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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  X-the revised formula./ZZ {O-#C\  P6Q/P#эxAccording to NECA, 122 firms would realize decreases in expense adjustments. See June 1998 Filing at III7. Given the current USF formula's tendency to vastly overcompensate  Xv-some firms,0vZ {O -#C\  P6Q/P#эxSee supra. n. 39 and accompanying text. 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  X -average schedule companies,&1 FZ {O-#C\  P6Q/P#эx See June 1998 Filing at III7. According to NECA, 210 companies that do not currently receive  yO-expense adjustments would begin receiving payments under the revised formula. & and it ensures that there will be no unreasonable reductions in  X -any company's USF support.2 Z {O=-#C\  P6Q/P#эxSee June 1998 Filing at III8, providing for an expense adjustment reduction limit of $2.22 per loop per month.  X -x16. We also considered Northern Plains LECs' proposal that we revise the formula "so  X -that the aggregate benefits are evenly distributed to all LECs."{3 Z yOR-#C\  P6Q/P#эxNorthern Plains LECs Comments at 3.{ 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  X4-schedule companies would receive $6.15 per line.44 Z yOo -#C\  P6Q/P#эxTotal USF settlement ($15.3 million) divided by the total number of access lines for the population of average schedule companies (2,487,364). However, under NECA's revised proposal  X-in its June 1998 Filing, Northern Plains LECs will receive $29.54 per line.5Z yO#-#C\  P6Q/P#эxWe calculate this amount based on information provided by Northern Plains LECs regarding the number of access lines and number of exchanges for the Northern Plains LECs. Thus, an even" :50*%%JJG" 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.  X-x17. Northern Plains LECs request that if the revised USF formula is approved, we provide a three year phasein period for average schedule LECs, and that the $2.22 cap on  X_-reductions be extended beyond the current settlement year.6_Z yO-#C\  P6Q/P#эxNorthern Plains LECs Comments at 56. 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 phasein period, nor sufficient evidence for establishing an appropriate cap for future periods.  X -x18. 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.  X4- IV. FUTURE FILINGS ă  X-x19. 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  X-companies.7XZ {O-#C\  P6Q/P#эxOrder on Reconsideration at para. 27. 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  X-requiring the use of expense and investment data from all average schedule companies.a8Z {O.-#C\  P6Q/P#эxId.a Our review of NECA's recent filings in the instant case continues to indicate that use of sample  Xe-data is problematic.9e|Z yO!-#C\  P6Q/P#эxFor instance, even though the revised USF formula is an improvement over previous proposals, overcompensation still results for some firms. 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"  90*%%JJ" from all average schedule companies, absent a showing within 60 days that such a  X-requirement would be unnecessarily burdensome.:Z yOb-#C\  P6Q/P#эxAlthough in recent conversations we have learned that NECA is including more small companies in its sample, we believe that problems still remain with using only a sample. Using a sample introduces variation to formula estimation which in turn leads to settlement variations not associated with costs. By using all the data of the population, greater ability for choosing the most appropriate formula is increased. Further if data from all average schedule companies were available, estimates of total settlements based on cost would be much more reliable and less volatile.  X-x20.  In our review of NECA's recent filings, we also found NECA, in developing its  X-formulas, does not deal sufficiently with outliers.c;Z@Z yO -#C\  P6Q/P#эxOutliers in a set of data are defined as observations that appear to be inconsistent with the remainder of  {O] -that set of data.  See Barnett, Vic and Lewis, Toby, Outliers in Statistical Data, 3rd Ed., John Wiley & Sons, Inc., 1994, p. 7.c It is important to deal with outliers  X-properly.<b Z yO-#C\  P6Q/P#эxIn appropriate circumstances, for example, robust methods of inference are used which employ all the  {Oh-data but minimize the influence of any outliers. Id. at 3. 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  X1-in developing its formulas.=1 Z {O-#C\  P6Q/P#эxSee December 1997 Filing at VII49. NECA lists different methods for removing specific data points in the sample for estimating formulas. For instance, for the Special Access formula, NECA calculates a measure of influence for each sample point by calculating the difference between an estimate with and without the data point. If the influence exceeds a certain threshold, the data point is removed. For other formulas, however, NECA removes data points which exceed or fall below three standard deviations of the estimated model. NECA identifies no method with respect to the CL formula.  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.  X -} VI. CONCLUSION  X - x21. We approve the average schedule formulas for Traffic Sensitive Central Office, Line Haul NonDistance 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. " 6=0*%%JJ"Ԍ X-ԙ VII. ORDERING CLAUSES ă  X-x22. 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 NonDistance 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.  X -x23. 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.  X -x24. 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.  X-x25. 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.  X-x26. 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. x` `  hhFEDERAL COMMUNICATIONS COMMISSION x x` `  hhKenneth P. Moran x` `  hhChief, Accounting Safeguards Division