99-15025. Federal-State Joint Board on Universal Service; Forward-Looking Mechanism for High Cost Support for Non-Rural LECs

[Federal Register Volume 64, Number 113 (Monday, June 14, 1999)]
[Proposed Rules]
[Pages 31780-31806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15025]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36, 54, and 69

[CC Docket Nos. 96-45 and 97-160; FCC 99-120]


Federal-State Joint Board on Universal Service; 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: This document concerning the Federal-State Joint Board on 
Universal Service proposes input values for the forward-looking 
mechanisms cost model for determining support for non-rural high-cost 
carriers. Comments are sought to supplement the record so that the 
Commission can select final input values.

DATES: Comments are due on or before July 2, 1999 and reply comments 
are due on or before July 16, 1999.
    Written comments by the public on the modified information 
collections are due on or before July 2, 1999 and reply comments are 
due on or before July 16, 1999. Written comments must be submitted by 
the Office of Management and Budget (OMB) on the modified information 
collections on or before August 13, 1999.

ADDRESSES: Parties who choose to file by paper must file an original 
and four copies of each filing. All filings must be sent to the 
Commission's Secretary, Magalie Roman Salas, Office of the Secretary, 
Federal Communications Commission, 445 Twelfth Street, S.W., TW-A325, 
Washington, D.C. 20554. In addition to filing comments with the 
Secretary, a copy of any comments on the information collections 
contained herein should be submitted to Judy Boley, Federal 
Communications Commission, Room 1-C804, 445 Twelfth Street, S.W., 
Washington, DC 20554, or via the Internet to [e-mail], and to 
Timothy Fain, OMB Desk Officer, 10236 NEOB, 725__17th Street, N.W., 
Washington, DC 20503 or via the Internet to [e-mail].

FOR FURTHER INFORMATION CONTACT: Richard Smith, Attorney, Common 
Carrier Bureau, Accounting Policy Division, [phone]. For 
additional information concerning the information collections contained 
in this Further Notice of Proposed Rulemaking contact Judy Boley at 
202-418-0214, or via the Internet at [e-mail].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's 
document released on May 28, 1999. The full text of this document is 
available for public inspection during regular business hours in the 
FCC Reference Center, Room CY-A257, 445 Twelfth Street, S.W., 
Washington, D.C. 20554.

Initial Paperwork Reduction Act Analysis

    1. This Further Notice of Proposed Rulemaking contains a modified 
information collection. The Commission, as part of its continuing 
effort to reduce paperwork burdens, invites the general public and the 
Office of Management and Budget (OMB) to comment on the information 
collections contained in this Further Notice of Proposed Rulemaking, as 
required by

[[Page 31781]]

the Paperwork Reduction Act of 1995, Public Law 104-13. Public and 
agency comments are due at the same time as other comments on this 
Further Notice of Proposed Rulemaking; OMB notification of action is 
due August 13, 1999. Comments should address: (a) whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information 
shall have practical utility; (b) the accuracy of the Commission's 
burden estimates; (c) ways to enhance the quality, utility, and clarity 
of the information collected; and (d) ways to minimize the burden of 
the collection of information on the respondents, including the use of 
automated collection techniques or other form of information 
technology.
    OMB Approval Number: 3060-0793.
    Title: Procedures for States Regarding Lifeline Consents. Adoption 
of Intrastate Discount Matrix, and Designation of Eligible 
Telecommunications Carriers.
    Form No.: N/A.
    Type of Review: Revision of a currently approved collection.
    Respondents: Business or other for profit.

----------------------------------------------------------------------------------------------------------------
                                                                                                        Total
                                                                        Number of     Estimate time     annual
                                                                       respondents    per response      burden
                                                                                         (hours)       (hours)
----------------------------------------------------------------------------------------------------------------
Self-Certification as a rural company for companies serving less                  5               1            5
 than 100,000 access lines.........................................
Self-Certification as a rural company for companies serving more                 20               1           20
 than 100,000 access lines.........................................
----------------------------------------------------------------------------------------------------------------

    Total Annual Burden: 25 hours.
    Estimated costs per respondent: $0.
    Needs and Uses: All the requirements contained herein are necessary 
to implement the congressional mandate for universal service. These 
reporting requirements are necessary to verify that particular carriers 
and other respondents are eligible to receive universal service 
support. In this document the Commission is proposing to change the way 
in which LECs file rural certification letters. The Commission proposes 
that once it has clarified the meaning of ``local exchange operating 
entity'' and ``communities of more than 50,000'' in section 153(37), it 
should require carriers with more than 100,000 access lines that seek 
rural status to file certifications for the period beginning January 1, 
2000, consistent with the Commission's interpretation of the ``rural 
telephone company'' definition.

I. Introduction

    2. In the Telecommunications Act of 1996 (1996 Act), Congress 
directed this Commission and the states to take the steps necessary to 
establish support mechanisms to ensure the delivery of affordable 
telecommunications service to all Americans. In response to this 
directive, the Commission has taken action to put in place a universal 
service support system that will be sustainable in an increasingly 
competitive marketplace. In the Universal Service Order, 62 FR 32862 
(June 17, 1997), the Commission adopted a plan for universal service 
support for rural, insular, and high cost areas to replace longstanding 
federal subsidies to incumbent local telephone companies with explicit, 
competitively neutral federal universal service support mechanisms. The 
Commission adopted the recommendation of the Federal-State Joint Board 
on Universal Service (Joint Board) that an eligible carrier's level of 
universal service support should be based upon the forward-looking 
economic cost of constructing and operating the network facilities and 
functions used to provide the services supported by the federal 
universal service support mechanisms.
    3. Our plan to adopt a mechanism to estimate forward-looking cost 
has proceeded in two stages. On October 28, 1998, with the release of 
the Platform Order, 63 FR 63993 (November 18, 1998), the Commission 
completed the first stage of this proceeding: the selection of the 
model platform. The platform encompasses the aspects of the model that 
are essentially fixed, primarily the assumptions about the design of 
the network and network engineering. In this document, we move toward 
completion of the second stage of this proceeding, by proposing input 
values for the model, such as the cost of cables, switches, and other 
network components, in addition to various capital cost parameters. For 
the most important inputs, we provide a description of the methodology 
we have used to arrive at the proposed values. In addition, we seek to 
supplement the record regarding certain inputs to the model.
    4. The forward-looking cost of providing supported services 
estimated by the model will be used to determine high cost support for 
non-rural carriers beginning January 1, 2000. The Commission is 
adopting a companion Order and Further Notice that establishes the 
framework for determining federal high cost support levels and seeks 
comment on the details of that mechanism.

II. Estimating Forward-Looking Economic Cost

A. Designing a Forward-Looking Wireline Local Telephone Network

    5. To understand the assumptions made in the mechanism, it is 
necessary to understand the layout of the current wireline local 
telephone network. In general, a telephone network must allow any 
customer to connect to any other customer. In order to accomplish this, 
a telephone network must connect customer premises to a switching 
facility, ensure that adequate capacity exists in that switching 
facility to process all customers' calls that are expected to be made 
at peak periods, and then interconnect that switching facility with 
other switching facilities to route calls to their destinations. A wire 
center is the location of a switching facility. The wire center 
boundaries define the area in which all customers are connected to a 
given wire center. The Universal Service Order required the models to 
use existing incumbent LEC wire center locations in estimating forward-
looking cost.
    6. Within the boundaries of each wire center, the wires and other 
equipment that connect the central office to the customers' premises 
are known as outside plant. Outside plant can consist of either copper 
cable or a combination of optical fiber and copper cable, as well as 
associated electronic equipment. Copper cable generally carries an 
analog signal that is compatible with most customers' telephone 
equipment, but thicker, more expensive cables or loading coils must be 
used to carry signals over greater distances. Optical fiber cable 
carries a digital signal that is incompatible with most customers' 
telephone equipment, but the quality of a signal carried on optical 
fiber cable is superior at greater distances when compared to a signal 
carried on copper

[[Page 31782]]

wire. Generally, when a neighborhood is located too far from the wire 
center to be served with copper cables alone, an optical fiber cable 
will be deployed to a point within the neighborhood, where a piece of 
equipment will be placed that converts the digital light signal carried 
on optical fiber cable to an analog, electrical signal that is 
compatible with customers' telephones. This equipment is known as a 
digital loop carrier remote terminal, or DLC. From the DLC, copper 
cables of varying gauge extend to all of the customer premises in the 
neighborhood. Where the neighborhood is close enough to the wire center 
to serve entirely on copper cables, a copper trunk connects the wire 
center to a central point in the serving area, called the serving area 
interface (SAI), and copper cables will then connect the SAI to the 
customers in the serving area. The portion of the loop plant that 
connects the central office with the SAI or DLC is known as the feeder 
plant, and the portion that runs from the DLC or SAI throughout the 
neighborhood is known as the distribution plant.
    7. The model's estimate of the cost of serving the customers 
located within a given wire center's boundaries includes the 
calculation of switch size, the lengths, gauge, and number of copper 
and fiber cables, and the number of DLCs required. These factors 
depend, in turn, on how many customers the wire center serves, where 
the customers are located within the wire center boundaries, and how 
they are distributed within neighborhoods. Particularly in rural areas, 
some customers may not be located in neighborhoods at all but, instead, 
may be scattered throughout outlying areas. In general, the model 
divides the area served by the wire center into smaller areas known as 
serving areas. For serving areas sufficiently close to the wire center, 
copper feeder cable extends from the wire center to a SAI where it is 
cross-connected to copper distribution cables. If the feeder is fiber, 
it extends to a DLC terminal in the serving area, which converts 
optical digital signals to analog signals. Individual circuits from the 
DLC are cross-connected to copper distribution cables at the adjacent 
SAI.
    8. The model assumes that wire centers are interconnected with one 
another using optical fiber networks known as Synchronous Optical 
Network (SONET) rings. The infrastructure to interconnect the wire 
centers is known as the interoffice network, and the carriage of 
traffic among wire centers is known as transport. In cases where a 
number of wire centers with relatively few people within their 
boundaries are located in close proximity to one another, it may be 
more economical to use the processor capacity of a single switch to 
supervise the calls of the customers in the boundaries of all the wire 
centers. In that case, a full-capacity switch (known as a host) is 
placed in one of the wire centers and less expensive, more limited-
capacity switches (known as remotes) are placed in the other wire 
centers. The remotes are then connected to the host with interoffice 
facilities. Switches that are located in wire centers with enough 
customers within their boundaries to merit their own full-capacity 
switches and that do not serve as hosts to any other wire centers are 
called stand-alone switches.
    9. There are also a number of expenses and general support 
facilities (GSF) costs associated with the design of a forward-looking 
wireline telephone network. GSF costs include the investment related to 
vehicles, land, buildings, and general purpose computers. Expenses 
include: plant specific expenses, such as maintenance of facilities and 
equipment expenses; plant non-specific expenses, such as engineering, 
network operations, and power expenses; customer service expenses, such 
as marketing, billing, and directory listing expenses; and corporate 
operations expenses, such as administration, human resources, legal, 
and accounting expenses.

B. Synthesis Model

    10. The ``synthesis'' model adopted in the Platform Order allows 
the user to estimate the cost of building a telephone network to serve 
subscribers in their actual geographic locations, to the extent these 
locations are known. To the extent that the actual geographic locations 
of customers are not available, the Commission determined that the 
synthesis model should assume that customers are located near roads.
    11. Once the customer locations have been determined, the model 
employs a clustering algorithm to group customers into serving areas in 
an efficient manner that takes into consideration relevant engineering 
guidelines. After identifying efficient serving areas, the model 
designs outside plant to the customer locations. In doing so, the model 
employs a number of cost minimization principles designed to determine 
the most cost-effective technology to be used under a variety of 
circumstances, such as varying terrain and density.
    12. The Commission concluded that the federal universal service 
mechanism should incorporate, with certain modifications, the HAI 5.0a 
switching and interoffice facilities module to estimate the cost of 
switching and interoffice transport. The Commission noted that it would 
consider adopting the LERG at the inputs stage of this proceeding to 
determine the deployment of host and remote switches. In addition, the 
Commission adopted the HAI platform module for calculating expenses and 
capital costs, such as depreciation.
    13. The Commission noted that technical improvements to the cost 
model will continue, both before implementation of the model for non-
rural carriers and on an ongoing basis, as necessary. The Commission 
therefore delegated to the Bureau the authority to make changes or 
direct that changes be made to the model platform as necessary and 
appropriate to ensure that the platform of the federal mechanism 
operates as described in the Platform Order. As contemplated in the 
Platform Order, Commission staff and interested parties have continued 
to review the model platform to ensure that it operates as intended. As 
a result, some refinements have been made to the model platform adopted 
in the Platform Order.

C. Selecting Forward-Looking Input Values

    14. In the Universal Service Order, the Commission adopted ten 
criteria to be used in determining the forward-looking economic cost of 
providing universal service in high cost areas. These criteria provide 
specific guidance for our selection of input values for use in the 
synthesis model. Rather than reflecting existing incumbent LEC 
facilities, the technology assumed in the model ``must be the least-
cost, most-efficient, and reasonable technology for providing the 
supported services that is currently being deployed.'' As noted, 
existing LEC plant does not necessarily, or even likely, reflect 
forward-looking technology or design choices. Similarly, the input 
values we tentatively select in this Notice are not intended to 
replicate any particular company's embedded or book costs. Criterion 
three directs that ``costs must not be the embedded cost of the 
facilities, functions, or elements.'' Rather, the model ``must be based 
upon an examination of the current cost of purchasing facilities and 
equipment.''
    15. As discussed, we generally have proposed using nationwide, 
rather than company-specific input values in the federal mechanism. In 
many cases, the only data for various inputs on the record in this 
proceeding are embedded cost, company-specific data. We have used 
various techniques to convert these data to forward-looking values. For 
example, we propose modifying the

[[Page 31783]]

switching data to adjust for the effects of inflation and the cost 
changes unique to the purchase and installation of digital switches. We 
propose nationwide averages, rather than company-specific values, to 
mitigate the rewards to less efficient companies.
    16. Although the BCPM sponsors have provided nationwide default 
values, they and other LECs generally advocate company-specific input 
values. For purposes of determining federal universal service support 
amounts, we believe that nationwide default values generally are more 
appropriate than company-specific values. Under the new mechanism, 
support is based on the estimated costs that an efficient carrier would 
incur to provide the supported services, rather than on the specific 
carrier's book costs. There may be some categories of inputs, however, 
where company-specific or state specific input values might be 
appropriate for use in the federal mechanism. We seek comment on 
specific alternatives to nationwide values for certain input values, as 
discussed. We make no finding with respect to whether nationwide values 
would be appropriate for purposes other than determining federal 
universal service support.

III. Determining Customer Locations

A. Issues for Comment

1. Geocode Data
    17. While we affirm our conclusion in the Platform Order that 
geocode data should be used to locate customers in the federal 
mechanism, we tentatively conclude that at this time we cannot adopt 
any particular source of geocode data because interested parties have 
not had adequate access or time to review such data. We tentatively 
conclude that a road surrogate algorithm will be used to locate 
customers in the federal mechanism until a source of geocode data is 
selected by the Commission. We reiterate our expectation, however, that 
we will identify and select a source of accurate and verifiable geocode 
data in the future for use in the federal mechanism.
    18. In the Platform Order, we concluded that a model is most likely 
to select the least-cost, most-efficient outside plant design if it 
uses the most accurate data for locating customers within wire centers, 
and that the most accurate data for locating customers within wire 
centers are precise latitude and longitude coordinates for those 
customers' locations. We noted that commenters generally support the 
use of accurate geocode data in the federal mechanism where available. 
We further noted that the only geocode data in the record were those 
prepared for HAI by PNR Associates (PNR), but that ``our conclusion 
that the model should use geocode data to the extent that they are 
available is not a determination of the accuracy or reliability of any 
particular source of the data.'' Although commenters support the use of 
accurate geocode data, several commenters question whether the PNR 
geocode data are adequately available for review by interested parties.
    19. In the Universal Service Order, the Commission required that 
the ``model and all underlying data, formulae, computations, and 
software associated with the model must be available to all interested 
parties for review and comment.'' In an effort to comply with this 
requirement, the Commission has made significant efforts to encourage 
parties to submit geocode data on the record in this proceeding. PNR 
took initial steps to comply with this requirement in December 1998 by 
making available the ``BIN'' files derived from the geocoded points to 
interested parties pursuant to the Protective Order, 63 FR 42753 
(August 11, 1998). In addition, PNR has continued to provide access to 
the underlying geocode data at its facility in Pennsylvania. Several 
commenters, in petitions for reconsideration of the Platform Order, 
have argued that the availability of the BIN data alone is not 
sufficient to comply with the requirements of criterion eight, 
particularly in light of the expense and conditions imposed by PNR in 
obtaining access to the geocode point data.
    20. We tentatively conclude that interested parties have not had an 
adequate opportunity to review and comment on the accuracy of the PNR 
geocode data. We note that a nationwide customer location database 
will, by necessity, be voluminous, relying on a variety of underlying 
data sources. In order to comply with criterion eight, all underlying 
data must be reasonably available to interested parties for review. In 
light of the concerns expressed by several commenters relating to the 
conditions and expense in obtaining data from PNR, we find that no 
source of geocode data has been made adequately available for review. 
We anticipate that a source of accurate and verifiable geocode data can 
be selected for use in the federal mechanism in the future and we 
encourage parties to make continued efforts to ensure that all 
underlying geocode data are available for review. For example, we note 
that PNR has contacted its data vendors for the purpose of making 
additional underlying data more freely available to parties in this 
proceeding. As noted in the Platform Order, we recognize that more 
comprehensive geocode data are likely to be available in the future and 
encourage parties to continue development of a data source that 
complies with the criteria outlined in the Universal Service Order for 
use in the federal mechanism. We therefore seek further comment on a 
source of geocode customer locations that will comply with the 
Commission's criteria for use in the federal mechanism. In addition, we 
seek comment on the availability for review of the PNR geocode data, 
including any further measures necessary to ensure that the PNR geocode 
data are sufficiently available for review by the public.
2. Road Surrogate Customer Locations
    21. We tentatively conclude that the road surrogating algorithm 
proposed by PNR should be used to develop road surrogate customer 
locations for the federal universal service mechanism. In the Platform 
Order, we concluded that, in the absence of actual geocode customer 
location data, BCPM's rationale of associating road networks and 
customer locations provides the most reasonable approach for 
determining customer locations. As anticipated in the Platform Order, 
once a source of geocode data has been selected, the road surrogate 
customer locations will be used only in the absence of geocode customer 
location data.
    22. As noted in the Platform Order, ``associating customers with 
the distribution of roads is more likely to correlate to actual 
customer locations than uniformly distributing customers throughout the 
Census Block, as HCPM proposes, or uniformly distributing customers 
along the Census Block boundary, as HAI proposes.'' We therefore 
concluded in the Platform Order that the selection of a precise 
algorithm for placing road surrogates should be conducted in the inputs 
stage of this proceeding.
    23. Currently, there are two road surrogating algorithms on the 
record in this proceeding--those proposed by PNR and Stopwatch Maps. On 
March 2, 1998, the HAI proponents provided a description of the road 
surrogate methodology developed by PNR for locating customers. On 
January 27, 1999, PNR made available for review by the Commission and 
interested parties, pursuant to the terms of the Protective Order, the 
road surrogate point data for all states except Alaska, Iowa, Virginia, 
Puerto Rico and eighty-four wire centers in various other states. On 
February 22, 1999, PNR filed a more detailed

[[Page 31784]]

description of its road surrogate algorithm.
    24. In general, the PNR road surrogate algorithm utilizes the 
Census Bureau's Topologically Integrated Geographic Encoding and 
Referencing (TIGER) files, which contain all the road segments in the 
United States. For each Census Block, PNR determines how many customers 
and which roads are located within the Census Block. For each Census 
Block, PNR also develops a list of road segments. The total distance of 
the road segments within the Census Block is then computed. Roads that 
are located entirely within the interior of the Census Block are given 
twice the weight as roads on the boundary. This is because customers 
are assumed to live on both sides of a road within the interior of the 
Census Block. In addition, the PNR algorithm excludes certain road 
segments along which customers are not likely to reside. For example, 
PNR excludes highway access ramps, alleys, and ferry crossings. The 
total number of surrogate points is then divided by the computed road 
distance to determine the spacing between surrogate points. Based on 
that distance, the surrogate customer locations are uniformly 
distributed along the road segments.
    25. Stopwatch Maps has compiled road surrogate customer location 
files for six states suitable for use in the federal mechanism. We 
tentatively conclude, however, that until a more comprehensive data set 
is made available, the Stopwatch data set will not comply with the 
Universal Service Order's criterion that the underlying data are 
available for review by the public. In addition, we note that the 
availability of only six states is of limited utility in a nationwide 
model.
    26. We tentatively conclude that the PNR road surrogate algorithm 
is a reasonable method for locating customers in the absence of actual 
geocode data. We note that PNR's methodology of excluding certain road 
segments is consistent with the Commission's conclusion in the Platform 
Order that certain types of roads and road segments should be excluded 
because they are unlikely to be associated with customer locations. In 
addition, we note that PNR's reliance on the Census Bureau's TIGER 
files ensures a degree of reliability and availability for review of 
much of the data underlying PNR's road surrogate algorithm, in 
compliance with criterion eight of the Universal Service Order. We note 
that the HAI proponents contend that use of a surrogate algorithm may 
overstate the amount of plant necessary to provide supported services. 
We seek comment on the validity of this contention. We also note that 
PNR has indicated that it intends to finalize a number of improvements 
to the road surrogate algorithm and data. For example, PNR states that 
the new release will incorporate any new input requirements relating to 
an authoritative wire center list, housing units versus households, and 
treatment of phone penetration rates. In addition, the new release will 
include data for all fifty states, Washington, D.C., and Puerto Rico. 
We seek comment on our tentative conclusion to adopt the PNR road 
surrogate algorithm to determine customer locations, and to adopt the 
PNR road surrogate data set for use in the model beginning on January 
1, 2000. We also seek comment on any changes that should be made to the 
PNR methodology to improve the accuracy of the customer locations it 
generates.
3. Methodology for Estimating the Number of Customer Locations
    27. In addition to selecting a source of customer data, we also 
must select a methodology for estimating the number of customer 
locations within the geographic region that will be used in developing 
the customer location data. We also must determine how demand for 
service at each location should be estimated and how locations should 
be allocated to each wire center.
    28. In the Universal Service Order, the Commission concluded that a 
``model must estimate the cost of providing service for all businesses 
and households within a geographic region.'' In the Inputs Public 
Notice, 63 FR 28339 (May 22, 1998), the Bureau sought comment on the 
appropriate method for defining ``households,'' or residential 
locations, for the purpose of calculating the forward-looking cost of 
providing supported services. Model proponents and interested parties 
have proposed alternative methods to comply with this requirement.
    29. The HAI sponsors propose that we use the methodology devised by 
PNR, which is based upon the number of households in each Census Block, 
while the BCPM sponsors propose that we use a methodology based upon 
the number of housing units in each Census Block. A household is an 
occupied residence, while housing units include all residences, whether 
occupied or not.
    30. Specifically, the HAI sponsors advocate the use of the PNR 
National Access Line Model to estimate the number of customer locations 
within Census Blocks and wire centers. The PNR National Access Line 
Model uses a variety of information sources, including: survey 
information, the LERG, Business Location Research (BLR) wire center 
boundaries, Dun & Bradstreet's business database, Metromail's 
residential database, Claritas' demographic database, and U.S. Census 
estimates. PNR's model uses these sources to estimate the number of 
residential and business locations, and the number of access lines 
demanded at each location. The model makes these estimations for each 
Census Block, and for each wire center in the United States.
    31. At the conclusion of PNR's process for estimating the number of 
customer locations: (1) PNR's estimate of residential locations is 
greater than or equal to the Census Bureau's estimate of households, by 
Census Block Group, and its estimate is disaggregated to the Census 
Block level, (2) PNR's estimate of demand for both residential and 
business lines in each study area is greater than or equal to the 
number of access lines in the Automated Reporting and Management 
Information System (ARMIS) for that study area, and the estimates are 
available by location at the Block level, and (3) each customer 
location is associated with a particular wire center.
    32. The BCPM sponsors rely on many of the same data sources as 
those used in PNR's National Access Line Model. For example, BCPM 3.1 
uses wire center data obtained from BLR and business line data obtained 
from PNR. In estimating the number of residential locations, however, 
the BCPM sponsors use Census data that include household and housing 
unit counts from the 1990 Census, updated based upon 1995 Census 
statistics regarding household growth by county. In addition, rather 
than attempting to estimate demand by location at the Block level, the 
BCPM model builds two lines to every residential location and at least 
six lines to every business.
    33. The synthesis model currently calculates the average cost per 
line by dividing the total cost of serving customer locations by the 
current number of lines. Because the current number of lines is used in 
this average cost calculation, the HAI sponsors argue that the total 
cost should be determined by using the current number of customer 
locations. The HAI sponsors contend that ``the key issue is the 
consistency of the numerator and denominator'' in the average cost 
calculation. The HAI sponsors argue that other approaches are 
inconsistent because they select the highest possible cost numerator 
and divide by the lowest possible line denominator, and therefore 
result in larger than necessary support levels. The HAI sponsors argue 
that, in

[[Page 31785]]

order to be consistent, housing units must be used in the determination 
of total lines if they are used in the determination of total costs. 
The HAI sponsors contend that ``[i]f used consistently in this manner, 
building to housing units as GTE proposes is unlikely to make any 
difference in cost per line.''
    34. In contrast, the BCPM sponsors and other commenters contend 
that the total cost should include the cost of providing service to all 
possible customer locations, even if some locations currently do not 
receive service. Furthermore, the BCPM sponsors contend that if total 
cost is based on a smaller number of locations, support will not be 
sufficient to enable carriers to meet their carrier-of-last-resort 
obligations. The BCPM sponsors also argue that basing the estimate of 
residential locations on households instead of housing units will 
underestimate the cost of building a network that can provide universal 
service. The BCPM sponsors, as well as some other commenters, contend 
that residential locations should be based on the number of housing 
units--whether occupied or unoccupied. These commenters contend that 
only this approach reflects the obligation to provide service to any 
residence that may request it in the future.
    35. We tentatively conclude that PNR's process for estimating the 
number of customer locations should be used for developing the customer 
location data. We also tentatively conclude that we should use PNR's 
methodology for estimating the demand for service at each location, and 
for allocating customer locations to wire centers. We believe that the 
PNR methodology is a reasonable method for determining the number of 
customer locations to be served in calculating the cost of providing 
supported services. To the extent that the PNR methodology includes the 
cost of providing service to all currently served households, we 
tentatively conclude that this is consistent with a forward-looking 
cost model, which is designed to estimate the cost of serving current 
demand. As noted by the HAI sponsors, adopting housing units as the 
standard would inflate the cost per line by using the highest possible 
numerator (all occupied and unoccupied housing units) and dividing by 
the lowest possible denominator (the number of customers with 
telephones).
    36. In addition, we do not believe that including the cost of 
providing service to all housing units will promote universal service 
to unserved customers or areas. We note that there is no guarantee that 
carriers would use any support derived from the cost of serving all 
housing units to provide service to these customers. Many states permit 
carriers to charge substantial line extension or construction fees for 
connecting customers in remote areas to their network. If that fee is 
unaffordable to a particular customer, raising the carrier's support 
level by including the costs of serving that customer in the model's 
calculations would have no effect on whether the customer actually 
receives service. In fact, as long as the customer remains unserved, 
the carriers would receive a windfall. We recognize that serving 
unserved customers in such circumstances is an important universal 
service goal. As discussed in the companion Order and Further Notice 
adopted on May 28, 1999, we will initiate a separate proceeding in July 
1999 to investigate the issue of unserved areas.
    37. If we were to calculate the costs of a network that would serve 
all potential customers, it would not be consistent to calculate the 
cost per line by using current demand. In other words, it would not be 
consistent to estimate the cost per line by dividing the total cost of 
serving all potential customers by the number of lines currently 
served. We note, however, that the level and source of future demand is 
uncertain. Future demand might include not only demand from currently 
unoccupied housing units, but also demand from new housing units, or 
potential increases in demand from currently subscribing households. We 
also recognize that population or demographic changes may cause future 
demand levels in some areas to decline. Given the uncertainty of future 
demand, we are concerned that including such costs may not reflect 
forward-looking costs and may perpetuate the system of implicit 
support.
    38. We recognize, however, that additional comment would be helpful 
with regard to certain issues. For example, if a currently vacant unit 
will again receive service in the near future, one might argue that it 
should be included in the calculation of total cost. It is also 
possible that housing stock is subject to a type of churn that could 
inflate the number of households used in determining total cost without 
affecting the total number of lines. That is, a certain percentage of 
housing units may be repeatedly vacated and then reoccupied, with the 
specific households involved constantly changing. At any given time, a 
certain number of housing units might be unoccupied as a result. Under 
the Census definition, such units are not considered households and 
therefore may not be included in the number of residential locations 
estimated by PNR. We seek comment on whether the costs associated with 
providing service to these housing units should be included in the 
total cost by identifying an additional number of unoccupied units. The 
PNR methodology may provide an estimate of the number of residential 
locations that is greater than the number that currently receive 
telephone service, however. Therefore PNR's methodology may already 
account for at least some portion of housing units subject to this type 
of churn. We seek comment on this issue.
    39. We also note that locations outside of existing wire centers 
will not be included under the PNR methodology. Therefore the accuracy 
of the wire center boundaries is of importance in estimating the number 
of customer locations. PNR currently uses BLR wire center information 
to estimate wire center boundaries. As noted, the BCPM model also uses 
BLR wire center boundaries, as does Stopwatch Maps in its road 
surrogate customer location files. PNR has indicated its intent to 
evaluate alternative sources of wire center boundaries to be used in 
the customer location data. We therefore seek comment on the accuracy 
of the BLR wire center boundaries and any possible alternatives to 
establish more accurate wire center boundaries.

IV. Outside Plant Input Values

A. Copper and Fiber Cable

1. Issues for Comment
    40. We now examine the inputs needed to determine outside plant 
cable costs in the synthesis model. The synthesis model uses several 
tables to calculate cable costs, based on the cost per foot of cable, 
which may vary by cable size (i.e., gauge and pair size) and the type 
of plant (i.e., underground, buried, or aerial). There are four 
separate tables for copper distribution and feeder cable of two 
different gauges, and one table for fiber cable. The engineering 
assumptions and optimizing routines in the model, in conjunction with 
the input values in the tables, determine which type of cable is used.
    41. After the synthesis model has grouped customer locations in 
clusters, it determines, based on cost minimization and engineering 
considerations, the appropriate technology type for the cluster and the 
correct size of cables in the distribution network. Every customer 
location is connected to the closest SAI by copper cable. The copper 
cable used in the

[[Page 31786]]

local loop typically is either 24-or 26-gauge copper. Twenty-four gauge 
copper is thicker and therefore is expected to be more expensive than 
26-gauge copper. Twenty-four gauge copper also can carry signals 
greater distances without degradation than 26-gauge copper and, 
therefore, is used in longer loops. In the synthesis model, if the 
maximum distance from the customer to the SAI is less than or equal to 
the copper gauge crossover point, then 26-gauge cable is used. Feeder 
cable is either copper or fiber. Fiber is used for loops that exceed 
18,000 feet, the maximum copper loop length permitted in the model, as 
determined in the Platform Order. When fiber is more cost effective, 
the model will use it to replace copper for loops that are shorter than 
18,000 feet.
    a. Engineering Assumptions and Optimizing Routines. 42. Before we 
consider our proposed input values for cable costs, we discuss certain 
input values related to the engineering assumptions and optimizing 
routines in the synthesis model that affect outside plant costs. 
Specifically, we must determine: (1) whether optimization in the 
synthesis model should be turned on or off; (2) whether the model 
should use T-1 technology; and (3) whether the model should use 
rectilinear or airline distances and the value of the corresponding 
``road factor.''
    i. Optimization. 43. In the synthesis model, the user has the 
option of optimizing distribution plant routing via a minimum cost 
spanning tree algorithm discussed in the model documentation. The 
algorithm functions by first calculating distribution routing using an 
engineering ``rule of thumb'' and then comparing the cost with the 
spanning tree result, choosing the routing that minimizes annualized 
cost. The user also has the option of not using the distribution 
optimization feature, thereby saving a significant amount of 
computation time, but reporting network costs that may be significantly 
higher than with the optimization. In addition, the user has the option 
of using the distribution optimization feature only in the lowest 
density zones.
    44. We tentatively conclude that the synthesis model should be run 
with the optimization turned on when the model is used to calculate the 
forward looking cost of providing the services supported by the federal 
mechanism. We point out that the optimization approach represents what 
a network planning engineer would attempt to accomplish in developing a 
forward-looking network. This approach also complies with criterion 
one's requirement that the model must assume the least-cost, most 
efficient, and reasonable technology for providing the supported 
service that is currently being deployed. We note, however, that the 
optimization can substantially increase the model's run time. 
Preliminary staff analysis of comparison runs with full optimization 
versus runs with no optimization indicate that, for clusters with line 
density greater than 500, the rule of thumb algorithm results in the 
same or lower cost for nearly all clusters. We seek comment on whether 
an acceptable compromise to full optimization would be to set the 
optimization factor at ``-p500,'' as described in the model 
documentation. With this setting the model will optimize distribution 
plant whenever the density of a cluster is less than or equal to 500 
lines per square mile. For purposes of further analysis of the proposed 
input values, we also anticipate that parties may wish to run the model 
without optimization turned on to save computing time. After staff has 
completed its analysis of comparison runs, we intend to make available 
a spreadsheet showing the estimated percentage change, for each non-
rural study area, between running the model with the distribution 
optimization disabled and running the model with the distribution 
optimization enabled.
    ii. T-1 Technology. 45. A user of the synthesis model also has the 
option of using T-1 technology as an alternative to copper feeder or 
fiber feeder in certain circumstances. T-1 is a technology that allows 
digital signals to be transmitted on two pairs of copper wires at 1.544 
Megabits per second (Mbps). If the T-1 option is enabled, the 
optimizing routines in the model will choose the least cost feeder 
technology among three options: analog copper, T-1 on copper, and 
fiber. For serving clusters with loop distances below the maximum 
copper loop length, the model could choose among all three options; 
between 18,000 feet and the fiber crossover point, which earlier 
versions of HCPM set at 24,000 feet, the model could choose between 
fiber and T-1; and above the fiber crossover point, the model would 
always use fiber. In the HAI model, T-1 technology is used to serve 
very small outlier clusters in locations where the copper distribution 
cable would exceed 18,000 feet. The BCPM sponsors and other LECs 
contend that T-1 is not a forward looking technology and, therefore 
should not be used in the synthesis model. The HAI sponsors contend 
that current advertisements show that T-1 is being used currently.
    46. As noted, a number of parties contend that the T-1 on copper 
technology is not forward looking. Other sources indicate that advanced 
technologies, like HDSL, potentially can be used on T-1 technology to 
transmit information at T-1 or higher rates. We seek comment on this 
issue. We also seek comment on the extent to which HDSL technology 
presently is being used on T-1.
    47. The only input values for T-1 costs on the record in this 
proceeding are the HAI default values. Because the synthesis model and 
the HAI model use T-1 differently, we tentatively find that the HAI 
default values would not be appropriate for use in the synthesis model. 
In light of the fact that T-1 may not be a forward looking technology 
and the lack of appropriate input values, we tentatively conclude that 
we should not use the T-1 option in the synthesis model. We seek 
comment on our tentative conclusion. We ask that parties who disagree 
with our tentative conclusion and recommend that the T-1 function be 
used in the synthesis model propose input values that will accurately 
estimate the cost of this technology, including what values are needed 
for the costs of shielded copper, repeaters, and terminals.
    iii. Distance Calculations and Road Factor. 48. We tentatively 
conclude that the synthesis model should use rectilinear distance, 
rather than airline distance, in calculating outside plant distances, 
because this more accurately reflects the routing of telephone plant 
along roads and other rights of way. In fact, research suggests that, 
on average, rectilinear distance closely approximates road distances. 
As a result, we tentatively conclude that the road factor in the model, 
which reflects the ratio between route distance and road distance, 
should be set equal to 1. We seek comment on these tentative 
conclusions.
    49. We also note that airline distance could be used in the model, 
if we were to derive accurate road factors. We seek comment on this 
alternative. Specifically, we seek comment on whether we should use 
airline miles with wire center specific road factors. Research has 
shown that the airline distance metric with an appropriate road factor 
is more accurate than the rectilinear metric. We seek comment on this 
alternative approach.
    b. Cost of Copper Cable. i. Preliminary Issues. 50. The synthesis 
model uses tables that show the cost per foot of copper cable, by pair 
size. In selecting input values for the cost of copper cables, we must 
first address a number of preliminary issues: the extent to which 24- 
and 26-gauge copper cable should be used in the synthesis model; 
whether cable installation costs should

[[Page 31787]]

differ between feeder and distribution cable; and whether cable 
installation costs should vary for underground, buried, and aerial 
cable.
    51. Use of 24- and 26-Gauge Copper. The HAI default values assume 
that all copper cable below 400 pairs in size is 24-gauge and all 
copper cable of 400 pairs and larger is 26-gauge. The BCPM default 
values include separate costs for 24- and 26-gauge copper of all sizes. 
We tentatively reject the HAI sponsors' argument that 26-gauge copper 
costs should be used for all larger pair sizes of copper cable. We 
tentatively conclude that the model should use both 24-gauge and 26-
gauge copper in all available pair-sizes. Based on a preliminary 
analysis of the results of the structure and cable cost survey, it 
appears that a significant amount of 24-gauge copper cable in larger 
pair sizes currently is being deployed. We seek comment on these 
tentative conclusions.
    52. Distinguishing Feeder and Distribution Cable Costs. We reaffirm 
the Commission's tentative conclusion in the 1997 Further Notice, 62 FR 
424572 (August 7, 1997), that the same input values should be used for 
copper cable whether it is used in feeder or in distribution plant. 
Although the BCPM sponsors previously disagreed with this tentative 
conclusion, they have not provided persuasive data for this position. 
We seek comment on this tentative conclusion.
    53. Distinguishing Underground, Buried, and Aerial Installation 
Costs. The HAI and BCPM sponsors both claim that their proposed values 
for cable costs include the cost of installation. The BCPM defaults 
provide separate cost estimates for aerial, buried, and underground 
cable. The HAI default cable costs do not vary by type of plant and, 
therefore, appear to assume that installation costs are the same for 
aerial, underground, and buried cable. For buried copper cable, the HAI 
defaults include a multiplier to estimate the additional cost of the 
filling compound used in buried cable to protect the cable from 
moisture. For underground cable, HAI adds a per foot material cost for 
the conduit material.
    54. We tentatively conclude that we should adopt separate input 
values for the cost of aerial, underground, and buried cable. Based on 
our analysis of cable cost data, we have found considerable differences 
in the per foot cost of cable, depending upon whether the cable was 
strung on poles, pulled through conduit, or buried. We seek comment on 
this tentative conclusion.
    ii. Cost Per Foot of Copper Cable. 55. We now turn to the cost per 
foot of 24-and 26-gauge copper cable. Both the HAI and BCPM sponsors 
provide default input values for copper cable costs that are based upon 
the opinions of their respective experts, but without data that enable 
us to substantiate those opinions. In addition, the Commission received 
cable cost data from a number of LECs, including data received in 
response to the structure and cable cost survey developed by staff, 
which staff is continuing to analyze, as noted.
    56. At the December 11, 1998 workshop, Commission staff described 
how they had estimated the preliminary copper cable costs, by pair size 
and by plant type (i.e., aerial, buried, or underground), that had been 
posted on the Commission's Web site prior to the workshop. For copper 
cable, the staff estimated high and low values for the cost of the 
smallest pair size of 26-gauge copper cable based on an analysis of the 
HAI default values and the values submitted by states filing cost 
models in this proceeding. These estimates were adjusted for larger 
pair sizes of 26-gauge cable and different structure types using 
estimates in Gabel and Kennedy's analysis of RUS data, which was 
published by the National Regulatory Research Institute (NRRI Study). 
The cost of 24-gauge copper cable was estimated by applying a 
multiplier to the 26-gauge estimates based on the relative weight of 
the copper in these two gauges.
    57. While the HAI sponsors support using the publicly available RUS 
data in the NRRI Study to estimate cable costs, Sprint questions the 
reliability and suitability of this data, and urges us instead to use 
the cable cost data provided by incumbent LECs. As Sprint points out, 
the RUS data contain information from only the two lowest density 
zones. Because loops are longer in sparsely populated areas, lower 
gauge copper often is used.
    58. We tentatively conclude that we should use, with certain 
modifications, the estimates in the NRRI Study for the per foot cost of 
aerial, underground, and buried 24-gauge copper cable. As described, we 
also tentatively conclude that we should estimate the cost of 26-gauge 
copper cable by adjusting our 24-gauge estimates with ratios derived 
from cost data submitted by several non-rural LECs. We seek comment on 
these tentative conclusions and proposed values.
    59. Although the RUS data were collected from the two lowest 
density zones, we note that none of the models considered by the 
Commission has the capability of varying cable costs by density zones. 
Nor have parties proposed cable cost values that vary by density zone. 
We also believe that Sprint has mischaracterized the analysis of the 
RUS data in the NRRI Study. For example, Sprint challenges the validity 
of the study because some of the observations have zero values for 
labor or material, while failing to recognize that these values were 
excluded from Gabel and Kennedy's regression analysis. Similarly, 
Sprint's complaint that Gabel and Kennedy do not analyze the components 
of total cable costs, labor and material, separately overlooks that 
Gabel and Kennedy's regression analysis is designed to explain the 
variation in total costs.
    60. The NRRI Study provides estimates for outside plant structure 
and cable costs using cost data derived from construction contracts 
supplied by the RUS for a sample of companies that operate under 
various soil, weather, and population density conditions. In generating 
these estimates, Gabel and Kennedy used standard regression techniques 
to measure the effect of geological and density conditions on cable and 
structure costs. In general, the econometric formulations that Gable 
and Kennedy developed to estimate cable costs measure the effect on 
these costs of cable size and the placement of two or more cables on 
the same route.
    61. We tentatively conclude that one substantive change should be 
made to Gabel and Kennedy's analysis. Gabel and Kennedy used the 
ordinary least squares statistical technique to estimate the cost of 
structure and cables. The ordinary least squares technique fits a 
straight line to the data by minimizing the sum of squared prediction 
errors. The ordinary least squares technique is efficacious, however, 
only for a data set lacking statistical outliers. Such outliers have an 
undue influence on regression results, since the residual associated 
with each outlier is squared in calculating the regression. In order to 
mitigate the influence of such outlier values, statisticians have 
developed so-called robust regression techniques for estimating 
regression equations. We tentatively conclude that a robust regression 
technique should be used for analyzing the RUS data. We seek comment on 
this tentative conclusion.
    62. Specifically, we tentatively conclude that the robust 
regression technique proposed by Huber should be applied to the RUS 
data. Essentially, this algorithm uses a standard statistical criterion 
to determine the most extreme outliers, and excludes them. Thereafter, 
as suggested by Huber, it iteratively performs a regression, then for 
each observation calculates an observation weight based on the absolute 
value of the observation residual. Finally, the

[[Page 31788]]

procedure performs a weighted least squares regression using the 
calculated weights. This process is repeated until the values of the 
weights effectively stop changing. We have used the robust regression 
parameter estimates for cable, conduit, and buried structure. The use 
of robust estimation did not improve the statistical properties of the 
estimators for pole costs, so we tentatively conclude that the ordinary 
least squares technique is appropriate for pole costs. We seek comment 
on these tentative conclusions and analysis.
    63. 24-Gauge Aerial Copper Cable. We tentatively conclude that we 
should use the regression equation in the NRRI Study, as modified by 
the Huber methodology described, to estimate the cost of 24-gauge 
aerial copper cable, with three adjustments.
    64. First, we propose to adjust the equation to reflect the 
superior buying power that non-rural LECs may have in comparison to the 
LECs represented in the RUS data. We seek comment on whether an 
adjustment for superior bargaining power is necessary, and, if so, how 
such an adjustment should be made.
    65. Based on data entered into the record in a proceeding before 
the Maine Public Utilities Commission, Gabel and Kennedy determined 
that Bell Atlantic's material costs for aerial copper cable are 
approximately 15.2 percent less than these costs for the RUS companies. 
We tentatively conclude that this figure represents a reasonable 
estimate of the difference in the material costs that non-rural LECs 
pay in comparison to those that the RUS companies pay. To reflect this 
degree of buying power in the cable cost estimates that we derive for 
non-rural LECs, we propose to reduce the regression coefficient for the 
number of copper pairs by 15.2 percent for aerial copper cable. This 
coefficient measures the incremental or additional cable cost 
associated with one additional copper pair and therefore largely 
reflects the material cost of the cable. We seek comment on this 
proposed adjustment. We also invite parties to suggest alternative 
methods for capturing the impact of superior buying power.
    66. Second, we propose to adjust the equation in the NRRI Study to 
account for LEC engineering costs, which were not included in the RUS 
cable data. The BCM2 default values include a loading of five percent 
for engineering. The HAI sponsors claim that engineering constitutes 
approximately 15 percent of the cost of installing outside plant 
cables. This percentage includes both contractor engineering and LEC 
engineering. The cost of contractor engineering already is reflected in 
the RUS cable cost data. Based on the record, we tentatively conclude 
that we should add a loading of 10 percent to the material and labor 
cost of the cable (net of LEC engineering and splicing costs) to 
approximate the cost of LEC engineering. We seek comment on this 
tentative conclusion and invite commenters to justify an alternative 
loading factor for LEC engineering.
    67. Third, we propose to adjust the equation to account for 
splicing costs, which also were not included in the RUS data. In the 
NRRI Study, Gabel and Kennedy determined that the ratio of splicing 
costs to copper cable costs (excluding splicing and LEC engineering 
costs) is 9.4 percent for RUS companies. We tentatively conclude that 
we should adopt a loading of 9.4 percent for splicing costs. We seek 
comment on this tentative conclusion.
    68. 24-Gauge Underground Copper Cable. We tentatively conclude that 
we should use the regression equation in the NRRI Study, as modified by 
the Huber methodology described, to estimate the cost of 24-gauge 
underground copper cable. We also tentatively conclude that we should 
use the same three adjustments proposed for 24-gauge aerial copper 
cable, with one exception. We tentatively conclude that we should 
reduce the regression coefficient for the number of copper pairs by 
16.3 percent, to reflect superior buying power, based on the analysis 
in the NRRI study. We seek comment on the use of this equation and the 
proposed adjustments.
    69. 24-Gauge Buried Copper Cable. We tentatively conclude that it 
is necessary to modify the regression equation in the NRRI Study, as 
modified by the Huber methodology described, to estimate the cost of a 
24-gauge buried copper cable, because the equation in the study 
includes labor and material costs for both buried cable and structure. 
We seek comment on this tentative conclusion and proposed equation.
    70. We propose to make the same three adjustments to this equation 
as we proposed for 24-gauge aerial and underground cables, with the 
exception of the adjustment for superior buying power. Because the NRRI 
Study does not include a recommendation for such an adjustment for 
buried cable, we tentatively conclude we should use 15.2 percent, which 
is the lower of the reductions used for aerial and underground cable. 
We seek comment on the use of these adjustments for 24-gauge buried 
cable.
    71. 26-Gauge Copper Cable. Because the NRRI Study did not provide 
estimates for 26-gauge copper cable, we must either use another data 
source or find a method to derive these estimates from those for 24-
gauge. The HAI sponsors support the proposal presented by Commission 
staff at the workshop to use the relative weight of copper to adjust 
the 24-gauge copper costs to derive 26-gauge copper costs, although 
they would make further adjustments to reflect the cost of 26-gauge 
copper for cable sizes of 400 pairs and larger. The BCPM sponsors 
challenge the assumption that the cost of copper cable is closely tied 
to the relative weight of the copper in the cable. Both the HAI 
sponsors and the BCPM sponsors argue that the cost of splicing is not 
directly a function of investment, but rather is primarily a function 
of the number of pairs to be spliced, and the distance between splices. 
Although they agree that splicing costs should be estimated using the 
average cost per pair-foot, they disagree over what those costs should 
be.
    72. We tentatively conclude that we should derive cost estimates 
for 26-gauge cable by adjusting our estimates for 24-gauge cable. We 
agree with the BCPM sponsors that the cost of copper cable should not 
be estimated based solely on the relative weight of the cable. Instead, 
we propose to use the ordinary least squares regression technique to 
estimate the ratio of the cost of 26-gauge to 24-gauge cable for each 
plant type (i.e., aerial, underground, buried). We propose to estimate 
these ratios using data on 26-gauge and 24-gauge cable costs submitted 
by Aliant and Sprint and the BCPM default values for these costs. While 
we would prefer to develop these ratios based on data from more than 
these three sources, we tentatively conclude that these are the best 
data available on the record for this purpose. We seek comment on these 
tentative conclusions and proposed analysis, including the regression 
techniques described. We invite parties to propose alternative methods 
of deriving cost estimates for 26-gauge cable.
    c. Cost of Fiber Cable. 73. In selecting input values for fiber 
cable costs, we must determine values for the cost per foot of fiber 
for various strand sizes for aerial, underground, and buried cable. 
Both the HAI and BCPM sponsors provide default input values for fiber 
cable costs that are based upon the opinions of their respective 
experts, without data enabling us to substantiate those opinions. In 
addition, the Commission received cable cost data from a number of 
LECs, including data received in response to the structure and cable 
cost survey, which staff is continuing to analyze, as noted.

[[Page 31789]]

    74. At the December 11, 1998 workshop, Commission staff described 
how they had computed the preliminary fiber cable costs, by pair size 
and by plant type (aerial, buried, or underground) that had been posted 
on the Commission's Web site prior to the workshop. Using a methodology 
similar to the one used for copper cable, staff estimated the cost of 
the smallest size fiber cable based on an analysis of proposed values 
and used the analysis in the NRRI Study to derive costs for larger 
sizes.
    75. We tentatively conclude that we should use the RUS data and the 
analysis in the NRRI Study, with certain adjustments, to estimate fiber 
cable costs. For the reasons discussed for copper cable, we also 
tentatively conclude that the cost of fiber cable will vary for aerial, 
underground, and buried plant. We tentatively select the input values 
for the per foot cost of aerial, underground, and fiber cable in 
various strand sizes, as shown. We seek comment on these tentative 
conclusions and proposed values.
    76. Aerial Fiber Cable. We tentatively conclude that we should use 
the regression equation in the NRRI Study, as modified by the Huber 
methodology described, to estimate the cost of aerial fiber cable, with 
three adjustments similar to those made for copper cable. We seek 
comment on this tentative conclusion.
    77. As noted, we propose three adjustments to the equation used in 
the NRRI Study to estimate the cost of aerial fiber cable. First, based 
on the NRRI Study, we propose to reduce by 33.8 percent the regression 
coefficient for the number of fiber strands, to reflect the superior 
buying power of non-rural LECs. Second, for the reasons described 
earlier, we tentatively conclude that we should add a loading of 10 
percent to the material and labor cost of the cable (net of LEC 
engineering and splicing costs) to approximate the cost of LEC 
engineering. Finally, we tentatively conclude that we should add a 
loading for splicing costs of 4.7 percent to the material and labor 
cost of the cable (net of LEC engineering and splicing costs), based on 
the estimates in the NRRI Study. We seek comment on these tentative 
conclusions and proposed adjustments.
    78. Underground Fiber Cable. We tentatively conclude that we should 
use the regression equation in the NRRI Study, as modified by the Huber 
methodology described, to estimate the cost of underground fiber cable, 
with three adjustments similar to those made for aerial fiber cable. We 
seek comment on this tentative conclusion.
    79. As noted, we propose three adjustments to the NRRI equation for 
the cost of underground fiber cable. First, based on the NRRI Study, we 
propose to adjust downward by 27.8 percent the regression coefficient 
for the number of fiber strands, to reflect the superior buying power 
of non-rural LECs. Second, for the reasons described earlier, we 
tentatively conclude that we should add a loading of 10 percent to the 
material and labor cost of the cable (net of LEC engineering and 
splicing costs) to approximate the cost of LEC engineering. Finally, we 
tentatively conclude that we should add a loading for splicing costs of 
4.7 percent to the material and labor cost of the cable (net of LEC 
engineering and splicing costs), based on the estimates in the NRRI 
Study. We seek comment on these tentative conclusions and proposed 
adjustments.
    80. Buried Fiber Cable. We tentatively conclude that it is 
necessary to modify the regression equation in the NRRI Study, as 
modified by the Huber methodology described, to estimate the cost of a 
buried fiber cable, because the equation in the study includes labor 
and material costs for both buried fiber cable and structure. We seek 
comment on this tentative conclusion and proposed equation.
    81. We also propose three adjustments to the proposed equation. 
First, based on the NRRI Study, we propose to reduce by 27.8 percent 
the regression coefficient for the number of fiber strands, to reflect 
the superior bargaining power of non-rural LECs. Second, for the 
reasons described earlier, we tentatively conclude that we should add a 
loading of 10 percent to the material and labor cost of the cable (net 
of LEC engineering and splicing costs) to approximate the cost of LEC 
engineering. Finally, we tentatively conclude that we should add a 
loading for splicing costs of 4.7 percent to the material and labor 
cost of the cable (net of LEC engineering and splicing costs), based on 
the estimates in the NRRI Study. We seek comment on these tentative 
conclusions and proposed adjustments.
    c. Cable Fill Factors. 82. In determining appropriate cable sizes, 
network engineers include a certain amount of spare capacity to 
accommodate administrative functions, such as testing and repair, and 
some expected amount of growth. The percentage of the total usable 
capacity of cable that is expected to be used to meet anticipated 
demand is referred to as the cable fill factor. If cable fill factors 
are set too high, the cable will have insufficient capacity to 
accommodate small increases in demand or service outages. In contrast, 
if cable fill factors are set too low, the network could have 
considerable excess capacity for many years. While carriers may choose 
to build excess capacity for a variety of reasons, we must determine 
the appropriate cable fill factors to use in the federal mechanism. If 
the fill factors are too low, the resulting excess capacity will 
increase the model's cost estimates to levels higher than an efficient 
firm's costs, potentially resulting in excessive universal service 
support payments.
    83. Variance Among Density Zones. In general, both the HAI and BCPM 
sponsors provide default fill factors for copper cable that vary by 
density zone, and they agree that fill factors should be lower in the 
lowest density zones. HAI sponsors claim that an outside plant engineer 
is more interested in providing a sufficient number of spares than in 
the ratio of working pairs to spares, so the appropriate fill factor 
will vary with cable size. For example, 75 percent fill in a 2400 pair 
cable provides 600 spares, whereas a 50 percent fill in a six pair 
cable provides only three spares. Because smaller cables are used in 
lower density zones, HAI recommends that lower fill factors be used in 
the lowest density zones to ensure there will be enough spares 
available. The BCPM sponsors claim that less dense areas require lower 
fill ratios because the predominant plant type is buried and it is 
costly to add additional capacity after installation. We tentatively 
agree with the HAI and BCPM sponsors that fill factors for copper cable 
should be lower in the lowest density zones, which is reflected in the 
fill factors that we propose in this Notice. We seek comment of this 
tentative finding.
    84. Distribution Fill Factors. The fill factors proposed by the HAI 
sponsors for distribution cable are somewhat lower than for copper 
feeder cable. The BCPM default fill factors for distribution cable, on 
the other hand, currently are set at 100 percent for all density zones. 
This difference is related to the differences between certain 
assumptions that were made in the HAI and BCPM models. The HAI 
proponents claim that the level of spare capacity provided by their 
default values is sufficient to meet current demand plus some amount of 
growth. This is consistent with the HAI model's approach of designing 
plant to meet current demand, which on average is 1.2 lines per 
household. BCPM, on the other hand, designs outside plant with the 
assumption that every residential location has two lines, which is more 
than current demand. Because

[[Page 31790]]

it is costly to add distribution plant at a later point in time, 
incumbent LECs typically build enough distribution plant to meet not 
only current demand, but also anticipated future demand. BCPM adopts 
this convention. Setting the fill factor at 100 percent in BCPM offsets 
BCPM's assumption that every household has two lines and the resulting 
estimation of appropriate cable sizes is sufficient to meet current 
demand, rather than long term growth.
    85. In a meeting with Commission staff, Ameritech raised the issue 
of whether industry practice is the appropriate guideline for 
determining fill factors to use in estimating the forward-looking 
economic cost of providing the services supported by the federal 
mechanism. Ameritech claims that forward-looking fill factors should 
reflect enough capacity to provide service for new customers for a few 
years until new facilities are built, and should account for the excess 
capacity required for maintenance and testing, defective copper pairs, 
and churn.
    86. We tentatively conclude that the fill factors selected for use 
in the federal mechanism generally should reflect current demand, and 
not reflect the industry practice of building distribution plant to 
meet ``ultimate'' demand. The fact that industry may build distribution 
plant sufficient to meet demand for ten or twenty years does not 
necessarily suggest that these costs should be supported by universal 
service support mechanisms. This also appears to reflect the 
assumptions underlying the HAI and BCPM default fill factors. Because 
the synthesis model designs outside plant to meet current demand in the 
same manner as the HAI model, we believe the fill factors should be set 
at less than 100 percent. We tentatively select the HAI defaults for 
distribution fill factors and tentatively conclude that they reflect 
the appropriate fill needed to meet current demand. We seek comment on 
these tentative conclusions.
    87. Feeder Fill Factors. In contrast to distribution plant, feeder 
plant typically is designed to meet only current and short term 
capacity needs. The BCPM copper feeder default fill factors are 
slightly higher than HAI's, but both the HAI and BCPM default values 
appear to reflect current industry practice of sizing feeder cable to 
meet current, rather than long term, demand. Because both the HAI and 
BCPM default values assume that copper feeder fill reflects current 
demand, we tentatively select copper feeder fill factors that are the 
average of the HAI and BCPM default values. We seek comment on these 
tentative selections.
    88. Fiber Fill Factors. Because of differences in technology, fiber 
fill factors typically are higher than copper feeder fill factors. 
Standard fiber optic multiplexers operate on four fiber strands: 
primary optical transmit, primary optical receive, redundant optical 
transmit, and redundant optical receive. In determining appropriate 
fiber cable sizes, network engineers take into account this 100 percent 
redundancy in determining whether excess capacity is needed that would 
warrant application of a fill factor. Both the HAI and BCPM models use 
the standard practice of providing 100 percent redundancy for fiber and 
set the default fiber fill factors at 100 percent. We tentatively 
conclude that the input value for fiber fill in the federal mechanism 
should be 100 percent. We seek comment on this tentative conclusion.

B. Structure Costs

1. Issues for Comment
    89. The synthesis model uses structure cost tables that identify 
the per foot cost of structure by type (aerial, buried, or 
underground), loop segment (distribution or feeder), and terrain 
conditions (normal, soft rock, or hard rock), for each of the nine 
density zones. For aerial structure, the cost per foot that is entered 
in the model is calculated by dividing the total installed cost per 
telephone pole by the distance between poles. As described, we 
tentatively conclude that we should use, with certain modifications, 
the estimates in the NRRI Study for the per foot cost of aerial, 
underground, and buried structure. In general, these estimates are 
derived from regression equations that measure the effect on these 
costs of density, water, soil, and rock conditions.
    a. Cost of Aerial Structure. 90. We tentatively conclude that we 
should use the regression equation for aerial structure in the NRRI 
Study as a starting point. We propose to use this equation to develop 
proposed input values for the labor and material cost for a 40-foot, 
class four telephone pole. We develop separate pole cost estimates for 
normal bedrock, soft bedrock, and hard bedrock. The regression 
coefficients estimate the combined cost of material and supplies. The 
NRRI Study reports that the average material price for a 40-foot, class 
four pole is $213.94. We note that this estimate is very close to 
results obtained from the data submitted in response to the 1997 Data 
Request. According to the Commission staff's analysis of these data, 
the unweighted average material cost of a 40-foot, class four pole is 
$213.97, and the weighted average, by line count, is $228.22. We seek 
comment on this tentative conclusion and analysis.
    91. We tentatively conclude that we should add to these estimates 
the cost of anchors, guys, and other materials that support the poles, 
because the RUS data from which this regression equation was derived do 
not include these costs. In the NRRI Study, Gabel and Kennedy used the 
RUS data to develop the following cost estimates for anchors, guys and 
other pole-related items: $32.98 in rural areas, $49.96 in suburban 
areas, and $60.47 in urban areas. We tentatively conclude that these 
are reasonable estimates for the cost of anchors, guys, and other pole-
related items. We seek comment on these tentative conclusions and 
proposed values.
    92. We also tentatively add an estimate for the cost of LEC 
engineering, which is not reflected in the data from which Gabel and 
Kennedy derived cost estimates for poles and anchors, guys, and pole-
related materials. For the reasons described for copper and fiber 
cable, we tentatively conclude that we should add a loading of 10 
percent to the material and labor cost (net of LEC engineering) for 
poles, anchors, guys, and other pole-related items. We seek comment on 
these tentative conclusions and invite proposals justifying an 
alternative loading factor for LEC engineering.
    93. In order to obtain proposed input values that can be used in 
the model, we must convert the estimated pole costs into per foot costs 
for each of the nine density zones. For purposes of this computation, 
we propose to use for density zones 1 and 2 the per pole cost that we 
have estimated for rural areas, based on the NRRI Study; for density 
zones 3 through 7 the per pole cost for suburban areas; and for density 
zones 8 and 9 the per pole cost for urban areas. We then divide the 
estimated cost of a pole by the estimated distance between poles. We 
propose to use the following values for the distance between poles: 250 
feet for density zones 1 and 2; 200 feet for zones 3 and 4; 175 feet 
for zones 5 and 6; and 150 feet for zones 7, 8, and 9. For the most 
part, these values are consistent with both the HAI and BCPM defaults. 
We seek comment on these proposals.
    b. Cost of Underground Structure. 94. We tentatively conclude that 
we should adopt a similar methodology to estimate the cost of 
underground structure, as we proposed for the cost of aerial structure. 
We tentatively conclude that we should use the equation set forth as a 
starting point for this estimate. We propose to use this equation to 
develop proposed

[[Page 31791]]

input values for the labor and material cost for underground cable 
structure. We develop separate cost estimates for underground structure 
in normal bedrock, soft bedrock, and hard bedrock for density zones 1 
and 2. As we did for aerial structure, we tentatively conclude that we 
should add a loading factor of 10 percent for LEC engineering. We seek 
comment on these tentative conclusions.
    95. We are able to develop directly from the regression equation 
cost estimates for underground structure only in density zones 1 and 2, 
because the RUS data is from companies that operate only in those 
density zones. We tentatively conclude that we should derive cost 
estimates for density zones 3 through 9 by extrapolating from the 
estimates for density zone 2. We further tentatively conclude that we 
should perform such extrapolation based on the growth rate between 
density zones in the BCPM and HAI default values for underground and 
buried structure. Although we would prefer to rely on data specific to 
the density zone, rather than extrapolated, we tentatively conclude 
that, based on our current analysis, this is the best data currently 
available for this purpose. We seek comment on these tentative 
conclusions. We seek comment on this proposed method and invite parties 
to suggest alternative methods for estimating costs in density zones 3 
through 9.
    c. Cost of Buried Structure.
    96. We tentatively conclude that we should use the modified 
equation for estimating the cost of 24-gauge buried copper cable and 
structure to estimate the cost of buried structure. It is necessary to 
modify this equation because estimates derived from it include labor 
and material costs for both buried cable and structure. We seek comment 
on this tentative conclusion.
    97. For the reasons described, we tentatively conclude that we 
should add a loading of 10 percent for LEC engineering to the estimates 
generated by the modified equation. We seek comment on this tentative 
conclusion.
    98. We are able to develop directly from the regression equation 
cost estimates for buried structure only in density zones 1 and 2, 
because the RUS data is from companies that operate only in those 
density zones. We tentatively conclude that we should derive cost 
estimates for density zones 3 through 9 by extrapolating from the 
estimates for density zone 2. We further tentatively conclude that we 
should perform such extrapolation based on the same method proposed for 
estimating the cost of underground structure. We seek comment on these 
tentative conclusions.
    d. Plant Mix. 99. As discussed, we have tentatively selected input 
values for the costs of cable and outside plant structure that differ 
for aerial, buried, and underground cable and structure. Because these 
cost differences can be significant, the relative amount of plant type 
in any given area, i.e., the plant mix, plays a significant part in 
determining total outside plant investment. The synthesis model 
provides three separate plant mix tables, for distribution, copper 
feeder, and fiber feeder, which can accept different percentages for 
each of the nine density zones. Although we tentatively propose using 
nationwide input values for plant mix, as we have for other input 
values, we seek comment on an alternative to nationwide plant mix input 
values, as discussed.
    100. The BCPM sponsors claim that in low densities there generally 
is a greater percentage of buried plant than underground plant, and 
conversely, in higher densities there is more underground than buried 
plant. The BCPM default plant mix values reflect these assumptions. 
Although the HAI default plant mix values for feeder plant also reflect 
these assumptions, HAI's assumptions with respect to distribution plant 
mix are quite different than BCPM's, as discussed. The HAI sponsors 
suggest that aerial plant is still the most prevalent plant type, but 
claim that their default plant mix values reflect an increasing trend 
toward the use of buried cable in new subdivisions. The HAI default 
values generally assume that there is more aerial plant than the BCPM 
default values. The BCPM defaults have separate values for plant mix in 
hard rock terrain, which generally assume there is slightly more aerial 
and less buried plant than the normal and soft rock terrain defaults.
    101. Distribution Plant. The BCPM default values for distribution 
plant assume that there is no underground plant in the lowest density 
zone and the percentage increases with each density zone to 90 percent 
underground distribution plant in the highest density zone. In 
contrast, the HAI default values for distribution plant mix place no 
underground structure in the six lowest density zones and assume that 
only 10 percent of the structure in the highest density zone is 
underground. The BCPM default values assume there is no aerial plant in 
the highest density zone in normal and soft rock terrain, and 10 
percent aerial plant in hard rock terrain. In contrast, the HAI default 
values assume that there is significantly more aerial cable, 85 
percent, in the highest density zone, but notes that this includes 
riser cable within multi-story buildings and ``block cable'' attached 
to buildings, rather than to poles.
    102. We tentatively select input values for distribution plant mix 
that more closely reflect the assumptions underlying BCPM's default 
values than HAI's default values for several reasons. The synthesis 
model does not design outside plant that contains either riser cable or 
block cable, so we do not believe it would be appropriate to assume 
that there is as high a percentage of aerial plant in densely populated 
areas as the HAI default values assume. Although our proposed plant mix 
values assume somewhat less underground structure in the lower density 
zones than the BCPM default values, we disagree with HAI's assumption 
that there is very little underground distribution plant and none in 
the six lowest density zones. We tentatively select the distribution 
plant mix values set forth, and seek comment on our tentative 
conclusions. We tentatively propose input values, for the lowest to the 
highest density zones, that range from zero percent to 90 percent for 
underground plant; 60 to zero percent for buried plant; and 40 to ten 
percent for aerial plant.
    103. Feeder Plant. The default plant mix percentages for feeder 
plant are generally similar in the BCPM and the HAI models. Although 
the BCPM default values vary between normal or soft rock terrain and 
hard rock terrain, as noted, and the HAI default values differ between 
copper and fiber feeder, the plant mix ratios across density zones are 
similar. For example, both the BCPM default values and the HAI default 
values assume that there is only five or ten percent of underground 
feeder plant in the lowest density zone. The HAI defaults assume there 
is somewhat more aerial feeder cable than the BCPM defaults, except for 
fiber feeder cable in the four lowest density zones. The BCPM defaults 
assume there is no aerial feeder plant in the three highest density 
zones, except in hard rock terrain. Despite these differences, the 
relative amounts of aerial and buried plant across density zones are 
generally similar.
    104. We tentatively select input values for feeder plant mix, set 
forth, that generally reflect the assumptions underlying the BCPM and 
HAI default plant mix percentages, with certain modifications. We 
tentatively propose input values, for the lowest to the highest density 
zones, that range from five percent to 95 percent for underground 
plant; 50 to zero percent for buried plant; and 45 to five percent

[[Page 31792]]

for aerial plant. Based on the Commission staff's preliminary review of 
the structure and cable survey data, the proposed values, unlike the 
HAI and the BCPM (for normal and soft rock) default values, assume that 
there is no buried plant in the highest density zone. In contrast to 
the BCPM defaults, the proposed values assume there is some aerial 
plant in the three highest density zones. We tentatively find that it 
is reasonable to assume that there is some aerial feeder plant in all 
density zones, as HAI does, particularly in light of our assumption 
that there is no buried feeder in the highest density zone, where 
aerial placement would be the only alternative to underground plant. 
Although the HAI sponsors have proposed plant mix values that vary 
between copper feeder and fiber feeder, they have offered no convincing 
rationale for doing so. We tentatively conclude that, like the BCPM 
defaults, our proposed plant mix ratios should not vary between copper 
feeder and fiber feeder. We seek comment on our tentative conclusions.
    105. Alternatives to Nationwide Plant Mix Values. In the 1997 
Further Notice, the Commission tentatively concluded that plant mix 
ratios should vary with terrain as well as density zones. Because the 
synthesis model does not provide separate plant mix tables for 
different terrain conditions, the proposed nationwide plant mix values 
do not vary by terrain. One method of varying plant mix by terrain 
would be to add separate plant mix tables, as there are in BCPM, to the 
synthesis model. We observe that, while the BCPM model provides 
separate plant mix tables, the BCPM default values reflect only 
slightly more aerial and less buried plant in hard rock terrain than in 
normal and soft rock terrain. Another method of varying plant mix would 
be to use company specific or state specific input values for plant mix 
as advocated by the BCPM sponsors and other LECs.
    106. We generally have chosen not to use study area specific input 
values in the federal mechanism, and recognize that historical plant 
mix ratios may not reflect an efficient carrier's plant type choice 
today. On the other hand, historical plant mix also may reflect terrain 
conditions that will not change over time. For example, because it is 
costly to bury cable in hard rock, a carrier serving a very rocky area 
would tend to use more aerial than buried plant. The Commission staff's 
analysis of current ARMIS data reveals a great deal of variability in 
plant mix ratios among the states. In certain state proceedings, U S 
West has proposed an algorithm for adjusting plant mix to reflect its 
actual sheath miles as reported in ARMIS. We seek comment on a modified 
version of this algorithm as an alternative method of determining plant 
mix percentages.
    107. The proposed algorithm uses ARMIS 43-08 data on buried and 
aerial sheath distances and trench distances to allocate model 
determined structure distance between aerial, buried, and underground 
structures. The first step is to set the underground structure distance 
equal to the ARMIS trench distance and to allocate that distance among 
the density zones on the basis of the nationwide plant mix defaults. 
Then an initial estimate of aerial plant is calculated as the sum of 
the synthesis model structure distances by density zone multiplied by 
the nationwide aerial plant mix defaults. A second estimate of aerial 
plant is calculated by multiplying structure distance less trench miles 
by the aerial percentage of total ARMIS sheath miles. Then an 
adjustment ratio is calculated by dividing the second estimate by the 
initial estimate. This adjustment ratio is then applied to each density 
zone to adjust the nationwide default so that the final synthesis model 
plant mix reflects the study area specific plant mix. The buried plant 
mix percentage is determined as a residual equal to one minus sum of 
the underground and aerial percentages. We seek comment on this 
alternative to nationwide plant mix values. We also invite parties to 
suggest other alternatives to determine plant mix in the synthesis 
model.
    108. We also seek comment on whether we should allow the synthesis 
model to choose the plant mix on the basis of minimum annual cost. We 
note that this optimization would be constrained to reflect the 
embedded underground plant percentage, because underground plant is 
typically deployed in relatively dense areas for reasons of public 
safety. Embedded percentages of aerial and buried plant, on the other 
hand, may reflect zoning ordinances but we note that these ordinances 
in turn may reflect purely aesthetic concerns rather than public 
safety. If we were to determine that we should use study area specific 
plant mix input values, we seek comment on whether the synthesis model 
should be permitted to use its optimization feature for percentages of 
aerial and buried plant.

C. Structure Sharing

1. Issues for Comment
    109. We tentatively adopt the following structure sharing 
percentages that represent the percentage of structure costs to be 
assigned to the LEC. For aerial structure, we tentatively assign 50 
percent of structure cost in density zones 1-6 and 35 percent of the 
costs in density zones 7-9 to the LEC. For underground and buried 
structure, we tentatively assign 90 percent of the cost in density 
zones 1-2, 85 percent of the cost in density zone 3, 65 percent of the 
cost in density zones 4-6, and 55 percent of the cost in density zones 
7-9 to the LEC.
    110. We believe that the structure sharing percentages that we 
tentatively adopt reflect a reasonable percentage of the structure 
costs that should be assigned to the LEC. We note that our tentative 
conclusions reflect the general consensus among commenters that 
structure sharing varies by structure type and density. While 
disagreeing on the extent of sharing, the majority of commenters agree 
that sharing occurs most frequently with aerial structure and in higher 
density zones. For example, no commenter attributes more than 50 
percent of the cost of aerial structure to the LEC. The sharing values 
that we tentatively adopt reflect these guidelines. In addition, we 
note that the Washington Utilities and Transportation Commission has 
adopted structure sharing values that are similar to those that we 
tentatively adopt. We also note that the sharing values that we 
tentatively adopt fall within the range of values proposed by HAI and 
BCPM.
    111. In addition, we agree with the Nebraska Public Service 
Commission that there are some opportunities for sharing even in the 
lowest density zones. As noted by the Nebraska Commission, ``[e]ven in 
these more remote regions of the state, there will be some 
opportunities for sharing as new homes and businesses are 
constructed.'' We therefore do not assign 100 percent of the cost of 
buried or underground structure to the LEC in the lowest density areas, 
as suggested by the BCPM proponents.
    112. We seek comment on the tentative conclusions set forth in this 
section. In addition, we seek comment on AT&T's contention that the 
structure sharing percentages should reflect the potential for sharing, 
rather than the LEC's embedded sharing practice.

D. Serving Area Interfaces

1. Issues for Comment
    a. Cost of a 7200 Pair SAI.
    113. Our proposed approach takes into account the cost of the 
following SAI components for a 7200 pair indoor SAI: building entrance 
splicing and distribution splicing; protectors; tie cables; placement 
of feeder blocks; placement of cross-connect jumpers/

[[Page 31793]]

punch down; and placement of distribution blocks. Of these, we 
tentatively conclude that protector and splicing costs are the main 
drivers of SAI costs, and cross-connect costs and feeder block and 
distribution block installation costs greatly contribute to the 
difference in Sprint's and the HAI proponents' indoor SAI costs. Based 
upon the following analysis of the record regarding these costs, we 
propose a total cost of $21,708 for the 7200 pair indoor SAI. We seek 
comment on this tentative analysis.
    114. Protector Costs. The cost of the protector is the single 
greatest contributor to the difference in Sprint's and HAI's indoor SAI 
costs. HAI proposes a cost of $2.00 per pair for protector material, 
and Sprint initially proposed a $6.62 cost per pair for protector 
material. In its review of Sprint's proposed cost, staff concluded that 
all of the parts identified in Sprint's proposal may not be necessary 
for SAI construction. Staff also believed, however, that HAI's proposal 
was for less than a fully functional SAI, and found HAI's proposed cost 
to be too low. Having analyzed the ex parte submissions, staff proposed 
a cost of $4.00 per pair for protector material. In its February 4, 
1999, ex parte submission, Sprint agreed that $4.00 is a reasonable 
estimate of the cost. We tentatively adopt this proposed value and seek 
comment.
    115. Splicing and Labor Rates. HAI and Sprint propose different 
splicing rates, but do not dispute splice set-up time. The HAI sponsors 
propose a splicing rate of 300 pairs per hour, while Sprint argues for 
a splicing rate of 100 pairs per hour. We believe that HAI's proposed 
rate is a reasonable splicing rate under optimal conditions, and 
therefore, we tentatively conclude that Sprint's proposed rate is too 
low. We note that the HAI sponsors have submitted a letter from AMP 
Corporation, a leading manufacturer of wire connectors, in support of 
the HAI rate. We recognize, however, that splicing under average 
conditions does not always offer the same achievable level of 
productivity as suggested by the HAI sponsors. For example, splicing is 
not typically accomplished under controlled lighting or on a worktable. 
Having accounted for such variables, we propose to adjust the splicing 
rate to 250 pairs per hour. We also propose a $60.00 per hour labor 
rate for splicing, which is within the range of filings on the record. 
We seek comment on these proposed values.
    116. Cross-Connect Costs. The cross-connect is the physical wire in 
the SAI that connects the feeder and distribution cable. Sprint asserts 
that the ``jumper'' method generally will be employed to cross-connect 
in a SAI. In contrast, HAI suggests that the ``punch down'' method is 
generally used to cross-connect. We tentatively conclude that neither 
the jumper method nor the punch down method is used exclusively in 
SAIs. In buildings with high churn rates, such as commercial buildings, 
carriers may be more likely to use the jumper method. On the other 
hand, in residential buildings, where changes in service are less 
likely, carriers may be more likely to use the less expensive punch 
down method. Based on the record, it appears that both methods are 
commonly used, and that neither is used substantially more than the 
other. Therefore, we tentatively conclude that we should assume that 
each method will be used half the time. We seek comment on this 
tentative conclusion. In particular, we invite parties to justify a 
particular allocation between the jumper and punch down methods.
    117. Feeder Block and Distribution Block Installation Rates. Sprint 
proposes an installation rate of 60 pairs per hour, while the HAI 
sponsors propose 400 pairs per hour. Because neither feeder block 
installation nor distribution block installation is a complicated 
procedure, we tentatively conclude that Sprint's rate of 60 pairs per 
hour is too low. We recognize, however, that installation conditions 
are not always ideal. Like splicing, feeder block and distribution 
block installations are not typically accomplished under controlled 
lighting or on a worktable. Having accounted for such variables, we 
propose a rate of 200 pairs per hour. We seek comment on this proposed 
value.
    b. Cost of Other SAI Sizes. 118. Because we currently do not have 
similar component-by-component data for other SAI sizes, we propose to 
determine the costs of the other SAI sizes by extrapolating from the 
cost of the 7200 pair indoor SAI. We believe that this is a reasonable 
approach because there is a linear relationship between splicing and 
protection costs, which are the main drivers of cost, and the number of 
pairs in the SAI. We look to the HAI data to determine the relationship 
in cost among the various sizes of SAI. Specifically, we develop a 
ratio of our proposed cost for a 7200 pair indoor SAI to the cost 
proposed by HAI. We then propose to apply this ratio, 2.25, to the 
values submitted by the HAI sponsors for other sizes of indoor and 
outdoor SAIs. Applying this factor, we tentatively adopt the cost 
estimates for indoor and outdoor SAIs. We propose to use the HAI, 
rather than BCPM data, in this manner because BCPM has not submitted 
estimates for all of the SAI sizes used in the model. We note that 
using the BCPM data in this way would result in roughly the same 
estimates. We seek comment on these tentative conclusions and proposed 
values.

E. Digital Loop Carriers

1. Issues for Comment
    119. Both the sponsors of BCPM and HAI have submitted default 
values for DLC costs. Because these values are based on the opinions of 
experts without data to enable us to substantiate these opinions, 
however, we tentatively conclude that we should not rely on these data. 
We also tentatively conclude that the most reliable data on DLC costs 
available to the Commission at this time are the contract data 
submitted to the Commission in response to the 1997 Data Request, and 
in ex parte submissions following the December 11, 1998 workshop. We 
seek comment on these tentative conclusions.
    120. Following their submission of DLC data to the Commission in 
response to the 1997 Data Request, US West, Bell South, and ATU 
resubmitted their data on the record in this proceeding. At the 
December 11, 1998 workshop, staff of the Common Carrier Bureau 
discussed the DLC costs data on the record in this proceeding. In an 
effort to elicit further discussion of DLC input values, staff 
presented a template of the components of a typical DLC. The HAI 
sponsors, GTE, and Aliant submitted data using the template of DLC 
costs. Staff found the data submitted by the HAI sponsors to be 
significantly lower than the contract data on the record, and staff 
concluded that it would be inappropriate to use it, especially as no 
support was provided in justification. Because the data submitted by 
the companies are based on actual costs incurred in purchasing DLCs, we 
tentatively conclude that they are more reliable than the opinions 
proffered, and, therefore, should be used to estimate the cost of DLCs. 
Although we would prefer to have a larger sampling of data, we note 
that the data represent the costs incurred by several of the largest 
non-rural carriers, as well as two of the smallest non-rural carriers. 
We also note that, throughout this proceeding, the Commission has 
repeatedly requested cost data on DLCs. We believe that we are using 
the best data available on the record to determine the cost of DLCs.
    121. We note that ATU asserts that material handling and shipping 
costs should be added to the DLC prices

[[Page 31794]]

reflected in the contract it submitted. ATU suggests that these costs 
could represent up to 10 percent of the material cost of a DLC. It is 
unclear whether the DLC data submitted by other parties include these 
costs. We seek comment on the extent, if any, to which we should 
increase our proposed estimates for DLCs to reflect material handling 
and shipping costs.
    122. We recognize that the cost of purchasing and installing a DLC 
changes over time. Such changes occur because of improvements in the 
methods and components used to produce DLCs, changes in both capital 
and labor costs, and changes in the functionality requirements of DLCs. 
Thus, we believe it is appropriate to adjust the contract data to 
reflect 1999 prices. In order to capture changes in the cost of 
purchasing and installing DLCs over time, we propose a 2.6 percent 
annual reduction in both fixed DLC cost and per line DLC cost. This 
proposed rate is based on the change in cost calculated for electronic 
digital switches over a four year period. We believe that the change in 
the cost of these switches over time is a reasonable proxy for changes 
in DLC cost, because they are both types of digital telecommunications 
equipment. We also note that the 2.6 percent figure is a conservative 
estimate, based on the change in cost of remote switches. Our analysis 
suggests that the change in cost of host switches over the past four 
years is much higher. Finally, we note that use of the current consumer 
price index results in a similar figure over four years. The indexed 
amount is based on the effective date of the contracts. Based upon an 
average of the contract data submitted on the record, adjusted for cost 
changes over time, we tentatively adopt the cost estimates for DLCs. We 
seek comment on this proposed analysis and the proposed values.

V. Switching and Interoffice Facilities

A. Issues for Comment

1. Switch Costs
    123. We now examine the inputs associated with the purchase and 
installation of new switches. Specifically, we must select values for 
the fixed and per-line cost of host and remote switches, respectively.
    124. Switch Cost Data. Both the sponsors of BCPM and HAI have 
submitted default values for switch costs. To a large extent, however, 
these values are based on non-public information or opinions of their 
experts, but without data that enable us adequately to substantiate 
those opinions. Consistent with the recommendation of the Joint Board 
and criterion eight in the Universal Service Order, we tentatively 
conclude that we should not rely on these submissions because the 
underlying data are not sufficiently open and available to the public. 
We also tentatively conclude that it is not necessary to rely on this 
information, because the Commission, in conjunction with the work of 
Gabel and Kennedy, the Bureau of Economic Analysis (BEA) of the 
Department of Commerce, and the U.S. Department of Agriculture Rural 
Utility Service (RUS), has compiled publicly available data on the cost 
of purchasing and installing switches. This information was gathered 
from depreciation reports filed by LECs at the Commission and from 
reports made by LECs to RUS.
    125. The depreciation data contains, for each switch reported: the 
model designation of the switch; the year the switch was first 
installed; and the lines of capacity and book-value cost of purchasing 
and installing each switch at the time the depreciation report was 
filed with the Commission. The RUS data contains, for each switch 
reported: the switch type (i.e., host or remote); the number of 
equipped lines; cost at installation; and year of installation.
    126. The sample that we propose to use to estimate switch costs 
includes 1,060 observations. The sample contains 921 observations 
selected from the depreciation data, which provide information on the 
costs of purchasing and installing switches gathered from 20 states. 
The sample also contains 139 observations selected from the RUS data, 
which provide information from across the nation on the costs of small 
switches purchased and installed by rural carriers. The combined sample 
represents purchases of both host and remote switches, with information 
on 468 host switches and 592 remote switches, and covers switches 
installed between 1989 and 1996. This set of data represents the most 
complete public information available to the Commission on the costs of 
purchasing and installing new switches.
    127. In response to the 1997 Data Request, the Commission received 
a second set of information pertaining to 1,486 switches. Upon 
analysis, however, Commission staff identified one or more problems 
with most of the data submitted: missing switch costs; zero or negative 
installation costs; zero or blank line counts; unidentifiable switches; 
or missing or inconsistent Common Language Local Identification (CLLI) 
codes. After excluding these corrupted observations, 302 observations 
remained. The remaining observations represented switches purchased by 
only four companies. We tentatively conclude that the data set we 
propose to use is superior to the data set obtained in response to the 
1997 Data Request, both in terms of the number of usable observations 
and the number of companies represented in the data set. We seek 
comment on this tentative conclusion.
    128. Following the December 1, 1999 workshop, three companies 
voluntarily submitted further data regarding the cost of purchasing and 
installing switches. Because these submissions were received late in 
the process, Commission staff has not had sufficient time to analyze 
the quality and content of the information. We seek comment on the use 
of this data set as a substitute or complement to the data set we 
propose.
    129. Adjustments to the Data. The cost figures reported in the 
depreciation information reflect the costs of purchasing and installing 
new switches. While the RUS cost data also contain information on 
purchasing and installing new switches, they do not include: (1) the 
cost associated with purchasing and installing the main distribution 
frame (MDF); (2) the cost associated with purchasing and installing 
power equipment; (3) the cost of connecting each remote switch to its 
respective host switch; and (4) LEC engineering costs. In order to make 
the depreciation and RUS information comparable, we propose to add 
estimates of these four components to the switch costs reported in the 
RUS information. These additions are discussed. We seek comment on this 
proposed approach.
    130. In order to account for the cost of MDF equipment omitted from 
the RUS information, AT&T recommends using the HAI 5.0a default value 
of $12 per line for MDF. We tentatively conclude that $12 per line is a 
reasonable cost for purchasing and installing MDF equipment. No party 
contests this value. We seek comment on this tentative conclusion and 
invite commenters to submit alternative values.
    131. In order to account for the cost of central office power 
equipment omitted from the RUS information, AT&T recommends using the 
HAI 5.0a default values for these inputs. We tentatively use the 
following input values for power equipment: $12,000 for switches with 
0-999 lines; $40,000 for switches with 1,000-4,999 lines; and $74,500 
for switches with 5,000-25,000 lines. These values are derived from a 
range of values on the record in this proceeding, including state cost 
studies. We seek comment on the values we

[[Page 31795]]

tentatively adopt and invite commenters to submit alternative values.
    132. Gabel and Kennedy estimate that the average cost of 
terminating a remote on a host switch is $27,598. Relying on this 
estimate, we tentatively conclude that $27,598 should be added to the 
cost of each remote switch reported in the RUS data. We seek comment on 
this tentative conclusion and invite commenters to submit alternative 
values.
    133. Gabel and Kennedy also recommend, based on a data analysis 
undertaken by RUS, that the cost of switches reported in the RUS data 
should be increased by 8 percent in order to account for the cost of 
LEC engineering. Relying on those estimates, we tentatively conclude 
that 8 percent should be added to the total cost, including MDF, power, 
and remote connection costs, of each switch reported in the RUS data. 
We note that the proposed value is based on the only information on the 
record on this issue. We seek comment on this tentative conclusion and 
invite commenters to submit alternative values.
    134. We tentatively conclude that switch costs should be estimated 
based on a sample of public data that includes both RUS and 
depreciation data. As noted, this information represents the broadest 
range of data publicly available for both small and large switches. We 
seek comment on the appropriateness of merging the two data sets.
    135. Methodology. In order to determine the reasonable forward-
looking cost of switches, based on the selected data set, we propose to 
employ regression analysis. In the process of estimation, we propose, 
where appropriate, to make adjustments to the information compiled by 
the parties. These proposed modifications to the data and estimation 
techniques used by the Commission are discussed.
    136. We tentatively conclude that the cost of a switch should be 
estimated as a linear function of the number of lines connected to the 
switch, the type of switch installed (i.e., host or remote), and the 
date of installation. We adopt a linear function based on examination 
of the data and statistical evidence. Sprint recommends using a non-
linear function, such as the log-log function, to take into account the 
declining marginal cost of a switch as the number of lines connected to 
it increases. We tentatively conclude that the linear function we adopt 
provides a better fit with the data than the log-log function. A 
discussion of the effect of time and type of switch on switch cost is 
presented. We seek comment on these tentative conclusions.
    137. Based upon an analysis of the data and the record, we 
tentatively conclude that the fixed cost (i.e., the base getting 
started cost of a switch, excluding costs associated with connecting 
lines to the switch) of host switches and remote switches differ, but 
the per-line variable cost (i.e., the costs associated with connecting 
additional lines to the switch) of host and remote switches are 
approximately the same. This is consistent with statistical evidence 
and the comments of the HAI sponsors. We seek comment on this tentative 
conclusion.
    138. Accounting for Changes in Cost Over Time. We recognize that 
the cost of purchasing and installing switching equipment changes over 
time. Such changes result, for example, from improvements in the 
methods used to produce switching equipment, changes in both capital 
and labor costs, and changes in the functional requirements that 
switches must meet for basic dial tone service. In order to capture 
changes in the cost of purchasing and installing switching equipment 
over time, we propose to modify the data to adjust for the effects of 
inflation, and explicitly incorporate variables in the regression 
analysis that capture cost changes unique to the purchase and 
installation of digital switches. We describe this process.
    139. To the extent that the general level of prices in the economy 
change over time, the purchasing power of a dollar, in terms of the 
volume of goods and services it can purchase, will change. In order to 
account for such economy-wide inflationary effects, we propose to 
multiply the cost of purchasing and installing each switch in the data 
set by the gross-domestic-product chain-type price index for 1997 and 
then divide by the gross-domestic-product chain-type price index for 
the year in which the switch was installed, thereby converting all 
costs to 1997 values.
    140. In order to account for cost changes unique to switching 
equipment, we propose to enter time terms directly into the regression 
equation. GTE expresses concern that, under certain specifications of 
time, the regression equation produces investments for remote switch 
``getting started'' costs that are negative and that such 
specifications overstate the decline in switch costs. The HAI sponsors 
also caution that the historical large percentage price declines seen 
in recent years may not continue. We tentatively conclude that the 
reciprocal form of time in the regression equation proposed would 
satisfy these concerns by yielding projections of switch purchase and 
installation costs that are positive yet declining over time.
    141. Ameritech and GTE advocate the use of the Turner Price Index, 
which is an index designed to measure the changing cost of 
telecommunications plant, to convert the embedded cost information 
contained in the depreciation data to costs measured in current 
dollars. We note, however, that this index and the data underlying it 
are not on the public record. We prefer to rely on public data when 
available. Moreover, we tentatively conclude it is not necessary to 
rely on this index to convert switch costs to current dollars. As 
described in the preceding paragraph, the Commission has proposed to 
account for costs explicitly in the estimation process, rather than 
adopt a surrogate such as the Turner Price Index. We seek comment on 
this proposed approach. In addition, we seek comment on the potential 
impact of increased use of packet switches, including the possibility 
that manufacturers will reduce the price of circuit switches to 
maintain market share.
    142. Treatment of Switch Upgrades. The book-value costs recorded in 
the depreciation data include both the cost of purchasing and 
installing new equipment and the cost associated with installing and 
purchasing subsequent upgrades to the equipment over time. Upgrades 
costs will be a larger fraction of reported book-value costs in 
instances where the book-value costs of purchasing and installing 
switching equipment are reported well after the initial installation 
date of the switch. In order to estimate the costs associated with the 
purchase and installation of new switches, and exclude the costs 
associated with upgrading switches, we propose to remove from the data 
set those switches installed more than three years prior to the 
reporting of their associated book-value costs. We believe that this 
restriction would eliminate switches whose book values contain a 
significant amount of upgrade costs, and recognizes that, when ordering 
new switches, carriers typically order equipment designed to meet 
short-run demand.
    143. We tentatively conclude that we should reject the suggestion 
of Ameritech, GTE, and Sprint that the costs associated with purchasing 
and installing switching equipment upgrades should be included in our 
cost estimates. The model platform we adopted is intended to use the 
most cost-effective forward-looking technology available at a 
particular period of time. The installation costs of switches, as 
configured by us, reflect the

[[Page 31796]]

most cost-effective forward-looking technology for meeting industry 
performance requirements. Switches, augmented by upgrades, may provide 
carriers the ability to meet performance requirements, but do so at 
greater costs. Therefore, such augmented switches do not constitute 
cost-effective forward-looking technology. In addition, as industry 
performance requirements change over time, so will the costs of 
purchasing and installing new switches. The historical cost data 
employed in this proposed analysis reflect such changes over time, as 
do the time-trended cost estimates. We seek comment on this tentative 
conclusion.
    144. Additional Variables. Several parties contend that additional 
independent variables should be included in our regression equation. 
Some of the recommended variables include minutes of use, calls, 
digital line connections, vertical features, and regional, state, and 
vendor-specific identifiers. For the purposes of this analysis, our 
proposed model specification is limited to include information that is 
in both the RUS and depreciation data sets. Neither data set includes 
information on minutes of use, calls, digital line connections, 
vertical features, or differences between host and stand-alone 
switches. Nor do they contain detail sufficient to allow us to obtain 
such information from other sources. State and regional identifiers are 
not included in the proposed regression because we only have 
depreciation data on switches from 20 states. Thus, we could not 
accurately estimate region-wide or state-wide differences in the cost 
of switching. Our proposed model specification also does not include 
vendor-specific variables or variables distinguishing host switches 
from stand-alone switches because the model platform does not 
distinguish between different types of switches.
    145. Switch Cost Estimates. Using the regression analysis 
discussed, we tentatively adopt the fixed cost (in 1999 dollars) of a 
remote switch as $186,400 and the fixed cost (in 1999 dollars) of both 
host and stand-alone switches as $447,000. We tentatively adopt the 
additional cost per line (in 1999 dollars) for remote, host, and stand-
alone switches as $83. We seek comment on these tentative conclusions.
2. Use of the Local Exchange Routing Guide (LERG)
    146. We tentatively conclude that the Local Exchange Routing Guide 
(LERG) database should be used to determine host-remote switch 
relationships in the federal universal service mechanism. In the 1997 
Further Notice, the Commission requested ``engineering and cost data to 
demonstrate the most cost-effective deployment of switches in general 
and host-remote switching arrangements in particular.'' In the 
Switching and Transport Public Notice, the Bureau concluded that the 
model should permit individual switches to be identified as host, 
remote, or stand-alone switches. The Bureau noted that, although stand-
alone switches are a standard component of networks in many areas, 
current deployment patterns suggest that host-remote arrangements are 
more cost-effective than stand-alone switches in certain cases. No 
party has placed on the record in this proceeding an algorithm that 
will determine whether a wire center should house a stand-alone, host, 
or remote switch.
    147. In the Platform Order, we concluded that the federal mechanism 
should incorporate, with certain modifications, the HAI 5.0a switching 
and interoffice facilities module. In its default mode, HAI assumes a 
blended configuration of switch technologies to develop switching cost 
curves. HAI also allows the user the option of designating, in an input 
table, specific wire center locations that house host, remote, and 
stand-alone switches. When the host-remote option is selected, 
switching curves that correspond to host, remote, and stand-alone 
switches are used to determine the appropriate switching investment. 
The LERG database could be used as a source to identify the host-remote 
switch relationships. In the Platform Order, we stated that ``[i]n the 
inputs stage of this proceeding we will weigh the benefits and costs of 
using the LERG database to determine switch type and will consider 
alternative approaches by which the selected model can incorporate the 
efficiencies gained through the deployment of host-remote 
configurations.''
    148. The majority of commenters support the use of the LERG 
database as a means of determining the deployment of host and remote 
switches. These commenters contend that the use of the LERG to 
determine host-remote relationships will incorporate the accumulated 
knowledge and efficiencies of many LECs and engineering experts in 
deploying the existing switch configurations. Commenters also contend 
that an algorithm that realistically predicts this deployment pattern 
is not feasible using publicly available data and would be ``massive 
and complex.'' The HAI proponents argue, however, that use of the LERG 
to identify host-remote relationships may reflect the use of embedded 
technology, pricing, and engineering practices. Although the HAI 
proponents oppose the use of the LERG, they have taken steps to ensure 
that the LERG database is compatible with use in the switching module 
in the synthesis model.
    149. We tentatively conclude that the LERG database is the best 
source currently available to determine host-remote switch 
relationships in the federal universal service mechanism. As noted, no 
algorithm has been placed on the record to determine whether a wire 
center should house a stand-alone, host, or remote switch. In addition, 
a majority of commenters agree that development of such an algorithm 
would be difficult using publicly available data. We tentatively 
conclude that the use of the LERG to identify the host-remote switch 
relationships is superior to HAI's averaging methodology which may not, 
for example, accurately reflect the fact that remote switches are more 
likely to be located in rural rather than urban areas. We therefore 
tentatively agree with the BCPM proponents and other commenters that 
use of the LERG is the most feasible alternative currently available to 
incorporate the efficiencies of host-remote relationships in the 
federal universal service mechanism. We seek comment on these tentative 
conclusions. In particular, we encourage parties to comment on any 
alternative source or methodology that will identify host-remote switch 
relationships on a forward-looking basis.
3. Other Switching and Interoffice Transport Inputs
    150. General. Several commenters assert that the depreciation 
studies on which the Commission relied to develop switch costs include 
all investments necessary to make a switch operational. These 
investments include telephone company engineering and installation, the 
main distribution frame (MDF), the protector frame (often included in 
the MDF), and power costs. To avoid double counting these investments, 
both as part of the switch and as separate input values, the model 
proponents agree that the MDF/Protector investment per line and power 
input values should be set at zero. In addition, commenters agree that 
the Switch Installation Multiplier should be set at 1.0. We agree that 
including these investments both as part of the switch cost and as 
separate investments would lead to double counting of these costs. We 
therefore tentatively conclude that the MDF/Protector investment per 
line and power input values should be set at zero. We further 
tentatively conclude that the Switch Installation Multiplier should be

[[Page 31797]]

set at 1.0. We seek comment on these tentative conclusions.
    151. Analog Line Offset. We tentatively conclude that the ``Analog 
Line Circuit Offset for Digital Lines'' input should be set at zero. 
The HAI proponents contend that the switch investment in the model 
should be adjusted downward to reflect the cost savings associated with 
terminating digital, rather than analog, lines. The HAI proponents 
assert that this cost savings is due primarily to: (1) the elimination 
of a MDF and protector frame termination; and (2) the economic 
efficiencies of terminating multiple lines on a DS-1 trunk termination 
instead of individual analog line terminations. Further, HAI contends 
that the depreciation data on which the Commission relied in developing 
switch investments do not reflect adequately the cost savings that 
would be realized if ``60+% of lines are terminated on DLC--as occurs 
in the TELRIC models.'' HAI contends that the depreciation data used to 
determine costs reflect the use of only approximately 15 percent 
digital lines.
    152. The HAI proponents suggest that the analog line offset input 
should be set to $15.00 per line to reflect additional savings in 
switch investment for terminating digital lines in the model. The BCPM 
proponents and GTE recommend setting the analog line offset to zero. 
Sprint contends that the analog line offset is inherent in the 
switching curve in the model, thus making this input unnecessary. 
Sprint argues that an unknown mixture of analog and digital lines are 
taken into consideration in developing the switch curve. GTE asserts 
that the analog offset must be set to zero to ``track with the 
switching inputs.''
    153. We note that the record contains no basis on which to quantify 
savings beyond those taken into consideration in developing the switch 
cost. We also note that the depreciation data used to determine the 
switch costs reflect the use of digital lines. The switch investment 
value will therefore reflect savings associated with digital lines. We 
also note that HAI's proposed analog line offset of $15.00 per line is 
based on assumptions that are neither supported by the record nor 
easily verified. For example, it is not possible to determine from the 
depreciation data the percentage of lines that are served by digital 
connections. It is therefore not possible to verify HAI's estimate of 
the digital line usage in the ``historical'' data. In addition, HAI 
provides little support for its conclusion that there is a $20.00 per 
line cost savings using digital lines. HAI merely attributes a portion 
of this estimate to certain ``efficiencies'' realized from terminating 
digital rather than analog lines. In the absence of more explicit 
support of HAI's position, we tentatively conclude that the Analog Line 
Circuit Offset for Digital Lines should be set at zero. We seek comment 
on this tentative conclusion.
    154. Switch Capacity Constraints. We tentatively adopt the HAI 
default switch capacity constraint inputs as proposed in the HAI 5.0a 
model documentation. The forward-looking cost mechanism contains switch 
capacity constraints based on the maximum line and traffic capabilities 
of the switch. The HAI proponents now recommend increasing the switch 
line and traffic capacity constraints above the HAI input default 
values for those inputs. HAI contends that the default input values no 
longer reflect the use of the most current technology. For example, HAI 
contends that the maximum equipped line size per switch should be 
increased from 80,000 to 100,000 lines.
    155. We tentatively conclude that the original HAI switch capacity 
constraint default values are reasonable for use in the federal 
mechanism. We note that commenters have reviewed these values and are 
in general agreement with the HAI default values. For example, we note 
that the HAI and BCPM default values for maximum equipped lines per 
switch are identical at 80,000 lines per switch. We also note that the 
HAI model documentation indicates that the 80,000 line assumption was 
based on a conservative estimate ``recognizing that planners will not 
typically assume the full capacity of the switch can be used.'' The HAI 
proponents therefore selected the 80,000 line limitation as the maximum 
equipped line size value with the knowledge that the full capacity of 
the switch may be higher. We seek comment on our tentative conclusion.
    156. Switch Port Administrative Fill. We tentatively adopt a switch 
port administrative fill factor of 94 percent. HAI defines the switch 
port administrative fill as ``the percent of lines in a switch that are 
assigned to subscribers compared to the total equipped lines in a 
switch.'' HAI assigns a switch port administrative fill factor of 98 
percent in its default input values. The BCPM default value for the 
switch percent line fill is 88 percent.
    157. The BCPM proponents contend that switches have significant 
unassigned capacity due to the fact that equipment is installed at 
intervals to handle one to three years' growth. BCPM most recently 
contends that U S WEST and BellSouth have company-wide average fills in 
the range of 76 percent. Sprint, on behalf of the BCPM proponents, now 
recommends an average fill factor of 80 percent.
    158. We note that the switch port administrative fill factor of 94 
percent has been adopted in several state universal service proceedings 
and is supported by the Georgetown Consulting Group, a consultant of 
BellSouth. We also note that this value falls within the range 
established by the HAI and BCPM default input values. The BCPM model 
documentation established a switch line fill default value of 88 
percent that included ``allowances for growth over an engineering time 
horizon of several years.'' BCPM has provided no additional evidence to 
support its revised value of 80 percent. We therefore tentatively adopt 
a switch port administrative fill factor of 94 percent. We seek comment 
on this tentative value.
    159. Trunking. We tentatively conclude that the switch module 
should be modified to disable the computation that reduces the end 
office investment by the difference in the interoffice trunks and the 
6:1 line to trunk ratio. In addition, we tentatively adopt the HAI 
suggested input value of $100.00 for the trunk port investment, per 
end.
    160. The HAI switching and interoffice module developed switching 
cost curves using the Northern Business Information (NBI) publication, 
``U.S. Central Office Equipment Market: 1995 Database.'' These 
investment figures were then reduced per line to remove trunk port 
investment based on NBI's implicit line to trunk ratio of 6:1. The 
actual number of trunks per wire center is calculated in the transport 
calculation, and port investment for these trunks is then added back 
into the switching investments.
    161. The BCPM proponents contend that, under the HAI trunk 
investment approach, raising the per-trunk investment leads to a 
decrease in the switch investment per line under the HAI approach, 
``despite a reasonable and expected increase'' in the investment per 
line. The BCPM proponents argue that the trunk port input value should 
be set at zero to avoid producing ``contradictory'' results. GTE also 
notes that the selection of the trunk port input value creates a 
dilemma in that it is used to reduce the end office investment, as 
noted, and to develop a tandem switch investment. GTE recommends that 
the switch module be modified by disabling the computation that reduces 
the end office investment by the difference in the computed interoffice 
trunks and the 6:1 line to trunk ratio. The HAI sponsors

[[Page 31798]]

agree that the trunk port calculation should be deactivated in the 
switching module.
    162. We agree with commenters that the trunk port input creates 
inconsistencies in reducing the end office investment. We do not, 
however, agree with the suggestion of the BCPM sponsors to simply set 
this input value at zero. As noted by GTE, this input value is also 
used to calculate the tandem switch investment. Consistent with the 
suggestions by GTE and the HAI sponsors, we tentatively conclude that 
the switch module should be modified to disable the computation that 
reduces the end office investment by the difference in the computed 
interoffice trunks and the 6:1 line to trunk ratio.
    163. Because the trunk port input value is also used to determine 
the tandem switch investment, we must determine the trunk port, per end 
investment. The HAI input value for trunk port investment per end is 
$100.00. GTE and Sprint contend that this value should be much higher--
ranging from $200.00 to $500.00. BellSouth notes that four states have 
issued orders addressing the cost of the trunk port for universal 
service. These states estimate the cost of the trunk port ranging from 
$62.73 to $110.77. We tentatively conclude that the record supports the 
adoption of a trunk port investment per end of $100.00, as suggested by 
the HAI sponsors. As noted, this value is consistent with the findings 
of several states and BellSouth. In addition, GTE and Sprint provide no 
data to support their proposed trunk port investment value. We 
therefore tentatively adopt the HAI suggested input value of $100.00 
for the trunk port investment, per end. We seek comment on our 
tentative conclusions.

VI. Expenses

    164. We address the inputs in the model related to expenses, 
including general support facilities (GSF) expenses. In light of the 
criteria identified in the Universal Service Order, the Commission 
intends to select inputs that will result in a reasonable allocation of 
joint and common costs for non-networked related costs such as GSF, 
plant specific and non-specific expenses, and corporate and customer 
operations. The Commission seeks to develop an appropriate methodology 
for estimating these types of expenses to ``ensure that the forward-
looking economic cost [calculated by the federal mechanism] does not 
include an unreasonable share of the joint and common costs for non-
supported services.''

A. Issues for Comment

1. Plant Specific Operations Expenses
    165. We first address the inputs related to plant specific 
operations. Plant specific operations expenses are the expense costs 
related to the maintenance of specific kinds of telecommunications 
plant.
    166. Nationwide Estimates. We tentatively conclude that we should 
adopt input values that reflect the average expenses that will be 
incurred by non-rural carriers, rather than a set of company-specific 
maintenance expense estimates. We make this tentative conclusion for a 
number of reasons. First, we note that this tentative conclusion is 
consistent with a recommendation of the state Joint Board members. 
Second, we have not been able to obtain current cost-to-book cost 
ratios for each ARMIS reporting firm, which would be necessary to 
calculate company or study area specific expense-to-investment ratios 
in the proposed methodology described. Further, we tentatively conclude 
that the use of national or regional averages for input factors is more 
consistent with the forward-looking nature of the high cost model 
because it mitigates the rewards to less efficient companies. We seek 
comment on these tentative conclusions. Parties advocating the use of 
company-specific values or other alternatives to nationwide or regional 
estimates should identify the method and data readily available to 
firms that would be used to estimate plant-specific expenses. 
Commenters should also indicate how their proposal is consistent with 
the goal of estimating forward-looking costs. We note that the proposed 
expense estimates are nationwide averages.
    167. In support of the use of company-specific factors, a number of 
commenters and workshop participants argue that maintenance expenses 
vary widely by geographic area and the type of plant installed. Others 
contend that plant-specific expenses are highly dependent on regional 
wage rate differentials. At this time, we have been unable to verify 
significant regional differences among study areas or between companies 
based solely on labor rate variations using the publicly available 
ARMIS expense account data for plant-specific maintenance costs. 
Nonetheless, we believe that expenses vary by the type of plant 
installed. The synthesis model takes this variance into account 
because, as investment in a particular type of plant varies, the 
associated expense cost also varies. We seek comment on the degree to 
which regional wage rate differentials exist and are significant. We 
ask parties to suggest independent data sources on variations of wage 
rates between regions. We seek comment on a methodology that permits 
such distinctions without resorting to self-reported information from 
companies.
    168. One possible approach would be to use indexes calculated by 
the President's Pay Agent for calculating locality pay differentials 
for Federal employees. Under this methodology, we would first calculate 
a baseline expense factor for the labor-related portion of each plant-
specific expense account according to a formula which is based on the 
sum of an expense factor for that category by study area, a weight 
representing the total investment in a study area, and the regional 
wage differential deflator calculated in the Pay Agent's report 
applicable to the study area. The baseline expense would then be 
disaggregated to each wire center or study area using the deflator. We 
seek comment both on the validity of this approach as well as on the 
specific implementation.
    169. We also tentatively conclude that we should not adopt 
different expense estimates for small, medium, and large non-rural 
companies on a per line basis. In order to determine if economies of 
scale should be a factor in plant-specific expenses, Commission staff 
tested whether significant differences in maintenance expenses per line 
could be discerned from segmenting companies into small carriers with 
less than 500,000 access lines, medium carriers with between 500,000 
and 5,000,000 access lines, and those large carriers with over 
5,000,000 access lines. We have found no significant differences in the 
expense factor per-line or per-investment estimates based on these 
criteria. Therefore, to estimate costs associated with an efficient 
network as determined by the forward-looking mechanism, we tentatively 
conclude that plant-specific maintenance factors should be estimated on 
a national basis. We seek comment on these tentative conclusions.
    170. Methodology. Commenters advocate two methods of estimating 
plant specific operations expenses. The BCPM sponsors contend that all 
expenses should be calculated on a per-line basis. The BCPM default 
estimates for these accounts are based on a survey of companies. The 
HAI sponsors argue that expenses should be calculated as a percentage 
of investment. Specifically, the HAI sponsors assert that plant 
specific operations expenses should be calculated as a fixed percentage 
of investment.

[[Page 31799]]

    171. Although we agree with the HAI sponsors that plant specific 
operations expenses should be estimated as a percentage of investment, 
we tentatively decline to adopt the flat percentages they advocate. By 
using ARMIS investment values that are not converted to current levels, 
the flat-rate method proposed by the HAI sponsors does not attempt to 
use forward-looking estimates. We also tentatively decline to adopt the 
per-line BCPM default estimates. Based on a private survey of 
companies, the BCPM values fail to comply with criterion eight 
identified in the Universal Service Order, because the underlying data 
for these values are not open to and verifiable by the public nor made 
available under the Protective Order. In contrast to the BCPM proposal, 
the methodology that we tentatively adopt here is primarily based on 
readily identifiable and publicly available ARMIS data. Although ARMIS 
data reflect the embedded costs incurred by incumbent LECs, we take 
steps in our proposed methodology to convert these costs to forward-
looking estimates, as described. We note that this methodology was 
proposed by Commission staff in the public workshop on maintenance 
expenses on December 10, 1998.
    172. In order to estimate forward-looking plant specific operations 
expenses, we have considered the requirements set forth in the Platform 
Order, and information provided in workshops, comments and ex-partes. 
We tentatively conclude that the input values for each plant specific 
operations expense account should be calculated as the ratio of booked 
expense to current investment. These expense-to-investment ratios would 
then be multiplied in the model by the model-derived investment for 
each investment account or group of accounts, to produce an estimate of 
the plant specific operations expenses.
    173. Our proposed methodology for estimating expense to investment 
ratios consists of four steps. First, staff obtained from some of the 
ARMIS-filing companies, account-specific current cost to book cost 
(current-to-book) ratios for the related investment accounts. The 
current-to-book ratio is a tool that is used to restate the historic, 
financial account balance on a company's books, which reflects 
investment decisions made over many years, to present day replacement 
cost. For each account or sub-account, a current-to-book ratio is 
developed by first revaluing each type of equipment at its current 
replacement cost. The sum of these current costs are then divided by 
the total, embedded cost account balance. The resulting current-to-book 
ratio will be greater than one if current costs are rising relative to 
the historic costs and less than one if current costs are declining. 
Current-to-book ratios for the years ending 1995 and 1996 were provided 
by the following five holding companies: Ameritech, Bell Atlantic, Bell 
South, GTE, and Southwestern Bell. Although we would prefer to have 
data from more companies, the other ARMIS-filing carriers informed us 
that, they either no longer maintain this type of information, or never 
used current-to-book ratios for accounting purposes.
    174. Second, staff calculated composite current-to-book ratios for 
each account. For each study area of the five holding companies that 
provided current-to-book ratios, we obtained year-end 1995 and 1996 
investment balances from ARMIS for the plant accounts consistent with 
the aforementioned plant-specific expense accounts. Study area-specific 
current-to-book ratios for the two periods were multiplied by the 1995 
and 1996 ARMIS investments in each account to derive the forward-
looking, ``current,'' year-end 1995 and 1996 investment levels by 
account and by study area. The ARMIS and current investments were then 
summed separately, by year and by account, for all study areas of the 
five holding companies. The resulting total current investment (by year 
and by account for the sum of all study areas) was then divided by the 
total ARMIS investment (by year and by account for the sum of all study 
areas) producing two sets of composite current-to-book ratios (year end 
1995 and 1996).
    175. Third, to calculate the expense-to-investment ratios for the 
plant-specific operations expense accounts, staff obtained total, year-
end 1995 and 1996 investment account balances from the ARMIS 43-03 
reports for all ARMIS-filing companies. To make these embedded account 
balances forward-looking, staff next multiplied each investment account 
balance for each year by the current-to-book ratios for the same year 
developed earlier. The 1995 and 1996 ``current'' balances for each 
account were then averaged by adding the two years together and 
dividing by two.
    176. Finally, from the 1996 ARMIS 43-03 report, staff obtained the 
1996 balances for each plant-specific operations expense account for 
all ARMIS-filing companies. The expense account balances were divided 
by their respective average ``current'' investment to obtain expense-
to-investment ratios. We tentatively conclude that these expense-to-
investment ratios should be applied in the mechanism to the model-
derived investment balances to obtain forward-looking plant-specific 
operations expense estimates. The industry-wide expense-to-investment 
ratios are listed. We seek comment on these proposed input values, 
tentative conclusions, and the proposed methodology outlined.
    177. Converting Expense Estimates to Current Values. We recognize 
that plant specific expenses will change over time. Because we 
initially used data from 1996 in the methodology described, we 
tentatively conclude that it is appropriate to adjust this data to 
account for inflation and changes in productivity by obtaining revised 
1997 current-to-book ratios from those companies providing data. In 
addition, we tentatively conclude that we should use the most current 
ARMIS data available necessary for the maintenance factor methodology. 
Because expense and investment balances for 1998 are not available from 
ARMIS at this time, we have also not been able to include them in 
calculating the plant-specific maintenance factors. We tentatively 
conclude that we should use these data in the final computation of 
expense estimates. We seek comment on these tentative conclusions.
    178. GSF Investment. GSF investment includes buildings, motor 
vehicles, and general purpose computers. The synthesis model uses a 
three-step algorithm to estimate GSF for each study area. First, the 
model calculates a GSF investment ratio for each GSF account by 
dividing the ARMIS investment for the account by the ARMIS total plant 
in service (TPIS). Second, the model calculates a preliminary estimate 
GSF investment for each account by multiplying the GSF investment ratio 
for that account times the model's estimate of TPIS. Finally, the model 
reduces each of the preliminary GSF investment estimates by multiplying 
by one of two factors, which are the same as those used in the HAI 
model.
    179. We tentatively conclude that the model's preliminary estimate 
of GSF investment should be reduced, because only a portion of GSF 
investment is related to the cost of providing the services supported 
by the federal mechanism. We also tentatively conclude that the 
synthesis model should not use the same factors as those used in the 
HAI model. The HAI sponsors, who developed the expense module in the 
synthesis model, have not shown why these particular factors should be 
used for this purpose. Instead, we tentatively conclude that total GSF 
investment should be reduced by factors that reflect the percentage of 
customer

[[Page 31800]]

operations, network operations, and corporate operations used to 
provide the supported services. We seek comment on these tentative 
conclusions.
2. Common Support Service Expenses
    180. We next address common support service expenses, which are 
comprised of corporate operations, customer service expenses, and plant 
non-specific expenses. Corporate operations expenses are those costs 
associated with general administrative, executive planning, human 
resources, legal, and accounting expenses for total company operations. 
Customer service expenses include marketing, billing, operator 
services, directory listing, and directory assistance costs. Plant non-
specific expenses are common network operations and maintenance type of 
expenses, including engineering, network operations, power and testing 
expenses, that are considered general or administrative overhead to 
plant operations. Commission staff held public workshops where they 
sought comment on various paradigms and econometric estimation 
techniques used to calculate these factors. Commission staff also 
discussed possible methods for subtracting non-recurring costs from 
expense estimates and for adjusting estimates for inflation and 
potential wage differentials.
    181. Per-Line Basis. Common support services are costs that cannot 
readily be associated with any particular maintenance expense or 
investment account. As a result, we tentatively conclude that these 
expenses (unlike plant-specific expenses) should be estimated on a per-
line basis, as advocated by the BCPM sponsors. We tentatively conclude 
that the HAI sponsors have failed to justify their proposal that 
expense estimates for certain accounts be based on a percentage of 
ARMIS-reported expenses or a percentage of total capital costs and 
operations expenses. We seek comment on these tentative conclusions.
    182. Nationwide Estimates. Commenters such as Aliant, Sprint, GTE, 
and Bell South have argued for the inclusion of all accounts, and have 
argued further that these types of corporations and customer service 
expenses are inherently company specific in nature and should be 
evaluated in this manner. We tentatively conclude that inputs for 
corporate operations, customer services, and plant non-specific 
expenses should also be estimated on a nationwide basis rather than a 
more disaggregated basis. We seek comment on this tentative conclusion.
    183. Costs associated with plant non-specific expenses used to 
supply and run network operations by definition cannot be directly 
allocated to individual maintenance or investment accounts. Commenters 
have suggested that these types of expenses may vary among carriers and 
between study areas. They argue that these differences may be a result 
of company specific plant configurations, geographic and labor 
demographic variables, one-time exogenous costs, and non-recurring 
adjustments such as re-engineering expenses. They further argue that 
administrative support expense differences are also a function of 
regional wage differentials and plant specifications. As stated 
earlier, we cannot at this time distinguish significant differences in 
regional wage differentials for administrative services based solely on 
ARMIS expense data for these accounts. Further, costs associated with 
corporate overhead and customer services accounts are not directly 
linked to specific company investment levels. We tentatively conclude 
that, for forward-looking cost estimates, these types of administrative 
and service expenses are less dependent on carrier physical plant or 
geographic differentials than those that also correlate to company size 
(number of lines) and demand (minutes of use), which were used as 
estimation variables to develop the model inputs. We seek further 
comment on this analysis.
    184. We also tentatively conclude that we should not adopt 
different estimates for small, medium, and large high cost non-rural 
companies for common support service expenses. As with plant specific 
expenses, Commission staff tested whether statistically significant 
differences in common support service expenses per line could be 
determined from segmenting companies into small carriers with less than 
500,000 access lines, medium carriers with between 500,000 and 
5,000,000 access lines, and those large carriers with over 5,000,000 
access lines. We have further reviewed whether expense estimates varied 
due to the total number of Dial Equipment Minutes (DEMs) reported by 
companies in addition to the number of lines. As with the plant-
specific accounts, we could find no significant differences in the 
expense factor per-line based on these criteria. Therefore, consistent 
with the forward looking costs associated with an efficient network as 
determined by the federal mechanism, we tentatively conclude that we 
should estimate these non-specific network operations expenses on a 
nationwide, per-line basis. We seek comment on this tentative 
conclusion.
    185. Data Source. Following standard economic analysis and 
forecasting methods, we propose to use publicly available 1996 ARMIS 
expense data and minutes of use information from NECA, by study area, 
to estimate the portion of these company-wide expenses to be covered by 
universal service support. We believe that consolidation of this data 
produces a sufficient number of observations by study area for each of 
these accounts. Public data for 1996 was used in this analysis in order 
to compare the estimates obtained with proprietary information received 
from a previous data request. We note that this methodology was 
proposed by Commission staff in a public workshop on December 1, 1998. 
We seek comment on this proposal.
    186. Regression Methodology. Using standard multi-variate 
regression analysis, we developed two different specifications to 
determine the portion of corporate and customer operations and plant 
non-specific expenses subject to universal service support. Each 
equation estimates total expenses per total lines as a function of 
switched lines per total lines, special lines per total lines, and toll 
minutes per total lines, either in combination (Specification 1) or 
separated between intrastate toll and interstate toll minutes per total 
lines (Specification 2).
    187. Each specification has been chosen to separate the portion of 
expenses that could be estimated as attributable to special access 
lines and toll usage, which are not supported by the high cost 
mechanism, rather than switched lines and local usage. Commission staff 
found from an earlier formulation that, when the model included both a 
switched line component and a local usage component, the number of 
switched lines and local DEMs were so highly correlated that it did not 
increase the explanatory power of the model to include both variables. 
As a result, we tentatively conclude that we should not include local 
dial equipment minutes per total lines as an explanatory variable, 
despite suggestions by a number of workshop participants and 
commenters. Because both regression equations produce reasonable 
estimates, and in order to prevent any potential advantage to firms 
which might have a different mix of toll minutes, we propose to use the 
average of the estimates from the two specifications. We seek further 
comment on this proposed regression methodology.
    188. Removal of One-Time and Non-Supported Expenses. In order to

[[Page 31801]]

eliminate the impact of one-time non-recurring expenses on forward-
looking estimates, we have sought verifiable public information on 
exogenous costs and those that are recovered through non-recurring 
charges and tariffs. These include specific one time charges for the 
cost of mergers, acquisitions, and process re-engineering. We also 
sought to estimate the cost of providing permanent number portability, 
network and interexchange carrier connection, disconnection, and re-
connection (i.e., churn) costs. Other recurring functions that we have 
attempted to identify include vertical features expenses, billing and 
collection expense not related to supported services, operational 
support systems and other expenses associated with providing unbundled 
network elements and wholesale services to competitive local exchange 
carriers, collocation expenses, and costs associated with SS7 services.
    189. Without obtaining proprietary information from carriers, we 
have been unable to find an objective public data source or discern a 
systematic method for excluding many of these costs from the expense 
data used to calculate the input factors. AT&T and MCI WorldCom 
presented an analysis to Commission staff on January 14, 1999, 
proposing a method to estimate, non-supported, non-recurring, or one-
time expenses for customer, network, and corporate operations expenses. 
Averaging data for five years (1993-1997) of corporate Security and 
Exchange Commission (SEC) 10-K and 10-Q filings, a percentage of 
corporate and network operations identified as one-time charges were 
estimated for the BOCs and all Tier One companies. Because the SEC 
reports do not specifically indicate whether the one-time expenses were 
actually made during the year(s) indicated, we tentatively conclude 
that we should not use these figures to adjust the 1996 ARMIS data used 
in estimating the expense input values. The analysis does indicate, 
however, that one-time expenses for corporate operations can be 
significant and should be estimated, if possible. Because this type of 
data detail is not publicly available from ARMIS or easily reconcilable 
from other public company financial reports to individual account 
expenses for a specific year, we invite comment on how to identify and 
estimate these expenses.
    190. We tentatively conclude that, if it is determined that expense 
estimates to be used as inputs in the high-cost mechanism are to be 
revised annually, as suggested by various parties, one-time non-
recurring costs should be systematically excluded. We further recommend 
that, to the extent possible, efforts be made to use current 
information supplied and verified by the companies, if none can be 
found independently, to more accurately reflect forward-looking 
expenses. We seek comment on this tentative conclusion and 
recommendation.
    191. Removal of Non-Supported Expenses. Cost reductions were made 
for continuous non-supportable services which could be identified and 
estimated from publicly available (ARMIS) expense data. Expense 
adjustments were made to calculated input values for marketing 
expenses. Though the HAI sponsors and state Joint Board members 
suggested that marketing expenses be excluded entirely, commenters and 
workshop participants noted that Section 214 of the Communications Act 
requires eligible telecommunications carriers to advertise the 
availability of residential local exchange and universal service 
supported services.
    192. We tentatively conclude that an analysis made by Economics and 
Technology, Inc., regarding the disaggregation of marketing and 
advertising expenses made by companies for basic telephone service, is 
the most accurate method on the record for apportioning marketing 
expenses between supported and non-supported services. This analysis 
attributes an average of 95.6 percent of company marketing costs to 
non-supported customers or activities, such as vertical and new 
services. We seek comment on this proposed analysis for estimating 
marketing expenses.
    193. We also propose adjustments for non-supported service costs 
related to coin operations and collection, published directory, access 
billing, interexchange carrier office operation, and service order 
processing, which are associated with specific expense accounts used in 
the regression analysis. Under this methodology, percentage reductions 
would be made to the estimated coefficients for those accounts using 
calculations based on a time trend analysis of average ARMIS 43-04 
expense data for five years (1993-1997). We seek comment on this 
proposed methodology.
    194. Converting Expenses to 1999 Values. In order to bring forward 
the 1996 data relied upon for estimating common support service 
expenses, we propose to use a 6.0 percent productivity factor for each 
year (1997 and 1998) to reduce the estimated input values for each 
account. The 6.0 percent productivity factor is based on the 6.5 
percent ``X-factor'' used in the Commission's price cap methodology. We 
note that the D.C. Circuit Court of Appeals recently reversed and 
remanded for further explanation the Commission's decision to select 
6.0 percent as the first component of the X-factor. In light of that 
remand, we seek comment on whether we should continue to adjust our 
expense input values to reflect productivity gains. If we determine 
that such adjustment is appropriate, we may want to use an alternative 
method of estimating productivity. We seek comment on what other 
measures we could use to adjust our expense data for gains in 
productivity. We further propose to add an inflation factor for each 
year based on the fixed weighted Gross Domestic Product Price Index 
(GDP-PI) for 1997 (2.1120 percent) and for 1998 (2.1429 percent). Thus, 
we propose a net reduction of 3.888 percent for 1997 and 3.8571 percent 
for 1998 when using the 6.0 percent productivity factor. We seek 
comment on this method for converting expenses to 1999 values.
    195. Estimates of Corporate Operations, Customer Operations, and 
Plant Non-Specific Expenses. This Further Notice contains a summary of 
the proposed per-line, per-month input figures for both plant non-
specific expenses, corporate operations, and customer operations 
adjusted expenses as calculated using the aforementioned methodology. 
We seek comment on these proposed values.

VII. Capital Costs

    196. We address the inputs in the model related to capital costs: 
depreciation, cost of capital, and annual charge factors.

A. Depreciation

1. Issues for Comment
    a. Method of Depreciation.
    197. Before selecting values for projected life and future net 
salvage value, we first tentatively adopt the method of depreciation 
that should be used in the model, that is, how depreciation allowances 
should be allocated over the life of an asset. The Commission's 
depreciation accounting rules require carriers to use straight-line 
equal-life group depreciation. Both the HAI and BCPM proponents 
advocate the use of straight-line depreciation in calculating 
depreciation expenses. Ameritech suggests that the depreciation method 
used for a specific geographic area should be consistent with any 
studies that underlie the development of economic lives or net salvage 
values for that same area. GTE proposes that incumbent LECs be allowed 
to use depreciation lives based on the expected economic life of the 
asset. Because the Commission's rules require the use of straight-line

[[Page 31802]]

depreciation, rather than a more accelerated depreciation method, we 
tentatively conclude that this method, which is used for all 
Commission-proposed depreciation, is also appropriate for use in the 
high cost support mechanism. We seek comment on this tentative 
conclusion.
    b. Depreciation Lives and Future Net Salvage Percentages.
    198. In estimating depreciation expenses, the model uses the 
projected lives and future net salvage percentages for the asset 
accounts in Part 32 of the Commission's rules. Traditionally, the 
projected lives and future net salvage values used in setting a 
carrier's rates have been determined in a triennial review process 
involving the state commission, the Commission, and the carrier. In 
order to simplify this process, the Commission has prescribed ranges of 
acceptable values for projected lives and future net salvage 
percentages. The Commission's prescribed ranges reflect the weighted 
average asset life for regulated telecommunications providers. These 
ranges are treated as safe harbors, such that carriers that incorporate 
values within the ranges into their depreciation filings will not be 
challenged by the Commission. Carriers that submit life and salvage 
values outside of the prescribed range must justify their submissions 
with additional documentation and support. Commission authorized 
depreciation lives are not only estimates of the physical lives of 
assets, but also reflect the impact of technological obsolescence and 
forecasts of equipment replacement. We believe that this process of 
combining statistical analysis of historical information with forecasts 
of equipment replacement generates forward-looking projected lives that 
are reasonable estimates of economic lives and, therefore, are 
appropriate measures of depreciation.
    199. In the 1997 Further Notice, the Commission tentatively 
concluded that it should adopt depreciation expenses that reflect a 
weighted average of the rates authorized for carriers that are required 
to submit their rates to us. The values submitted by the HAI sponsors 
essentially reflect such a weighted average. The HAI values represent 
the weighted average depreciation lives and net salvage percentages 
from 76 study areas. According to the HAI sponsors, these depreciation 
lives and salvage values reflect the experience of the incumbent LEC in 
each of these study areas in retiring plant, and its projected plans 
for future retirements.
    200. We tentatively conclude that HAI's values represent the best 
forward-looking estimates of depreciation lives and net salvage 
percentages. We seek comment on this tentative conclusion. Generally, 
these values fall within the ranges prescribed by the Commission for 
projected lives and net salvage percentages. Although the HAI values 
for four account categories fall outside of the Commission's prescribed 
ranges, these values still reflect the weighted average of projected 
lives and net salvage percentages that were approved by the Commission 
and therefore are consistent with the approach proposed in the 1997 
Further Notice. As noted, the fact that an approved value falls outside 
of the prescribed range simply means that the carrier that proposed the 
value was required to provide additional justification to the 
Commission for this value. We are satisfied that HAI calculated its 
proposed rates using the proper underlying depreciation factors and 
that HAI's documentation supports the selection of these values.
    201. We disagree with the BCPM sponsors and other incumbent LECs 
that the Commission's prescribed ranges are not appropriate for 
determining depreciation rates in a competitive environment. These 
parties argue that rapid changes in technology and the opening of local 
telecommunications markets to competition shorten asset lives 
significantly beyond what the Commission has prescribed. The BCPM 
sponsors claim that these factors cause existing equipment to become 
obsolete at a faster pace, thus reducing the overall economic value of 
the assets more quickly. We agree with the HAI sponsors that there is 
no evidence to support the claim that increased competition or advances 
in technology require the use of shorter depreciation lives in the 
model than are currently prescribed by the Commission. The Commission's 
prescribed lives are not based solely on the engineered life of an 
asset, but also consider the impacts of technological change and 
obsolescence. We note that the depreciation values we tentatively adopt 
are generally at the lower end of the prescribed range. We further note 
that although the average depreciation rate for an incumbent LEC's 
Total Plant in Service is approximately seven percent, incumbent LECs 
are retiring plant at a four percent rate. This difference has allowed 
depreciation reserves to increase so that the depreciation reserve-
ratio is greater than 50 percent. We tentatively conclude that the 
existence of this difference implies that the prescribed lives are 
shorter than the engineered lives of these assets. In addition, this 
difference provides a buffer against technological change and 
competitive risk for the immediate future. We therefore tentatively 
conclude that the Commission's prescribed ranges are appropriate to 
determine depreciation rates for the model. We seek comment on these 
tentative conclusions.
    202. We tentatively decline to adopt the values for projected lives 
and net salvage percentages submitted by the BCPM proponents. The BCPM 
proponents based their default values for projected lives and salvage 
on a LEC industry data survey requesting forward-looking values. With 
regard to projected lives, the BCPM values generally fall outside of 
the Commission's prescribed ranges. Because the BCPM sponsors fail to 
introduce sufficient evidence supporting their values, we tentatively 
decline to accept their approach. The BCPM proponents submitted values 
for projected life that are significantly shorter than the already 
shortened Commission's prescribed life ranges. This is significant 
because BCPM's values that fall outside of the prescribed ranges 
represent accounts that reflect the overwhelming majority of plant 
investment, thus potentially triggering a dramatic increase in support. 
We seek comment on this assessment.

B. Cost of Capital

    203. The cost of capital represents the annual percentage rate of 
return that a company's debtholders and equity holders require as 
compensation for providing the debt and equity capital that a company 
uses to finance its assets. In the Universal Service Order, the 
Commission concluded that the current federal rate of return of 11.25 
percent is a reasonable rate of return by which to determine forward-
looking costs.
    204. The HAI proponents have submitted data indicating that the 
incumbent LEC's cost of capital is 10.01 percent, not the current 11.25 
percent federal rate of return. The HAI proponents also contend that 
certain state commissions have determined that even lower costs of 
capital are appropriate. The BCPM proponents advocate a cost of capital 
rate of 11.36 percent.
    205. We find that both BCPM and HAI proponents have failed to make 
an adequate showing to justify rates that differ from the current 11.25 
percent federal rate of return. We tentatively conclude, therefore, 
that the current rate is reasonable for determining the cost of 
universal service. If the Commission, in a rate represcription order, 
adopts a different rate of return, we tentatively

[[Page 31803]]

conclude the model should use the more recently determined rate of 
return. We seek comment on these tentative conclusions.

C. Annual Charge Factors

    206. Incumbent LECs develop cost factors, called ``annual charge 
factors,'' to determine the dollar amount of recurring costs associated 
with acquiring and using particular pieces of investment for a period 
of one year. Incumbent LECs develop these annual charge factors for 
each category of investment required. The annual charge factor is the 
sum of depreciation, cost of capital, adjustments to include taxes on 
equity, and maintenance costs.
    207. To develop annual charge factors, the BCPM proponents propose 
a model with user-adjustable inputs to calculate the depreciation and 
cost of capital rates for each account. The BCPM proponents state that 
this account-by-account process was designed to recognize that all of 
the major accounts have, inter alia, differing economic lives and 
salvage values that lead to distinct capital costs. HAI's model is also 
user adjustable and reflects the sum for the three inputs: 
depreciation, cost of capital, and maintenance costs.
    208. Because the synthesis model uses HAI's expense module, with 
modifications, we tentatively conclude that HAI's annual charge factor 
should be used. We believe that HAI's annual charge factor is 
consistent with other inputs used in the model adopted by the 
Commission, and therefore easier to implement. We seek comment on this 
analysis and our tentative decision to use HAI's annual charge factor.

VIII. Other Issues Related to the High Cost Mechanism

A. Alternatives to the Forward-Looking Cost Model

    209. It is our expectation that the model outputs will be fully 
verified in time for implementation on January 1, 2000, and we remain 
firmly committed to the idea that support based on forward-looking 
costs will provide the best assurance of predictable, specific, and 
sufficient support as competition develops. In the unlikely event that 
the model is not ready for timely implementation, however, we seek 
comment on how the Commission might determine support levels without 
resort to a forward-looking cost model. Commenters addressing this 
issue should specifically describe how their proposal will generate 
sufficient support to meet the goals of section 254, even as 
competition develops in the local exchange.

B. Proposed Modification to Procedures for Distinguishing Rural and 
Non-Rural Companies

1. Issues for Comment
    210. On June 22, 1998, the Accounting Policy Division released a 
Public Notice with a list of the approximately 1,400 carriers that had 
certified as rural carriers as of April 30, 1998. Because a vast 
majority of the carriers certifying as rural serve under 100,000 access 
lines, we tentatively conclude that we should adopt new filing 
requirements for carriers filing rural self-certification letters. We 
propose that carriers who serve under 100,000 access lines should not 
have to file the annual rural certification letter unless their status 
has changed since their last filing. We believe that this is a better 
approach because the overwhelming majority of the companies that filed 
rural certification letters qualified as rural telephone companies 
because they provide service to fewer access lines than either the 
50,000 or 100,000 line thresholds identified in the statute. Access 
line counts can be verified easily with publicly-available data. 
Further, this relaxation in filing requirements would lessen the burden 
on many rural carriers and Commission staff. We estimate that this 
change will eliminate the filing requirement for approximately 1,380 of 
the carriers that filed this year. We seek comment on this proposal.
    211. As noted, the Commission can easily determine whether a 
carrier satisfies criteria (B) or (C) of the rural telephone company 
definition, because these criteria are based on information that can be 
verified easily with publicly available data--the number of access 
lines served by a carrier. In contrast, criteria (A) and (D) require 
additional information and analysis to verify a carrier's self-
certification as a rural company. Specifically, under criterion (A) a 
carrier is rural if its study area does not include ``any incorporated 
place of 10,000 inhabitants or more'' or ``any territory * * * in an 
urbanized area,'' based upon Census Bureau statistics and definitions. 
Under criterion (D) a carrier is rural if it had ``less than 15 percent 
of its access lines in communities of more than 50,000 on the date of 
enactment of the [1996 Act].''
    212. We tentatively conclude that, once we have clarified the 
meaning of ``local exchange operating entity'' and ``communities of 
more than 50,000'' in section 153(37), we should require carriers with 
more than 100,000 access lines that seek rural status to file 
certifications for the period beginning January 1, 2000, consistent 
with the Commission's interpretation of the rural telephone company 
definition. We seek comment on this tentative conclusion. We also seek 
comment on whether we should require these carriers to re-certify each 
year (after the filing for January 1, 2000) or, in the alternative, 
whether they should be required to re-certify only if their status has 
changed.
    213. Most of the carriers asserting rural status under criterion 
(A) or (D) also claim rural status under the access line thresholds in 
criterion (B) or (C). In these cases, the Commission does not need 
additional information to verify the carrier's rural status. If a 
carrier serves a local exchange study area with more than 100,000 
access lines, however, the Commission needs additional information 
about the study area to determine whether criterion (A) or (D) is met. 
Based on the certifications we have received, we believe that carriers 
have adopted differing interpretations of criterion D. We tentatively 
conclude that criterion A, on the other hand, by referencing Census 
Bureau sources, can be applied consistently without further 
interpretation by the Commission. We seek comment on this tentative 
conclusion.
    214. We have identified at least two issues in the rural telephone 
company definition for which carriers have adopted different 
interpretations that affect the determination of whether a carrier 
satisfies the requirements of criterion D. Specifically, carriers 
differ on whether criterion (D) should be applied on a holding company 
or study area-by-study area basis. For example, while most carriers 
have asserted that they meet the 15 percent/50,000 test in criterion 
(D) for a particular study area because less than 15 percent of its 
access lines within that study area are in communities of more than 
50,000, at least one carrier claims it meets this criterion for all of 
its study areas, because less than 15 percent of its access lines 
nationwide are in such communities. In order to resolve these 
differences, we must interpret the phrase ``local exchange operating 
entity'' in the introductory text of section 153(37).
    215. We therefore seek comment on how we should interpret the 
phrase ``local exchange operating entity'' in section 153(37) of the 
Communications Act. Specifically, we seek comment on whether that term 
refers to an entity operating at the study area level or at the holding 
company level. Although most of the carriers certifying under

[[Page 31804]]

subparagraph (D) have construed the term to refer to an entity at the 
study area level, we note that at least one state commission, in 
denying a carrier's request for an exemption under section 251(f)(1) of 
the Communications Act, viewed the exemption claim from the perspective 
of the national operating entity. We also request information on how 
states have construed the rural telephone company definition in 
exercising their authority under section 251(f)(1) and section 
214(e)(2) of the Act.
    216. Carriers also have used different interpretations of the 
phrase ``communities of more than 50,000'' in criteria (D) of the rural 
telephone company definition. Some carriers have used Census Bureau 
statistics for legally incorporated localities, consolidated cities, 
and census-designated places, to identify communities of more than 
50,000. Other carriers have provided lists of communities without 
identifying the source of the designation or the population 
information. Some carriers have attempted to distinguish between rural 
communities and communities that may be characterized as urban or 
suburban. One carrier, for example, based its analysis of its service 
territories on the Commission's definition of ``rural area'' in section 
54.5 of the Commission's rules. The carrier calculated its percentage 
of rural/non-rural lines by determining whether each of its wire 
centers is associated with a metropolitan statistical area (MSA). If 
so, these lines were considered to be urban, unless the wire center has 
rural pockets, as defined by the most recent Goldsmith Modification.
    217. We seek comment on how we should interpret the phrase 
``communities of more than 50,000'' in section 153(37) of the Act. We 
seek comment on whether we should define communities of more than 
50,000 by using Census Bureau statistics for legally incorporated 
localities, consolidated cities, and census-designated places. In the 
alternative, we seek comment on whether we should distinguish between 
rural and non-rural communities in applying criterion D of section 
153(37). Specifically, we seek comment on whether we should use the 
methodology in section 54.5 of the Commission's rules to determine 
whether a community is in a rural area. We also seek comment on other 
methods of defining communities with populations greater than 50,000 
for purposes of applying criterion D.
    218. As noted, states apply the definition of rural telephone 
company in determining whether a rural telephone company is entitled to 
an exemption under section 251(f)(1) of the Act and in determining, 
under section 214(e)(2) of the Act, whether to designate more than one 
carrier as an eligible telecommunications carrier in an area served by 
a rural telephone company. Although the Commission used the rural 
telephone company definition to distinguish between rural and non-rural 
carriers for purposes of calculating universal service support, there 
is no statutory requirement that it do so. The Commission adopted the 
Joint Board's recommendation to allow rural carriers to receive support 
based on embedded cost for at least three years, because, as compared 
to large LECs, rural carriers generally serve fewer subscribers, serve 
more sparsely populated areas, and do not generally benefit as much 
from economies of scale and scope. The Commission also noted that for 
many rural carriers, universal service support provides a large share 
of the carriers' revenues, and thus, any sudden change in the support 
mechanisms may disproportionately affect rural carriers' operations. We 
seek comment on whether the Commission should reconsider its decision 
to use the rural telephone company definition to distinguish between 
rural and non-rural carriers for purposes of calculating universal 
service support. That is, we seek comment on whether there are 
differences between our universal service policies and the competitive 
policies underlying sections 251(f)(1) and 214(e)(2) that would justify 
definitions of ``rural telephone company'' and ``rural carrier'' that 
differ.
    219. Finally, we address a necessary procedural matter. Currently, 
carriers are required to file rural certifications by July 1, 1999 to 
be classified as rural for January 1, 2000. Given our tentative 
conclusions that we should modify the current filing requirements for 
rural certification, including eliminating the filing requirement for 
most carriers that have filed previously, we move the July 1, 1999 
filing deadline to October 15, 1999.

IX. Procedural Matters and Ordering Clause

A. Ex Parte Presentations

    220. This is a permit-but-disclose notice-and-comment rulemaking 
proceeding. Ex parte presentations are permitted, except during the 
Sunshine Agenda period, provided that they are disclosed as provided in 
Commission's rules.

B. Initial Regulatory Flexibility Act

    221. As required by the Regulatory Flexibility Act (RFA), the 
Commission has prepared this Initial Regulatory Flexibility Analysis 
(IRFA) of the possible significant economic impact on small entities by 
the proposals in this Further Notice. Written public comments are 
requested on the IRFA. These comments must be filed in accordance with 
the same filing deadlines as comments on the rest of this Further 
Notice, and should have a separate and distinct heading designating 
them as responses to the IRFA. The Commission will send a copy of this 
Further Notice, including the IRFA, to the Chief Counsel for Advocacy 
of the Small Business Administration (SBA) in accordance with the RFA. 
In addition, the Further Notice and IRFA (or summaries thereof) will be 
published in the Federal Register.
    222. Need for and Objectives of Proposed Rules. In the Universal 
Service Order, the Commission adopted a plan for universal service 
support for rural, insular, and high cost areas to replace longstanding 
federal subsidies to incumbent local telephone companies with explicit, 
competitively neutral federal universal service mechanisms. In doing 
so, the Commission adopted the recommendation of the Joint Board that 
an eligible carrier's support should be based upon the forward-looking 
economic cost of constructing and operating the networks facilities and 
functions used to provide the services supported by the federal 
universal service mechanism.
    223. Our plan to adopt a mechanism to estimate forward-looking cost 
has proceeded in two stages. On October 28, 1998, the Commission 
completed the first stage of this proceeding: the selection of the 
model platform. The platform encompasses the aspects of the model that 
are essentially fixed, primarily assumptions about the design of the 
network and network engineering. In this Further Notice we move toward 
completion of the second stage of this proceeding, by proposing input 
values for the cost model, such as the cost of cables, switches and 
other network components, in addition to various capital cost 
parameters. In addition, we propose adoption of a road surrogate 
algorithm to determine the location of customers and a data set of 
customer locations. This Further Notice also seeks comment on other 
issues related to the federal high cost mechanism, including 
alternatives to the forward-looking cost model and modifications to the 
procedures for distinguishing rural and non-rural companies.

[[Page 31805]]

    224. Legal Basis: The proposed action is supported by sections 
4(i), 4(j), 201-205, 254, and 403 of the Communications Act of 1934, as 
amended, 47 U.S.C. 154(i), 154(j), 201-205, 254, and 403.
    225. Description and Estimate of the Number of Small Entities to 
which the Further Notice will Apply. 
    226. The RFA generally defines ``small entity'' as having the same 
meaning as the term ``small business,'' ``small organization,'' and 
``small government jurisdiction.'' In addition, the term ``small 
business'' has the same meaning as the term ``small business concern'' 
under the Small Business Act, unless the Commission has developed one 
or more definitions that are appropriate to its activities. Under the 
Small Business Act, a ``small business concern'' is 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. The SBA has defined a small business for Standard Industrial 
Classification (SIC) category 4813 (Telephone Communications Except 
Radiotelephone) to be small entities when they have no more than 1,500 
employees.
    227. The most reliable source of information regarding the total 
number of certain common carriers appears to be data the Commission 
publishes annually in its Carrier Locator report, derived from filings 
made in connection with the Telecommunications Relay Service (TRS).
    228. Although some affected incumbent LECs may have 1,500 or fewer 
employees, we do not believe that such entities should be considered 
small entities within the meaning of the RFA because they are either 
dominant in their field of operations or are not independently owned 
and operated, and therefore by definition not ``small entities'' or 
``small business concerns'' under the RFA. Accordingly, our use of the 
terms, ``small entities'' and ``small businesses'' does not encompass 
incumbent LECs. Out of an abundance of caution, however, for regulatory 
flexibility analysis purposes, we will separately consider small 
incumbent LECs within this analysis and use the term ``small incumbent 
LECs'' to refer to any incumbent LEC that arguably might be defined by 
the SBA as ``small business concerns.''
    229. Local Exchange Carriers. Neither the Commission nor SBA has 
developed a definition of small local exchange carriers. The closest 
applicable definition for these carrier-types under SBA rules is for 
telephone communications companies other than radiotelephone (wireless) 
companies. The most reliable source of information regarding the number 
of these carriers nationwide of which we are aware appears to be data 
that we collect annually in connection with the TRS. According to our 
most recent data, there are 1,410 LECs. Although it seems certain that 
some of these carriers are not independently owned and operated, or 
have more than 1,500 employees, we are unable at this time to estimate 
with greater precision the number of these carriers that would qualify 
as small business concerns under SBA's definition. Consequently, we 
estimate that there are fewer than 1,410 small entity LECs that may be 
affected by the proposals adopted in this Further Notice. We also note 
that, with the exception of a modification in reporting requirements, 
the proposals in this Further Notice apply only to larger ``non-rural'' 
LECs.
    230. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. 
    231. On June 22, 1998, the Accounting Policy Division released a 
Public Notice with a list of the approximately 1,400 carriers that had 
certified as rural carriers as of April 30, 1998. Because a vast 
majority of the carriers certifying as rural serve under 100,000 access 
lines, we tentatively conclude that we should adopt new filing 
requirements for carriers filing rural self-certification letters. We 
propose that carriers who serve under 100,000 access lines should not 
have to file the annual rural certification letter unless their status 
has changed since their last filing. We believe that this is a better 
approach because the overwhelming majority of the companies that filed 
rural certification letters qualified as rural telephone companies 
because they provide service to fewer access lines than either the 
50,000 or 100,000 line thresholds identified in the statute. Access 
line counts can be verified easily with publicly-available data. 
Further, this relaxation in filing requirements would lessen the burden 
on many rural carriers and Commission staff. We estimate that this 
change will eliminate the filing requirement for approximately 1,380 of 
the carriers that filed this year.
    232. We tentatively conclude that, once we have clarified the 
meaning of ``local exchange operating entity'' and ``communities of 
more than 50,000'' in section 153(37), we should require carriers with 
more than 100,000 access lines that seek rural status to file 
certifications for the period beginning January 1, 2000, consistent 
with the Commission's interpretation of the rural telephone company 
definition. We also seek comment on whether we should require these 
carriers to re-certify each year (after the filing for January 1, 2000) 
or, in the alternative, whether they should be required to re-certify 
only if their status has changed.
    233. In addition, we address a necessary procedural matter. 
Currently, carriers are required to file rural certifications by July 
1, 1999 to be classified as rural for January 1, 2000. Given our 
tentative conclusions that we should modify the current filing 
requirements for rural certification, including eliminating the filing 
requirement for most carriers that have filed previously, we propose 
moving the July 1, 1999 filing deadline to October 15, 1999.
    234. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Significant Alternatives Considered. Throughout the 
Further Notice, we seek comment on the tentative conclusions that we 
propose. In addition, we believe that the reporting modifications that 
are proposed will reduce the burden on rural LECs. As noted, we propose 
that carriers serving fewer access lines than either the 50,000 or 
100,000 line thresholds should not be required to file annual rural 
certification letters unless their status has changed since their last 
filing.
    235. Federal Rules That May Overlap, Duplicate or Conflict with the 
Proposed Rule. None.

C. Initial Paperwork Reduction Act Analysis

    236. This Further Notice contains a proposed information 
collection. As part of its continuing effort to reduce paperwork 
burdens, we invite the general public and the Office of Management and 
Budget (OMB) to take this opportunity to comment on the information 
collections contained in this Further Notice, as required by the 
Paperwork Reduction Act of 1995, Public Law No. 104-13. Public and 
agency comments are due at the same time as other comments on this 
Further Notice; OMB comments are due 60 days from date of publication 
of this Further Notice in the Federal Register. Comments should 
address: (a) whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information shall have practical 
utility; (b) the accuracy of the Commission's burden estimates; (c) 
ways to enhance the quality, utility, and clarity of the information 
collected; and (d) ways to minimize the burden of the collection of 
information on the

[[Page 31806]]

respondents, including the use of automated collection techniques or 
other form of information technology.

D. Deadlines and Instructions for Filing Comments

    237. Pursuant to 47 CFR 1.415, 1.419, interested parties may file 
comments on or before July 2, 1999 and reply comments on or before July 
16, 1999. Comments may be filed using the Commission's Electronic 
Comment Filing System (ECFS) or by filing paper copies. See Electronic 
Filing of Documents in Rulemaking Proceedings, 63 Fed. Reg. 24,121 
(1998).
    238. Comments filed through the ECFS can be sent as an electronic 
file via the Internet to http://www.fcc.gov/e-file/ecfs.html>. 
Generally, only one copy of an electronic submission must be filed. If 
multiple docket or rulemaking numbers appear in the caption of this 
proceeding, however, commenters must transmit one electronic copy of 
the comments to each docket or rulemaking number referenced in the 
caption. In completing the transmittal screen, commenters should 
include their full name, Postal Service mailing address, and the 
applicable docket or rulemaking number. Parties may also submit an 
electronic comment by Internet e-mail. To get filing instructions for 
e-mail comments, commenters should send an e-mail to [e-mail], and 
should include the following words in the body of the message, ``get 
form