W., Suite 257 Washington, D.C. 20554 William Sharkey Federal Communications Commission 1919 M Street, N.W., Room 534N Washington, D.C. 20554 Richard D. Smith Federal Communications Commission 2100 M Street, N.W., Room 8605 Washington, D.C. 20554 Pamela Szymczak Federal Communications Commission 2100 M Street, N.W., Room 8912 Washington, D.C. 20554 Brad Wimmer Federal Communications Commission 1919 M Street, N.W., Room 518 Washington, D.C. 20554 Lori Wright Federal Communications Commission 2100 M Street, N.W., Room 8603 Washington, D.C. 20554 FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 December 12, 1996 Glenn Brown Executive Director-Public Policy U S West, Inc. 1020 Nineteenth Street, N.W. Washington, DC 20036 Dear Mr. Brown: On November 7, 1996, the Federal-State Joint Board on Universal Service adopted the Recommended Decision required by Section 254 of the Telecommunications Act of 1996. In that decision, the Joint Board recommended that the Commission work with state commissions to develop an adequate proxy model that could be used to determine high cost support. The Joint Board further recommended that the federal and state staffs work collaboratively to conduct workshops with interested parties on the development of a proxy model(s). On December 12, 1996, the attached Public Notice was released announcing that the workshops will be held on January 14 and 15, 1997. The federal and state staffs believe that there are several questions that should be specifically addressed by the sponsors of the proxy models prior to the workshops. Therefore, we ask that you specifically address the following questions and provide data where appropriate. Model revisions 1) With regard to the model that you have submitted, list and explain the differences between the current model and the version of the model previously filed in CC Docket 96-45. Explain any plans for additional enhancements to the model. Provide a date certain for when the planned enhancements will be provided to the Commission. 2) Using the current version of your model, provide study area results for Southwestern Bell - Texas (SWTX). For this study area please provide: a. Summary statistics: total investment; investment per line; loop investment per line; end office switching investment per line; monthly cost per line; loop monthly cost per line; end office switching monthly cost per line; monthly transport cost per line; total households; total residential lines; total single business lines; total business lines; total switched lines; the number of residential lines per density zone, and monthly cost per line per density zone. b. Model results reported on an ARMIS basis: all expenses and plant in service rows that are contained in ARMIS report 43-03. If any of the rows can not be shown separately, provide a list of rows that have been combined and the algorithm used to combine the rows. c. Switching: the total number of switches; and the lines per each switch. Please explain how the cost of the switches was determined, provide all cost input data, and explain how the model determines whether a switch will be a host, remote, or stand alone switch. d. Cable and wire statistics: percent underground, buried and aerial; the length, gauge and size of copper cable used; length and size of fiber cable used; fill factors used as inputs; percent distribution fill determined by the number of lines served divided by the total number of distribution lines installed; percent feeder fill determined by the number of lines served divided by the total number of feeder lines installed (when the feeder is fiber, explain what assumptions were used to determine the capacity and use of the fiber); the distribution of households by loop length; and any factors that alter the cost of cable or the installation of cable such as additional costs associated with placing cable in dense urban areas. e. Digital carrier: the number of lines served by carrier, the investment in carrier and investment in carrier as a percent of circuit investment. f. Depreciation: the model depreciation rate and expected life by type of plant. g. Expenses: direct network expenses; indirect expenses; and common and overhead expenses. Please explain how the model allocates expenses among these various expense categories. h. Capital costs: return on capital; and taxes. Please explain how the percentage return on capital was calculated; and how tax gross-ups were determined. i. Support: the aggregate support at $20, $30 and $40 benchmark levels and the number of households by cost category, where cost categories are ranges of cost per month such as greater than or equal to $5 and less than $10. Documentation and verification 3) Explain how the model complies with the criteria for evaluating proxy models set forth in paragraph 277 of the Joint Board's Recommended Decision. 4) In its Recommended Decision, the Joint Board recommended that universal service support be provided for single line businesses in high cost areas. How do the models calculate costs for single line businesses? 5) List all equations used in the model. For each variable used in an equation, provide the definition of the variable, the default value of the variable, identify the source of the value, and state whether the user can change the value of the variable. 6) What sources are available to verify that a network derived by a model is capable of delivering telecommunications services consistent with the standard of service adopted in the Joint Board's Recommended Decision? 7) Your model assumes that vendors typically offer a discount off their list prices for switches and digital loop carrier equipment. Purchasers, however, may be prohibited from disclosing the size of such discounts. Given the inability to provide such information, what alternatives are available to acquire such information? Outside plant 8) Describe the specific manner in which network design parameters (cable gauge, capacitance, loading, resistance, attenuation, cable fill, and concentrator or repeater placement) are used in the development of the models. 9) What service capability will local loops have if built to the specifications used in the model? Will all local loops provide (1) full time (non-traffic sensitive and non-party line) service between the customer and the serving wire center and/or (2) digital subscriber line (DSL) capability as described in "BOC Notes on the LEC Networks - 1994?" Will all local loops be capable of providing (1) basic rate ISDN service (2B+D) and/or (2) full duplex service at the DS1 level (commonly called T1) of 1.544 Mbps? 10) The Hatfield and BCM2 models differ with regard to the sharing of structure investments, the mix of aerial, underground and buried cable, and the relationship between the cost of installation and the terrain. For example, the Hatfield model shares structure costs among three utilities, while the BCM2 model assigns 100% of the cost of structures to the telephone company. The Hatfield model assumes that cable will be extended by 20% when encountering difficult terrain rather then using terrain specific cost characteristics, while the BCM2 uses terrain specific cost characteristics. The BCM2, however, aggregates the terrain specific costs by activities, such as trenching in hard rock or restoring asphalt. Please provide documentation that supports the assumptions used in the models. Alternatively, please provide documentation that refutes these assumptions. Switching 11) The models, at least in part, rely on Bellcore's Local Exchange Routing Guide, which may not include all wire centers. Do the models reflect all wire center locations? Should the models reflect all wire center locations? Do the models include host-remote configurations when it is efficient to do so? Demand for lines 12) Do the models accurately estimate the total demand for lines in a particular geographic area, such as a Census block group, wire center, or service area? What types of lines (e.g. residential, single-line business, multiline business, and special access) are, or should be, included in a model's estimated demand for lines? Can the model estimate the incremental cost of adding households to the network? Expenses 13) All of the models appear to base repair and maintenance and retail costs on historical costs. In some cases this is done based on a historical relationship between investment and expenses as reported in ARMIS; in other cases they are based on per line amounts. For these categories of expense, to what extent are these historical expenses a reasonable approximation of forward looking expenses? How are gains in productivity due to technological advances and increased competitive pressure captured by the model's estimates of repair and maintenance and retail costs? 14) Do the retail costs--the cost of bill production, billing inquiries, sales and advertising--developed for your model reflect the costs associated with the services included in the revenue benchmark included in the Recommended Decision? What share of your retail costs are associated with bill production and billing inquiries? How are retail costs developed to capture the costs of services included in the revenue benchmark while excluding retail costs associated with services not included in the benchmark, such as intraLATA toll. 15) How is depreciation expense treated in the current version of the model? In particular, describe in detail the set of plant categories considered and the asset lives or economic depreciation rates associated with each. Justify, if possible, the default choices made in the model. Describe the extent to which the model has sufficient built in flexibility to accurately reflect differing decisions by the FCC and state commissions regarding depreciation rates? Are there enough distinct categories of plant to accurately model forward looking depreciation expense? For example, should asset lives for conduit necessarily be the same as cable lives? 16) The BCM2 includes 75% of $133.39 per year or $8.34 per month per line to reflect non-plant-related expenses such as marketing and customer operations. The adjustable 10% overhead figure in the Hatfield model is the only similar component. Should costs for customer or corporate operations be a fixed amount per line? If not, what should be the basis for allocating these costs? To what extent should basic local service be charged with marketing or customer operations expenses? Use of proxy models for multiple objectives 17) Can a single proxy model be used to estimate the cost of the local exchange network for universal service support and for other objectives such as the pricing of network elements or access reform? Does a network specifically dedicated to universal service objectives differ in a significant way from the summation of network elements envisioned in Section 251? Are there insurmountable problems in the treatment of common costs in the different uses of the model? Describe specifically the modifications, if any, that would be required if a single model is used for multiple objectives. Please submit your responses by January 7, 1996 to the federal and state staff appearing on the service list attached to the December 12, 1996 Public Notice. Your responses, including data diskettes, should also be filed with the Commission's Office of the Secretary and the Commission's copy contractor, International Transcription Service. If you have any questions, please call Emily Hoffnar, Federal Communications Commission, at (202) 530-6065, Robert Loube, Federal Communications Commission, at (202) 530-6033, or Sandra Makeeff, Iowa Utilities Board at (515) 281-4034. Sincerely, John S. Morabito Deputy Chief, Accounting and Audits Division Common Carrier Bureau