********************************************************
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. 20054
In the Matter of )
)
National Exchange Carrier Association, Inc. ) AAD 98-20
Proposed Modifications to the 1998-99 )
Interstate Average Schedule Formulas )
ORDER
Adopted: June 29, 1998 Released: June 29, 1998
By the Chief, Accounting Safeguards Division:
I. INTRODUCTION
1. On December 31, 1997, the National Exchange Carrier Association, Inc. ("NECA")
filed proposed modifications to current average schedule formulas to become effective July 1,
1998. The December 1997 Filing was submitted in accordance with Commission rules that
require NECA to submit proposed modifications to the average schedule formulas annually or
to certify that no modifications are warranted. On June 2, 1998, NECA filed Further
Modification of Average Schedules proposing revisions to its December 1997 Filing for the
Common Line ("CL") and Universal Service Fund Loop Cost ("USF") formulas. For the
reasons discussed below, we approve the average schedule formulas proposed in NECA's
June 1998 Filing for CL and USF and the average schedule formulas proposed in NECA's
December 1997 Filing for all other categories.
II. BACKGROUND
2. Incumbent local exchange carriers ("incumbent LECs") that participate in the tariff
and pooling arrangements administered by NECA recover costs from the pool based on
analysis of their booked costs of service or based on average schedule formulas used to
estimate their costs of service. The average schedule formulas are designed to simulate the
disbursements that would be received by a cost company that is representative of average
schedule companies.
3. An incumbent LEC participating in a NECA pool must charge interstate access
rates according to a NECA tariff. The settlement process determines whether the company
has collected from its customers an amount greater than or less than its interstate costs. If a
company's interstate access charge revenues exceed its costs, including a reasonable rate of
return on its interstate investment, that company pays money to the NECA pool in the
settlement process. Conversely, if the company receives less in interstate access revenues
than its actual or estimated costs of service, the NECA pool pays money to the company.
4. Interstate access rates set out in NECA tariffs and the settlement process are based,
in part, on average schedule formulas approved by the Commission. Section 69.606(b) of the
Commission's rules requires NECA either to file revised average schedule formulas on or
before December 31 of each year, or to certify that no such revisions are necessary. If the
proposed average schedule formulas are approved or modified by the Commission, they take
effect on July 1.
5. On December 31, 1997, NECA filed proposed revisions to the following average
schedule formulas: Traffic Sensitive Central Office; Line Haul Non-Distance Sensitive; Line
Haul Distance Sensitive; Intertoll Dial Switching; Special Access; Traffic Sensitive Rate of
Return; Signaling System 7; Database Query and Interim NXX Translation; USF; CL and CL
Rate of Return. Except for the USF formula, NECA requested that these modifications take
effect on July 1, 1998, and remain in effect through June 30, 1999. We conducted a
preliminary review and raised concerns about the validity of the CL and USF formulas, as
discussed below. Subsequently, NECA filed revised formulas for the CL and USF on June 2,
1998, requesting expeditious approval of both formulas and seeking an effective date for both
formulas of July 1, 1998.
6. By Public Notices issued January 8 and June 3, 1998, we sought comment on
NECA's proposed December 1997 Filing, as further modified by its June 1998 Filing. On
February 9, 1998, the Organization for the Promotion and Advancement of Small
Telecommunications Companies ("OPASTCO"), the National Telephone Cooperative
Association ("NTCA"), the United States Telephone Association ("USTA"), and ICORE filed
comments on NECA's December 1997 Filing. These associations generally support NECA's
proposed revisions to the average schedule formulas. On February 24, 1998, NECA filed
reply comments urging the Commission to approve its proposed modifications. No parties
filed in opposition to NECA's December 1997 Filing. In response to the June 3 Public
Notice, USTA, NTCA and the Northern Plains LECs filed comments on NECA's June 1998
Filing proposing modifications to the CL and USF formula. USTA and NTCA generally
support NECA's proposed modification to the CL and USF formulas. The Northern Plains
LECs oppose certain aspects of the proposed revised USF formula.
7. We believe that the procedures followed with respect to NECA's proposed
modifications provided adequate notice to the public and opportunity to comment on the
merits of the proposed modifications of average schedule formulas. We note Northern Plains
LECs concern about the seven-day comment cycle established with respect to NECA's June
1998 Filing. We believe the shortened comment period in the case of NECA's June 1998
Filing was justified due to the proximity of the effective date of July 1, 1998, and that no
party was disadvantaged in presenting comments on the revisions made to the two formulas at
issue in the June 1998 Filing. We received timely comments from USTA and NTCA, and
despite the lateness of Northern Plains LECs filing, we carefully studied and considered the
issues raised by Northern Plains LECs. We affirm our intent to provide adequate notice and
opportunity for comment with respect to future average schedule formulas proposed by NECA
or the Commission.
III. DISCUSSION
8. We reviewed NECA's December 1997 Filing and find that its proposed
modifications to the Traffic Sensitive Central Office, Line Haul Non-Distance Sensitive, Line
Haul Distance Sensitive, Intertoll Dial Switching, Special Access, Traffic Sensitive Rate of
Return, Signaling System 7, Database Query and Interim NXX Translation, and CL Rate of
Return formulas are reasonable. We therefore approve the proposed modifications to these
average schedule formulas as submitted in NECA's December 1997 Filing.
9. We reviewed NECA's June 1998 Filing proposing revisions to the CL and USF
formulas. For the reasons discussed below, we approve these formulas.
10. CL Formula: NECA's December 1997 Filing proposed a linear spline model
for the CL formula similar to the proposed CL formula we had rejected in previous
decisions. In our earlier reviews, as well as our review of the December 1997 Filing, we
found that NECA's proposed linear spline models consistently and significantly overstated the
average schedule company revenue requirements. Our analysis also showed that NECA's
linear spline models had a poor goodness of fit and a tendency to overcompensate the large
average schedule companies. We raised these concerns with NECA, and, as in our earlier
orders, encouraged the use of other statistical models, including a reciprocal model developed
by the Bureau, that would not only reduce the tendency to overstate the average schedule
company revenue requirements, but would more closely fit the data used to develop the
formula.
11. In its June 1998 Filing, NECA proposed a revised CL formula incorporating
features of both linear spline and reciprocal models. We find that NECA's revised CL
formula is an improvement over past proposals producing results that better reflect actual
costs than previous formulas using only linear spline models. The revised CL formula
results in a higher goodness of fit than NECA's previous proposal and the other models we
explored. We also find that the revised CL formula does not have a tendency to
overcompensate the larger average schedule companies, as did NECA's previous formula.
For these reasons, we approve the revised CL formula proposed in NECA's June 1998 Filing.
12. USF Formula: NECA's December 1997 Filing proposed a USF formula identical
to the one it proposed in its earlier November 3, 1997 filing, which we rejected. In its
November 3, 1997 filing, NECA changed the method of estimating the total USF expense
adjustments for average schedule companies leading to a USF formula that, if approved,
would increase the USF payments for average schedule companies by approximately $16
million. We rejected NECA's proposed USF formula because we found that the actual costs
per loop for sampled companies was generally less than the costs per loop derived from
NECA's proposed formula. We also found that NECA had offered no persuasive
justification for the proposed increase and directed NECA to continue using the USF average
schedule formula that was then currently in effect. NECA's December 1997 Filing
contained the same formula as proposed in its November 3, 1997 filing. We continued to
raise our concerns about the proposed USF formula with NECA, and in particular,
emphasized the need to develop a formula that more reasonably approximates the actual costs
per loop and more accurately allocates payments to average schedule companies consistent
with universal service rules.
13. In its June 1998 Filing, NECA proposed a revised USF formula. Under the
revised formula, USF expense adjustments of $15.3 million would be paid to 388 average
schedule study areas, and reductions in expense adjustments would be limited to $2.22 per
loop per month. We believe the revised formula is a substantial improvement over both the
current formula and the proposed formula set forth in NECA's December 1997 Filing. Our
analysis shows that the revised formula improves the USF fund allocation by reducing the
tendency of overcompensation for some of the smaller firms and providing more appropriate
USF assistance to some of the larger firms. The current model, as well as the model
proposed in the December 1997 Filing, on the other hand, substantially overcompensates
smaller firms while providing no USF assistance at all to any of the larger firms, regardless
whether such assistance is justified. While overcompensation for some of the smaller firms
still exists under the revised USF formula, we believe the revised formula makes sufficient
improvement in the accuracy of the distribution of USF fund and produces estimated costs per
loop closer to carriers' actual costs than the other formulas. We will therefore approve it.
14. Northern Plains LECs filed comments opposing certain aspects of the revised USF
formula proposed by NECA in its June 1998 Filing. Northern Plains LECs claim that the
revised formula will result in reductions in USF expense adjustments to more companies than
NECA represented in its June 1998 Filing, and that in order to recapture these lost revenues,
companies will be forced to pass costs on to the intrastate jurisdiction, thus, raising local
service rates. This result, Northern Plains LECs contend, is inconsistent with Congressional
and Commission policy of ensuring support for rural telephone companies. Northern Plains
LECs propose that the Commission revise the proposed USF formula "so that aggregate
benefits are evenly distributed to all LECs." If not, Northern Plains LECs request a three
year phase-in period during which average schedule companies would have the opportunity to
revise their upgrade plans and other budgetary projections to adapt to the decreased revenues
and universal service support. Northern Plains LECs also request that if NECA's revised
formula is accepted, the $2.22 cap on reductions be extended beyond the current settlement
year.
15. We recognize that while the total amount of USF assistance for average schedule
companies increases, from $9.1 million under the current formula to $15.3 million under the
revised formula, some companies may experience a reduction in expense adjustments under
the revised formula. Given the current USF formula's tendency to vastly overcompensate
some firms, we expect that any formula that moves towards more accurate allocations will
cause some dislocation in USF assistance. The objective of the average schedule process is to
establish cost formulas that reasonably approximate the actual costs of average schedule
companies. We believe NECA's revised USF proposal is a balanced approach. It provides
an important improvement in the accuracy in the distribution of USF funds for all sizes of
average schedule companies, and it ensures that there will be no unreasonable reductions in
any company's USF support.
16. We also considered Northern Plains LECs' proposal that we revise the formula
"so that the aggregate benefits are evenly distributed to all LECs." Without further detail,
we find that such a revision could significantly create substantial decreases in interstate
revenues and universal service support for many rural LECs, including Northern Plains LECs.
Under the revised formula, USF assistance will increase from $9.1 million to $15.3 million.
If the $15.3 million were evenly distributed according to the number of lines, for instance,
average schedule companies would receive $6.15 per line. However, under NECA's revised
proposal in its June 1998 Filing, Northern Plains LECs will receive $29.54 per line. Thus,
an even distribution of USF funds would lead to much lower payments for the Northern
Plains LECs, as well as many of the smaller LECs. While we agree that aggregate benefits
should be equitably distributed, we do not believe Northern Plains LECs proposed revision as
presented provides a viable alternative to NECA's revised USF formula.
17. Northern Plains LECs request that if the revised USF formula is approved, we
provide a three year phase-in period for average schedule LECs, and that the $2.22 cap on
reductions be extended beyond the current settlement year. We note that the effective
period for the revised USF formula is July 1, 1998, through December 31, 1998. At the end
of the effective period, we will review any new proposals for the USF formula and will
determine proper modifications to the USF formula at that time. At this time, however, we
do not have a sufficient record for determining the merits of a phase-in period, nor sufficient
evidence for establishing an appropriate cap for future periods.
18. Overall, we find that the revised USF formula produces a better result than
current and previously proposed formulas. While some companies may receive a modest
reduction in expense adjustments, we believe the revised USF formula allocates funds more
accurately as well as distributes funds to deserving companies that were not entitled to such
payments under previous formulas.
IV. FUTURE FILINGS
19. In its previous order, the Bureau directed NECA to work with staff to develop a
means of assuring that sample data accurately reflect all sizes of average schedule
companies. The Bureau noted its concern that NECA's sample data may not contain
information that is representative of small average schedule companies and stated that if it
determined that the use of sample data continued to be problematic, it would consider
requiring the use of expense and investment data from all average schedule companies. Our
review of NECA's recent filings in the instant case continues to indicate that use of sample
data is problematic. The difficulties in ensuring that the average schedule formulas are
representative of firms of all sizes lead us to conclude that the formulas may best be
developed using cost data from all average schedule companies. Therefore, we intend to
recommend to the Bureau that NECA be required to base their next annual filing on data
from all average schedule companies, absent a showing within 60 days that such a
requirement would be unnecessarily burdensome.
20. In our review of NECA's recent filings, we also found NECA, in developing its
formulas, does not deal sufficiently with outliers. It is important to deal with outliers
properly. Failure to do so can lead to incorrect models that seriously misinterpret the data
since outliers can have an undue influence on the underlying regression analysis. We are
concerned that the techniques that NECA uses to determine outliers focus too much on single
outliers and may ignore other outliers. Also, NECA does not use consistent outlier techniques
in developing its formulas. We recommend that NECA use more accurate outlier analysis
techniques when modifying its average schedule formulas and use these techniques
consistently throughout each of its formulas.
VI. CONCLUSION
21. We approve the average schedule formulas for Traffic Sensitive Central Office,
Line Haul Non-Distance Sensitive, Line Haul Distance Sensitive, Intertoll Dial Switching,
Special Access, Traffic Sensitive Rate of Return, Signaling System 7, Database Query and
Interim NXX Translation, and Common Line Rate of Return proposed by NECA in its
December 1997 Filing. We approve the modified CL and USF formulas as revised in
NECA's June 1998 Filing. The formulas we herein approve shall become effective on July 1,
1998.
VII. ORDERING CLAUSES
22. Accordingly, IT IS ORDERED, pursuant to Sections 0.91 and 0.291 of the
Commission rules, 47 C.F.R. 0.91, 0.291, that the average schedule formulas proposed by
the National Exchange Carriers Association, Inc. on December 31, 1997 for Traffic Sensitive
Central Office, Line Haul Non-Distance Sensitive, Line Haul Distance Sensitive, Intertoll Dial
Switching, Special Access, Traffic Sensitive Rate of Return, Signaling System 7, Database
Query and Interim NXX Translation, and Common Line Rate of Return formulas SHALL
BECOME EFFECTIVE July 1, 1998 and remain in effect through June 30, 1999.
23. IT IS FURTHER ORDERED, pursuant to Sections 0.91 and 0.291 of the
Commission rules, 47 C.F.R. 0.91, 0.291, that the average schedule formulas proposed by
the National Exchange Carrier Association, Inc. on June 3, 1998 for Common Line SHALL
BECOME EFFECTIVE July 1, 1998 and remain in effect through June 30, 1999.
24. IT IS FURTHER ORDERED, pursuant to Sections 0.91 and 0.291 of the
Commission rules, 47 C.F.R. 0.91, 0.291, that the average schedule formulas proposed by
the National Exchange Carrier Association, Inc. on June 3, 1998 for Universal Service Fund
Loop Cost SHALL BECOME EFFECTIVE July 1, 1998 and remain in effect through
December 31, 1998.
25. IT IS FURTHER ORDERED, pursuant to Section 4(i) of the Communications Act
of 1934, as amended, 47 U.S.C. 154(i), Section 553(6)(B) of the Administrative Procedures
Act, 5 U.S.C. 553(6)(B), and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.
0.91, 0.291, that THIS ORDER IS EFFECTIVE UPON ITS RELEASE.
26. IT IS FURTHER ORDERED, pursuant to Section 4(i) of the Communications Act
of 1934, as amended, 47 U.S.C. 154(i), Section 553(6)(B) of the Administrative Procedures
Act, 5 U.S.C. 553(6)(B), and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.
0.91, 0.291, that THIS ORDER IS EFFECTIVE UPON ITS RELEASE.
FEDERAL COMMUNICATIONS COMMISSION
Kenneth P. Moran
Chief, Accounting Safeguards Division