******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) National Exchange Carrier ) Association, Inc. (NECA) ) AAD 97-2 ) Proposed Modifications to the 1997) Interstate Average Schedule Formulas) ORDER Adopted: May 27, 1997 Released: May 28, 1997 By the Chief, Common Carrier Bureau: I. INTRODUCTION 1. On December 31, 1996, the National Exchange Carrier Association, Inc. ("NECA") filed modifications to the average schedule formulas scheduled to become effective July 1, 1997. The filing was submitted in accordance with the Commission's rules that require NECA to submit proposed modifications to the average schedules annually or to certify that no modifications are warranted. Comments were filed by three parties: the United States Telephone Association ("USTA"); the Organization for the Promotion and Advancement of Small Telecommunications Companies ("OPASTCO"); and the National Telephone Cooperative Association ("NTCA"). In this order, we approve the proposed modifications to the average schedule formulas with the exception of the Common Line formula. We direct NECA to use the Common Line formula shown in Attachment 3. II. BACKGROUND 2. Incumbent local exchange carriers ("ILECs"), that participate in NECA tariffs, receive compensation as "cost companies," or as "average schedule companies." Cost companies receive compensation for the use of their facilities in originating and terminating interstate common carrier communications services on the basis of their actual interstate costs of performing those functions. Cost companies perform studies of their costs in accordance with Parts 32, 36, and 64 of the Commission's rules to determine their actual interstate costs. Average schedule companies receive compensation for their interstate common carrier services on the basis of formulas that are designed to "simulate the disbursements that would be received...by a [cost study] company that is representative of average schedule companies." III. PLEADINGS A. NECA's Filing 3. Average schedule companies currently receive interstate compensation pursuant to formulas that became effective July 1, 1996. There are average schedule formulas for each of the following categories: Traffic Sensitive Central Office ("TSCO"); Line Haul Non-Distance Sensitive; Line Haul Distance Sensitive; Intertoll Dial Switching; Signal System 7 ("SS7"); Special Access; Equal Access; Database Query and Interim Translation; Universal Service; and Common Line. NECA proposes to revise these formulas as shown in Attachment 1. NECA states that the proposed formulas simulate disbursements that would be received by a cost company that is representative of average schedule companies, as required by Section 69.606(a) of the Commission's rules. NECA projects that its proposed modifications will result in an overall 0.8% decrease in settlements for average schedule companies, assuming demand levels are constant. B. Comments and Reply Comments 4. In a Public Notice released January 10, 1997, we invited comments on NECA's proposals. USTA, NTCA and OPASTCO all recommend that the Commission approve NECA's proposed modifications to the current average schedule formulas. All commenters state that the proposed modifications are both reasonable and meet the requirements of the Commission's rules. IV. DISCUSSION 5. Our analysis shows that all of the proposed formula changes, with the exception of the Common Line formula, are reasonable. We, therefore, approve all but the Common Line formula. 6. Common Line Formula. We have analyzed NECA's proposed Common Line formula, a number of possible alternative formulas, as well as the underlying data NECA used to determine its proposed formula. From this analysis, we conclude that NECA's proposed formula is not the one that best fits the data. NECA's proposed formula is a linear spline model, i.e., two lines that meet at an inflection point, but the inflection point in the model is not well supported by the data. We have developed a linear spline model using NECA's current sample that better fits the data. The model we developed has a significantly higher inflection point than the inflection point NECA proposes. We believe that the inflection point in NECA's proposed formula is not representative of the current data because NECA developed it by analyzing 1985 data rather than current data. In addition, we believe that NECA's proposed formula would overestimate settlements for average schedule companies. We found that the sum of the estimated settlements derived from the proposed formulas for NECA's current sample of average schedule companies exceeded the sum of NECA's simulated revenue requirements for those companies. Similarly, after reviewing the 1994-1995 samples, we determined that the sum of NECA's settlements exceeded the sum of the corresponding revenue requirements. 7. We have identified two non-linear models for the Common Line formula that better fit the data and would not have a tendency to overestimate settlements for average schedule companies. Because these alternative models are non-linear, none rely on a particular inflection point. The "reciprocal" formula, for example, models settlements per line with a smooth transition curve rather than with two line segments with different slopes meeting at a specific inflection point. Because the reciprocal formula has a better "goodness-of-fit" and does not have a tendency to overestimate average schedule company settlements, we direct NECA to use the reciprocal model for its Common Line settlement formula. 8. Future Filings. Our analysis shows that NECA's proposed TSCO formula improves the fit of the model to the data for high volume traffic companies, and we therefore approve it. We are concerned, however, that the TSCO formula may be unnecessarily complex because it involves relationships between demand variable access lines, minutes, and the number of exchanges. The complexity of this formula increases the Commission's task of evaluation. Also, the Universal Service Order, adopted May 7, 1997, alters the allocation rules for central office switching investment. In light of these concerns, we believe the structure may require revision in future filings. We, therefore, direct NECA to investigate whether the complexity of the formula may be reduced without compromising accuracy and to discuss possible modifications with the Commission staff prior to proposing future modifications to this formula. 9. In addition, for future modifications to the average schedule formulas, we require NECA, at the time of filing, to provide the Commission with the average schedule company names and NECA's six-digit identification number rather than coded sequence numbers. Such information will enable the Commission to assess both the effects of current formulas and proposed changes to those formulas better. In addition, having this information will allow us to cross-reference, for analysis, NECA's data with data available to the Commission from other sources. Moreover, we find no reason this information should not be disclosed. Similar information for cost-based companies has been available for many years with no demonstrated harm to those companies. For each average schedule company, NECA is required to provide, in an electronic format, the settlements that company currently receives and its proposed new settlements, and all of the data in the appendices of Volume 2 of the filing, so that a complete and thorough evaluation of the settlement formulas and NECA's methodologies can be completed within our limited time constraints. V. ORDERING CLAUSES 10. Accordingly, IT IS ORDERED, pursuant to Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91 and 0.291, that NECA shall use the average schedule formulas specified in Attachment 3 effective July 1, 1997. 11. IT IS FURTHER ORDERED, pursuant to Sections 0.91 and 0.291 of the Commission's rules, C.F.R. 0.91 and 0.291, that NECA shall include the reciprocal model in their Common Line average schedule formula in tariffs that become effective on July 1, 1997. 12. IT IS FURTHER ORDERED, pursuant to Sections 4(i) of Communications Act of 1934, as Amended, 47 U.S.C.  154(i), and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91 and 0.291, that THIS ORDER IS EFFECTIVE UPON ITS RELEASE. FEDERAL COMMUNICATIONS COMMISSION Regina M. Keeney Chief, Common Carrier Bureau ATTACHMENT 1 NECA'S CURRENT AND PROPOSED AVERAGE SCHEDULE FORMULAS A. COMMON LINE FORMULAS 1. Common Line: Current Formula: Settlement = Access Lines x Settlement Per Access Line For study areas with an average number of access lines per exchange less than 385.55: Settlement Per Access Line = $15.537935 - ($0.020346 x Access Lines Per Exchange) For study areas with an average number of access lines per exchange greater than or equal to 385.55: Settlement Per Access Line = $7.693526 Proposed Formula: Settlement = Access Lines x Settlement Per Access Line For study areas with an average number of access lines per exchange less than 385.55: Settlement Per Access Line = $15.085712 - ($0.018762 x Access Lines Per Exchange) For study areas with an average number of access lines per exchange greater than or equal to 385.55: Settlement Per access line = $7.852010 2. Common Line Rate of Return: Monthly Common Line settlements are adjusted to reflect the Rate of Return (ROR) achieved by the total NECA Common Line pool. Current Formula: Common Line Factor = 0.712939 + (2.551651 x ROR) Proposed Formula: Common Line Factor = 0.695876 + (2.703324 x ROR) B. TRAFFIC SENSITIVE FORMULAS 1. Traffic Sensitive Central Office: Current Formula Settlement = (Basic Settlement x Access Line Factor) + $1,999.37 For Study Areas with Minutes Per Line Less Than or Equal to 350: Basic Settlement = ($0.028532 x Access Minutes) + ($400.93 x Exchanges) For Study Areas with Minutes Per Line Greater Than 350 but Less Than or Equal to 600: Basic Settlement = ($0.028532 x 350 x Access Lines) + {$0.024258 x [Access Minutes - (350 x Access Lines)]} x High Volume Access Line Multiplier + ($400.93 x Exchanges) For Study Areas with Minutes Per Line Greater Than 600 but Less Than or Equal to 1,300: Basic Settlement = ($0.028532 x 350 x Access Lines) + {$0.024258 x (600 - 350) x Access Lines + $0.01 x [Access Minutes - (600 x Access Lines)]} x High Volume Access Line Multiplier + ($400.93 x Exchanges) For Study Areas with Minutes Per Line Greater Than 1,300: Basic Settlement = ($0.028532 x 350 x Access Lines) + {$0.024258 x (600 - 350) x Access Lines + $0.01 x (1,300 - 600) x Access Lines + $0.005 x [Access Minutes - (1300 x Access Lines)]} x High Volume Access Line Multiplier + ($400.93 x Exchanges) Access Line Factor: For Study Areas with Access Lines Less Than 10,000: Access Line Factor = 2.210230- (0.0001210230 x Access Lines) For Study Areas with Access Lines Greater Than or Equal to 10,000: Access Line Factor = 1.0 High Volume Access Line Multiplier = ( 600 / Access Lines ) Proposed Formula: Settlement = (Basic Settlement x Access Line Factor) + $1,895.24 For Study Areas with Minutes Per Line Less Than or Equal to 350: Basic Settlement = ($0.027606 x Access Minutes) + ($995.65 x Exchanges) For Study Areas with Minutes Per Line Greater Than 350 but Less Than or Equal to 700: Basic Settlement = ($0.027606 x 350 x Access Lines) + {$0.022211 x [Access Minutes - (350 x Access Lines)]} x High Volume Access Line Multiplier + ($995.65 x Exchanges) For Study Areas with Minutes Per Line Greater Than 700 but Less Than or Equal to 1,300: Basic Settlement = ($0.027606 x 350 x Access Lines) + {$0.022211 x (700 - 350) x Access Lines + $0.0115 x [Access Minutes - (700 x Access Lines)]} x High Volume Access Line Multiplier + ($995.65 x Exchanges) For Study Areas with Minutes Per Line Greater Than 1,300: Basic Settlement = ($0.027606 x 350 x Access Lines) + {$0.022211 x (700 - 350) x Access Lines + $0.0115 x (1,300 - 700) x Access Lines + $0.004162 x [Access Minutes - (1,300 x Access Lines)]} x High Volume Access Line Multiplier + ($995.65 x Exchanges) Access Line Factor: For Study Areas with access lines Less Than 10,000: Access Line Factor = 1.870363- (0.0000870363 x access lines) For Study Areas with access lines Greater Than or Equal to 10,000: Access Line Factor = 1.0 High Volume Access Line Multiplier = (775/access lines) 2. Intertoll Dial Switching Current Formula: Settlement Per Intertoll Trunk = $21.24 Proposed Formula: Settlement Per Intertoll Trunk = $13.09 3. Line Haul Distance Sensitive: Current Formula: Settlement = ($0.954699 x Circuit Miles) + ($0.001330 x Access Minutes) Proposed Formula: For study areas with Interstate Circuit Miles greater than zero: Settlement = ($0.938795 x Circuit Miles) + ($0.001778 x Access Minutes) 4. Line Haul Non-Distance Sensitive: Current Formula: Settlement Per Interstate Circuit Termination = $29.11 Proposed Formula: For study areas with Interstate Circuit Terminations Per Exchange less than 200: Settlement Per Interstate Circuit Termination = $40.00 - $0.098755 x Terminations Per Exchange For study areas with Interstate Circuit Terminations Per Exchange greater than or equal to 200: Settlement Per Interstate Circuit Termination = $20.25 5. Special Access: Current Formula: Settlement = Special Access Revenue x 0.985674 x Tariff Rate Index Tariff Rate Index = 1/(1+ Tariff Special Access Relative Rate Change Since 12/95) Proposed Formula: Settlement = Special Access Revenue x 0.946130 x Tariff Rate Index Tariff Rate Index = 1/(1+ Tariff Special Access Relative Rate Change Since 12/96) 6. Traffic Sensitive Rate of Return: Monthly Traffic Sensitive settlements are adjusted to reflect the Rate of Return (ROR) achieved by the total NECA Traffic Sensitive pool. Current Formula: Traffic Sensitive Factor = 0.686163 + (2.789660 x ROR) Proposed Formula: Traffic Sensitive Factor = 0.654946 + (3.067149 x ROR) 7. Equal Access Implementation: Current Formula: The interstate portion of initial incremental equal access expenses paid in the month in which they are incurred and 0.0245 x (the interstate portion of initial incremental equal access investment) per month for 96 months. Proposed Formula: The interstate portion of initial incremental equal access expenses paid in the month in which they are incurred and 0.0247 x (the interstate portion of initial incremental equal access investment) per month for 96 months. 8. Signalling System 7: Current Formula: Settlement = $1,551 For each end office with SP or SSP equipment in service with full connectivity to the nationwide signalling network. Settlement = $696 For each end office with SP or SSP equipment in service not yet having full connectivity to the nationwide signalling network. Proposed Formula: Settlement = $1,518 For each end office with SP or SSP equipment in service with full connectivity to the nationwide signalling network. Settlement = $ 698 For each end office with SP or SSP equipment in service not yet having full connectivity to the nationwide signalling network. 9. Database Query and Interim NXX Translation: Current Formula: Settlement = Interstate Charges Paid to Providers of 800 Databases for 800 Database Queries and Earned Access Revenues for Interim NXX Translation. Proposed Formula: Settlement = Interstate Charges Paid to Providers of Databases for Translation Queries and Earned Access Revenues for Interim NXX Translation. C. AVERAGE SCHEDULE USF LOOP COST FORMULA Current Formula For Study Areas with 685.86127 or Fewer Loops per Exchange: Cost per Loop = $1,081.88 - $127.07 x Natural Log of Loops per Exchange For Study Areas with More Than 685.86127 Loops per Exchange: Cost per Loop = $252.06 Proposed Formula: For study areas with 629.8 or fewer loops per exchange: Cost per loop = $1,207.90 - $146.76 x Natural Log of Loops per Exchange For study areas with more than 629.8 loops per exchange: Cost per loop = $262.01 ATTACHMENT 2 Comparison of Common Line Settlement Models Models R-Squared % Difference of Proposed Settlement vs. Revenue Requirement for Sample Companies Total Settlement NECA Spline 0.16 5.4% $239,800,296 Best-Fit Spline 0.19 0.8% $232,210,066 Reciprocal 0.20 1.4% $232,006,652 Log Reciprocal 0.17 -1.5% $225,409,994 ATTACHMENT 3 FCC APPROVED FORMULAS A. COMMON LINE FORMULAS 1. Common Line: Settlement = Access Lines x Settlement Per Access Line Settlement Per Access Line = $7.166204 + $728.054152 x 1/(Access Lines Per Exchange) 2. Common Line Rate of Return: Monthly Common Line settlements are adjusted to reflect the Rate of Return (ROR) achieved by the total NECA Common Line pool. Common Line Factor = 0.695876 + (2.703324 x ROR) B. TRAFFIC SENSITIVE FORMULAS: 1. Traffic Sensitive Central Office: Settlement = (Basic Settlement x Access Line Factor) + $1,895.24 For Study Areas with Minutes Per Line Less Than or Equal to 350: Basic Settlement = ($0.027606 x Access Minutes) + ($995.65 x Exchanges) For Study Areas with Minutes Per Line Greater Than 350 but Less Than or Equal to 700: Basic Settlement = ($0.027606 x 350 x Access Lines) + {$0.022211 x [Access Minutes - (350 x Access Lines)]} x High Volume Access Line Multiplier + ($995.65 x Exchanges) For Study Areas with Minutes Per Line Greater Than 700 but Less Than or Equal to 1,300: Basic Settlement = ($0.027606 x 350 x Access Lines) + {$0.022211 x (700 - 350) x Access Lines + $0.0115 x [Access Minutes - (700 x Access Lines)]} x High Volume Access Line Multiplier + ($995.65 x Exchanges) For Study Areas with Minutes Per Line Greater Than 1,300: Basic Settlement = ($0.027606 x 350 x Access Lines) + {$0.022211 x (700 - 350) x Access Lines + $0.0115 x (1,300 - 700) x Access Lines + $0.004162 x [Access Minutes - (1,300 x Access Lines)]} x High Volume Access Line Multiplier + ($995.65 x Exchanges) Access Line Factor: For Study Areas with Access Lines Less Than 10,000: Access Line Factor = 1.870363- (0.0000870363 x Access Lines) For Study Areas with Access Lines Greater Than or Equal to 10,000: Access Line Factor = 1.0 High Volume Access Line Multiplier = (775/Common Line Access Lines) 2. Intertoll Dial Switching: Settlement Per Intertoll Trunk = $13.09 3. Line Haul Distance Sensitive: Settlement = ($0.938795 x Circuit Miles) + ($0.001778 x Access Minutes) 4. Line Haul Non-Distance Sensitive: For study areas with Interstate Circuit Terminations Per Exchange less than 200: Settlement Per Interstate Circuit Termination = $40.00 - $0.098755 x Terminations Per Exchange For study areas with Interstate Circuit Terminations Per Exchange greater than or equal to 200: Settlement Per Interstate Circuit Termination = $20.25 5. Special Access: Settlement = Special Access Revenue x 0.946130 x Tariff Rate Index Tariff Rate Index = 1/ (1+ Tariff Special Access Relative Rate Change Since 12/96) 6. Traffic Sensitive Rate of Return: Monthly Traffic Sensitive settlements are adjusted to reflect the Rate of Return (ROR) achieved by the total NECA Traffic Sensitive pool. Traffic Sensitive Factor = 0.654946 + (3.067149 x ROR) 7. Equal Access Implementation: The interstate portion of initial incremental equal access expenses paid in the month in which they are incurred and 0.0247 x (the interstate portion of initial incremental equal access investment) per month for 96 months. 8. Signalling System 7: Settlement = $1,518 For each end office with SP or SSP equipment in service with full connectivity to the nationwide signalling network. Settlement = $ 698 For each end office with SP or SSP equipment service not yet having full connectivity to the nationwide signalling network. 9. Database Query and Interim NXX Translation: Settlement = Interstate Charges Paid to Providers of Databases for Translation Queries and Earned Access Revenues for Interim NXX Translation. C. AVERAGE SCHEDULE USF LOOP COST FORMULA: For study areas with 629.8 or fewer loops per exchange: Cost per loop = $1,207.90 - $146.76 x Natural Log of Loops per Exchange For study areas with more than 629.8 loops per exchange: Cost per loop = $262.01