WPC\ 2BJZ|{ X4#X\  P6G;ɒP#X01Í ÍX01Í Í#Xj\  P6G;ynXP# X'  ({ S'#&a\  P6G;u&P# Federal Communications Commission`g(#bFCC 99304 ă   yxdddy( I. A. 1. a.(1)(a) i) a) I. 1. 1. a.(1)(a) i) a) vf#X\  P6G;ɒP#Before the FEDERAL COMMUNICATIONS COMMISSION  yO'a7Washington, D.C. 20554#Xj\  P6G;ynXP#у  Xb4 In the Matter of hhCq) ` `  hhCq)  X44FederalState Joint Board onhhCq)ppCC Docket No. 9645  X4Universal Service hhCq) ` `  hhCq)  X4ForwardLooking Mechanism hhCq)ppCC Docket No. 97160  X4for High Cost Support forhhCq)  X 4NonRural LECs hhCq)  X ' LTENTH REPORT AND ORDER  Xe 4Adopted: October 21, 1999 `H(# Released: November 2, 1999 ă  X74By the Commission: Commissioner Tristani issuing a separate statement; Commissioner (#(#` `  FurchtgottRoth dissenting and issuing a statement.  X 4  X4  X4- TABLE OF CONTENTS ă  X4C)Paragraph Number (#(#\   X\I. INTRODUCTION p>"(# 1 X\II. PROCEDURAL HISTORY p>"(# 3  X#4XX` ` A. ` ` Universal Service Order ` p>"(# 3  X4XX` ` B.` ` 1997 Further Notice and the Input Value Development Process ` p>"(# 5  X4XX` ` C. ` ` Platform Order and Second Recommended Decision ` p>"(# 8  X4XX` ` D. ` ` Inputs Further Notice and Seventh Report and Order ` p!(# 10 X\III. ESTIMATING FORWARDLOOKING ECONOMIC COST p!(# 12  X4XX` ` A.` ` Designing a ForwardLooking Wireline Local Telephone Network ` p!(# 12  X 4XX` ` B. ` ` Synthesis Model ` p"(# 17  Xs!4XX` ` X ` ` 1.  Historical Background p"(# 17  X\"4XX` ` X ` ` 2.  Validation p"(# 21  XE#4XX` ` C.` ` Selecting ForwardLooking Input Values ` p"(# 29 X\IV. DETERMINING CUSTOMER LOCATIONS p"(# 33"%0*&&``K#"Ԍ X4XX` ` A. ` ` Background ` p"(# 33  X4XX` ` B. ` ` Customer Location Data ` p"(# 36  X4XX` ` ` ` 1.  Geocode Data ` p"(# 36  X4XX` ` ` ` 2.  Road Surrogate Customer Locations ` p"(# 40  X4XX` ` X ` ` 3.  Methodology for Estimating the Number of Customer Locations p"(# 48 X\V. OUTSIDE PLANT INPUT VALUES p"(# 63  X_4XX` ` A.` ` Introduction ` p"(# 63  XH4XX` ` B.` ` Engineering Assumptions and Optimizing Routines ` p"(# 66  X14XX` ` X ` ` 1. Optimization p"(# 67  X 4XX` ` X ` ` 2. T1 Technology p"(# 77  X 4XX` ` X ` ` 3. Distance Calculations and Road Factor p"(# 80  X 4XX` ` C.` ` Cable and Structure Costs ` p"(# 83  X 4XX` ` X ` ` 1. Background p"(# 83  X 4XX` ` X ` ` 2. Nationwide Values p"(# 90  X 4XX` ` X ` ` 3. Preliminary Issues Cable Costs p"(# 94  X4XX` ` X ` ` 4. Cost Per Foot of Cable p!(# 101  Xy4XX` ` X ` ` 5. Cable Fill Factors p!(# 186  Xb4XX` ` X ` ` 6. Structure Costs p!(# 209  XK4XX` ` X ` ` 7. Plant Mix p!(# 227  X44XX` ` D.` ` Structure Sharing ` p!(# 241  X4XX` ` X ` ` 1. Background p!(# 241  X4XX` ` X ` ` 2. Discussion p!(# 243  X4XX` ` E.` ` Serving Area Interfaces ` p!(#250  X4XX` ` X ` ` 1. Background p!(#250  X4XX` ` X ` ` 2. Discussion p!(#253  X4XX` ` F.` ` Digital Loop Carriers ` p!(#269  X4XX` ` X ` ` 1. Background p!(#269  X|4XX` ` X ` ` 2. Discussion p!(#274 X\VI. SWITCHING AND INTEROFFICE FACILITIES p!(#286  X74XX` ` A. ` ` Introduction ` p!(#286  X 4XX` ` B. ` ` Switch Costs ` p!(#290  X 4XX` ` X ` ` 1.  Background p!(#290  X4XX` ` ` ` 2.  Discussion ` p!(#296  X4XX` ` C. ` ` Use of the Local Exchange Routing Guide (LERG) ` p!(#320  X 4XX` ` D. ` ` Other Switching and Interoffice Transport Inputs ` p!(#324 X\VII. EXPENSES p!(#338  X#4XX` ` A.` ` Introduction ` p!(#338  Xh$4XX` ` B.` ` PlantSpecific Operations Expenses ` p!(#341  XQ%4XX` ` X ` ` 1.  Background p!(#341"Q%0*&&``e#"Ԍ X4XX` ` X ` ` 2. Discussion p!(#346  X4XX` ` C.` ` Common Support Services Expenses ` p!(#377  X4XX` ` X ` ` 1. Background p!(#377  X4XX` ` X ` ` 2. Discussion p!(#382  X4XX` ` D.` ` GSF Investment ` p!(#409  X4XX` ` X ` ` 1. Background p!(#409  Xv4XX` ` X ` ` 2. Discussion p!(#411 X\VIII. CAPITAL COSTS p!(#419  X14XX` ` A.` ` Depreciation ` p!(#419  X 4XX` ` X ` ` 1. Background p!(#419  X 4XX` ` X ` ` 2. Discussion p!(#422  X 4XX` ` B.` ` Cost of Capital ` p!(#432  X 4XX` ` C.` ` Annual Charge Factors ` p!(#436  X 4X\IX. PROPOSED MODIFICATION TO PROCEDURES FOR DISTINGUISHING RURAL AND NONRURAL COMPANIES p!(#440  Xy4XX` ` A. ` ` Background ` p!(#440  Xb4XX` ` B. ` ` Discussion ` p!(#443  XK4XX` ` X ` ` 1.  Annual Filing Requirement p!(#447  X44XX` ` X ` ` 2. Statutory Terms p!(#450  X4XX` ` X ` ` 3. Identification of Rural Telephone Companies p!(#458 X\X. PROCEDURAL MATTERS AND ORDERING CLAUSE p!(#460  X4XX` ` A. ` ` Final Regulatory Flexibility Analysis ` p!(#460  X4XX` ` B. ` ` Paperwork Reduction Act Analysis ` p!(#472  X4XX` ` C. ` ` Ordering Clauses ` p!(#473 X\Appendix A (Input Values) p!(#A1 X\Appendix B (Methodology for Estimating Outside Plant Costs) p!(#B1 X\Appendix C (Description of Methodology for Estimating Switching Costs) p!(#C1 X\\Appendix D (Expenses) p!(#D1 X\Appendix E (Parties Filing Comments and Reply Comments) p"(#E1 "Q%0*&&``e#"Ԍ  X':M I. INTRODUCTION א\  X41. ` ` In the Telecommunications Act of 1996 (1996 Act),<ZD6 yO4'ԍ Pub. L. No. 104104, 110 Stat. 56. The 1996 Act amended the Communications Act of 1934, 47 U.S.C.  {O' 151 et. seq. (Act). Hereinafter, all citations to the Act will be to the relevant section of the United States Code unless otherwise noted.< Congress directed this Commission and the states to take the steps necessary to establish explicit 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  X_4system that will be sustainable in an increasingly competitive marketplace. In the Universal  XJ4Service Order , the Commission adopted a plan for universal service support for rural, insular, and highcost areas to replace longstanding federal support to incumbent local telephone  X 4companies with explicit, competitively neutral federal universal service support mechanisms.k D6 {O'ԍ Federal-State Joint Board on Universal Service, Report and Order, CC Docket No. 96-45, 12 FCC Rcd  {O'8776 (1997) (Universal Service Order), as corrected by Federal-State Joint Board on Universal Service, Errata,  {OM'CC Docket No. 96-45, FCC 97-157 (rel. June 4, 1997). See also Texas Office of Public Utility Counsel v. FCC  {O'and USA, 183 F.3d 393 (5th Cir. 1999) (affirming in relevant part the Commission's decisions regarding implementation of the highcost support system).k  X 4The Commission adopted the recommendation of the FederalState Joint Board on Universal Service (Joint Board) that an eligible carrier's level of universal service support should be based upon the forwardlooking economic cost of constructing and operating the network facilities and functions used to provide the services supported by the federal universal service  X 4support mechanisms. D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 8888, para. 199. The Commission also determined that highcost support for rural carriers should continue essentially unchanged and should not be based on forwardlooking costs  {O'until 2001, at the earliest. Universal Service Order, 12 FCC Rcd at 8889, para. 203. The Commission adopted the Joint Board's recommendation to define "rural carriers" as those carriers that meet the statutory definition of  {O"'a "rural telephone company." Universal Service Order, 12 FCC Rcd at 8943, para. 310 (citing 47 U.S.C.  153(37)).  X}42. ` ` In this Report and Order, we complete the selection of a model to estimate  Xf4forwardlooking cost by selecting input values for the synthesis model we previously adopted.f D6 {O7 'ԍ FederalState Joint Board on Universal Service, Fifth Report and Order, CC Docket Nos. 9645, 97160,  {O!'13 FCC Rcd 21323 (1998) (Platform Order). These input values include such things as the cost of switches, cables, and other network components necessary to provide supported services, in addition to various capital cost parameters. The forwardlooking cost of providing supported services estimated by the model will be used as part of the Commission's methodology to determine highcost support for nonrural carriers beginning January 1, 2000. This methodology is established in a"|0*&&``w"  X4companion order.D6 {Oy'ԍ FederalState Joint Board on Universal Service, Ninth Report and Order and Eighteenth Order on  {OC'Reconsideration, CC Docket No. 9645, FCC 99306 (adopted Oct. 21, 1999) (Methodology Order).    X' II. PROCEDURAL HISTORY א\  X4 A. Universal Service Order    Xw43. ` ` Prior to the 1996 Act, three explicit interstate universal service programs provided assistance to small incumbent local exchange carriers (LECs) and LECs that served  XI4rural and highcost areas: highcost loop support;[XI$D6 yO 'ԍ Although the existing highcost loop fund has historically been known as the "Universal Service Fund," we will avoid this terminology because of the confusion it may create with the new universal service support mechanisms that the Commission has created pursuant to section 254 of the Communications Act.[ dial equipment minutes (DEM) weighting;  X24and the LongTerm Support (LTS) program.:2DD6 {O''ԍ The Commission's rules governing these programs are set forth at 47 C.F.R.  36.601 et. seq. (highcost  yO'loop fund); 47 C.F.R.  36.125(b) (DEM weighting); and 47 C.F.R.  69.105, 69.502, 69.603(e), 69.612 (LTS).: Other mechanisms also have historically contributed to maintaining affordable rates in rural areas, including support implicit in geographic toll rate averaging, intrastate rates, and interstate access charges. Section 254 of the Communications Act of 1934, as amended, directed the Commission to reform universal service support mechanisms to ensure that they are compatible with the procompetitive goals of the 1996 Act, and it required the Commission to institute a Joint Board on universal  X 4service and to implement the recommendations from the Joint Board by May 8, 1997.J D6 yO'Ѝ 47 U.S.C.  254(a).J After  X4receiving the recommendations of the Joint Board on November 7, 1996, . D6 {Op'ԍ FederalState Joint Board on Universal Service, First Recommended Decision, CC Docket No. 9645, 12  {O:'FCC Rcd 87 (1996) (First Recommended Decision). the Commission  Xz4adopted the Universal Service Order on May 7, 1997.  XN44. ` ` In the Universal Service Order, the Commission adopted a forwardlooking economic cost methodology to calculate support for nonrural carriers. Under this methodology, a forwardlooking economic cost mechanism selected by the Commission, in consultation with the Joint Board, would be used to estimate nonrural carriers' forward X4looking economic cost of providing the supported services in highcost areas.{ $ D6 {O/#'ԍ #X\  P6G;ɒP#Universal Service Order, 12 FCC Rcd at 8890, para. 206. In the Universal Service Order, the Commission concluded that the federal universal service support mechanism would support 25 percent of the difference between the forwardlooking economic cost of providing the supported service and a nationwide  {O%'revenue benchmark. See Universal Service Order, 12 FCC Rcd at 8888, para. 201. In response to issues raised"% 0*&&%" by commenters and state Joint Board members, the Commission referred back to the Joint Board questions  {OX'related to how federal support should be determined. See FederalState Joint Board on Universal Service, Order  {O"'and Order on Reconsideration, CC Docket No. 9645, 13 FCC Rcd 13749 (1998) (Referral Order). See also  {O'FederalState Joint Board on Universal Service, Second Recommended Decision, CC Docket No. 9645, 13 FCC  {O'Rcd 24744 (1998) (Second Recommended Decision).{ " 0*&&``"Ԍ  X4 B.1997 Further Notice and the Input Value Development Process    X45. ` ` In a July 18, 1997 Further Notice of Proposed Rulemaking, the Commission established a multiphase plan to develop a federal universal service support mechanism that  X4would send the correct signals for entry, investment, and innovation.] ^D6 {O 'ԍ FederalState Joint Board on Universal Service, ForwardLooking Mechanism for High Cost Support for  {O 'NonRural LECs, Further Notice of Proposed Rulemaking, CC Docket Nos. 9645, 97160, 12 FCC Rcd 18514  {OU 'at 18519, para. 5 (1997) (1997 Further Notice).] The 1997 Further  X{4Notice divided questions related to the cost models into "platform design" issues and "input  Xf4value" issues.( fD6 yO'ԍ Generally, there is a platform component for each portion of the local exchange network being modeled. Examples of platform design issues are the establishment of switch capacity limitations and the routing of feeder and distribution cables. Examples of input values are the price of various network components, their associated  {O'installation and placement costs, and capital cost parameters such as debtequity ratios. See 1997 Further Notice, 12 FCC Rcd at 1851618, paras. 1718.( The 1997 Further Notice subdivided each of the platform and input issues into the following four topic groups: (1) customer location; (2) outside plant design; (3)  X:4switching and interoffice; and (4) general support facilities (GSF) and expense issues.R :X D6 {OC'ԍ See generally 1997 Further Notice.R  X 46. ` ` After reviewing the comments received in response to the 1997 Further Notice, the Common Carrier Bureau (Bureau) released two public notices to guide parties wishing to  X 4submit cost models for consideration as the highcost federal mechanism. D6 {O{'ԍ Guidance to Proponents of Cost Models in Universal Service Proceeding: Switching, Interoffice  {OE'Trunking, Signaling, and Local Tandem Investment, Public Notice, CC Docket Nos. 9645, 97160, DA 971912  {O'(rel. Sept. 3, 1997) (Switching and Transport Public Notice); Guidance to Proponents of Cost Models in  {O'Universal Service Proceeding: Customer Location and Outside Plant, Public Notice, CC Docket Nos. 9645, 97 {O'160, DA 972372 (rel. Nov. 13, 1997) (Customer Location & Outside Plant Public Notice).ċ  X 47. ` ` In addition to the 1997 Further Notice, the Bureau has solicited comment and allowed interested parties the opportunity to participate in the development of the input values  X4to be used in the forwardlooking cost model. On May 4, 1998, the Bureau released a Public"0*&&``V"  X4Notice to update the record on several inputrelated issues.N^D6 {Oy'ԍ Common Carrier Bureau Requests Further Comment On Selected Issues Regarding The ForwardLooking  {OC'Economic Cost Mechanism For Universal Service, Public Notice, CC Docket Nos. 9645, 97160, DA 98848  {O '(rel. May 4, 1998) (Inputs Public Notice).N The Bureau also issued data requests designed to acquire information that could be useful in determining the final input  X4values,D6 {Os'ԍ FederalState Joint Board on Universal Service, Order, CC Docket No. 9645, 12 FCC Rcd 9803 (1997)  {O='(1997 Data Request). and conducted a series of public workshops designed to elicit further comment from  X4interested parties in selecting final input values.\^JD6 {O 'ԍ Common Carrier To Hold Three Workshops On Input Values To Be Used To Estimate ForwardLooking  {O 'Economic Costs For Purposes Of Universal Service Support, Public Notice, CC Docket Nos. 9645, 97160, DA  {OL '982406 (rel. Nov. 25, 1998) (Workshop Public Notice).\ Finally, the Bureau conducted numerous ex  X4parte meetings with interested parties throughout this proceeding.@Zp D6 {O'ԍ See, e.g., Letter from W. Scott Randolph, GTE, to Magalie Roman Salas, FCC, dated March 2, 1999; Letter from Pete Sywenki, Sprint, to Magalie Roman Salas, FCC, dated, February 26, 1999; Letter from Chris Frentrup, MCI, to Magalie Roman Salas, FCC, dated February 9, 1999.@   X|4 C. Platform Order and Second Recommended Decision   XO48. ` ` In the Platform Order, released on October 28, 1998, the Commission adopted the forwardlooking cost model platform to be used in determining federal universal service  X# 4highcost support for nonrural carriers.[# D6 {Of'ԍ See Platform Order.[ The model platform that the Commission adopted combined elements from each of the three models under consideration in this proceeding: (1)  X 4the BCPM, Version 3.0 (BCPM);X $D6 yO'ԍ Submission in CC Docket Nos. 9645 and 97160 by BellSouth Corporation, BellSouth Telecommunications, Inc., U S WEST, Inc., and Sprint Local Telephone Company (BCPM proponents), dated Dec. 11, 1997 (BCPM Dec. 11, 1997 submission). (2) the HAI Model, Version 5.0a (HAI);dZ DD6 yO'ԍ Letter from Richard N. Clarke, AT&T, to Magalie Roman Salas, FCC, dated Dec. 11, 1997 (HAI Dec.  {O'11, 1997 submission). HAI was submitted by AT&T and MCI (HAI sponsors). See also Letter from Richard Clarke, AT&T, to Magalie Roman Salas, FCC, dated February 3, 1998 (HAI Feb. 3 submission).d and (3) the  X 4Hybrid Cost Proxy Model, Version 2.5 (HCPM).$ fD6 yO!'Ѝ HCPM was developed by Commission staff members William Sharkey, Mark Kennet, C. Anthony Bush,  {O"'Jeffrey Prisbrey, and Commission contractor Vaikunth Gupta of Panum Communications. Common Carrier  {O#'Bureau Announces Release of HCPM Version 2.0, Public Notice, DA 972712 (rel. Dec. 29, 1997). See also  yOQ$'United States Government Memo from W. Sharkey, FCC, to Magalie Roman Salas, FCC, dated Feb. 6, 1998. In the Platform Order, the Commission also specified several issues that would be addressed in the inputs stage of this proceeding. " R0*&&``4 "  X4These issues include: (1) the geocode data source to determine customer locations;^D6 {Oy'ԍ Platform Order, 13 FCC Rcd at 21338, para. 34.^ (2) the  X4road surrogate method to determine the location of nongeocoded customer locations;^ZD6 {O'ԍ Platform Order, 13 FCC Rcd at 21341, para. 41.^ and (3) the use of the local exchange routing guide (LERG) to identify the existing hostremote  X4switch relationships.D6 {OX'ԍ Platform Order, 13 FCC Rcd at 21355, para. 76. The LERG is a database of switching information maintained by Telcordia Technologies (formerly Bellcore) that includes the existing hostremote relationships.  X49. ` ` On November 25, 1998, the Joint Board released the Second Recommended  Xx4Decision, in which it recommended that the Commission compute federal highcost support  Xc4for nonrural carriers through a twostep process.jcFD6 {OZ'ԍ Second Recommended Decision, 13 FCC Rcd at 24746, para. 5.j First, the Joint Board recommended that the Commission should estimate the total support amount necessary in those areas considered to have high costs relative to other areas. Second, the Joint Board recommended that the Commission should consider, in a consistent manner across all states, any particular state's  X 4ability to support highcost areas within the state.j D6 {O'ԍ Second Recommended Decision, 13 FCC Rcd at 24746, para. 5.j The Joint Board recommended that federal support should be provided to the extent that the state would be unable to support its  X 4highcost areas through its own reasonable efforts.m j D6 {O'ԍ Second Recommended Decision, 13 FCC Rcd at 2474647, para. 5.m In addition, the Joint Board recommended that the Commission continue to work with the Joint Board to select the input values to complete a forwardlooking cost model and to finalize the methodology for  X4distributing federal highcost support.k D6 {OA'ԍ Second Recommended Decision, 13 FCC Rcd at 24757, para. 28.k  Xf4 D. Inputs Further Notice and Seventh Report and Order   X94 10. ` ` On May 28, 1999, the Commission released the Inputs Further Notice and the  X$4Seventh Report and Order.-$ D6 {Oc!'ԍ FederalState Joint Board on Universal Service, ForwardLooking Mechanism for High Cost Support for  {O-"'NonRural LECs, Further Notice of Proposed Rulemaking, CC Docket Nos. 9645, 97160, FCC 99120 (rel.  {O"'May 28, 1999) (Inputs Further Notice); FederalState Joint Board on Universal Service, Access Charge Reform, Seventh Report and Order and Thirteenth Order on Reconsideration in CC Docket No. 9645; Fourth Report and Order in CC Docket No. 96262; and Further Notice of Proposed Rulemaking, CC Docket Nos. 9645, 96262,  {OQ%'14 FCC Rcd 8078 (1999) (Seventh Report and Order). See also Common Carrier Bureau Releases Preliminary"Q%0*&&L%"  {O'Results Using Proposed Input Values In The ForwardLooking Cost Model For Universal Service, Public Notice,  {OZ'CC Docket Nos. 9645, 97160, DA 991165 (rel. June 16, 1999) (Preliminary Input Values Public Notice); Common Carrier Bureau Releases Revised Spreadsheet For Estimating Universal Service Support Using  {O'Proposed Input Values In The ForwardLooking Cost Model, Public Notice, CC Docket Nos. 9645, 97160, DA 991322 (rel. July 2, 1999).- In the Inputs Further Notice, we proposed and sought comment"$~0*&&``?" on a complete set of input values for use in the model, such as the cost of switches, cables,  X4and other network components.X~D6 {O'ԍ See Inputs Further Notice at Appendix A.X For the most important inputs, we provided a detailed  X4description of the methodology that was used to arrive at the proposed values.V D6 {O 'ԍ See generally Inputs Further Notice. V  X4 11. ` ` In the Seventh Report and Order, we adopted revisions to the federal support mechanisms, in light of the Joint Board's recommendations, to permit rates to remain affordable and reasonably comparable across the nation, consistent with the 1996 Act. To accomplish these goals, we established and sought comment on a methodology for determining nonrural carriers' support amounts, based on the forwardlooking costs estimated using a national cost model, and a national cost benchmark, that will begin on January 1,  X 42000.X! D6 {Oo'ԍ See generally Seventh Report and Order. X  X 4 III. ESTIMATING FORWARDLOOKING ECONOMIC COST ׃  X ' A.Designing a ForwardLooking Wireline Local Telephone Network  X4 12. ` ` To understand the assumptions made in the mechanism, it is necessary to  X{4understand the layout of the current wireline local telephone network."{4 D6 yO`'ԍ We also note that technologies such as wireless services are likely to become more important over time in providing universal service. We will continue to review suggestions for incorporating such technologies into the  {O'forwardlooking mechanism for future years. See, e.g., Letter from David L. Sieradzki, on behalf of Western Wireless, to Magalie Roman Salas, FCC, dated January 26, 1999 (submitting the "Wireless Cost Model"). In addition, we intend to initiate a proceeding in the near future to consider how changes in technologies and other related factors should be accounted for in the model. 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  X4connected to a given wire center. The Universal Service Order required the models to use" "0*&&``a"  X4existing incumbent LEC wire center locations in estimating forwardlooking cost.#$D6 {Oy'ԍ The Universal Service Order established ten criteria to ensure consistency in calculations of federal  {OC'universal service support. Universal Service Order, 12 FCC Rcd at 8913, para. 250. Criterion one requires that a model must include incumbent LECs' wire centers as the center of the loop network and the outside plant should terminate at incumbent LECs' current wire centers.  X4 13. ` ` Within the boundaries of each wire center, the wires and other equipment that  X4connect 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. The range of an analog signal over copper is limited, however, so 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 wire. Generally, when a neighborhood is located too far from the wire center to be served by copper cables alone, an optical fiber cable will be deployed to a point within the neighborhood, where a piece of electronic 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, which is connected to a serving area interface (SAI). From the SAI, copper cables of varying gauge extend to all of the customer premises in the neighborhood. Where the  Xb4neighborhood is close enough to the wire center to be served entirely on copper cables, copper trunks connect the wire center to the 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  X4office with the SAI or DLC is known as the feeder plant, and the portion that runs from the  X4DLC or SAI throughout the neighborhood is known as the distribution plant.  X4 14. ` ` 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  X74served 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 crossconnected 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 crossconnected to copper distribution cables at the adjacent SAI. " #0*&&``;"Ԍ X4ԙ15. ` ` The model assumes that wire centers are interconnected with one another using  X4optical fiber networks known as Synchronous Optical Network (SONET) rings.`$XD6 yOb'ԍ SONET is a set of standards for optical (fiber optic) transmission. It was developed to meet the need for transmission speeds above the T3 level (45 Mbps) and is generally considered the standard choice for transmission devices used with broadband networks. BCPM Dec. 11 submission, Model Methodology at 68. ` The infrastructure to interconnect the wire centers is known as the interoffice network, and the  X4carriage 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  X_4fullcapacity switch (known as a host) is placed in one of the wire centers and less expensive,  XH4more limitedcapacity 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 fullcapacity switches and that do not serve as hosts to any other wire centers are called standalone switches.  X 416. ` ` There are also a number of expenses and general support facilities (GSF) costs  X 4associated with the design of a forwardlooking wireline telephone network.u% D6 {O@'ԍ See Platform Order, 13 FCC Rcd at 2135761, paras. 8191.u GSF costs include the investment related to vehicles, land, buildings, and general purpose computers. Expenses include: plantspecific expenses, such as maintenance of facilities and equipment expenses; plant nonspecific expenses, such as engineering, network operations, and power expenses; customer services expenses, such as marketing, billing, and directory listing expenses; and corporate operations expenses, such as administration, human resources, legal,  X4and accounting expenses.a&zD6 {OH'ԍ Platform Order, 13 FCC Rcd at 2135758, para. 82.a  X' B. Synthesis Model   X' 1. ` ` Historical Background  X417. ` ` 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  Xg4locations, to the extent these locations are known.'g D6 {O$#'ԍ Platform Order, 13 FCC Rcd at 21337, para. 33. See also discussion of customer location data, infra section IV. To the extent that the actual geographic locations of customers are not available, the Commission determined that the synthesis model"P f '0*&&``"  X4should assume that customers are located along roads.(D6 {Oy'ԍ Platform Order, 13 FCC Rcd at 2134041, para. 40. See also discussion of road surrogating method,  {OC'infra.  X418. ` ` 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  X4into consideration relevant engineering constraints.^)$D6 {Oy'ԍ Platform Order, 13 FCC Rcd at 21342, para. 44.^ After identifying efficient serving areas,  X4the model designs outside plant to the customer locations.^*D6 {O 'ԍ Platform Order, 13 FCC Rcd at 21346, para. 55.^ In doing so, the model employs a number of cost minimization principles designed to determine the most costeffective  X_4technology to be used under a variety of circumstances, such as varying terrain and density.^+_HD6 {OX'ԍ Platform Order, 13 FCC Rcd at 21348, para. 61.^  X1419. ` ` The Commission concluded that the federal universal service mechanism should incorporate, with certain modifications, the HAI 5.0a switching and interoffice facilities  X 4module to estimate the cost of switching and interoffice transport.a, D6 {O'ԍ Platform Order, 13 FCC Rcd at 2135455, para. 75.a The Commission noted that it would consider adopting the LERG at the inputs stage of this proceeding to determine  X 4the deployment of host and remote switches.^- l D6 {O'ԍ Platform Order, 13 FCC Rcd at 21355, para. 76.^ In addition, the Commission adopted the HAI  X 4platform module for calculating expenses and capital costs, such as depreciation.l. D6 {Om'ԍ Platform Order , 13 FCC Rcd at 21357, para. 81. l  X420. ` ` The Commission noted that technical improvements to the cost model will continue, both before implementation of the model for nonrural carriers and on an ongoing  Xb4basis, as necessary.^/b D6 {O'ԍ Platform Order, 13 FCC Rcd at 21329, para. 13.^ 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  X4Platform Order.^0"D6 {O"'ԍ Platform Order, 13 FCC Rcd at 21329, para. 13.^  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  X4a result, some refinements have been made to the model platform adopted in the Platform" 00*&&``:"  X4Order.11\D6 {Oy'ԍ Common Carrier Bureau To Post On The Internet Modifications To The ForwardLooking Economic Cost  {OC'Model For Universal Service Support, Public Notice, CC Docket Nos. 9645, 97160, DA 982533 (rel. Dec. 15,  yO '1998).1 All changes to the model platform are posted on the Commission's Web site.)2D6 yO'ԍ Model platform changes can be found at http://www.fcc.gov/ccb/apd/hcpm. Changes to the model are detailed in the "History.doc" file. The model platform was not modified after June 2, 1999, in order to allow parties an opportunity to evaluate the model platform, the proposed inputs to the model, and issues related to the methodology for determining highcost support. After release of this Order, we will post a revised model platform on the Commission's Web site, including the input values adopted herein.)  X' 2. ` ` Validation   X421. ` ` In the Universal Service Order, the Commission concluded that highcost  X4support should be based on forwardlooking costs.q3D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 88998900, paras. 224226.q Since that time, the Commission has  Xz4continued to work to adopt a cost model that is reasonably accurate and verifiable.4z. D6 {OY'ԍ See, e.g., 1997 Further Notice; Inputs Public Notice; Workshop Public Notice; Inputs Further Notice.  Xc4Although we have remained confident in our ability to adopt a model, in the Inputs Further  XN4Notice, we sought comment on how the Commission might determine support levels without using a model, "[i]n the unlikely event that the model is not ready for timely  X" 4implementation."S5" D6 {O'ԍ Inputs Further Notice at para. 243.S A few commenters offered concrete suggestions in response to this  X 4request, virtually all of which involved the use of carriers' book costs in lieu of the model.:6\ R D6 {O'ԍ See, e.g., Bell Atlantic Inputs Further Notice comments at 56, GTE Inputs Further Notice comments at  {O'8991, USTA Inputs Further Notice comments at 45. But see US West Inputs Further Notice comments at 7071.:  X 422. ` ` As an initial matter, we affirm the Commission's decision to base support calculations on forwardlooking costs. We have repeatedly articulated our reasons for believing that forwardlooking costs represent a superior method for determining support amounts. The most significant of these is that forwardlooking costs are the basis of economic decisions in a competitive market, and therefore send the correct signals for entry and investment.  X<423. ` ` Moreover, the Commission and its staff have undertaken a thorough review of the model and its input values over the past six months. In so doing, the staff has coordinated extensively with and received substantial input from the Joint Board staff and interested outside parties. As a result of this examination of the model, we are convinced that it" v60*&&``" generates reasonably accurate estimates of forwardlooking costs and that the model is the best basis for determining nonrural carriers' highcost support in a competitive environment.  X424. ` ` After this review of the model, we find that none of the criticisms of the model undermine our decision to use it for calculating nonrural carriers' highcost support. For example, some parties have observed that the model seems to generate unexpectedly high cost  Xv4estimates for certain states, such as Mississippi and Alabama.d7vD6 {O'ԍ Bell Atlantic Inputs Further Notice comments at 4. d Because of the high levels of cost estimated in these states, they receive larger shares of forwardlooking support than they receive under the current mechanism, and also receive higher levels of support than some other states (such as the sparsely populated Western and Midwestern states) that many parties expected to lead the list of highcost states. After further review, however, we have found several factors that explain the model's results.  X 425. ` ` We first sought to verify the model's results by determining whether the model generated higher costs in areas where customers are more dispersed. Although there are other relevant factors, most people agree that telephone plant costs tend to be highest when customers are spread thinly over a large area. We used a "minimum spanning tree"  Xy4measurement to determine relative dispersion of customers.8yZD6 {O'ԍ See C.A. Bush et al., The Hybrid Cost Proxy Model Customer Location and Loop Design Modules, Dec.  {ON'15, 1998 at 1314 (HCPM Dec. 15, 1998 documentation). We found that the model's cost estimates were highly correlated with dispersion of customers. This provides a preliminary, objective check on the model's accuracy.  X426. ` ` This analysis does not, however, explain why the model estimates higher costs in some states relative to others in a distribution that differs from carriers' book costs and from some observers' expectations. In researching this issue, we discovered that significant differences exist among the states in the territory served by larger carriers, which are typically  X4considered nonrural carriers under the Act.Q9D6 {O('ԍ See 47 U.S.C.  153(37).Q It is important to remember that the present model runs only cover the territory served by nonrural carriers. The costs estimated by the model will be significantly affected by the type of territory served by those carriers in the state whose costs are being calculated, and to the extent that a rural territory is being served by a rural carrier that is not receiving highcost support under this mechanism, the cost of serving that territory will not be reflected in the level of support for that state determined in this phase of the proceeding. In general, we found that the states where the model estimated the highest costs were those states in which the territory served by the nonrural carriers, which are typically larger carriers, included more rural areas than in other states. We also found that some states that are generally perceived as rural are served primarily by small"H90*&&``" carriers, so that the remaining territory in the state, which would be served by the nonrural carrier, is less rural than the state as a whole. For example, in Mississippi, the large incumbent LEC serves the vast majority of the state's territory, including many very rural areas. By contrast, in Montana for example, the large incumbent LEC serves less than a third of the state's territory, and its serving area includes all but one of the largest cities in the state. Small rural carriers serve the most sparsely populated rural areas in Montana. As a result, considering only the nonrural carriers' territory, Mississippi appears to be a considerably more rural state than Montana. As discussed above, our analysis showed that the model's cost estimates were highly correlated with dispersion that is, the areas with the most dispersed customers were estimated by the model to have the highest costs. Although this results in relative cost estimates among states that differ from some people's expectations, we believe that this may primarily reveal that those expectations were based on a lack of information or incorrect premises about nonrural carriers' service territories.  X 427. ` ` Moreover, our investigation revealed that most of the variations between carriers' book cost levels and the model's estimated forwardlooking costs can be explained by three factors. The first is the percentage of business lines in the study area. Study areas with a lower percentage of business lines tend to have lower book costs relative to forwardlooking costs. The second factor is the percentage of customers in rural areas. Study areas with a higher percentage of rural customers also tend to have lower relative book costs. These two factors, taken together, suggest that the book cost of the existing network is more likely to be below the model's estimate of the cost of a forwardlooking network in rural areas with fewer business customers. This may suggest that these areas are served by networks of a different quality standard than that assumed in the model, or that the networks in these areas have not been upgraded or experienced much growth in some time and therefore are substantially depreciated on carriers' books. The third factor is discrepancies in line counts between the data used in the model and the most current carrierreported data. We have taken steps to correct these discrepancies in the line count data that we adopt in this  X|4Order.C:|D6 {O'ԍ See infra para. 61.C  XN428. ` ` We believe that the model, as used in the methodology we set out in the  X74companion Methodology Order, is the best way to generate nonrural carriers' support amounts for the funding year beginning January 1, 2000. We also recognize, however, that the model must evolve as technology and other conditions change. We therefore have committed to initiating a proceeding to study how the model should be used in the future (e.g., how often inputs data should be updated) and how the model itself should change to reflect changing circumstances. We anticipate releasing a further notice of proposed rulemaking on these issues in early 2000, and hope to reach significant decisions on these issues during the course of that year. "#Z:0*&&``!"Ԍ X4 C.Selecting ForwardLooking Input Values   X429. ` ` In the Universal Service Order, the Commission adopted ten criteria to be used in determining the forwardlooking economic cost of providing universal service in highcost  X4areas.j;D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 891316, para. 250.j 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 leastcost, mostefficient, and reasonable technology for  Xa4providing the supported services that is currently being deployed."w<aZD6 {Ol 'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250 (criterion one).w As noted below, existing  XJ4LEC plant in a particular area may not reflect forwardlooking technology or design choices.I=JD6 {O 'ԍ See infra paras. 63, 351.I Similarly, the input values we adopt in this Order are not intended to replicate any particular company's embedded or book costs. Criterion three directs that "costs must not be the  X 4embedded cost of the facilities, functions, or elements."y> ~D6 {O4'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250 (criterion three).y Rather, the model "must be based  X 4upon an examination of the current cost of purchasing facilities and equipment."y? D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250 (criterion three).y  X 430. ` ` As discussed below, we generally adopt nationwide, rather than companyspecific, input values in the federal mechanism. In many cases, the only data for various inputs on the record in this proceeding are embedded cost, companyspecific data. We have used various techniques to convert these data to forwardlooking values. For example, we modify the switching data to adjust for the effects of inflation and the cost changes unique to  XM4the purchase and installation of digital switches.D@MD6 {O'ԍ See infra para. 311.D Where possible, we have tried to account for variations in costs by objective means. For example, the model reflects differences in structure costs by using different values for the type of plant, the density zone, and geological conditions. There may be additional modifications we can make in the future to more accurately reflect variations in forwardlooking costs based on objective criteria. For example, we do not adjust our maintenance expense estimates to reflect regional wage differences, as discussed below, because we have not found and no party has suggested a  X4specific data source or methodology that would be useful in making such adjustments.HA4 D6 {O#'ԍ See infra paras. 36164.H We certainly remain open to considering data sources in the future of the model proceeding that would permit us to vary these or other input values to reflect differences in forwardlooking"~ A0*&&``J" cost that can be measured objectively.  X431.` ` Although the BCPM sponsors have provided nationwide default values, they  X4and other LECs generally advocate companyspecific input values. For purposes of determining federal universal service support amounts, however, we believe that nationwide default values generally are more appropriate than companyspecific values. Under the new federal universal service support 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. We also believe that it would be administratively unworkable to use companyspecific values in the federal nationwide model. Finally, we note that, for most inputs, we have no means of adopting companyspecific input values, except possibly by relying on embedded data for each company. We make no finding as to whether nationwide values would be appropriate for purposes other than determining federal universal service  X 4support.$BX D6 yON'ԍ State commissions, for example, may find that it is not appropriate to use nationwide values in determining state universal service support or prices for unbundled network elements and may choose instead to use statewide or companyspecific values. $  X 432. ` ` For universal service purposes, we find that using nationwide averages is appropriate. The Commission has not considered what type of input values, companyspecific or nationwide, nor what specific input values, would be appropriate for any other purposes. The federal cost model was developed for the purpose of determining federal universal service support, and it may not be appropriate to use nationwide values for other purposes, such as  X44determining prices for unbundled network elements. We caution parties from making any claims in other proceedings based upon the input values we adopt in this Order.  X4j  IV. DETERMINING CUSTOMER LOCATIONS ׃  X' A. Background   X4 33. ` ` The determination of customer locations relative to the wire center heavily influences a forwardlooking cost model's design of outside plant facilities. This is because assumptions about the locations of customers will determine the predicted loop length, which in turn will have a large impact on the cost of service and the technologies employed by the  X74model.gC7D6 {O!'ԍ See 1997 Further Notice, 12 FCC Rcd at 18535, para. 44.g Each of the models under consideration in the Platform Order provided a  X"4methodology for determining customer locations.^D"zD6 {OM$'ԍ Platform Order, 13 FCC Rcd at 21337, para. 31.^ The Bureau sought comment on these"" D0*&&``"  X4proposals and solicited alternative proposals from interested parties for locating customers.{E^D6 {Oy'ԍ See, e.g., 1997 Further Notice, 12 FCC Rcd at 18535, para. 44; Inputs Public Notice at 34; Common  {OC'Carrier Bureau Seeks Comment On Model Platform Development, Public Notice, CC Docket Nos. 9645, 97160,  {O 'DA 981587 (rel. Aug. 7, 1998) (Platform Public Notice) at 24.{  X4!34. ` ` In the Platform Order, the Commission concluded that HAI's proposal to use actual geocode data, to the extent that they are available, and BCPM's proposal to use road network information to create "surrogate" customer locations where actual data are not  X4available, provided the most reasonable method for determining customer locations.FD6 {O. 'ԍ Platform Order, 13 FCC Rcd at 21337, para. 31. The term "geocode data" refers to the identification of each customer location by precise latitude and longitude coordinates. Surrogating methods, and customer location data provided by the Census Bureau, constitute geocode data. For purposes of clarity, however, we will use the term "geocode" data to refer only to actual precise latitude and longitude data, unless we specifically refer to the data as "surrogate geocode" data. The Commission concluded that "the source or sources of geocode data to use in determining  Xa4customer location will be decided at the inputs phase of this proceeding."aGaD6 {O'ԍ Platform Order, 13 FCC Rcd at 2133738, para. 34.a The Commission also concluded that "the selection of a precise algorithm for placing road surrogates pursuant to these conclusions should be conducted in the inputs stage of this proceeding as part of the  X 4process of selecting a geocode data set for the federal mechanism."aH 2 D6 {O'ԍ Platform Order, 13 FCC Rcd at 2134041, para. 40.a  X 4"35. ` ` In the Inputs Further Notice, we tentatively concluded that no source of actual geocode data had been made sufficiently available for review to be used in the model at that  X 4time.WI D6 {O7'ԍ Inputs Further Notice at paras. 2528. W Therefore, we tentatively concluded that a road surrogate algorithm would be used to locate customers in the federal mechanism until a source of actual geocode data is selected by the Commission. In doing so, we tentatively adopted the road surrogate algorithm proposed  X}4by PNR Associates (PNR) to develop road surrogate customer locations.RJ}V D6 {O'ԍ Inputs Further Notice at para. 29.R   XO' B. Customer Location Data   X!' 1. ` ` Geocode Data   X4#36. ` ` While we affirm our conclusion in the Platform Order that geocode data should be used to locate customers in the federal mechanism, we conclude that no source of actual geocode data has yet been made adequately accessible for public review. We conclude below"J0*&&``" that we will use an algorithm based on the location of roads to create surrogate geocode data on customer locations for the federal mechanism until a source of actual geocode data is identified and selected by the Commission. We reiterate our expectation that a source of accurate and verifiable actual geocode data will be identified in the future for use in the  X4federal mechanism.KD6 {O'ԍ In the upcoming proceeding on future changes to the model, see supra note 34, we intend to consider alternatives for obtaining customer location data.  Xv4$37. ` ` In the Platform Order, we concluded that a model is most likely to select the leastcost, mostefficient 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  X34wire centers are precise latitude and longitude coordinates for those customers' locations.^L3"D6 {O 'ԍ Platform Order, 13 FCC Rcd at 21337, para. 33.^ We noted that commenters generally support the use of accurate geocode data in the federal  X 4mechanism where available.aM D6 {Oj'ԍ Platform Order, 13 FCC Rcd at 2133738, para. 34.a We further noted that the only actual geocode data in the record were those prepared for HAI by PNR, but also noted that "our conclusion that the model should use geocode data to the extent that they are available is not a determination of  X 4the accuracy or reliability of any particular source of the data."^N FD6 {O'ԍ Platform Order, 13 FCC Rcd at 21338, para. 34.^ Although commenters supported the use of accurate geocode data, several commenters questioned whether the PNR  X4geocode data were adequately available for review by interested parties.^OD6 {O'ԍ Platform Order, 13 FCC Rcd at 21338, para. 34.^  Xd4%38. ` ` 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  X84available to all interested parties for review and comment."yP8j D6 {OS'ԍ Universal Service Order, 12 FCC Rcd at 8915, para. 250 (criterion eight).y In an effort to comply with this requirement, the Commission has made significant efforts to encourage parties to submit  X 4geocode data on the record in this proceeding. Q  D6 {O 'ԍ See FederalState Joint Board on Universal Service, Protective Order, CC Docket Nos. 9645, 97160, 13  {O!'FCC Rcd 13910 (1998) (Protective Order). See also Inputs Public Notice at 34.  PNR took initial steps to comply with this  X4requirement in December 1998 by making available the "BIN" filesRXX D6 yO#'ԍ BIN files are the output of the clustering routine in the synthesis model platform derived from the actual geocode customer locations and, as such, do not reveal the actual geocoded customer locations. The BIN files allow users to run all aspects of the model except for the clustering. PNR has made the BIN files available to"%Q0*&&%"  {O'interested parties for a fee of $25.00, pursuant to the terms of the Protective Order. See Letter from William M.  {OZ'Newman, PNR, to Magalie Roman Salas, FCC, dated December 17, 1998 (PNR Dec. 17 ex parte). derived from the"$R0*&&``"  X4geocoded points to interested parties pursuant to the Protective Order.OS$D6 {O'ԍ See PNR Dec. 17 ex parte.O PNR also has continued to provide access to the underlying geocode data at its facility in Pennsylvania.  X4Several commenters argue, however, that the availability of the BIN data alone is not sufficient to comply with the requirements of criterion eight, particularly in light of the  X4expense and conditions imposed by PNR in obtaining access to the geocode point data. TD6 {O 'ԍ See, e.g., Bell Atlantic Petition for Reconsideration at 56; BellSouth Petition for Reconsideration at 34;  {O 'GTE Petition for Reconsideration at 21; Sprint Inputs Further Notice comments at 11.  In addition, PNR acknowledges that its geocode database relies on thirdparty data that PNR is  Xx4not permitted to disclose.UxD6 yO;'ԍ Letter to Thomas W. Mitchell, on behalf of GTE, from Charles A. White, PNR, dated April 29, 1999  {O'(PNR April 29 ex parte) at 1.  XJ4&39. ` ` Consistent with our tentative conclusion in the Inputs Further Notice, we conclude that interested parties have not had an adequate opportunity to review and comment on the accuracy of the PNR actual geocode data set. The majority of commenters addressing  X 4this issue support this conclusion.V l D6 {O$'ԍ See, e.g., Ameritech Inputs Further Notice comments at 2; GTE Inputs Further Notice comments at 36 {O'37; SBC Inputs Further Notice comments at 4; Sprint Inputs Further Notice comments at 11. We note that a nationwide customer location database will, by necessity, be voluminous, relying on a variety of underlying data sources. In light of the concerns expressed by several commenters relating to the conditions and expense in obtaining geocode data from PNR, we find that no source of actual geocode data has been made sufficiently available for review. While PNR has made some effort to satisfy the requirements of criterion eight, we prefer to adopt a data set that is more readily available for meaningful review. In particular, we note that the geocode points are available only onsite at  Xf4PNR's facilities, making it difficult for parties to verify the accuracy of those points. We recognize, however, that more comprehensive actual geocode data are likely to be available in the future, and we encourage parties to continue development of an actual geocode data  X!4source that complies with the criteria outlined in the Universal Service Order for use in the  X 4federal mechanism.W"  D6 yO!'ԍ We note that AT&T and MCI have suggested that the Commission condition receipt of universal service  {OM"'funding on the provision of customer location data by the carrier. See AT&T/MCI Inputs Further Notice comments at 5. We decline to adopt this suggestion at this time, but will consider this and other alternatives to obtaining customer location data in the upcoming proceeding on future changes to the model.  X4 2. ` ` Road Surrogate Customer Locations  "W0*&&``{"Ԍ X4ԙ'40. ` ` We conclude that PNR's road surrogating algorithm should be used to develop geocode customer locations for use in the federal universal service mechanism to determine  X4highcost support for nonrural carriers beginning January 1, 2000. In the Platform Order, we concluded that, in the absence of actual geocode customer location data, associating road networks and customer locations provides the most reasonable approach for determining  X4customer locations.aXD6 {O'ԍ Platform Order, 13 FCC Rcd at 2134041, para. 40.a  Xa4(41. ` ` As we 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  X 4customers along the Census Block boundary, as HAI proposes."aY ZD6 {O) 'ԍ Platform Order, 13 FCC Rcd at 2134041, para. 40.a We therefore concluded in  X 4the Platform Order that the selection of a precise algorithm for placing road surrogates should  X 4be conducted in the inputs stage of this proceeding.^Z D6 {O'ԍ Platform Order, 13 FCC Rcd at 21341, para. 41.^ In the Inputs Further Notice, we  X 4tentatively adopted the PNR road surrogate algorithm to determine customer locations.R[ ~D6 {O 'ԍ Inputs Further Notice at para. 34.R  X 4)42. ` ` Currently, there are two road surrogating algorithms on the record in this proceeding those proposed by PNR and Stopwatch Maps. On March 2, 1998, AT&T provided a description of the road surrogate methodology developed by PNR for locating  Xj4customers.\jD6 yO+'ԍ Letter from Michael Liebermann, AT&T, to Magalie Roman Salas, FCC, dated March 2, 1998 (AT&T  {O'March 2 ex parte). On January 27, 1999, PNR made available for review by the Commission and  XS4interested parties, pursuant to the terms of the Protective Order, the road surrogate point data for all states except Alaska, Iowa, Virginia, Puerto Rico and eightyfour wire centers in  X'4various other states.e]\'j D6 yOB'ԍ Letter from William M. Newman, PNR, to Magalie Roman Salas, FCC, dated January 27, 1999 (PNR  {O 'Jan. 27 ex parte). PNR has made available by mail to interested parties the road surrogate point data for a fee of  {O'$25.00, pursuant to the terms of the Protective Order.e On February 22, 1999, PNR filed a more detailed description of its  X4road surrogate algorithm.^ D6 yOO"'ԍ Letter from Charles A. White, PNR, to Magalie Roman Salas, FCC, dated February 22, 1999 (PNR Feb.  {O#'22 ex parte). Consistent with the conditions set forth in the Inputs Further"^0*&&``"  X4Notice, PNR has now made available road surrogate data for all fifty states and Puerto Rico._D6 {Oy'ԍ Letter from Charles A. White, PNR, to Magalie Roman Salas, FCC, dated July 29, 1999 (PNR July 29 ex  {OC'parte).  X4*43. ` ` In general, the PNR road surrogate algorithm utilizes the Census Bureau's Topologically Integrated Geographic Encoding and Referencing (TIGER) files, which contain  X4all the road segments in the United States.E`\$D6 {O{'ԍ PNR Feb. 22 ex parte at 1. A road segment is a length of road between two intersections. The Census Bureau classifies and numbers each of these road segments. PNR uses a slightly modified version of the Census  {O 'Bureau road classifications. Id. at 2E For each Census Block, PNR determines how  X4many customers and which roads are located within the Census Block.aHD6 yO 'ԍ The PNR National Access Line Model is used to determine the number of residential and business  {OP 'customer locations in a given wire center. See PNR Feb. 22 ex parte at 1. 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  X 4likely to reside.Lb D6 {OX'ԍ PNR Feb. 22 ex parte at 2. L For example, PNR excludes highway access ramps, alleys, and ferry  X 4crossings.Jc 4 D6 {O'ԍ PNR Feb. 22 ex parte at 2.J 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  X 4surrogate customer locations are uniformly distributed along the road segments.Jd D6 {O7'ԍ PNR Feb. 22 ex parte at 2.J In order to ensure that its road surrogate data set includes all currently served customers, PNR has made minor adjustments to its methodology in some instances. For example, Census Blocks that are not assigned to any current wire center have been assigned to the nearest known wire center, based on the "underpinned of the census block in relation to the wire center's central  XM4office location."eMX D6 {OV 'ԍ See PNR July 29 ex parte. PNR has also filled in the states and wire centers that were missing from earlier versions of its road surrogate customer location data set.  X4+44. ` ` Stopwatch Maps has compiled road surrogate customer location files for six"e0*&&``2"  X4states suitable for use in the federal mechanism.fD6 {Oy'ԍ See Letter from Pete Sywenki, Sprint, to Magalie Roman Salas, FCC, dated December 11, 1998 (Sprint  {OC'Dec. 11 ex parte). We conclude, however, that until a more  X4comprehensive data set is made available, the Stopwatch data set will not comply with the  X4Universal Service Order's criterion that the underlying data are available for review by the  X4public. Only GTE endorses the use of the Stopwatch data set.Yg$D6 {O'ԍ GTE Inputs Further Notice comments at 38.Y In addition, we note that the availability of customer locations for only six states is of limited utility in a nationwide model designed to be implemented on January 1, 2000.  Xa4,45. ` ` AT&T and MCI contend that the exclusive use of a road surrogate algorithm to locate customers produces a 2.7 percent upward bias in loop cost on average on a study area basis when compared to a data set consisting of PNR actual geocode data, where available,  X 4and surrogate locations where actual data are unavailable.h" D6 {O'ԍ AT&T/MCI Inputs Further Notice comments at 3. Because the PNR actual geocode data set does not provide a complete data set of customer locations, AT&T and MCI compare a combination of actual and  yO'surrogate data with the use of all surrogate data. The percentage of actual geocoded customer data varies in different areas. AT&T and MCI argue that this occurs because the road surrogate methodology uniformly disperses customers along roads, failing to take into consideration actual, uneven customer distributions that tend to cluster  X 4customer locations more closely.i$ D6 {O('ԍ AT&T/MCI Inputs Further Notice comments at 3 (contending that customers tend to cluster unevenly  {O'along roads and even leave stretches unpopulated). See also Ameritech Inputs Further Notice comments at 5 (contending that PNR surrogate locations tend to spread customers more evenly than when compared to Ameritech's geocoded customer data). AT&T and MCI therefore suggest a downward  X 4adjustment to produce more accurate outside plant cost estimates.dj D6 {O'ԍ AT&T/MCI Inputs Further Notice reply comments at 10.d GTE disagrees and contends that, because the PNR actual geocode data create serving areas that are too dense, it is not surprising that AT&T and MCI have found that the use of road surrogate data produces  X{4costs that are slightly higher.hk{D6 {OJ'ԍ GTE Inputs Further Notice reply comments at 45. h GTE argues that there is no evidence to conclude, therefore,  Xd4that a uniform dispersion of customers is likely to overstate outside plant costs.^ldD6 {O!'ԍ GTE Inputs Further Notice reply comments at 5.^ Sprint contends that the decision to optimize distribution plant in the model mitigates any concern  X64that the road surrogate algorithm overstates the amount of outside plant.\m6BD6 {O)%'ԍ Sprint Inputs Further Notice comments at 13.\"6m0*&&``U"Ԍ X4ԙ-46. ` ` We agree with GTE and Sprint that there should be no downward adjustment in cost to reflect the exclusive use of a road surrogate algorithm. In doing so, we note that, although the Commission has gone to great lengths to identify a source of actual, nationwide customer locations, no satisfactory data source has been identified. In fact, only one source of such data, the PNR geocode data, has been placed on the record. As noted above, however, we have rejected the PNR geocode data set at this time because it has not been made adequately available for review. In the absence of a reliable source of actual customer locations by which to compare the surrogate locations, it is impossible to substantiate AT&T and MCI's contention that the road surrogate algorithm overstates the dispersion of customer  X14locations in comparison to actual locations.qn 1D6 yO 'ԍ As noted above, AT&T and MCI rely on the PNR actual geocode data that we have rejected for lack of a meaningful verification process. In the absence of a verifiable, actual geocode data source, it is impossible to make the type of comparison suggested by AT&T and MCI to determine the accuracy of the road surrogate algorithm.q Although LECG has made comparisons between Ameritech geocode locations and the PNR road surrogate locations, the validity of  X 4that comparison is dependent on the accuracy of the geocode data used in that comparison.o D6 yOd'ԍ Letter from Celia Nogales, Ameritech, to Magalie Roman Salas, FCC, dated July 14, 1999 (Ameritech  {O,'July 14 ex parte). LECG is an economic consulting firm. As Ameritech has not filed that data on the record, we have no way of verifying the accuracy of its geocoded locations. In addition, we note that Ameritech agrees that the PNR road surrogate "is a reasonable method for locating customers in the absence of actual geocode  X 4data."^p D6 {Ob'ԍ Ameritech Inputs Further Notice comments at 3.^ Having no reliable evidence that the PNR road surrogate algorithm systematically overstates customer dispersion, we conclude that no downward adjustment to the outside plant cost estimate is required.  XK4.47. ` ` We also disagree with Bell Atlantic's contention that road surrogate data is  X44inherently random and likely to misidentify highcost areas.q\4D6 {O'ԍ Bell Atlantic Inputs Further Notice comments at 8. As noted, the decision to use a surrogating algorithm  {OK'based on roads was made by the Commission in the Platform Order. Our purpose in this Order is not to revisit that decision but to select the road surrogate algorithm that will be used in the federal mechanism. As noted in the Platform  X4Order, we believe that it is reasonable to assume that customers generally reside along roads and, therefore, associating customers with the distribution of roadways is a reasonable method to estimate customer locations. We note that PNR's methodology of excluding certain road  X4segments 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  X4associated with customer locations.^r D6 {O!%'ԍ Platform Order, 13 FCC Rcd at 21341, para. 41.^ In addition, we note that PNR's reliance on the Census"R r0*&&``" 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  X4Universal Service Order.Zs\D6 yOK'ԍ We also note that PNR has made the road surrogate data points available to interested parties pursuant to  {O'the provisions of the Protective Order in this proceeding. See PNR Jan. 27 ex parte; PNR Feb. 9 ex parte; PNR  {O'Feb. 22 ex parte.Z The PNR road surrogate algorithm is also generally supported by  X4commenters addressing this issue.tD6 {OZ'ԍ See, e.g., Ameritech Inputs Further Notice at 3; AT&T/MCI Inputs Further Notice comments at 67;  {O$ 'Sprint Inputs Further Notice at 12. While AT&T and MCI advocate the use of actual geocode data points, AT&T and MCI endorse the PNR road surrogate algorithm to identify  X4surrogate locations in the absence of actual geocode data.euHD6 {O 'ԍ AT&T/MCI Inputs Further Notice comments at 67.e We therefore affirm our tentative  Xx4conclusion in the Inputs Further Notice and adopt the PNR road surrogate algorithm and data set to determine customer locations for use in the model beginning on January 1, 2000.  X5' 3. ` ` Methodology for Estimating the Number of Customer Locations   X 4/48. ` ` 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. In addition, we must determine how demand for service at each customer location should be estimated and how customer  X 4locations should be allocated to each wire center. In the Inputs Further Notice, we tentatively concluded that PNR's methodology for estimating the number of customer locations based on  X4households should be used for developing the customer location data.RvD6 {O 'ԍ Inputs Further Notice at para. 43.R In addition, we also tentatively concluded that we should use PNR's methodology for estimating the demand for  XQ4service at each location, and for allocating customer locations to wire centers.RwQl D6 {On'ԍ Inputs Further Notice at para. 43.R We now affirm these tentative conclusions.  X 4049. ` ` 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  X4region."ux D6 {O"'ԍ Universal Service Order, 12 FCC Rcd at 8915, para. 250 (criterion 6).u The Commission has sought comment on the appropriate method for defining "households," or residential locations, for the purpose of calculating the forwardlooking cost  X4of providing supported services.~y D6 {O%'ԍ Inputs Public Notice at 46. See also Inputs Further Notice at para. 46.~ Interested parties have proposed alternative methods to""y0*&&``\"  X4comply with this requirement.zD6 yOy'ԍ We note that the question of which residential and business locations should be included for purposes of estimating the forwardlooking cost of providing the supported services is distinct from the question of which  {O 'lines should be supported. See Universal Service Order, 12 FCC Rcd at 8829, paras. 9596 (declining to adopt the Joint Board's recommendation to restrict universal service highcost support to primary residential lines and singleline businesses).  X4150. ` ` AT&T, MCI, and Ameritech support the methodology devised by PNR, which is based upon the number of households in each Census Block, while BellSouth, GTE, SBC, USTA, and US West propose that we use a methodology based upon the number of housing  X4units in each Census Block.{&zD6 {O 'ԍ Ameritech Inputs Further Notice comments at 6; AT&T/MCI Inputs Further Notice comments at 78;  {O 'BellSouth Inputs Further Notice comments at B2; GTE Inputs Further Notice comments at 40; SBC Inputs  {OL 'Further Notice comments at 6; USTA Inputs Further Notice comments at 23; US West Inputs Further Notice comments at 4546. A household is an occupied residence, while housing units  Xv4include all residences, whether occupied or not.|vh D6 {O'ԍ These definitions reflect the Census Bureau's methodology for housing unit and household estimates.   {OY'See http://www.census.gov/population/methods/sthhmet.txt.  XH4251. ` ` In the Inputs Further Notice, we tentatively adopted the use of the PNR National Access Line Model, as proposed by AT&T and MCI, to estimate the number of  X 4customer locations within Census Blocks and wire centers.b} D6 yO'ԍ HAI Dec. 11, 1997 submission, Model Description at 21. b 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's demographic database; and U.S. Census Bureau estimates. PNR's model uses these sources in a series of steps to estimate the number of residential and business locations, and the number of access lines demanded at each  X4location.Y~T D6 {O'ԍ See Inputs Further Notice at Appendix B.Y The model makes these estimates for each Census Block, and for each wire center  X{4in the United States.`{D6 yO 'ԍ HAI Dec. 11, 1997 submission, Model Description at 21.` In addition, each customer location is associated with a particular wire  Xd4center.$dvD6 yO"'ԍ Customer locations in unserved areas, as reflected by BLR wire center boundaries, are not associated  {OS#'with particular wire centers. See Letter from Charles A. White, PNR, to Magalie Roman Salas, FCC, dated April 12, 1999. PNR has, however, taken steps to assign such customer locations to the nearest wire center.  {O$'PNR July 29 ex parte. We conclude that PNR's process for estimating the number of customer locations should be used for developing the customer location data. We also conclude that we should"Mb0*&&``x" use PNR's methodology for estimating the demand for service at each location, and for  X4allocating customer locations to wire centers.D6 {Ob'ԍ See Inputs Further Notice at Appendix B for a complete description of the PNR methodology for estimating the number of customer locations. 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.  X4352. ` ` PNR's process for estimating the number of customer locations results in an estimate of residential locations that 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. PNR's estimate of demand for both residential and business lines in each study area will also be greater than or equal to the number of access lines in the Automated Reporting and Management Information System (ARMIS) for that study area.  X 4453. ` ` The BCPM model relied on many of the same data sources as those used in PNR's National Access Line Model. For example, BCPM 3.1 used wire center data obtained  X 4from BLR and business line data obtained from PNR.h "D6 yO'ԍ BCPM April 30, 1998 documentation, Model Methodology at 2627.h In estimating the number of residential locations, however, the BCPM model used Census Bureau data that include household and housing unit counts from the 1990 Census, updated based upon 1995 Census Bureau 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.  X4554. ` ` A number of commenters contend that the total cost estimated by the model should include the cost of providing service to all possible customer locations, even if some  X4locations currently do not receive service.0\D6 {OR'ԍ BellSouth Inputs Further Notice at B2; GTE Inputs Further Notice at 40; SBC Inputs Further Notice  {O'comments at 6; USTA Inputs Further Notice comments at 23; US West Inputs Further Notice comments at 4546.0 Some commenters further contend that, if total cost is based on a smaller number of locations, support will not be sufficient to enable carriers to meet their carrieroflastresort obligations. These commenters argue that basing the estimate of residential locations on households instead of housing units will underestimate the  X4cost of building a network that can provide universal service.D6 {O"'ԍ BellSouth Inputs Further Notice comments at B2; GTE Inputs Further Notice comments at 40; PRTC  {O"'Inputs Further Notice comments at 5. They therefore assert that residential locations should be based on the number of housing units whether occupied or"|2 0*&&``"  X4unoccupied.A\D6 {Oy'ԍ See, e.g., BellSouth Inputs Further Notice at B2; GTE Inputs Further Notice at 40; SBC Inputs Further  {OC'Notice comments at 6; USTA Inputs Further Notice comments at 23; US West Inputs Further Notice comments at 4546.A These commenters contend that only this approach reflects the obligation to  X4provide service to any residence that may request it in the future.D6 {O'ԍ See, e.g., BellSouth Inputs Further Notice comments at B2; GTE Inputs Further Notice comments at 40;  {OP'US West Inputs Further Notice comments at 4546.  X4655. ` ` Some commenters also contend that the PNR National Access Line Model has  X4not been made adequately available for review.HD6 {O 'ԍ Bell Atlantic Inputs Further Notice comments at 1415; GTE Inputs Further Notice comments at 3738;  {Og 'Sprint Inputs Further Notice comments at 1314; US West Inputs Further Notice reply comments at 12. As noted above, the National Access Line Model is a multistep process used to develop customer location counts and demand and  Xv4associate those customer locations with Census Blocks and wire centers.vD6 yO'ԍ HAI has provided a complete description of the process by which PNR's National Access Line Model  {O'develops customer counts. See HAI Dec. 11, 1997, Model Description at 21. As a result, PNR contends that the National Access Line Model cannot be provided in a single, uniform  XH4format.^H D6 {O'ԍ PNR Inputs Further Notice reply comments at 2.^ The HAI sponsors have provided a description of the National Access Line Model  X14process in the HAI model documentation._1 D6 {Or'ԍ See HAI Dec. 11, 1997, Model Description at 21._ PNR has made the National Access Line Model process available for review through onsite examination and has provided more detailed explanation of the National Access Line Model upon request from interested parties. PNR  X 4notes that several parties have taken advantage of this opportunity._ "D6 {O'ԍ PNR Inputs Further Notice reply comments at 2._ PNR also notes that the  X 4National Access Line Model computer code is available for review onsite.` D6 {O:'ԍ PNR Inputs Further Notice reply comments at 23.` PNR also has  X 4filed with the Commission the complete output of the National Access Line Model process. FD6 yO'ԍ Letter from Charles White, PNR, to Magalie Roman Salas, FCC, dated October 6, 1999. In addition, Bell Atlantic and Sprint argue that the National Access Line Model produces line  X4counts that vary significantly from actual line counts.D6 {O#'ԍ Bell Atlantic Inputs Further Notice comments at 1415; Sprint Inputs Further Notice comments at 1314.  Xb4756. ` ` In adopting the PNR approach for developing customer location counts, we note that the synthesis model currently calculates the average cost per line by dividing the"Kh0*&&``" total cost of serving customer locations by the current number of lines. Because the current  X4number of lines is used in this average cost calculation, we agree with AT&T and MCI that the total cost should be determined by using the current number of customer locations. As AT&T and MCI note, "the key issue is the consistency of the numerator and denominator" in the average cost calculation. According to AT&T and MCI, other proposed approaches result in inconsistency because they use the highest possible cost in the numerator and divide by the lowest possible number of lines in the denominator, and therefore result in larger than  X_4necessary support levels.U_D6 {O'ԍ AT&T and MCI ex parte, Dec. 23, 1997.U AT&T and MCI also assert that, in order to be consistent, housing units must be used in the determination of total lines if they are used in the  X14determination of total costs.1ZD6 {O< 'ԍ Letter from Chris Frentrup, MCI, to Magalie Roman Salas, FCC, dated March 5, 1999 (MCI March 5 ex  {O 'parte). MCI points out that "[i]f used consistently in this manner, building to housing units as GTE proposes is unlikely to make any difference in cost per  X 4line."V D6 {Oj'ԍ MCI March 5 ex parte (Issues 1 and 2).V Although SBC advocates the use of housing units, it agrees that the number of lines resulting from this approach should also be used in the denominator of any cost per line  X 4calculation to prevent the distortion noted by AT&T and MCI.X HD6 {O'ԍ SBC Inputs Further Notice comments at 6.X We agree with AT&T and MCI that, as long as there is consistency in the development of total lines and total cost, it makes little difference whether households or housing units are used in determining cost per line. For the reasons discussed below, we believe that PNR's methodology based on households is less complex and more consistent with a forwardlooking methodology than housing units.  X44857. ` ` To the extent that the PNR methodology includes the cost of providing service to all currently served households, we conclude that this is consistent with a forwardlooking cost model, which is designed to estimate the cost of serving current demand. As noted by AT&T and MCI, 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  X4by the lowest possible denominator (the number of customers with telephones).UD6 {OL 'ԍ AT&T and MCI ex parte, Dec. 23, 1997.U  X4958. ` ` If we were to calculate the cost 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. The level and source of future demand, however, is uncertain. Future demand might include not only"7l 0*&&``" 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.  X4Given the uncertainty of future demand, we noted in the Inputs Further Notice that we are concerned that including such a highly speculative cost of future demand may not reflect forwardlooking cost and may perpetuate a system of implicit support. Ameritech and AT&T and MCI also note that adopting the proposed conservative fill factors will ensure sufficient  Xa4plant to deal with any customer churn created as a result of temporarily vacant households.aD6 {O'ԍ Ameritech Inputs Further Notice comments at 7; AT&T/MCI Inputs Further Notice comments at 8. See  {O 'infra section V for discussion of fill factors.  X34:59. ` ` In addition, we do not believe that including the cost of providing service to all housing units would necessarily promote universal service to unserved customers. 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 carrier would receive a windfall. We recognize that providing service to currently unserved customers in such circumstances is an important universal service goal  XM4and the Commission is addressing this issue more directly in another proceeding.V\M$D6 {O"'ԍ See FederalState Joint Board on Universal Service: Promoting Deployment and Subscribership in  {O'Unserved and Underserved Areas, Including Tribal and Insular Areas, Further Notice of Proposed Rulemaking, CC Docket No. 9645, FCC 99204 (rel. Sept. 3, 1999) at paras. 120121.V  X4;60. ` ` We also find that interested parties have been given a reasonable opportunity to review and understand the National Access Line Model process for developing customer counts. The HAI sponsors have documented the process by which the National Access Line Model derives customer location counts and PNR has made itself available to respond to inquiries from interested parties. The National Access Line Model is a commercially licensed product developed by PNR, and we do not find it unreasonable for PNR to place some restriction on its distribution to the public. In addition, we agree that the National Access Line Model is more correctly characterized as a process consisting of several steps, and therefore we find no practical alternative to onsite review. Even if it were possible for PNR to turn the National Access Line Model over to the public in a single format, we believe that this would be of limited utility without a detailed explanation of the entire process. We therefore conclude that PNR has made reasonable efforts to ensure that interested parties understand the underlying process by which the National Access Line Model develops customer counts and has made that process reasonably available to interested parties. In"H0*&&``" addition, unlike the case with PNR's geocode data points, PNR's road surrogate customer location points are available for review and comparison by interested parties.  X4<61. ` ` In response to Bell Atlantic and Sprint's concern regarding the line counts generated by the National Access Line Model, we note that the line count data proposed in  X4the Inputs Further Notice had been trued up by PNR to 1996 ARMIS line counts. We subsequently have modified those data to reflect the most currently available ARMIS data. Accordingly, the input values that we adopt in this Order will true up the line counts generated by the National Access Line Model to 1998 ARMIS line counts. While the  X34Commission has requested line count data from the nonrural LECs,3D6 {O 'ԍ See FederalState Joint Board on Universal Service, ForwardLooking Mechanism for High Cost Support  {Ov 'for NonRural LECs, Order, CC Docket Nos. 9645, 97160, DA 991406 (rel. July 19, 1999). no party has suggested, and we have not been able to discern, any feasible way of associating such data with wire centers used in the model. The Commission intends to continue to review this issue in addressing future refinements to the forwardlooking cost model.  X 4=62. ` ` In the Inputs Further Notice, we also noted that the accuracy of wire center  X 4boundaries is important in estimating the number of customer locations.X $D6 {O'ԍ Inputs Further Notice at para. 47.X PNR currently  X4uses BLR wire center information to estimate wire center boundaries.bD6 yO'ԍ HAI Dec. 11, 1997 submission, Model Description at 21. b As noted above, the BCPM model also uses BLR wire center boundaries, as does Stopwatch Maps in its road  Xf4surrogate customer location files.ifFD6 {O]'ԍ See Sprint Dec. 11, 1998 ex parte, attachment at 1.i A few commenters support the use of BLR wire center  XO4boundaries, noting widespread use by the model proponents.OD6 {O'ԍ AT&T/MCI Inputs Further Notice comments at 8; PNR Inputs Further Notice reply comments at 3. Others advocate the use of  X84actual wire center boundaries.8j D6 {OS'ԍ PRTC Inputs Further Notice comments at 6; SBC Inputs Further Notice comments at 6. These commenters acknowledge, however, that this information is generally considered confidential and may not be released publicly by the  X 4incumbent LEC.  D6 {O 'ԍ SBC Inputs Further Notice comments at 6; PNR Inputs Further Notice reply comments at 3. We conclude that the BLR wire center boundaries are the best available data that are open to inspection and that they provide a reasonably reliable estimation of wire center boundaries. We note that both the BCPM and HAI proponents have utilized the BLR wire center data in their respective models. While use of actual wire center boundaries may be preferable, we agree that such information is currently unavailable or proprietary. We therefore approve the use of the BLR wire center boundaries in the current customer location" 0*&&```" data set.  X'  V. OUTSIDE PLANT INPUT VALUES ׃  X' A.Introduction   Xv4>63.` ` In this section, we consider inputs to the model related to outside plant. The  X_4Universal Service Order's first criterion specifies that "[t]he technology assumed in the cost study or model must be the leastcost, most efficient, and reasonable technology for providing  X34the supported services that is currently being deployed."m3D6 {O 'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250.m Thus, while the model uses existing incumbent LEC wire center locations in designing outside plant, it does not  X 4necessarily reflect existing incumbent LEC loop plant. ZD6 {O'ԍ Inputs Further Notice at para. 11; Universal Service Order, 12 FCC Rcd at 8913, para. 250. Indeed, as the Commission stated in  X 4the Platform Order, "[e]xisting incumbent LEC plant is not likely to reflect forwardlooking  X 4technology or design choices."X\ D6 {Ov'ԍ Platform Order, 12 FCC Rcd at 21350, para. 66. "Instead, incumbent LECs' existing plant will tend to reflect choices made at a time when different technology options existed or when the relative cost of equipment  {O'to labor may have been different than it is today." Id.X The Universal Service Order's third criterion specifies that  X 4"[o]nly longrun forwardlooking costs may be included."m D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250.m We select input values consistent with these criteria.  X4?64.` ` As the Commission noted in the Platform Order, outside plant, or loop plant,  Xj4constitutes the largest portion of total network investment, particularly in rural areas.^jD6 {O'ԍ Platform Order, 13 FCC Rcd at 21335, para. 27.^ Outside plant investment includes the copper cables in the distribution plant and the copper and optical fiber cables in the feeder plant that connect the customers' premises to the central office. Cable costs include the material costs of the cable, as well as the costs of installing  X4the cable.4 D6 yO'ԍ As discussed below, cable installation costs for buried cable often are included with the structure costs.  X4@65.` ` Outside plant consists of a mix of aerial, underground, and buried cable. D6 yOU#'ԍ The phrase "plant mix" refers to the ratio of outside plant that is aerial, underground, or buried in a network or particular area. Aerial cable is strung between poles above ground. Underground cable is placed underground within conduits for added support and protection. Buried cable is placed underground but" 0*&&``" without any conduit. A significant portion of outside plant investment consists of the poles, trenches, conduits, and other structure that support or house the copper and fiber cables. In some cases, electric utilities, cable companies, and other telecommunications providers share structure with the LEC and, therefore, only a portion of the costs associated with that structure are borne by the LEC. Outside plant investment also includes the cost of the SAIs and DLCs that connect the feeder and distribution plant.  X_' B.Engineering Assumptions and Optimizing Routines   X14A66.` ` As noted in the Inputs Further Notice, the model determines outside plant investment based on certain cost minimization and engineering considerations that have  X 4associated input values.` D6 {O~ 'ԍ See Inputs Further Notice at paras. 5663.` In the Inputs Further Notice, we recognized that it was necessary to examine certain input values related to the engineering assumptions and optimization  X 4routines in the model that affect outside plant costs.R ZD6 {O'ԍ Inputs Further Notice at para. 56.R Specifically, we tentatively concluded that: (1) the optimization routine in the model should be fully activated; (2) the model should not use T1 feeder technology; and (3) the model should use rectilinear distances and a "road  X4factor" of one.ZD6 {O1'ԍ Inputs Further Notice at paras. 58, 6162.Z  Xf' ` ` 1. Optimization   X84B67.` ` When running the model, the user has the option of optimizing distribution  X!4plant routing via a minimum spanning tree algorithm discussed in the model documentation.!~D6 yOP'ԍ The model uses a minimum spanning tree algorithm based on the Prim algorithm. The model always  {O'optimizes feeder plant. See HCPM Dec. 15, 1998 documentation at 13. 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  X4minimizes annualized cost.]D6 yOe'ԍ  HCPM Dec. 15, 1998 documentation at 11.] The user 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. The user also has the option of using the optimization feature only in the lowest density zones.  Xi4C68.` ` In reaching our tentative conclusion that the model should be run with the optimization routine fully activated in all density zones, we recognized that using full"R!h 0*&&``"  X4optimization can substantially increase the model's run time.RD6 {Oy'ԍ Inputs Further Notice at para. 58.R We noted that a preliminary analysis of comparison runs with full optimization versus runs with no optimization indicated that, for clusters with line density greater than 500, the rule of thumb algorithm results in the  X4same or lower cost for nearly all clusters.QZZD6 {O'ԍ See Inputs Further Notice at para. 58 n. 135. Since, under full optimization, the model chooses the least cost of the full optimization algorithm or the rule of thumb algorithm, a comparison run as described above can show how well the full optimization performs as a function of density.Q Accordingly, we sought comment on whether an acceptable compromise to full optimization would be to set the optimization factor at "-p500,"  X4as described in the model documentation.|D6 {O 'ԍ See HCPM Dec. 15, 1998 documentation at 3031; see also Design History of HCPM, April 6, 1999 at http://www.fcc.gov/ccb/apd/hcpm.  X_4D69.` ` We adopt our tentative conclusion that the model should be run with the optimization routine fully activated in all density zones when the model is used to calculate the forwardlooking cost of providing the services supported by the federal mechanism. The  X 4first of the ten criteria pronounced by the Commission to ensure consistency in calculations of federal universal support specifies that "[t]he technology assumed in the cost study or model must be the leastcost, most efficient, and reasonable technology for providing the supported  X 4services that is currently being deployed."h D6 {O\'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250. h As we explained in the Inputs Further Notice, running the model with the optimization routine fully activated complies with this  X 4requirement.R h D6 {O'ԍ Inputs Further Notice at para. 58.R In contrast, running the model with the optimization routine disabled may result in costs that are significantly higher than with full optimization. The majority of  X{4commenters that address the optimization issue support the use of full optimization.N{ D6 {O&'ԍ  See e.g., AT&T and MCI Inputs Further Notice comments at 910; US West Inputs Further Notice  {O'comments at 21; SBC Inputs Further Notice comments at 7. We note that SBC supports full optimization so long as its application produces a significant difference in the results. As we explain, application of full optimization does produce a significant difference in the results. Moreover, SBC states that the optimization  {OJ'routine offers "the most cost effective design." Id.N GTE  Xd4opposes any implementation of optimization.dD6 {O!'ԍ GTE Inputs Further Notice comments at 3335; GTE Inputs Further Notice reply comments at 911.  X64E70.` ` We agree with AT&T and MCI and GTE that it is inappropriate to deviate"6"B0*&&``U"  X4from full optimization merely to minimize computer run time.VZD6 {Oy'ԍ AT&T and MCI Inputs Further Notice comments at 10; GTE Inputs Further Notice comments at 33. We note that although GTE opposes any implementation of optimization, GTE also specifically addressed whether the compromise to full optimization on which we sought comment was acceptable.V While the rule of thumb algorithm generally results in costs that are approximately the same as the spanning tree algorithm for dense clusters, for some dense clusters the spanning tree algorithm will result in lower costs. For this reason, we believe that any choice in maximum density clusters in which the minimum spanning tree algorithm is not applied may result in an arbitrary overestimate of costs for some clusters. Accordingly, running the model with full optimization is consistent with ensuring that the model uses the leastcost, most efficient, and reasonable distribution plant routings for providing the supported services.  X14F71.` ` As explained above, the model seeks to minimize costs by selecting the lower of the cost estimates from the spanning tree algorithm and the rule of thumb algorithm. Both GTE and US West challenge the selection of the routing that minimizes annualized cost on the basis of a comparison between an engineering rule of thumb and the spanning tree  X 4result. D6 {Op'ԍ US West Inputs Further Notice comments at 1821; GTE Inputs Further Notice comments at 3435. US West claims that use of the rule of thumb approach is inappropriate because combining it with the spanning tree analytical approach to determine the amount of needed  X 4plant biases the results downward and will produce inappropriately low results.M |D6 yO'ԍ US West contends that, because the optimization algorithm functions by choosing between the lowest value produced by the rule of thumb or the spanning tree, the optimization algorithm retains those instances where the rule of thumb underestimates the amount of plant needed while eliminating all estimates that exceed the more analytically derived results, thereby biasing the results downward. In order to remedy this flaw, US West recommends that the model be modified to consider only the minimum spanning tree results for distribution design.M ` `  Xy4G72.` ` We find that US West's concerns are misplaced. Contrary to US West's  Xb4characterization, the rule of thumb used in the model is not an averaging methodology.jb D6 {O'ԍ See US West Inputs Further Notice comments at 1821.j Instead, it is a methodology that determines a sufficient amount of investment to serve each customer in every cluster using a standardized approach to network design. This approach connects every populated microgrid cell to the SAI using routes which are placed along the vertical and horizontal boundaries of the microgrid cells constructed in the distribution  X4algorithm.  D6 yO&#'ԍ Because the optimization routine allows for the possibility of some, but not all possible junction nodes (also called Steiner nodes), it is possible that the "rule of thumb" can provide a feasible lower cost result than the optimization routine in certain cases. As explained in the model documentation, junction nodes can sometimes  yO~%'reduce the cost of constructing a communications network. HCPM Dec.15, 1998 documentation at 14. The ruleofthumb algorithm is somewhat similar in its functioning to the so"#n0*&&``w"ԫcalled pinetree methodology proposed by both the early HAI and BCPM models for building feeder plant. Thus, the rule of thumb provides an independent calculation of sufficient outside plant for each cluster. The minimum spanning tree algorithm connects drop terminal points to the SAI using a more sophisticated algorithm in which routes are not restricted to following the vertical and horizontal boundaries of microgrid cells. The algorithm "chooses" a path independently of the set route structure defined by the ruleofthumb,but still connects all drop terminals to the SAI. Since both the rule of thumb algorithm and the spanning tree algorithm use currently available technologies and generate investments that are sufficient to provide supported services, an approach which selects the minimum cost based on an evaluation of both of the algorithms is fully consistent with cost minimization  X 4principles./  D6 yO 'ԍ US West's recommendation that only the minimum spanning tree results be recognized would have us ignore accepted practices in cost minimization. Because it is not possible in the general case to solve for the optimal solution, it is accepted practice in cost minimization analysis to examine the results of various available alternative cost minimization methodologies and choose the lowest cost result, provided that each alternative meets the appropriate design standards. This is the same principle on which Branch and Bond algorithms work.  {O{'See e.g., Mark S. Daskin, Network and Discrete Location: Models, Algorithms, and Applications (1995). In so doing, the result that is chosen is the result that is closer to the least cost, while providing a sufficient amount of plant to provide the supported services. For these reasons, the optimization algorithm employed in the model produces results superior to those produced by the application of only a single cost minimization methodology. /  X 4H73.` ` We also disagree with GTE's assertion that the optimization routine should be disabled because it disproportionately affects lower density areas where universal service is  X 4needed most.V\ D6 yO 'ԍ GTE asserts that an analysis of GTE's service area in Oregon reveals that a majority of the cost impact  {O'occurs when the spanning tree algorithm optimizes clusters with less than 100 lines per square mile. GTE Inputs  {O'Further Notice reply comments at 11. V The task of the model is to estimate the cost of the leastcost, mostefficient network that is sufficient to provide the supported services. Moreover, we note that the model does not determine the level of highcost support amounts. We have taken steps in our  Xy4companion order to ensure that sufficient support is provided for rural and highcost areas.  XK4I74.` ` We also reject GTE's claim that the optimization routine does not work as  X44intended._4 D6 {O'ԍ GTE Inputs Further Notice reply comments at 11._ GTE bases this contention on the observation that in some instances when the optimization factor is increased from p100 to p200 (i.e. going from density zones less than or equal to 100 lines per square mile to density zones less than or equal to 200 lines per square mile), both loop investment and universal service requirements increase. This,"$P 0*&&``P"  X4according to GTE, would not happen if the optimization worked properly."D6 yOy'ԍ GTE also claims that there are numerous cases where the optimization routine has resulted in increased  {OA'costs at the wire center level. GTE Input Further Notice comments at 3435. Specifically, GTE contends that when the optimization logic is applied to clusters with fewer than 100 lines per square mile for GTE's Florida serving area, total monthly costs for eight wire centers were higher than without optimization.    X4J75.` ` We disagree. Optimizing the distribution plant is not synonymous with optimizing the entire network. Because the model's optimization routine optimizes distribution and feeder sequentially, and the starting point for the optimization of feeder plant is the distribution plant routing chosen, there are occasions when the optimal feeder plant will be more costly than it would be if distribution plant and feeder plant had been optimized simultaneously. In some cases, the lower distribution investment produced by the optimization routine may be offset by higher feeder investment, resulting in higher total  X14outside plant costs than produced by the rule of thumb algorithm.1D6 yO'ԍ This situation can occur because the minimum spanning tree algorithm may increase the distance of some customers in a cluster from the serving area interface in order to achieve lower overall costs through more efficient routing. In some cases, this increased distance might cause a cluster that fell within the maximum copper distance constraint under the rule of thumb algorithm to exceed that constraint. The increased cost of serving the cluster with the fiber feeder system could then increase total cost even though the optimization worked as intended in the distribution portion of the model.  Contrary to GTE's assertion, this phenomenon does not demonstrate that the optimization works improperly. To the contrary, it demonstrates that optimization occurs properly within the constraints of the model's design.  X 4K76.` ` Moreover, we conclude that such rare occurrences do not outweigh the benefits of the optimization routine. The magnitude of the difference between the network cost  X4produced by the optimization routine in these instances and the rule of thumb algorithm is de  X{4minimis. Furthermore, altering the model to optimize distribution investment and feeder investment simultaneously would greatly add to the complexity of the model.  X8' 2.` ` T1 Technology    X 4L77.` ` A user of the model also has the option of using T1 on copper technology as  X4an alternative to analog copper feeder or fiber feeder in certain circumstances.V* D6 {O 'ԍ See Inputs Further Notice at para. 59.V T1 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 T1 option is enabled, the optimizing routines in the model will choose the least cost feeder technology among three options: analog copper; T1  X4on copper; and fiber.] D6 yO&'ԍ HCPM Dec. 15, 1998 documentation at 10.] For serving clusters with loop distances below the maximum copper"%L 0*&&``" loop length, the model could choose among all three options; between 18,000 feet and the  X4fiber crossover point, which earlier versions o f the model set at 24,000 feet, the model could choose between fiber and T1, and above the fiber crossover point, the model would always use fiber. In the HAI model, T1 technology is used to serve very small outlier clusters in locations where the copper distribution cable would exceed 18,000 feet.   Xv4M78.` ` In the Inputs Further Notice, we tentatively concluded that the T1 option in  Xa4the model should not be used at this time.RaD6 {O'ԍ Inputs Further Notice at para. 61.R We noted that the only input values for T1 costs on the record were the HAI default values and tentatively found that, because the model and HAI model use T1 differently, it would be inappropriate to use the T1 technology in the  X 4model based on these input values.R ZD6 {O' 'ԍ Inputs Further Notice at para. 61.R We also noted that the BCPM sponsors and other LECs maintained that T1 was not a forwardlooking technology and therefore should not be used in  X 4the model.R D6 {O'ԍ  Inputs Further Notice at para. 59.R Other sources indicated that advanced technologies, such as HDSL, could be  X 4used to transmit information at T1 or higher rates.KZ ~D6 yO'ԍ HDSL (high data rate digital subscriber line) transmits 1.544 Mbps or 2.048 Mbps in bandwidths ranging from 80 kilohertz (kHz) to 240 kHz, rather than in a bandwidth of 1.5 megahertz (mHz) required for traditional  {O'T1 services. See www.adsl.com/general_tutorial.K We sought comment on this issue.R D6 {O('ԍ Inputs Further Notice at para. 60.R We also sought comment on the extent to which HDSL technology presently is being used to  X 4provide T1 service.R 2 D6 {O'ԍ Inputs Further Notice at para. 60.R   X{4N79.` ` We conclude that the T1 option should not be employed in the current version of the model. We agree with those commenters addressing this issue that traditional T1  XM4using repeaters at 6000 foot intervals is not a forwardlooking technology.DM D6 {O'ԍ See e.g., GTE Inputs Further Notice comments at 62; SBC Inputs Further Notice comments at 7; AT&T  {O'and MCI Inputs Further Notice comments at 11; AT&T and MCI Inputs Further Notice reply comments at 1213. We note that, notwithstanding their support for the decision to not use T1, AT&T and MCI encourage the Commission to modify the model to use T1 technology in the same manner as does the HAI model, i.e., as a distribution alternative where, after using a fiber fed integrated digital loop carrier to link a main cluster of customer locations with a serving wire center, outlying customer locations beyond 18,000 feet from the main cluster's center are served by copper T1 distribution loops. This recommendation, which would represent a  yO>$'platform change, will be considered in the upcoming proceeding on future changes to the model.  While HDSL and other DSL variants are forwardlooking technologies, we do not at this time have"6&0*&&``." sufficient information to determine appropriate input values for these technologies for use in the model. We conclude, therefore, that use of T1 in the optimization routine as an alternative to analog copper or digital fiber feeder for certain loops under 24,000 feet is not  X4appropriate at this time.#D6 yO4'ԍ SBC and GTE responded to our inquiry regarding the use and extent of advanced technologies to transmit information at T1 on higher rates. SBC maintains that it is not reasonable to expect that HDSL will be  {O'used on T1 technology. SBC Inputs Further Notice comments at 7. SBC explains that HDSL is being considered primarily for small pair gain (DLC) activation to meet specific customer needs or HICAP provisioning, and not for normal DLC activation. GTE maintains that HDSL can be and is used to provide 1.544 Megabit per second data rates over embedded copper plant, but its use is not an appropriate forward {O 'looking technology. GTE Inputs Further Notice comments at 62. GTE adds that predominant uses of HDSL are to provision "short fuse" 1.544 Mbps service requests and extend the life of the embedded copper network. In sum, SBC and GTE assert that, even if augmented by advanced technology such as HDSL, T1 is still not a forwardlooking technology.# Accordingly, the model will be run for universal service purposes with the T1 option disabled.   Xv' 3.` ` Distance Calculations and Road Factor    XH4 O80.` ` In the distribution and feeder computations within the model, costs for cable and structure are computed by multiplying the route distances by the cost per foot of the cable or the structure facility, which depends on capacity and terrain factors. Distances between  X 4any two points in the network are computed using either of two distance functions.TX d D6 yO'ԍ A rectilinear measurement computes the distance between two points by constructing a rectangle with the two points as opposite vertices and measuring the distance of two adjacent sides of the rectangle. The airline distance is the length of the diagonal line that directly connects the two points.T The model allows a separate road factor for each distance function, and every distance measurement made in the model is multiplied by the designated factor. Road factors could be computed by comparing average distances between geographic points along actual roads with distances computed using either of the two distance functions. Given sufficient data, these factors could be computed at highly disaggregated levels, such as the state, county, or individual wire center.   XK4P81.` ` In the Inputs Further Notice, we tentatively concluded that the model should use rectilinear distance in calculating outside plant distances, rather than airline distance, because rectilinear distance more accurately reflects the routing of telephone plant along roads  X4and other rights of way.S D6 {O="'ԍ Inputs Further Notice at para. 62. S We also tentatively concluded that the road factor in the model, which reflects the ratio between route distance and road distance, should be set equal to  X4one.RD6 {O%'ԍ Inputs Further Notice at para. 62.R In addition, we asked whether we should use airline miles with wire center specific"'0*&&``-"  X4road factors as an alternative to rectilinear distance.RD6 {Oy'ԍ Inputs Further Notice at para. 63.R   X4 Q82.` ` We reaffirm our tentative conclusion that the model should use rectilinear  X4distance rather than airline distance in calculating outside plant distances.ZD6 {O'ԍ As BellSouth attests, cable rarely follows a straightline "as the crow flies" route. BellSouth Inputs  {O'Further Notice comments, Attachment B at B3. As we noted in  X4the Inputs Further Notice, research suggests that, on average, rectilinear distance closely  X4approximates road distances.D6 {O 'ԍ Inputs Further Notice at para. 62 n. 142 citing Robert F. Love et al., Facilities Location Models and  {O 'Methods, Chapter 10 (1988). We agree with SBC that the calculation of outside plant distances should reflect the closest approximation to actual route conditions and road  Xa4distance.XaD6 {O$'ԍ SBC Inputs Further Notice comments at 7.X We also conclude that it would be inappropriate to use airline distance in the model without simultaneously developing a process for determining accurate road factors (which would be uniformly greater than or equal to 1 in this case). While the use of geographically disaggregated road factors may merit further investigation, we note that the absence of such a data set on the record at this time precludes our ability to adopt that  X 4approach.(X D6 yOC'ԍ We make no finding as to whether using airline miles with geographically disaggregated road factors, if available, would be a more appropriate method of calculating distances and intend to explore this issue further in the future of the model proceeding.( We therefore conclude that the model should use a rectilinear distance metric with a road factor of one.  X 4  X 4 C.Cable and Structure Costs   X{'  1.` ` Background   XM4R83.` ` The 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.  X4S84.` ` The model also uses structure cost tables that identify the per foot cost of loop structure by type (aerial, buried, or underground), loop segment (distribution or feeder), and"( 0*&&``"  X4terrain conditions (normal, soft rock, or hard rock) for each of the nine density zones.+XD6 yOy'ԍ The nine density zones (measured in terms of the number of lines per square mile) are as follows: (1) zero 4.99; (2) 5 99.99; (3) 100 199.99; (4) 200 649.99; (5) 650 849.99; (6) 850 2549.99; (7) 2550 4999.99; (8) 5000 9,999.99; (9) 10,000+.+  X4 T85.` ` After the 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 local loop typically is either 24 or 26gauge copper. Twentyfour gauge copper is thicker and, therefore, is expected to be more expensive than 26gauge copper. Twentyfour gauge copper also can carry signals greater distances without degradation than 26gauge copper and, therefore, is used in longer loops. In the model, if the maximum distance from the customer to the SAI is less than or equal to the copper gauge crossover point, then 26gauge cable is used. Feeder cable is either copper or fiber. Fiber is used for loops that exceed 18,000 feet,  X 4the maximum copper loop length permitted in the model, as determined in the Platform  X 4Order.a D6 {Op'ԍ Platform Order, 13 FCC Rcd at 2135253, para. 70.a When fiber is more cost effective, the model will use it to replace copper for loops that are shorter than 18,000 feet.  X4  U86.` ` In the 1997 Further Notice, the Commission sought comment on the input  X4values that the model should use for cable and installation costs.YzD6 {O'ԍ 1997 Further Notice, 12 FCC Rcd at 18544.Y The Commission specifically sought comment on the accuracy of the default values in the BCPM and HAI  XQ4models and encouraged companies to submit data to support their positions.3|Q D6 {O'ԍ 1997 Further Notice, 12 FCC Rcd at 18544. The BCPM and HAI default values are the default input values for the useradjustable input values in the BCPM and HAI models, respectively. Although we had chosen a model platform and were no longer considering adoption of the BCPM and HAI models, we continued to consider the BCPM and HAI default input values for the inputs to be used in the model. As we explained in the  {O0'Inputs Further Notice, for some inputs, these were the only values on the record. Inputs Further Notice at para. 51 n. 125. We also noted that although the BCPM model includes nationwide default values, the BCPM sponsors generally advocated the use of companyspecific values and, in some cases, proposed such values. 3 The Commission tentatively concluded that cable material and installation costs should be  X#4separately identified by both density zone and terrain type.Y#P D6 {O$"'ԍ 1997 Further Notice, 12 FCC Rcd at 18544.Y Because the Commission had received no documentation confirming that feeder and distribution cable installation costs should differ, the Commission tentatively concluded that the federal mechanism should adopt")0*&&``"  X4HAI's assumption that such costs are identical.YD6 {Oy'ԍ 1997 Further Notice, 12 FCC Rcd at 18544.Y  X4V87.` ` The Commission also sought comment and adopted tentative findings and  X4conclusions relating to the cost of outside plant structure in the 1997 Further Notice.YZD6 {O'ԍ 1997 Further Notice, 12 FCC Rcd at 18541.Y The Commission directed the HAI and BCPM sponsors to justify fully their default values for their mix of aerial, underground, and buried structure (i.e., plant mix) and sought comment on  Xx4the input values that will accurately reflect the impact of varying terrain conditions on costs.YxD6 {O 'ԍ 1997 Further Notice, 12 FCC Rcd at 18541.Y The Commission noted that "recent installations of outside structure may more closely meet  XJ4forwardlooking design criteria than do historical installations."ZJ~D6 {Oy'ԍ 1997 Further Notice, 12 FCC Rcd at 18541. Z The Commission found that an efficient carrier will vary its plant mix according to the population density of an area and tentatively concluded that the assignment of plant mix defined by the model should reflect  X 4both terrain factors and line density zones.Y D6 {O'ԍ 1997 Further Notice, 12 FCC Rcd at 18541.Y  X 4 W88.` ` In the Inputs Public Notice, the Bureau sought comment on the analysis of David Gabel and Scott Kennedy of data from the Rural Utilities Service (RUS) regarding  X 4cable and structure costs.{\ D6 {O'ԍ Inputs Public Notice at 7. See David Gabel and Scott Kennedy, Estimating the Cost of Switching and  {O'Cables Based on Publicly Available Data, National Regulatory Research Institute NRRI 9809, April 1998, (NRRI Study). Dr. Gabel and Mr. Kennedy are consultants for the Commission in this proceeding.{ On December 11, 1998, the Bureau held a public workshop  X4designed to elicit comment on the input values for materials costs.K D6 {O 'ԍ See Workshop Public Notice.K At the workshop, Dr. Gabel presented the methodology used by the Commission staff to derive preliminary values for cable costs for nonrural LECs based on his earlier analysis of the RUS data.  X84 X89.` ` We sought to supplement the record with respect to cable and structure costs by requesting additional data from LECs, including competitive LECs, in the form of a voluntary  X 4survey of structure and cable costs. X D6 yO#'ԍ After numerous discussions with industry during development of the survey, we distributed a final version on December 14, 1998, and requested responses by January 14, 1999. Ten companies eventually responded to the survey.} D6 yO'ԍ BellSouth, Ameritech, Pacific Bell, Nevada Bell, Southwestern Bell, Sprint, GTE, Aliant, SNET, and AT&T submitted data in response to the structure and cable cost survey. Several companies requested additional time to complete and submit their data. After receiving and reviewing the data, staff found that, despite detailed survey instructions, further discussions with a number of companies were required before we could assemble the data for comparison and analysis. In a number of cases, respondents filed revised data or clarified the data they  yOx'had submitted.}" *@0*&&``"Ԍ  X' 2.` ` Nationwide Values   X4Y90.` ` As discussed in this section, we adopt nationwide average values for estimating  X4cable and structure costs in the model rather than companyspecific values.@D6 {O 'ԍ See also supra paragraphs 2932 and infra paragraph 348 for further discussion of the adoption of nationwide average values for estimating costs and expenses in the model. In reaching this  X4conclusion, we reject the explicit or implicit assumption of most LEC commenters that companyspecific values, which reflect the costs of their embedded plant, are the best predictor of the forwardlooking cost of constructing the network investment predicted by the  XH4model. We find that, consistent with the Universal Services Order's third criterion, the forwardlooking cost of constructing a plant should reflect costs that an efficient carrier would  X 4incur, not the embedded cost of the facilities, functions, or elements of a carrier.m D6 {Og'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250.m We recognize that variability in historic costs among companies is due to a variety of factors and does not simply reflect how efficient or inefficient a firm is in providing the supported services. We reject arguments of the LECs, however, that we should capture this variability by using companyspecific data rather than nationwide average values in the model. We find that using companyspecific data for federal universal service support purposes would be administratively unmanageable and inappropriate. Moreover, we find that averages, rather than companyspecific data, are better predictors of the forwardlooking costs that should be supported by the federal highcost mechanism. Furthermore, we note that we are not attempting to identify any particular company's cost of providing the supported services. We are estimating the costs that an efficient provider would incur in providing the supported services.  X4Z91. ` ` AT&T and MCI agree that nationwide input values generally should be used  X4for the input values in the model.g, D6 {O!'ԍ AT&T and MCI Inputs Further Notice reply comments at 3.g AT&T and MCI concur with our tentative conclusion that the use of nationwide values is more consistent with the forwardlooking nature of the highcost model because it mitigates the rewards to less efficient companies. Additionally, AT&T and MCI maintain that developing separate inputs values on a statespecific, studyarea specific, or holding companyspecific basis is not practicable. As AT&T and MCI contend,"~+ 0*&&``" doing so would be costly and administratively burdensome.  X4 [92. ` ` While reliance on companyspecific data may be appropriate in other contexts, we find that for federal universal service support purposes it would be administratively unmanageable and inappropriate. The incumbent LECs argue that virtually all model inputs should be companyspecific and reflect their individual costs, typically by state or by study  Xv4area.^vD6 {O'ԍ See, e.g., Bell Atlantic Inputs Further Notice comments at 2021; BellSouth Inputs Further Notice  {O'comments, Attachment B at B16, B18; GTE Inputs Further Notice comments at 1011; Ameritech Inputs  {O 'Further Notice comments at 8; Sprint Inputs Further Notice comments at 37.  For example, GTE claims that the costs that an efficient carrier incurs to provide  X_4basic service vary among states and even among geographic areas within a state._D6 {O 'ԍ GTE Inputs Further Notice comments at 1011. See also BellSouth Inputs Further Notice comments,  yO 'Attachment A at A5, A8 A14. GTE asserts that the only way for the model to generate accurate estimates, i.e., estimates that reflect these differences, is to use companyspecific inputs rather than nationwide input values. As parties in this proceeding have noted, however, selecting inputs for use in the highcost model is a complex process. Selecting different values for each input for each of the fifty states, the District of Columbia, and Puerto Rico, or for each of the 94 nonrural study areas, would increase the Commission's administrative burden significantly. Unless we simply accept the data the companies provide us at face value, we would have to engage in a lengthy process of verifying the reasonableness of each company's data. For example, in a typical tariff investigation or state rate case, regulators examine company data for one time high or low costs, pro forma adjustments, and other exceptions and direct carriers to adjust their rates accordingly. Scrutinizing companyspecific data to identify such anomalies and to make the appropriate adjustments to the companyproposed input values to ensure that they are reasonable would be exceedingly time consuming and complicated given the number of inputs to the model.   X4\93. ` ` Where possible, we have tried to account for variations in costs by objective means. As explained below, the model reflects differences in structure costs by using different values for the type of plant, the density zone, and geological conditions. As  X4discussed below, we sought comment in the Inputs Further Notice on alternatives to nationwide plant mix values, but the algorithms on the record produce biased results. We continue to believe that varying plant mix by state, study area, or region of the country may more accurately reflect variations in forwardlooking costs and intend to seek further comment on this issue in the future of the model proceeding.    X ' 3.` ` Preliminary Cable Cost Issues  ",H0*&&``"Ԍ X4]94. ` ` Use of 24gauge and 26gauge Copper. In the Inputs Further Notice, we tentatively concluded that the model should use both 24gauge and 26gauge copper in all  X4available pairsizes.RD6 {OM'ԍ Inputs Further Notice at para. 65.R We based our tentative conclusion on a preliminary analysis of the results of the structure and cable cost survey, in which it appeared that a significant amount of 24gauge copper cable in larger pair sizes currently is being deployed. We also noted that, while HAI default values assume that all copper cable below 400 pairs in size is 24gauge and all copper cable of 400 pairs and larger is 26gauge, the BCPM default values include  Xa4separate costs for 24 and 26gauge copper of all sizes.aZD6 {Ol 'ԍ Inputs Further Notice at para. 65 n. 145 citing HAI Inputs Portfolio at 20.   X34^95.` ` We conclude that the model should use both 24gauge and 26gauge copper in all available pair sizes. No commenter refuted our observation that a significant amount of 24gauge copper cable in larger pair sizes currently is being deployed. Those commenters  X 4addressing this issue concur with our tentative conclusion.! D6 {O'ԍ  See e.g., AT&T and MCI Inputs Further Notice comments at 13; GTE Inputs Further Notice comments  {OU'at 4748; Sprint Inputs Further Notice comments at 1718; SBC Inputs Further Notice comments at 78. ! SBC confirms our analysis of  X 4the survey data and notes that it deploys 24gauge cable in sizes from 25 to 2400 pairs.X HD6 {O'ԍ SBC Inputs Further Notice comments at 8.X GTE explains, and we agree, that the model should use both 24gauge and 26gauge copper in all available pair sizes in order to stay within transmission guidelines when modeling 18  X4kilofoot loops.4ZD6 {O' GTE Inputs Further Notice comments at 47. GTE asserts that it believes that, even for 12 kilofoot loops, a significant amount of 24gauge cable will continue to be deployed in the network because of certain costsaving reasons related to its larger diameter.4   Xd4_96. ` `  Distinguishing Feeder and Distribution Cable Costs. In the Inputs Further  XO4Notice, we reaffirmed the Commission's tentative conclusion in the 1997 Further Notice that the same input values should be used for copper cable whether it is used in feeder or in  X#4distribution plant.R# D6 {O'ԍ Inputs Further Notice at para. 66.R We adopt this tentative conclusion. Those commenters addressing this  X 4issue agree with our tentative conclusion.  D6 {OK"'ԍ  See e.g., GTE Inputs Further Notice comments at 48; Sprint Inputs Further Notice comments at 18; SBC  {O#'Inputs Further Notice comments at 8. GTE contends that it is both unnecessary and" -0*&&``"  X4inappropriate to have different costs for feeder and distribution cable material.ZZD6 {Oy'ԍ GTE Inputs Further Notice comments at 47. See also SBC Inputs Further Notice comments at 8. SBC contends that the same input values should be used as long as density values, which reflect costs differences in varying degrees of urban and suburban construction, are properly reflected.Z GTE explains that, although quantities of material and labor related to cable size may differ  X4between feeder and distribution, the unit costs for each remain the same._D6 {Om'ԍ GTE Inputs Further Notice comments at 47._ Similarly, Sprint agrees that the material cost of cable is the same whether it is used for distribution or  X4feeder.WZ|D6 {O 'ԍ Sprint Inputs Further Notice comments at 17. Sprint contends however that in actual practice, splicing costs may be somewhat higher for distribution cable due to such factors as more frequent tapering of cable sizes and branch splices, but this difference is not material for modeling purposes.W In sum, we find that the record demonstrates that it is appropriate to use the same input values for copper cable whether it is used in feeder or in distribution plant.   X_4  `97. ` ` Distinguishing Underground, Buried, and Aerial Installation Costs. In the  XH4Inputs Further Notice, we also tentatively concluded that we should adopt separate input  X34values for the cost of aerial, underground, and buried cable.R3D6 {O'ԍ Inputs Further Notice at para. 68.R We reached this tentative conclusion on the basis of our analysis of cable cost data supplied to us in response to data  X 4requests and through ex parte presentations. We found considerable differences in the per foot cost of cable, depending upon whether the cable was strung on poles, pulled through  X 4conduit, or buried.   X 4a98.` ` We conclude that separate input values for the cost of aerial, underground, and buried cable should be adopted. Those commenters addressing this issue confirm our analysis  X}4of the data, i.e., that there are differences, some significant, in placement costs for aerial,  Xf4underground, and buried cable..f0 D6 {OG'ԍ  See e.g., GTE Inputs Further Notice comments at 48; SBC Inputs Further Notice comments at 8; Sprint  {O'Inputs Further Notice comments at 18. See also AT&T and MCI Inputs Further Notice comments at 13.. GTE explains that, from a material perspective, the cable  XO4may have different protective sheathing, depending on construction applications.YO D6 {O'ԍ GTE Inputs Further Notice comments at 48.Y GTE adds  X84that labor costs also differ depending on the type of placement._8D6 {O"'ԍ GTE Inputs Further Notice comments at 48._ Both SBC and Sprint  X!4identify the cost of labor as varying significantly depending upon the type of placement.!D6 {O$'ԍ SBC Inputs Further Notice comments at 8; Sprint Inputs Further Notice comments at 18. Based upon a review of the record in this proceeding, we conclude that separate input values" .B0*&&``6" for the cost of aerial, underground, and buried cable are, therefore, warranted.   X4b99.` ` Deployment of Digital Lines. We also conclude that two inputs, "pct_DS1" and "pct_1sa", should be modified to provide more accurate deployment of digital lines in the distribution plant. The model can deploy a portion of distribution plant on digital DS1 circuits by specifying these two user adjustable inputs. The input "pct_DS1" determines the percentage of switched business traffic carried on DS1 circuits, and the input "pct_1sa" determines the percentage of special access lines carried on DS1 circuits. Previously, we used default values for the inputs "pct_DS1" and "pct_1sa." We now adopt more accurate values for these inputs using 1998 line count data, following the methodology described below.  X 4c100.` ` Initially the model determines the number of special access lines from a "LineCount" table in the database "hcpm.mdb," which provides for each wire center the number of residential lines, business lines, special access lines, public lines, and single  X 4business lines.v D6 yO7'ԍ By model convention, business lines are reported as switched business lines.v The Commission required incumbent LECs to provide line counts for  X 4business switched and nonswitched access lines on a voice equivalent basis XD6 yO'ԍ For example, DS1 service provides 24 voice equivalent channels using two copper pairs. and on a  X4facilities basis.1^D6 {O)'ԍ See FederalState Joint Board on Universal Service, ForwardLooking Mechanism for High Cost Support  {O'for NonRural LECs, Order, CC Docket Nos. 9645, 97160, DA 991406 (rel. July 19, 1999) (1999 Data  {O'Request). 1 Upon receipt of those filings, we determined industry totals for each of the  Xy4line count items requested.zZyD6 yO8'ԍ For these line count totals, we only use data from the responses that we found to be consistent with the  {O'definitions prescribed in the 1999 Data Request. Submissions in which companies reported more facilities than channels are inconsistent with those definitions and do not reflect current industry practice.z By applying the model's engineering conventions to the totals, the model determines the percentage of switched and nonswitched lines provided as DS1type  XK4service.K0 D6 yO,'ԍ We note that only DS0 or DS1 service is provided under the model's conventions. The model does not allow for the deployment of DS2 or DS3 services. Thus, using the channel and facility counts submitted in response to the 1999 Data  X64Request, it is possible to determine the "pct_DS1" input value using the following formula:  X!4(1pct_DS1)*channels + pct_DS1*channels/12 = facilities.r! D6 yOZ!'ԍ This equation is applied separately for switched and nonswitched lines.r A similar calculation is performed to solve for the "pct_1sa" input value. For both switched business and special access lines, the number of digital lines is then determined by multiplying the respective line count by the input value "pct_DS1" or "pct_1sa." Since 24 communications channels can be carried by two pairs of copper wires, the number of copper cables required to carry digital traffic is computed by dividing the number of digital channels by 12. These percentages are"/0*&&``\" used to adjust the wire center cable requirements by reducing the facilities needed to serve multiline business and special access customers.  X4  4.` ` Cost Per Foot of Cable  X' ` ` a.  Background  X_4d101.` ` In the Inputs Further Notice, we tentatively concluded that we should use, with  XJ4certain modifications, the estimates in the NRRI Study, Estimating the Cost of Switching and  X54Cables Based on Publicly Available Data, for the perfoot cost of aerial, underground, and  X 4buried 24gauge copper cable. D6 {O 'ԍ  Inputs Further Notice at para. 72; See also Inputs Further Notice at 77, 8283. As noted in paragraph 88  {Oc 'supra, this study provides a methodology for estimating cable and structure costs.  Concomitantly, we tentatively concluded that we should use, with certain modifications, the estimates in the NRRI Study for the perfoot cost of aerial,  X 4underground, and buried fiber cable.a $D6 {O'ԍ Inputs Further Notice at paras. 90, 92, 94.a  X 4e102. ` ` In reaching these conclusions, we rejected the default input values for cable costs provided by both the HAI and BCPM sponsors which are based upon the opinions of their respective experts, because they lacked additional support that would have enabled us to  X4substantiate those opinions.YD6 {O'ԍ Inputs Further Notice at para. 69. Y We also noted that we had received cable cost data from a number of LECs, including data received in response to the structure and cable cost survey,  XQ4and were in the process of scrutinizing it.XQHD6 {OJ'ԍ Inputs Further Notice at para. 69.X  X#4f103.` ` The HAI sponsors supported using the publicly available RUS data in the  X 4NRRI Study to estimate cable costs and structure costs. D6 {O'ԍ See Inputs Further Notice at para. 71 n. 152 citing Letter from Chris Frentrup, MCI Worldcom, to  {Oa'Magalie Roman Salas, FCC, dated Feb. 9, 1999 (MCI Feb. 9, 1999 ex parte). In contrast, Sprint questioned the reliability and suitability of these data, and urged us instead to use the cable cost data  X4provided by incumbent LECs.6 D6 {O!'ԍ  See Inputs Further Notice at para. 71 n. 153 citing Letter from Pete Sywenki, Sprint, to Magalie Roman  {O"'Salas, FCC, dated Jan 29, 1999 (Sprint Jan. 29, 1999 ex parte). Sprint pointed out that the RUS data only reflect  X4information from the two lowest density zones. D6 {O %'ԍ  See Inputs Further Notice at para 71 n. 154 citing Sprint Jan. 29, 1999 ex parte at 89. Sprint explained that because longer loops are used in sparsely populated areas, lowergauge copper often is used. We explained that"0$0*&&``" Sprint had mischaracterized the analysis of the RUS data in the NRRI Study. We noted for example, that Sprint challenged 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  X4excluded from Gabel and Kennedy's regression analysis.D6 {O4'ԍ Inputs Further Notice at para. 73 n. 156 citing Sprint Jan. 29 ex parte, Attachment at 5. Similarly, we found that Sprint's complaint that Gabel and Kennedy do not analyze separately the components of total cable costs, labor and material, overlooked the fact that Gabel and Kennedy's regression analysis is  Xv4designed to explain the variation in total costs.vZD6 {O 'ԍ Inputs Further Notice at para. 73 n. 157 citing Sprint Jan. 29 ex parte, Attachment at 7.  XH4g104. ` ` Moreover, in reaching our tentative conclusion to use the NRRI Study and the underlying data from the two lowest density zones, i.e., rural areas, to estimate cable costs for nonrural LECs, we noted that none of the parties proposed cable cost values that vary by density zones. Nor did the models considered by the Commission have the capability of  X 4varying cable costs by density zones.R D6 {O'ԍ  Inputs Further Notice at para. 73.R  X '` ` b. Discussion  X4h105.` ` We affirm our tentative conclusion that we should use, with certain modifications as described more fully below, the estimates in the NRRI Study for the perfoot cost of aerial, underground, and buried 24gauge copper cable and for the perfoot cost of aerial, underground, and buried fiber cable. We conclude that, on balance, these estimates, as  X44modified in the Inputs Further Notice, and further adjusted herein, are the most reasonable estimates of the perfoot cost of aerial, underground, and buried 24gauge copper cable and fiber cable on the record before us. In reaching this conclusion, we reject, for the reasons enumerated below, the arguments of those commenters who contend that we should use companyspecific data to develop the inputs for the perfoot cost of cable to be used in the  X4model. ~D6 {O'ԍ See e.g., Bell Atlantic Inputs Further Notice comments at 18; GTE Inputs Further Notice comments at  {O'48; BellSouth Inputs Further Notice comments, Attachment B at B7 B11.   X4i106.` ` Companyspecific data. As we discussed above, we have determined to use  X~4nationwide average input values for estimating outside plant costs.\~D6 {O #'ԍ  See supra paragraph 2932 and 9093. \ In reaching this conclusion, we determined that the use of companyspecific inputs was inappropriate because of the difficulty in verifying the reasonableness of each company's data, among other reasons. We have examined cable cost and structure cost data received from a number of nonrural"91l 0*&&``" LECs, as well as AT&T, in response to the structure and cable cost survey and through a  X4series of ex parte filings. In addition, we have examined additional companyspecific data submitted by certain parties with their comments. As discussed more fully below, we  X4conclude that these data are not sufficiently reliable to use to estimate the nationwide input  X4values for cable costs or structure costs to be used in the model.D6 yO'ԍ The following discussion reaches conclusions with regard to the use of companyspecific data in the estimation of cable costs inputs. Such information was received initially, in conjunction with structure costs data, in response to our survey on cable and structure costs. Because we find that the data for cable costs and structure costs suffers from the same deficiencies, we also reach conclusions with regard to the use of such data in the estimation of structure cost inputs.   Xx4j107.` ` We conclude that the cable cost and structure cost data received in response to  Xa4the structure and cable cost survey, in the ex parte filings, and in the comments are not verifiable. We find that with regard to the survey data, notwithstanding our request, most respondents did not trace the costs submitted in response to the survey from dollar amounts set forth in contracts by providing copies of these contracts and all of the interim calculations  X 4for a single project or a randomly selected central office. With regard to the ex parte data and data submitted with the comments, we find that, because most respondents did not document in sufficient detail the methodology, calculations, assumptions, and other data used to develop the costs they submitted, nor did they submit contracts or invoices setting forth in  X 4detail the cable and structure costs they incurred, these data cannot be substantiated.9Z xD6 yO'ԍ In reaching this conclusion we also take note of AT&T and MCI's inability to link the incumbents LECs  {O'actual contract costs and the data they submitted to the Commission. AT&T and MCI Inputs Further Notice comments at 15 (Proprietary Version). 9 Moreover, we note that the structure and cable costs reported in the survey by some parties  X4differ significantly from those reported by the same parties in the ex parte filings. These differences are not explained, and render those sets of data unreliable.  X<4k108.` ` We find this lack of backup information particularly unsettling given the magnitude of certain of the costs reported. We agree with AT&T and MCI that the cable  X4installation costs submitted by the incumbent LECs appear to be high.wD6 {OY'ԍ AT&T and MCI Input Further Notice comments at 15 (Proprietary Version).w We also agree with AT&T and MCI that this is because the loading factors employed in calculating these costs appear to be overstated. Because of the lack of backup information to explain these loading costs, however, there is no evidence on the record to controvert our initial assessment. Accordingly, the level of these costs remains suspect.  X4l109.` ` Moreover, we find additional deficiencies beyond the critical lack of  Xm4substantiating data, impugning the reliability of the LEC survey data and the ex parte data we  XX4have received. As discussed above, the task of the model is to calculate forwardlooking"X2, 0*&&``[" costs of constructing a wireline local telephone network. To that end, the survey directed respondents to submit cable and structure costs for growth projects for which expenditures  X4were at least $50,000.aD6 {OK'ԍ  Inputs Further Notice, Appendix C, section III.C.a We believed that such projects would best reflect the costs that a LEC would incur today to install cable if it were to construct a local telephone network using current technology. In contrast, absent from the data would be costs associated with maintenance or projects of smaller scale which do not represent the costs of installing cable during such construction using current technology. Thus, the data would capture the economies of scale enjoyed on large projects which, should result in lower cable costs on a perfoot basis. Notwithstanding the survey directions, several of the respondents submitted data representing projects that were not growth projects or projects for which expenditures were less than the $50,000 minimum we established.  X 4m110.` ` Conversely, some respondents included costs that should have been excluded under the definitions employed in the survey. For example, some respondents included costs for terminating structures, such as crossconnect boxes, in the cable costs they reported. Similarly, some respondents reported underground structure costs on a "per duct foot" basis contrary to the instructions set forth in the survey directing that such costs be reported on a "per foot" basis. We find that these inconsistencies render the use of the survey data  Xb4inappropriate.  X44n111.` ` In sum, we find that certain of the concerns we identified with regard to using companyspecific data, rather than nationwide average inputs for model inputs, have been borne out in our review of the cable cost and structure cost data we have reviewed. Specifically, we find that we are unable to verify the reasonableness of such data. Accordingly, we find that we are unable to use the companyspecific data we have received for the estimation of cable cost and structure cost inputs for the model.  X4o112.` ` In reaching this conclusion, we reject the contention that the inability to link the costs submitted in response to the cable and structure cost survey to contracts is irrelevant  Xe4because the survey request was not intended to create such a trail._eZD6 {Op'ԍ GTE Inputs Further Notice reply comments at 27._ This claim ignores the fact that the reasonableness of the survey data was placed into question by the presence of data received on the record that was inconsistent with the survey data. For this reason, as GTE attests, we attempted to create such a trail by requesting contracts and other supporting data in an effort to verify the reasonableness of the companyspecific data received in  X4response to the survey as well as in ex parte filings.D6 yO$'ԍ As GTE explains in its comments, GTE submitted additional information as a followup to our original request. GTE submitted such information in response to a request from the Bureau. "3D0*&&``"Ԍ X4ԙp113.` ` Methodology. As we explained in the Inputs Further Notice, our tentative decision to rely on the NRRI Study was predicated on our inability to substantiate the default  X4input values for cable costs and structure costs provided by the HAI and BCPM sponsors.'\D6 {OM'ԍ Inputs Further Notice at paras. 6974, 105. As noted above, we had received data in response to the  {O'cable and structure cost survey and, at the time of the Inputs Further Notice, were in the process of scrutinizing it. ' For that reason, we tentatively concluded, in the absence of more reliable evidence of cable and structure costs for nonrural LECs, to use estimates in Gabel and Kennedy's analysis of RUS data, subject to certain modifications, to estimate cable and structure costs for nonrural LECs. As we explained, Gabel and Kennedy first developed a data base of raw data from contracts for construction related to the extension of service into new areas, and reconstruction of existing exchanges, by ruralLECs financed by the RUS. Gabel and Kennedy then performed regression analyses, using data from the HAI model on line counts and rock, soil, and water conditions for the geographic region in which each company in the database  X 4operates to estimate cable and structure costs.A D6 yO'ԍ NRRI Study at 3436. A Regression analysis is a standard method used to study the dependence of one variable, the dependent variable, on one or more other variables, the explanatory variables. It is used to predict or forecast the mean value of the  X 4dependent variable on the basis of known or expected values of the explanatory variables. |D6 {O'ԍ For a discussion of regression analysis, See William H. Greene, Econometric Analysis (1990).  X4q114.` ` Those commenters advocating the use of companyspecific data provide a litany of alleged weaknesses and flaws in the NRRI Study, and the modifications we proposed, to  Xd4discredit its use to estimate the input values for cable costs and structure costs. In sum, they argue that the overall approach we proposed is unsuitable for estimating the cable and structure costs of nonrural LECs and generally leads to estimates which understate actual  X4forwardlooking costs. &D6 {O'ԍ  See e.g., GTE Inputs Further Notice comments at 1333; Bell Atlantic Inputs Further Notice comments  {O'at 1519; BellSouth Inputs Further Notice comments, Attachment A at A2 A5, Attachment B at B1 B14;  {Or'US West Inputs Further Notice comments, Attachment A at 229; Sprint Inputs Further Notice comments at 57, 1733.  As discussed below, we find the contentions in support of this claim unpersuasive. Significantly, we note that these commenters provide no evidence that substantiates the reasonableness of the companyspecific cable costs and structure costs submitted on the record to permit their use as an alternative in the estimation of cable and  X4structure cost inputs to be used in the model. " D6 yOp#'ԍ As discussed in more detail below, we have relied on contract data in the estimation of input values for  {O8$'the costs of DLCs and ex parte data in the estimation of input values for the costs of SAIs. As explained in paragraphs 253254 and 274275, such data is the only reliable data available on the record for the determination of such costs.  "4 0*&&``1"Ԍ X4ԙr115.` ` For similar reasons, we reject AT&T and MCI's recommendation that we rely on the RUS data to develop cost estimates for the material cost of cable and then adopt "reasonable" values for the costs of cable placing, splicing, and engineering based on the  X4expert opinions submitted by AT&T and MCI in this proceeding.e D6 {O4'ԍ AT&T and MCI Inputs Further Notice comments at 1516.e We find that the expert opinions on which AT&T and MCI's proposed methodology relies lack additional support that would permit us to substantiate those opinions. Moreover, as discussed in more detail below, we reject AT&T and MCI's contentions, often analogous to those raised by the nonrural LECs, that the approach we proposed to estimate cable and structure costs is flawed in certain respects.  X 4 s116.` ` We reject the contentions of the commenters, either express or implied, that it is inappropriate to employ the NRRI Study because the RUS data set on which it relies is not a sufficiently reliable data source for structure and cable costs. We find that the RUS data set is a reasonably reliable source of absolute cable costs and structure costs, and more reliable and verifiable than the companyspecific data we have reviewed. As explained in the NRRI Study, and noted above, the RUS data reflect contract costs for construction related to the extension into new areas, and reconstruction of existing exchanges, by rural LECs financed by  Xy4the RUS.; yZD6 yO'ԍ NRRI Study at 2. ; Thus, the RUS data reflect actual costs derived from contracts between LECs and  Xb4vendors. These costs are not estimates, but actual costs. Nor do they reflect only the opinions of outside plant engineers. In sum, we conclude that these are verifiable data.  X4t117.` ` We also note that the RUS data reflect the costs from 171 contracts covering  X457 companies operating in 27 states adjusted to 1997 dollars.: D6 yO'ԍ NRRI Study at 2.: These companies operate in  X4areas that have different terrain, weather, and density characteristics. This fact makes the RUS data sample suitable for econometric analysis. Moreover, we find that, because the costs are for construction that must abide by the engineering standards established by the RUS, these data are consistent. We note also that the imposition of consistent engineering requirements mitigate the impact of any inefficiencies or inferior technologies that may otherwise be reflected in the data.  XN4u118.` ` Finally, as noted above, the RUS data reflect costs for additions to existing plant or new construction. The use of such costs is consistent with the objective of the model to identify the cost today of building an entire network using current technology.  X4v119.` ` In reaching our conclusion to use the NRRI Study and thus the underlying RUS data, we have considered and rejected the contentions of the commenters that the RUS data"5z 0*&&``" set is flawed thereby rendering use of the NRRI Study inappropriate. GTE claims that because certain highcost observations were removed from the RUS data, the NRRI Study's results are unrepresentative of rural companies' costs, and are even less representative of non X4rural companies' costs.\D6 {O4'ԍ GTE Inputs Further Notice comments at 1516.\ We disagree. Gabel and Kennedy omitted data reflecting certain contracts from the RUS data they used to develop cost estimates because estimates produced  X4using the data were inconsistent with the values of such estimates suggested by a priori  Xx4reasoning or evidence.DxZD6 yO 'ԍ NRRI Study at 3740.D For example, they excluded certain observations from the buried copper and structure regression analysis because buried copper cable and structure estimates obtained from this analysis would otherwise be higher in low density areas than in higher density areas. Such a result is contrary to the information contained in the more than 1000 observations reflected in the data from which Gabel and Kennedy developed their buried copper cable and structure regression equation. Thus, removing the observations does not render the remaining data set less representative of rural companies' costs or, as adjusted below, the estimates of the costs of nonrural companies. Moreover, we note that the evidence supplied on the record in this proceeding demonstrates that structure costs increase as population density increases. Thus, we find that the RUS data set is not flawed as GTE contends. We conclude that the removal of certain high cost observations was reasonable.  Xd4w120.` ` We also disagree with GTE's and Bell Atlantic's assertion that the NRRI Study is flawed because the RUS company contracts do not reflect actual unit costs for work  X64performed, but rather the total cost for a project.6D6 {O'ԍ GTE Inputs Further Notice comments at 1719; Bell Atlantic Inputs Further Notice comments at 16, Attachment C at 9. Both commenters claim that this alleged failure results in unexplained variations in the RUS data which undermine the validity of the estimates produced. Contrary to GTE's and Bell Atlantic's contention, the contracts from which Gabel and Kennedy developed their data base for developing structure and cable costs  X4do set forth per unit costs for materials and per unit costs for specific labor tasks.LDD6 yO'ԍ NRRI Study at 89 and 6773.L  X4x121.` ` We also disagree with AT&T and MCI's claim that the RUS data are defective  X4because they consist of primarily small cables.bD6 {O"'ԍ AT&T and MCI Inputs Further Notice comments at 14.b AT&T and MCI claim that 74 percent of the RUS data are for cables of 50 pairs or less, and 95 percent are for cable sizes of 200 pairs or less. As a result, AT&T and MCI contend that the RUS data are inaccurate, especially for cable sizes above 200 pairs. We disagree with AT&T and MCI's analysis. We note that, for the buried copper cable and structure regression equations we proposed and adopt,"96f 0*&&``" approximately 39 percent of the observations are for cable sizes of 50 pairs or less, and approximately 76 percent are for 200 pairs or less. For the underground copper cable regression equation we proposed and adopt, approximately 10 percent of the observations are for cable sizes of 50 pairs or less, and approximately 33 percent are for 200 pairs or less. For the aerial copper cable regression equation we proposed and adopt, approximately 40 percent of the observations are for cable sizes of 50 pairs or less, and approximately 76 percent are for 200 pairs or less. Thus, the proportion of the observations reflected in the copper cable cost estimates we adopt are significantly greater for relatively large cables than what AT&T and MCI contend.  X 4y122.` ` Finally, we reject the contention that it is inappropriate to use the NRRI Study because the RUS data base is not designed for the purpose of developing input values for the  X 4model. D6 {Oe 'ԍ See e.g., Bell Atlantic Input Further Notice comments at 16, Attachment C at 9. In the NRRI Study, Gabel and Kennedy explain that they began developing the data base as an outgrowth of the Commission's January 1997 workshop on cost proxy models when it became apparent that costs used as inputs in such models should be able to be validated by regulatory commissions. For this reason, they prepared data that is in the public  X4domain to provide independent estimates of structure and cable costs.<ZD6 yO'ԍ NRRI Study at 12.<  Xb4z123.` ` We also find unpersuasive the contention that there are econometric flaws in  XK4the NRRI Study which render it unsuitable for developing input values.KD6 {O'ԍ  See e.g., GTE Inputs Further Notice comments at 1922; Bell Atlantic Inputs Further Notice comments at 1617, Attachment C at 1314. We disagree with the contentions of several commenters that the structure cost and cable cost regression equations that we develop from the RUS data are flawed because they are based on a  X4relatively small number of observations.DD6 {O'ԍ See e.g., GTE Inputs Further Notice comments at 15; Ameritech Inputs Further Notice comments at 26;  {O'AT&T and MCI Inputs Further Notice comments at 14. As a general rule of thumb, in order to obtain reliable estimates for the intercept and the slope coefficients in a regression equation, the number of observations on which the regression is based should be at least 10 times the  X4number of independent variables in the regression equation.D6 {O!'#X\  P6G;ɒP#э Richard W. Madsen and Melvin L. Moeschberger, Statistical Concepts with Applications to Business and  {O!'Economics, 490 (2nd Edition 1986). Ameritech claims that the sample size used to estimate the costs of buried placement is too small because it contains  X4only 26 observations in density zone one._ D6 {O@%'ԍ Ameritech Inputs Further Notice comments at 16._ Ameritech's criticism ignores the fact that we"7 0*&&``" use a single regression equation to estimate buried copper cable and structure costs for density zones one and two based on 1,131 observations (1,105 in zone two and 26 in zone one). There are four independent variables in the buried copper cable and structure regression equation, i.e., the variables that indicate the size of the cable, presence of a high water table, combined rock and soil type, and density zone. This suggests that approximately 40 observations are needed to obtain reliable estimates for the parameters in this regression equation. The total number of observations used to estimate this regression equation, 1,131, readily exceeds the number suggested for estimating reliably this regression equation. The number of observations for density zone one alone, 26, provides 65 percent of the suggested number of observations. Similarly, AT&T and MCI claim that the sample size for  X 4underground cable is too small because it contains only 80 observations. D6 {O '#X\  P6G;ɒP#э AT&T and MCI Inputs Further Notice comments at 14. There is one independent variable in the adopted underground copper cable equation, i.e., the variable that indicates the size of the cable. Based on the rule of thumb noted above, 10 observations are needed to reliably estimate this regression equation. The number of observations used to estimate the adopted underground copper cable regression equation, 81, is more than eight  X 4times this suggested number.JZ ZD6 {O'ԍ The Inputs Further Notice indicated that 80 observations were used to estimate the proposed underground copper cable costs. However, 81 observations were used to develop these proposed costs. Eighty one observations are used to estimate the adopted underground copper cable costs.J Moreover, we note that Ameritech does not provide any evidence that suggest that a sample that has 26 observations in density zone 1 produces biased estimates of buried structure and cable costs for density zone one. Similarly AT&T and MCI do not provide any evidence to support their allegation that a sample size of 80 observations produces biased estimates of underground copper cable costs. Finally, we note that GTE contends that the regression results for aerial structure are undermined because the sample size  X4for poles is based only on 19 observations.Y|D6 {OJ'ԍ GTE Inputs Further Notice comments at 15.Y While a sample of this size fails to satisfy the general rule of thumb we noted above, we find that the estimates produced are reasonable.  X4As we pointed out in the Inputs Further Notice, the average material price reported in the NRRI Study for a 40foot, class four pole is $213.94. This is close to our calculations of the unweighted average material cost for a 40foot, class four pole, $213.97, and the weighted  X4average material cost, by line count, $228.22, based on data submitted in response to the 1997  X4Data Request. Moreover, we note that GTE does not provide any evidence that suggests that a sample size of 19 poles for developing aerial structure costs produces biased estimates as GTE seems to allege.  X=4{124.` ` We also disagree with GTE's contention that the NRRI Study contains three methodological errors that make its results unreliable. First, GTE asserts that the most serious of these flaws is that the NRRI Study improperly averages ordinal or categorical data, i.e.,"80*&&``"  X4qualitative values, for the costs of placing structure in different types of soil.D6 {Oy'ԍ GTE Inputs Further Notice comments at 1921. See also Bell Atlantic Inputs Further Notice comments at 1617, Attachment C at 1314. Contrary to GTE's claim, the independent variables that indicate soil type, rock hardness, and the presence of a high water table used in the regression equations for aerial and underground structure and  X4buried structure and cable costs in the NRRI Study and proposed in the Inputs Further Notice do not reflect an incorrect averaging of ordinal data. The variables for soil, rock, and water indicate the average soil, rock, and water conditions in the service areas of RUS companies. They are based on averages of data obtained from the HAI database for the Census Block Groups in which the RUS companies operate. In general, the magnitude of the tstatistics for the coefficients of the independent variables for soil, rock, and water in the structure regression equations indicate that these variables have a statistically significant impact on structure costs. The magnitude of the Fstatistic indicates that the independent variables in the structure regression equations, including those that indicate water, rock, and soil type, jointly provide a statistically significant explanation of the variation in structure costs. These statistical findings justify use of these variables in the structure regression equations. We also note that HAI uses as cardinal values, i.e., quantitative, not ordinal values, the soil and rock data from which the averages reflected in the rock and soil variables in the NRRI Study are calculated. For example, HAI uses a multiplier of between 1 and 4 to calculate the increase in placement cost attributable to the soil condition. Moreover, and more importantly, we note that no commenter has demonstrated the degree of, or even the direction of, any bias in the  XM4cost estimates derived in the NRRI Study or in the regression equations proposed in the Inputs  X84Further Notice as a result of the use of soil, water, and rock variables based on averages of HAI data.  X4|125.` ` GTE also claims that the NRRI Study is flawed because it relies on the HAI  X4model's values relating to soil type which GTE claims were "made up."Y"D6 {O'ԍ GTE Inputs Further Notice comments at 21.Y GTE contends that this renders the variable relating to soil type judgmental and biased. We find GTE's concern misplaced. As explained above, the econometric analyses of the data demonstrate a statistically significant relationship between the geological variables developed from the HAI data and the structure costs. Finally, we disagree with GTE's claim that the NRRI Study is flawed because of a mismatch in the geographic coverage of the RUS data and the HAI  XT4model variables.YTD6 {O!'ԍ GTE Inputs Further Notice comments at 22.Y GTE does not provide any evidence showing that the alleged mismatch introduces an upward or downward bias on the cost estimates obtained from the regression equations. Moreover, and more importantly, the tstatistics for the coefficients of the variables that measure rock and soil type generally indicate that these geological variables provide a statistically significant explanation of variations in RUS companies' structure costs."9F0*&&``"Ԍ X4 ę}126.` ` We also reject the claims that the derivation of the equations for 24gauge buried copper cable, buried structure, and buried fiber cable from the NRRI Study regression equations for 24gauge buried copper cable and structure and buried fiber cable and structure,  X4respectively, is inappropriate.mD6 {O4'ԍ See e.g., GTE Inputs Further Notice comments at 5253; m As we explained in the Inputs Further Notice, we modified the regression equations in the NRRI Study for 24gauge buried copper cable and structure and buried fiber cable and structure, as modified by the Huber methodology described below, to estimate the cost of 24gauge buried copper cable, buried structure and buried fiber cable because the regression equations for buried copper cable and structure and buried fiber cable and structure provide estimates for labor and material costs for both buried cable and structure  X34combined. 3ZD6 {O> 'ԍ Inputs Further Notice at paras. 83, 113. See also Inputs Further Notice, Appendix D, sections I.C., III.C. In layman's terms, we split the modified 24gauge buried copper cable and structure regression equation into two separate equations, one for 24gauge buried copper cable and one for buried structure costs. We also split the modified buried fiber cable and  X 4structure regression equation to obtain an equation for buried fiber cable.! D6 {O'ԍ Inputs Further Notice at para. 94. See also Inputs Further Notice, Appendix D, section II.C. We did this because the model requires a separate input for labor and material costs for cable and a separate input for labor and material costs for structure. In contrast, the RUS data and buried cable and structure regression equations developed from these data, reflect labor and material costs for buried cable and structure combined.  Xd4~127.` ` Significantly, the criticisms of our development of the 24gauge buried copper cable equation, buried structure equation and buried fiber cable equation in this manner ignore the fact that reliable, alternative data for buried cable costs and buried structure costs is not  X4available on the record.m"Z~D6 yON'ԍ Moreover, at least one LEC commenter states that it is not able to separate buried structure costs from  {O'total buried plant costs. GTE Inputs Further Notice comments at 53. This inability may reflect the fact that under current FCC accounting guidelines these costs are not identified separately.m Given that the model requires a separate input reflecting labor and material costs for both copper and fiber cable and a separate input reflecting labor and material costs for structure, and that the only reliable data on the record does not separate such costs between cable and structure, we find it necessary to split the regression equation.  X4128.` ` Contrary to the assertions of the commenters, either express or implied, the  X4steps we took to derive these equations were not arbitrary.#D6 {O"'ԍ See e.g., GTE Inputs Further Notice comments at 52; BellSouth Inputs Further Notice comments, Attachment A at A16. We used a single buried structure equation to estimate the cost for buried structure without distinguishing between the equation for buried copper structure and the equation for buried fiber structure because the"g: #0*&&``" model does not distinguish between buried copper structure costs and buried fiber structure costs. We find that this is reasonable because the intercept and the coefficients for the variables that primarily explain the variation in structure costs, i.e., the variables that indicate density zone, the combined soil and rock type, and the presence of a high water table, in the combined regression equation for buried fiber cable and structure are not statistically different from the intercept and the coefficients for these variables in the combined regression equation  Xv4for 24gauge buried copper cable and structure.L$vD6 yO'#X\  P6G;ɒP#э#X\  P6G;ɒP# That is, the values of the intercept and the coefficients for the variables that indicate density zone, the combined soil and rock type, and the presence of a high water table in the combined regression equation for buried fiber cable and structure lie within the 95 percent confidence interval surrounding the values of the intercept and the coefficients for the respective variables in the combined regression equation for 24gauge buried copper cable and structure.L We also find that it is reasonable to develop a separate structure equation from the regression equation for the combined cost of 24gauge buried copper cable and structure rather than from the regression equation for the combined cost of buried fiber cable and structure because the water and soil and rock type indicator variables in the regression equation for the combined cost of 24gauge buried copper cable and structure are statistically significant. In contrast, these variables are not statistically  X 4significant in the buried fiber cable and structure regression equation.% xD6 yO'#X\  P6G;ɒP#э Nevertheless, the value of the Fstatistic for the regression equation for the combined cost of buried fiber cable and structure, 172.80, indicates that the regression equation is statistically significant. In addition, we note that the number of observations used to estimate the 24gauge buried copper cable and structure regression equation, 1,131, exceeds the number of observations used to estimate the buried fiber cable and structure regression equation, 707 observations.  Xy4129.` ` We note that we included in the separate buried cable equations the variable for cable size and its coefficient reflected in the combined cable and structure regression equations. We find that this is reasonable because the cable size variable and its coefficient explain the variation in cable costs. We also note that we excluded from the separate buried cable equations the independent variables in the combined cable and structure regression equations that indicate density zone, the presence of a high water table, and the soil and rock type. We find that this is reasonable because these variables and their coefficients explain primarily the variation in buried structure costs. Conversely, we excluded from the separate buried structure equation the variable for cable size and its coefficient reflected in the combined 24gauge buried copper cable and structure regression equation because this variable and its coefficient explain the variation in cable costs.  Xe4130.` ` We also included in the separate structure equation the variables and the coefficients for the variables that indicate density zone, the combined soil and rock type, and the presence of a high water table in the combined regression equation for 24gauge buried copper cable and structure. Again, we find this is reasonable because these independent variables and coefficients primarily explain the variation in structure costs. " ;%0*&&``"Ԍ X4ԙ131.` ` Finally, because the estimated intercepts in the regression equations for the cost of buried cable and structure reflect the fixed cost for both buried cable and structure in density zone one, we included in the separate equations for buried cable an intercept reflecting the fixed cost of cable. Similarly, we included in the equation for buried structure an intercept reflecting the fixed cost of structure in density zone one. Specifically, we allocated an estimate of the portion of the combined fixed cable and structure costs that represents the fixed copper cable costs reflected in the intercept in the 24gauge buried copper cable and structure cost regression equation to the intercept in the equation for 24gauge buried copper cable. Correspondingly, we allocated an estimate of the portion of fixed cable and structure cost that represents the fixed costs of buried structure reflected in the intercept in the buried 24gauge copper cable and structure cost regression equation to the intercept in the equation for structure costs. We also allocated to the intercept in the separate buried fiber cable equation the remaining portion of the fixed costs reflected in the intercept in the combined buried fiber cable and structure regression equation after subtracting from the value of this intercept the estimate for fixed structure costs in density zone 1 in the separate buried structure equation. The sum of the particular values that we adopt for the fixed cable cost in the separate 24gauge copper cable equation, $.46, and the fixed structure cost in density zone 1 in the separate structure equation, $.70, equals the 24 gauge buried copper cable and structure fixed costs reflected in the intercept in the combined copper cable and structure regression equation of $1.16. The sum of the particular values that we adopt for the fixed cable cost in density zone 1 in the separate fiber cable equation, $.47, and the fixed structure cost in the separate structure equation of $.70 equals the buried fiber cable and structure fixed costs reflected in the intercept in the combined fiber cable and structure regression equation,  X4$1.17. We find that these values are reasonable. We note that $.46 &D6 yOh'#X\  P6G;ɒP#э This estimate of the fixed cost for a 24gauge buried copper cable excludes fixed costs for structure, LEC engineering, and splicing, but includes fixed costs for contractor engineering.  lies between AT&T  X4and MCI's estimate of the fixed cost for a 24gauge buried copper cable of $.12i'Z D6 {O'#X\  P6G;ɒP##X\  P6G;ɒP#э  See AT&T and MCI Inputs Further Notice comments, Appendix A at A7. The AT&T and MCI estimate of the fixed cost for a 24gauge buried copper cable excludes fixed costs for structure, splicing, and contractor and LEC engineering.i and the  X4HAI default value for the installed cost of a 6pair 24gauge buried copper cable of $.63._(BD6 {O'ԍ See HAI Model, Release 5.0a, Model Description, Appendix B at 15. A 6pair 24gauge buried copper cable is the smallest buried cable for which HAI has a default value. The HAI default value for the installed cost of a 6pair 24gauge buried copper cable excludes fixed and variable costs for structure, but includes fixed and variable costs for material, contractor and LEC engineering, and splicing. Fixed cable costs do not vary with  yO!'cable size. A large percentage of the installed cable cost for a small cable is a fixed cost. _ Moreover, we note that we could have used relatively higher or lower values for the fixed structure and cable costs in the separate structure and cable equations. However, we note that the sum of the fixed costs reflected in the buried structure cost estimates (excluding LEC engineering costs) developed from the separate buried structure equation and the fixed costs"e< (0*&&``~" reflected in the buried cable cost estimates (excluding LEC engineering and splicing costs) developed from the separate buried copper or fiber cable equation is not affected by the  X4relative values that we use for the fixed cost in these separate equations.)D6 yOK'#X\  P6G;ɒP##X\  P6G;ɒP##X\  P6G;ɒP##X\  P6G;ɒP##X\  P6G;ɒP##X\  P6G;ɒP#э#X\  P6G;ɒP# The sum of the fixed costs reflected in the buried structure cost estimates, including LEC engineering costs, developed from the separate buried structure equation and the fixed costs reflected in the buried copper or fiber cable cost estimates, including LEC engineering and splicing costs, developed from the separate buried cable equation is affected slightly by the relative values used for the fixed cost in these separate equations. The relative values used for these fixed costs affects slightly the sum of these fixed costs because a splicing loading of 9.4 or 4.7 percent is applied to the fixed cost reflected in the separate buried copper or fiber cable cost estimates (excluding LEC engineering and splicing costs), while a loading of 10 percent for LEC engineering is applied to the fixed cost reflected in the separate buried structure cost estimates (excluding LEC engineering costs).  X4132.` ` Finally, we note that GTE contends that the proposed equations for buried cable and buried structure are questionable because the buried structure costs would not vary  Xv4with the presence of water.Y*vD6 {O'ԍ GTE Inputs Further Notice comments at 52.Y As discussed below, we have modified the regression equation for buried copper cable and structure by adding the variable that indicates the presence of a high water table. We obtain structure cost estimates used as input values by setting the coefficient for the water indicator variable equal to zero. These structure cost estimates, therefore, assume that a high water table is not present. The model adjusts these estimates to reflect the impact on these costs of a high water table. GTE also claims that the proposed equations are questionable because the costs for buried structure derived from the buried structure equation would not vary with cable size. We reject this contention. GTE has not provided any evidence that demonstrates that buried structure costs vary with cable size. To the contrary, GTE states that it cannot produce such evidence because it is not able to separate actual costs of buried structure from total costs of buried plant.   Xb4133.` ` In sum, we find that the regression equations we proposed and tentatively  XK4adopted in the Inputs Further Notice are an appropriate starting point for estimating cable costs and structure costs for nonrural LECs for purposes of developing inputs for the model, particularly given the absence of more reliable cable and structure cost data from any other  X4source.+"* D6 yO'ԍ We note that the regression equations in the NRRI Study are a starting point because, as we explained in  {O 'the Inputs Further Notice, and discuss in more detail below, we proposed to modify the regression equations used to estimate cable costs to capture the buying power of the nonrural LECs reflected in the price they pay for cable.  We find, however, that certain commenters' criticisms of the regression equations we proposed have merit. We make the following adjustments to improve the regression"=+0*&&``P"  X4equations consistent with those criticisms., D6 yOy'ԍ We set forth in Appendix B the regression equations that we adopt in this Order. We also set forth in  yOA'Appendix B the adjustments we make to those equations to reflect the buying power of large LECs, splicing costs, LEC engineering costs, and to separate the buried cable and structure regression equations into separate equations for buried cable and buried structure.  X4134.` ` First, we remove the independent variable that indicates whether two or more cables are placed at the same location from the regression equations for 24gauge aerial copper cable, 24gauge buried copper cable and structure, aerial fiber cable, and buried fiber  X4cable and structure. -D6 {O 'ԍ See Bell Atlantic Inputs Further Notice comments, Attachment C at 25; Ameritech Inputs Further Notice  {O 'comments at 1314; US West Inputs Further Notice comments, Attachment A at 9, 11.  As a result, the regression equations we adopt do not have this variable as an independent variable. We do not include this independent variable in any of the cable and structure equations because the model does not use a different cable cost if the outside plant portion of the network it builds requires more than one cable.  X 4135.` ` We also remove from the regression equation for 24gauge underground copper cable the variable that is the mathematical square of the number of copper cable pairs. We remove this variable because its use results in negative values for the largest cable sizes, as  X 4some parties point out.8.\ D6 {O'ԍ See e.g., Ameritech Inputs Further Notice comments at 1011; GTE Inputs Further Notice comments at  {O\'3031; Bell Atlantic Inputs Further Notice comments at 2526; US West Inputs Further Notice comments, Attachment A at 9.8 We note that none of the other proposed cable and structure regression equations had this variable as an independent variable.  X4136.` ` We add the variable that indicates the presence of a high water table to the regression equations for buried copper cable and structure and underground structure costs. With this change, all of the regression equations for structure costs adopted in this Order have  XK4this variable as an independent variable.Q/^K0 D6 {O,'ԍ See Bell Atlantic Inputs Further Notice comments, Attachment C at 2526; Ameritech Inputs Further  {O'Notice comments at 13; US West Inputs Further Notice comments, Attachment A at 9; GTE Inputs Further  {O'Notice comments at 3031. Q We include this variable in the structure equations because the model applies a cost multiplier to all structure costs when the water table depth is less than the critical water depth. To develop structure cost inputs, we set the value of the water indicator variable equal to zero in the structure regression equations, thereby developing structure costs that assume that there is no water in the geographic area where the structure is installed. The multiplier in the model then adjusts these costs to reflect the impact on these costs of a high water table when it determines that the water table depth is less than the critical water depth.">V /0*&&``"Ԍ X4ԙ137.` ` We reduce the value of the intercept to $.46 from $.80 in the equation  X4proposed in the Inputs Further Notice for calculating the labor and material costs for buried copper cable (excluding structure, LEC engineering, and splicing costs). We now estimate the buried 24gauge copper cable and structure regression equation after removing the multicable variable and adding the water indicator variable. The value of the intercept in this regression equation of $1.16 is less than the intercept in the proposed regression equation of $1.51. As  Xx4we did in the Inputs Further Notice, we derive the buried copper cable equation from the regression equation for 24gauge buried copper cable and structure costs. The value of the intercept in the buried copper cable and structure regression equation represents the fixed cost for both buried copper cable and buried copper cable structure in density zone 1. We assume,  X 4as we did in the Inputs Further Notice, that $.70 is the fixed cost for buried copper cable structure in density zone 1. Accordingly, the fixed labor and material cost for buried copper cable is $1.16 minus $.70, or $.46.  X 4138.` ` We also reduce the value of the intercept to $.47 from $.60 in the equation  X 4proposed in the Inputs Further Notice for calculating the labor and material costs for buried fiber cable (excluding structure, LEC engineering, and splicing costs). We now estimate the buried fiber cable and structure regression equation after removing the multicable variable. The value of the intercept in this regression equation, $1.17, is greater than the value of the  XS4intercept in the proposed regression equation, $1.14. As we did in the Inputs Further Notice, we derive the buried fiber cable equation from the regression equation for buried fiber cable and structure costs. The value of the intercept in the buried fiber cable and structure regression equation represents the fixed cost for both buried fiber cable and buried fiber cable structure in density zone 1. We assume that $.70 is the fixed cost for buried fiber cable structure in density zone 1. Accordingly, the fixed labor and material cost for buried fiber cable in density zone 1 is $1.17 minus $.70 or $.47  X4139.` ` Huber Adjustment. In the Inputs Further Notice, we tentatively concluded that  X4one substantive change should be made to Gabel and Kennedy's analysis.R0D6 {O'ԍ Inputs Further Notice at para. 75.R As we explained, we tentatively concluded that the regression equations in the NRRI Study should be modified  XZ4using the Huber regression technique1ZZD6 yOe'ԍ We used Stata Statistical Software: Release 5 (Stata) to perform the calculations needed to estimate the regression equations adopted in this Order for cable and structure costs. Stata has a robust regression methodology that uses formulas developed by P.J. Huber, R.D. Cook, A.E. Beaton and J.W. Tukey. We used this methodology to estimate the regression equations for cable and structure costs. We refer to this robust  {O"'regression methodology as the Huber methodology. See Stata Reference Manual, Release 5, Volume 3, PZ, Stata Press, College Station, TX, 168173. to mitigate the influence of outliers in the RUS  XC4data.S2CD6 {O%'ԍ Inputs Further Notice at para. 76. S Statistical outliers are values that are much higher or lower than other data in the data"C?f 20*&&``" set. The Huber algorithm uses a standard statistical criterion to determine the most extreme  X4outliers and exclude those outliers. Thereafter, the Huber algorithm iteratively performs a regression, then for each observation calculates an observation weight based on the absolute value of the observation residual. Finally, the algorithm performs a weighted least squares regression using the calculated weights. This process is repeated until the values of the  X4weights effectively stop changing.63D6 {O'ԍ As noted in the Inputs Further Notice, we 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 concluded that the ordinary least squares technique is appropriate for  {O` 'pole costs. The value of the Fstatistic was not statistically significant at the five percent level.  Inputs Further  {O* 'Notice at para. 76 n. 161.6  X_4140.` ` We affirm our tentative conclusion to modify the regression equations in the NRRI Study using the Huber methodology to develop input values for cable and structure  X14costs.  The cable and structure cost inputs used in the model should reflect values that are typical for cable and structure for a number of different density and terrain conditions. If they do not reflect values that are typical, the model may substantially overestimate or underestimate the cost of building a local telephone network. As discussed below, application of the Huber methodology minimizes this risk, thereby producing estimates that are consistent with the goal of developing cable and structure cost inputs that reflect values that are typical for cable and structure for different density and terrain conditions.  Xy4141. The commenters attest to the fact that there are significant variances in the RUS  Xb4structure and cable cost data. q4^b~D6 {O'ԍ  See e.g., GTE Inputs Further Notice comments at 2326; Bell Atlantic Inputs Further Notice comments  {O['at 17, Attachment C at 2934; US West Inputs Further Notice comments, Attachment A at 1113; BellSouth  {O%'Inputs Further Notice comments, Attachment A at A17.q We find that the presence of these outliers warrants the use of the Huber methodology. By relying on the Huber methodology to identify and to exclude or give less than full weight to these data outliers in the regressions, we decrease the likelihood that the cost estimates produced reflect measurement error or data anomalies that may represent unusual circumstances that do not reflect the typical case. We note that we are not readily able to ascertain the specific circumstances that may explain why some data points are outliers relative to more clustered data points because of the multivariate nature of the database. Such occurrences are expected when dealing with such a database. Not only are there many observations, but these observations reflect the circumstances surrounding the construction work of many different contractors done for a large number of companies on different projects over a number of years. We also note that the task of identifying structure cost outliers without using a statistical approach such as Huber is especially difficult because these costs are a function of different geological conditions and population densities. Given that it is not feasible, as a practical matter, to determine why particular data points are outliers and our objective is to develop typical cable and structure costs, we conclude that use of the" @40*&&``"  X4Huber methodology is appropriate.]5XD6 yOy'ԍ For example, for one to determine why the reported structure cost for a single project is an outlier, one would have to interview the LEC engineers and contractors to verify the reported cost, identifying with precision whether unusual circumstances surrounded the project thereby leading to atypical costs.]  X4 142.` ` We find the comments opposing application of the Huber methodology unpersuasive. In the first instance, we reject the assertions of the commenters, either express or implied, that the application of robust regression analysis is not the preferred method of  X4dealing with outliers in a regression.p6^D6 {O& 'ԍ See e.g., GTE Inputs Further Notice comments at 2326; Bell Atlantic Inputs Further Notice comments  {O 'at 17, Attachment C at 2934; US West Inputs Further Notice comments, Attachment A at 1113; BellSouth  {O 'Inputs Further Notice comments, Attachment A at A17.p There is no preferred method. The use of robust regression techniques is a matter of judgement for the estimator. As we explained above, the goal of our analysis is to estimate values that are typical for cable and structure costs for different density and terrain conditions. We determined that we should mitigate the effects of outliers occurring in the data to ensure that the estimates we produce reflect typical costs. Noting that such outliers have an undue influence on ordinary least squares regression estimates because the residual associated with each outlier is squared in calculating the regression, we determined, in our expert opinion, to employ the Huber methodology to diminish the destabilizing effects of these outliers. Thus, while it can be argued that we could have produced a different estimate, the commenters have not established that application of the Huber methodology produces an unreasonable estimate.  Xy4143.` ` Bell Atlantic and GTE assert that the probability distribution of the error term must be symmetric about its mean and have fatter tails than in the normal distribution in order  XK4to use the Huber methodology.!7KD6 {O '#&a\  P6G;u&P##X\  P6G;ɒP#э See Bell Atlantic Inputs Further Notice comments at 17, Attachment C at 30, 31; See GTE Inputs  {O'Further Notice comments at 25.! We disagree. The Huber methodology in effect fits a line or a plane to a set of data. The algebraic expression of this line or plane explains or predicts the effects on a dependent variable, e.g., 24gauge aerial copper cable cost, of changes in independent variables, e.g., aerial copper cable size. It does this by assigning zero or less than full weight to observations that have extremely high or extremely low values. The assignment of weights to observations depends on the values of the observations. It does not depend on the probability of observing these values. The error term to which Bell Atlantic and GTE refer is the difference between the predicted or estimated values of the dependent variable and the observed values of the dependent variable. Given that the error term is the difference between the predicted and observed values of the dependent variable, and that the assignment of weights by the Huber methodology does not depend on the probability of observing particular values of this variable, this assignment of weights does not depend on the probability of observing particular values of the error term. It, therefore, does not depend on"7Aj 70*&&``8" whether the probability distribution of the error term is symmetric about its mean and has fatter tails than in the normal distribution.  X4144.` ` Bell Atlantic also argues that the Huber methodology should not be used unless  X4there is evidence that outliers in the RUS data are erroneous.8D6 {O'#X\  P6G;ɒP#э See Bell Atlantic Inputs Further Notice comments at 17. We disagree. We believe that use of the Huber methodology with RUS data ensures that cost estimates reflect typical costs regardless of whether there is evidence that outliers in the RUS data are erroneous. The RUS data, as Bell Atlantic and other parties point out, have a number of high values and low  XH4values.]9HZD6 {OS '#X\  P6G;ɒP##X\  P6G;ɒP#э Bell Atlantic Inputs Further Notice comments, Attachment C at 23, 24. See also GTE Inputs Further  {O 'Notice comments at 17, 18; AT&T Inputs Further Notice comments at 14.] These outliers may reflect unusual circumstances that are unlikely to occur in the future. The Huber methodology dampens the effects of anomalistically high or low values that may reflect unusual circumstances. Notwithstanding the dispersion in the RUS data, we believe that there are relatively few errors in these data. As we explained, the RUS data are derived from contracts. Gabel and Kennedy determined that the values reflected in the RUS  X 4data are within one percent of the values set forth on the contracts.;: D6 yO<'ԍ NRRI Study at 34.; There are likely to be few errors in the contracts themselves because these are binding agreements that involve substantial sums of money between RUS companies and contractors. These parties have an obvious interest in ensuring that these values are correctly reflected in these contracts. While we believe that errors in these contracts are likely to be infrequent, outlier observations in the RUS data may reflect large errors. The Huber methodology dampens the effects of outlier observations that may reflect large errors.  X4145.` ` We find that the estimates produced by applying the Huber methodology are  X4reasonable. As we explain more fully in Appendix B , the estimates resulting from application of the Huber methodology reflect most of the information represented in nearly all of the cable and structure cost observations in the RUS data. Approximately 80 percent of the cable and structure observations are assigned a weight of at least 80 percent in each structure and regression equation that we adopt. This large majority comprises closely clustered observations that clearly represent typical costs. Conversely, approximately 20 percent of the cable and structure observations are assigned a weight of less than .8 in each of these regression equations. This small minority comprises observations that have extremely high and extremely low values that do not represent typical costs. We also note that because the Huber methodology treats symmetrically observations that have high or low values, it excludes or assigns less than full weight to data outliers without regard to whether these are high or low cost observations.  "BF:0*&&``"Ԍ X4 146.` ` Buying Power Adjustment. In the Inputs Further Notice, we tentatively concluded that we should make three adjustments to the regression equations in the NRRI Study, as modified by the Huber methodology described above, to estimate the cost of 24gauge aerial copper cable, 24gauge underground copper cable, and 24gauge buried copper  X4cable.a;D6 {O'ԍ Inputs Further Notice at paras. 7781; 82; 8384.a We further tentatively concluded that these adjustments should be made in the  X4estimation of the cost of aerial fiber cable, buried fiber cable, and underground fiber cable.V<ZD6 {O'ԍ Inputs Further Notice at paras. 9095.V The first of these adjustments was to adjust the equation to reflect the superior buying power that nonrural LECs may have in comparison to the LECs represented in the RUS data. We noted that 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 based on data entered into the record in a proceeding before the Maine Public Utilities Commission (the  X 4"Maine Commission).w= D6 {O'ԍ Inputs Further Notice at para. 79 n. 163 citing NRRI Study at 47.w Similarly, Gabel and Kennedy determined that Bell Atlantic's material costs for aerial fiber cable are approximately 33.8 percent less than these costs for  X 4the RUS companies.w> ~D6 {O'ԍ Inputs Further Notice at para. 91 n. 174 citing NRRI Study at 47.w We also noted that Gabel and Kennedy determined that Bell Atlantic's material costs for underground copper cable are approximately 16.3 percent less than these costs for the RUS companies and 27.8 percent less for underground fiber cable. We tentatively concluded that these figures represent reasonable estimates of the difference in the material costs that non-rural LECs pay in comparison to those that the RUS companies pay  Xd4for cable.W?dD6 {O%'ԍ Inputs Further Notice at paras. 79, 82.W Accordingly, to reflect this degree of buying power in the copper cable cost estimates that we derived for non-rural LECs, we proposed to reduce the regression coefficient for the number of copper pairs by 15.2 percent for aerial copper cable, and 16.3 percent for 24gauge underground copper cable.  X4147.` ` We also proposed to reduce the regression coefficient for the number of fiber  X4strands by 33.8 percent for aerial fiber cable and 27.8 percent for underground fiber cable.W@D6 {O- 'ԍ Inputs Further Notice at paras. 91, 93.W As we explained, this coefficient measures the incremental or additional cost associated with one additional copper pair or fiber strand, as applicable, and therefore, largely reflects the material cost of the cable. Because the NRRI Study did not include a recommendation for such an adjustment for buried copper cable or buried fiber, we tentatively concluded we should reduce the coefficient by 15.2 percent for buried copper cable and 27.8 percent for"gC4 @0*&&``"  X4buried fiber cable.WAD6 {Oy'ԍ Inputs Further Notice at paras. 84, 95.W We explained that the level of these adjustments reflect the lower of the reductions used for aerial and underground copper cable and aerial and underground fiber cable, respectively.  X4 148.` ` We adopt the tentative conclusion in the Inputs Further Notice and select buying power adjustments of 15.2 percent, 16.3 percent and 15.2 percent for 24gauge aerial copper cable, 24gauge underground copper cable, and 24gauge buried copper cable, respectively. Correspondingly, we adopt buying power adjustments of 33.8 percent, 27.8 percent, and 27.8 percent for aerial fiber cable, underground fiber cable, and buried fiber cable, respectively. We find that, based on the record before us, the buying power adjustment is appropriate and the levels of the adjustments we proposed for the categories of copper and fiber cable we identified are reasonable.  X 4149.` ` As we explained in the Inputs Further Notice, the buying power adjustment is intended to reflect the difference in the materials prices that non-rural LECs pay in  X 4comparison to those that the RUS companies pay.RB ZD6 {O'ԍ Inputs Further Notice at para. 79.R Because nonrural LECs pay less for cable, a downward adjustment to the estimates developed from data reflecting the costs of ruralLECs is necessary to derive estimates representative of cable costs for nonrural LECs.  Xf4The commenters generally concede that such differences exist.!CfD6 {O'ԍ See e.g., SBC Inputs Further Notice comments at 8; Sprint Inputs Further Notice comments at 22; Sprint  {O'Inputs Further Notice reply comments at 15; AT&T and MCI Inputs Further Notice comments at 21.! There is, however, disagreement among the commenters that an adjustment is necessary in this instance to reflect this difference.  X 4150.` ` Those commenters advocating the use of companyspecific data oppose the buying power adjustment as unnecessary. GTE and Sprint contend that the use of a more representative data set, i.e., companyspecific data, would account for any differences in  X4buying power.DHD6 {O'ԍ GTE Inputs Further Notice comments at 2627; Sprint Inputs Further Notice reply comments at 14. As we explained above, however, the RUS data are the most reliable data on the record before us for estimating cable and structure costs. Because there is a difference in the material costs that non-rural LECs pay in comparison to those that the RUS companies  X4pay, a downward adjustment to the RUS cable estimates is necessary to obtain representative  Xi4cable cost estimates for nonrural LECs.  X;4151.` ` We note that AT&T and MCI support the proposed adjustment for aerial and";DD0*&&``_"  X4underground copper and fiber cable.cED6 {Oy'ԍ AT&T and MCI Inputs Further Notice comments at 21. c AT&T and MCI oppose, however, the use of the lower of the reductions adopted for aerial and underground cable categories, for the buried cable category. Although AT&T and MCI agree that an adjustment is appropriate for buried cable, they contend that the buying power adjustment should be set at the higher figures of 16.3 percent for buried copper cable and 33.8 percent for buried fiber cable, or at the very least, at the average of the higher and lower values for aerial and underground cable. We disagree. We find that AT&T and MCI offer no support to demonstrate why the higher values should be used. As explained below, the levels of the adjustments we proposed and adopt are the most conservative based on the available record evidence.  X 4152.` ` Apart from opposing the buying power adjustment on the ground that as a general matter the adjustment is unnecessary, those opposing the adjustment take issue with the adjustment on methodological grounds. GTE contends that the adjustment cannot properly convert RUS data into costs for nonrural carriers because the RUS data do not reflect the  X 4cost structure of rural carriers.ZF ZD6 {O'ԍ GTE Inputs Further Notice comments at 26. Z As we explained above, the assertion that the RUS data does not reflect the cost structure of rural carriers is without merit. GTE also contends that the application of the adjustment factors to the coefficients in the regression equations is  Xy4contrary to the fundamentals of sound economic analysis._GyD6 {O'ԍ GTE Inputs Further Notice comments at 27._ The solution GTE recommends is that additional observations for nonrural companies be added to the data set. This solution echoes GTE's assertion that companyspecific data should be used. Reliable observations for nonrural LECs are not available, however, as explained above.  X4153.` ` GTE also identifies what it considers flaws in the development of the buying  X4power adjustment.YH~D6 {O'ԍ GTE Inputs Further Notice comments at 28.Y GTE argues that because the adjustment to the RUS data was developed using only one larger company's data (Bell Atlantic's) reflecting costs for a single year, the  X4adjustment is not proper.YID6 {O'ԍ GTE Inputs Further Notice comments at 28.Y We disagree for several reasons. First, we note that although we  X4specifically requested comment on this adjustment and its derivation in the Inputs Further  X4Notice,RJD6 {O"'ԍ Inputs Further Notice at para. 79.R GTE and other parties challenging the use of Bell Atlantic's data have not provided any alternative data for measuring the level of market power, despite their general agreement"E4 J0*&&``"  X4that such market power exists.KD6 yOy'ԍ Such agreement is consistent with representations by parties in merger contexts that a merger will produce costs savings. These parties failed to submit comparable verifiable data to show that the buying power adjustment we proposed was inaccurate. Under these circumstances, we cannot give credence to the unsupported claims that the Bell Atlantic data is not representative.  X4154.` ` Equally important, we have reason to conclude that the adjustment we adopt is a conservative one. The buying power adjustment we proposed and adopt is based upon a submission by Bell Atlantic to the Maine Commission in a proceeding to establish permanent  XH4unbundled network element (UNE) rates.iLH D6 {O 'ԍ NRRI Study at 47. See Inputs Further Notice at para. 79.i In that context, it was in Bell Atlantic's interests to submit the highest possible cost data in order to ensure that the UNE rates would give it ample compensation. But in the context of the adjustment we consider here for buying  X 4power, a relatively higher cost translates into a reduced adjustment because the greater the LEC costs, the less the differential between LEC and rural carrier costs. Therefore, given the source of this data, we conclude that it is likely to produce a conservative buying power adjustment, not an excessive one. Nevertheless, in the proceeding on the future of the model, we intend to seek further comment on the development of an appropriate buying power adjustment to reflect the forwardlooking costs of the competitive efficient firm. In sum, we find that GTE's criticisms are not persuasive, and that the adjustment is a reasonable one, supported by the record.  X44155.` ` GTE also asserts a litany of other concerns that, according to GTE, render the  X4buying power adjustment invalid.^MD6 {O'ԍ GTE Inputs Further Notice comments at 2829. ^ We find these concerns unpersuasive. GTE claims that the adjustment is suspect because some RUS observations used in the determination of  X4material costs are not used in the regression.YNDD6 {O'ԍ GTE Inputs Further Notice comments at 29.Y We disagree. As discussed above, we apply  X4the Huber methodology to RUS cable costs that reflect both labor and material costs.IOD6 {O_'ԍ See supra paras. 139145.I The observations in the RUS database to which the Huber methodology assigns zero or less than full weight are those with the highest and the lowest values. As described more fully below, a statistical analysis demonstrates that this assignment of weights to these observations has little impact on the level of material costs reflected in the cable cost estimates derived by using this methodology. Therefore, material cost averages based on all of the RUS data are not likely to vary significantly from material cost averages based on a subset of these data. "7Fh O0*&&``"Ԍ X4156.` ` Specifically, with one exception, the value of the regression coefficient for the variable representing the size of the cable in the cable cost regression equations derived by using the Huber methodology lies inside the 95 percent confidence interval surrounding the value of this coefficient in these regression equations in the NRRI Study obtained by using  X4ordinary least squares.P D6 yO'ԍ We set forth in Appendix B a table that shows the value of this regression coefficient derived by using the Huber methodology and the 95 percent confidence interval surrounding the value of this coefficient obtained by using ordinary least squares. We also discuss in more detail the statistical evidence on the impact of the Huber methodology on the level of the material costs reflected in the cable cost estimates. The coefficient for the variable that represents cable size represents the additional cost for an additional pair of cable and therefore represents cable material costs. The values of the coefficient for the cable size variable obtained by using Huber and ordinary  X_4least squares are based on a sample of RUS companies' cable costs drawn from a larger population of such costs. The values of the coefficient obtained from this sample by using the Huber methodology and ordinary least squares are estimates of the true values of this coefficient theoretically obtained from the population of cable costs by using these techniques. Generally speaking, a 95 percent confidence interval associated with a coefficient estimate  X 4contains, with a probability of 95 percent, the true value of the coefficient.QX D6 yOM'ԍ As a general matter, 95 percent of the confidence intervals associated with different estimates of a given coefficient derived from a large number of samples of a given population can be expected to contain the true value of the coefficient. The fact that the value of the cable size coefficient obtained by using the Huber methodology lies within an  X 4interval that contains with 95 percent certainty the true value of the ordinary least squares cable size coefficient supports the conclusion that the Huber methodology does not by its weighting methodology have a statistically significant impact on the level of the material costs  Xy4reflected in the cable cost estimates derived by using this methodology.RyD6 yO'ԍ The one exception is that the value of the cable size coefficient obtained by using the Huber methodology for buried copper cable lies outside the 95 percent confidence interval associated with the cable size coefficient for buried copper cable obtained in the NRRI Study using ordinary least squares. This suggests that the assignment of weights by the Huber methodology does have a statistically significant impact on the level of the buried material costs reflected in the buried cable cost estimates. We find that this does not lead to an unreasonable estimate for buried cable costs. As we explained, application of the Huber methodology results in a better estimate of the expected value or tendency of the material costs for the RUS companies. Moreover, as noted above, the level of the buying power adjustment we adopt for buried copper cable is the most conservative estimate on the record before us.  XK4 157.` ` GTE also claims that some RUS observations appear to be from rescinded  X44contracts or contracts excluded from the NRRI Study perfoot cable cost calculation.YS4D6 {O#'ԍ GTE Inputs Further Notice comments at 29.Y However, GTE offers no evidence that this is the case. Finally, GTE claims that some RUS observations are for technologies that may not be appropriate for a forwardlooking cost"G2S0*&&``"  X4model.YTD6 {Oy'ԍ GTE Inputs Further Notice comments at 29.Y On the contrary, loading coils were excluded from the RUS data base. Thus, we find that the RUS data do not reflect any nonforwardlooking technologies.  X4158.` ` GTE and Sprint each attempt to impugn the validity of the buying power adjustment, claiming that there may be an incongruity between the data submitted to the  X4Maine Commission by Bell Atlantic and the RUS data.UZD6 {O'ԍ GTE Inputs Further Notice comments at 2829; Sprint Inputs Further Notice comments at 2223. We find this claim unpersuasive. Both GTE and Sprint assert that it is unknown whether the underlying data include such items as sales tax or shipping costs and, if so, whether the level of these items is comparable between Maine and the states included in the RUS data. Significantly, neither claim that such an incongruity exists in fact, nor do they provide viable alternatives for the calculation of the adjustment. We note that the RUS data reflect the same categories of costs as those reflected in the Bell Atlantic data. More importantly, this data reflects the best available evidence on the record on which to base the buying power adjustment.  X 4159.` ` BellSouth claims that the buying power adjustment is flawed because it does  X 4not take into account the exclusion of RUS data resulting from the Huber adjustment.tV D6 {OD'ԍ BellSouth Inputs Further Notice comments, Attachment A at A5, A18.t Bell  X4Atlantic makes a similar claim.xW~D6 {O'ԍ Bell Atlantic Inputs Further Notice comments, Attachment C at 2223, 27.x Both parties argue that because the Huber methodology excludes high cost data from the regression analysis, it is inappropriate to apply a discount which essentially has the same effect. In sum, these commenters claim that we are adjusting for high material costs twice. We disagree. This contention ignores the fact that the application of the Huber methodology and the buying power adjustment are fundamentally different adjustments. The Huber adjustment gives reduced weight to observations that are out of line with other data provided by the RUS companies. The Huber adjustment provides coefficient estimates that can be used to estimate the cost incurred by a typical RUS company. The adjustment is designed to dampen the effect of outlying observations that otherwise would exhibit a strong influence on the analysis. The large buying power adjustment, on the other hand, adjusts for the greater buying power of the non-rural companies. None of the RUS companies have the buying power of, for example, Bell Atlantic or GTE, and therefore have to pay more for material. The buying power adjustment could only duplicate the Huber adjustment if some of the RUS companies have the buying power of a company as large as Bell Atlantic. Because none of the firms in the RUS data base are close to the size of Bell Atlantic, the commenters are incorrect when they assert that, since the Huber methodology excludes high cost data from the regression analysis, it is inappropriate to apply the buying power adjustment. " HW0*&&``"Ԍ X4ԙ160.` ` We also reject BellSouth's argument that, to determine the size of the buying power adjustment, we should use a weighted average of the cable price differentials between Bell Atlantic and the RUS companies that is based on the miles of cable installed, not the  X4number of observations, for each cable size.oXD6 {O4'ԍ BellSouth Inputs Further Notice comments, Attachment A at A18.o In the NRRI Study, this weighted average price differential is determined by: (1) calculating the price differential between Bell Atlantic's average cable price and the RUS companies' average cable price for each cable size; (2) weighting the price differential for each cable size by the number of observations used to calculate the RUS companies' average cable price; and (3) summing these weighted  XH4price differentials.GYHZD6 yOS 'ԍ NRRI Study at 47 n. 47.G The average measures the central tendency of the data. In general, the average more reliably measures this central tendency the larger the number of observations from which this average is calculated. In the NRRI Study, the average cable prices calculated for the RUS companies that reflect a relatively large number of observations are more reliable than those that reflect relatively few observations. Accordingly, weighting the price differentials for each cable size by the number of observations reflected in the average cable price calculated for the RUS companies provides a weighted average that reliably measures the central tendency of the price. In contrast, use of the miles of cable installed as weights to determine the average cable price differentials could result in a less reliable measure of central tendency because price differentials based on a small number of observations but reflecting a high percentage of cable miles purchased would have a greater impact on the weighted average than price differentials based on a large number of observations of cable purchase prices. Moreover, use of the number of miles of cable installed as the weights would result in a weighted average price differential that reflects RUS companies' relative use of different size cables. The RUS companies' relative use of different size cables is irrelevant for use in a model used to calculate nonrural LECs' cost of constructing a network.  X4161. ` ` We also reject Bell Atlantic's contention that the buying power adjustment is flawed because it should have been applied to the material costs rather than the regression  X4coefficient of copper cable pairs or the number of fiber strands.sZD6 {O.'ԍ Bell Atlantic Inputs Further Notice comments, Attachment C at C27.s Bell Atlantic has provided no evidence that demonstrates that applying the discount to the coefficient is incorrect. It is an elementary proposition of statistics that the result of applying the discount to the regression  XN4coefficient is equal to applying the discount to the material costs.[N|D6 {O{"'ԍ E(aX) = aE(X) where "a" is the discount factor and X is the price of cable. See, e.g., Gerald Keller and  {OE#'Brian Warrick, Statistics for Management Economics at 206 (Fourth Edition, Duxbury, 1997).  Significantly, Bell Atlantic has not demonstrated that applying the discount to the regression coefficient does not produce the same result as applying the discount to the material costs. " I[0*&&``"Ԍ X4162.` ` Finally, we disagree with Sprint that, because buying power equates to  X4company size, it is inappropriate to apply this adjustment uniformly to all carriers.\D6 {Ob'ԍ Sprint Inputs Further Notice comments at 22. See also Cincinnati Bell Inputs Further Notice comments  yO,'at 35. We are  X4estimating the costs that an efficient provider would incur to provide the supported services.P]"D6 {O'ԍ  See supra at paragraph 29.P We are not attempting to identify any particular company's cost of providing the supported services. We find, therefore, that applying the buying power adjustment as we propose is appropriate for the purpose of calculating universal service support.  X_4 163.` ` In sum, we find unpersuasive the criticisms of the buying power adjustment we proposed. We conclude that, based on the record before us, a downward adjustment to the estimates developed from data reflecting the cable costs of rural LECs is necessary to derive estimates representative of cable costs for nonrural LECs and that the levels we have proposed for this adjustment are reasonable.  X 4164.` ` LEC Engineering. The second adjustment we proposed to the regression equations used to estimate cable costs was to account for LEC engineering costs, which were  X 4not included in the RUS data.^$ D6 {O 'ԍ See Inputs Further Notice at paras. 80, 91. It should be noted that the LEC Engineering Adjustment as  {O'well as the Splicing Adjustment discussed infra in paragraphs 168176 would be required in the estimation of costs for rural LECs from the RUS data base because such costs were not reflected in the RUS data. These adjustments are part of the process in developing estimates from the data.  As we noted, the BCM2 default values include a loading of  X4five percent for engineering.R_D6 {O'ԍ  Inputs Further Notice at para. 80.R In contrast, the HAI sponsors claimed that engineering  Xy4constitutes approximately 15 percent of the cost of installing outside plant cables.R`y2 D6 {O\'ԍ  Inputs Further Notice at para. 80.R This percentage includes both contractor engineering and LEC engineering. The cost of contractor  XK4engineering already is reflected in the RUS cable cost data. In the Inputs Further Notice, we tentatively concluded that we should add a loading of 10 percent to the material and labor costs of cable (net of LEC engineering and splicing costs) to approximate the cost of LEC  X4engineering.ga D6 {O}!'ԍ Inputs Further Notice at paras. 80, 82, 84, 91, 93, 95.g  X4165.` ` We affirm our tentative conclusion to add a loading of 10 percent to the material and labor for the cost of cable (net of LEC engineering and splicing costs) to approximate the cost of LEC engineering. We find that, based on the record before us, the"JV a0*&&``\" proposed LEC engineering adjustment, as modified below, is appropriate. We also find that the level of the adjustment we proposed is reasonable. We note that there is a general  X4consensus among the commenters that the proposed adjustment is necessary.b(D6 {OK'ԍ See e.g., GTE Inputs Further Notice comments at 3132; AT&T and MCI Inputs Further Notice  {O'comments at 1618; BellSouth Inputs Further Notice comments, Attachment B at B8 B9; BellSouth Inputs  {O'Further Notice reply comments at 67; Sprint Inputs Further Notice comments at 2425; Bell Atlantic Inputs  {O'Further Notice reply comments, Attachment A at 1.  We reject, however, the contentions of those commenters that advocate that the level of the LEC adjustment be based on companyspecific data. As we explained above, we find such data to be unreliable. For similar reasons, we reject the LEC engineering adjustment proposed by AT&T and MCI. As we explained, AT&T and MCI's proposal is based on expert opinions  X_4which we find to be unsupported and, therefore, unreliable.bc_D6 {O 'ԍ AT&T and MCI Inputs Further Notice comments at 16.b Accordingly, the level of the  XH4adjustment that we proposed, which, as we explained in the Inputs Further Notice represents the midpoint between the HAI default loading and the BCPM default loading, is the most reasonable value on the record before us.  X 4166.` ` Sprint contends that we should calculate the loadings for LEC engineering on a  X 4flat dollar basis rather than on a fixed percentage of the labor and material costs of cable.\d JD6 {O'ԍ Sprint Inputs Further Notice comments at 24.\ We find persuasive Sprint's contention that LEC engineering costs do not vary with the size of the cable and therefore do not vary with the cost of the cable. Accordingly, we find it reasonable to apply the loading for LEC engineering in the manner that Sprint recommends.  Xd4167.` ` We also find that the commenters are correct that the loading for LEC engineering should not reflect any adjustment for buying power because the buying power  X64differential between nonrural and rural LECs only relates to materials.e6D6 {O'ԍ  See e.g., GTE Inputs Further Notice comments at 2628; BellSouth Inputs Further Notice comments, Attachment B at B9. We adjust our calculation accordingly. Similarly, we also find it appropriate to include in the loading for  X4LEC engineering an allowance for LEC engineering associated with splicing.f6 D6 yO'ԍ AT&T and MCI develop equations for engineering costs that reflect engineering costs associated with  {O 'splicing. See AT&T and MCI Inputs Further Notice comments, Exhibit A at A7. We find that this is appropriate because the loading for LEC engineering is based on BCPM and HAI default values for this loading that are expressed as a percentage of cable costs inclusive of"K f0*&&``{"  X4engineering.g D6 yOy'ԍ We develop the flat costperfoot loading for LEC engineering for each type of cable by first estimating the RUS companies' total cable cost inclusive of splicing and exclusive of LEC engineering costs based on: (1) the regression equations we adopt in this Order; (2) the number of feet of cable that was placed pursuant to the contracts from which the data used to develop these regression equation are derived; and (3) the loadings that we adopt in this Order for splicing costs, 9.4 percent for copper cable and 4.7 percent for fiber cable. We then compute for each type of cable the total LEC engineering cost based on the total cable cost inclusive of LEC splicing costs and the loading that we adopt in this Order for LEC engineering, 10 percent. Finally, for each type of cable, we compute the flat cost per foot loading for LEC engineering by dividing the total LEC engineering costs by the total number of feet of cable placed pursuant to the RUS contracts. Based on this methodology, we derive values for LEC engineering costs of $.19, $1.50, $.16, $.19, $.65, and $.14 per foot for 24gauge aerial copper cable costs, 24gauge underground copper cable costs, 24gauge buried copper cable costs, aerial fiber cable costs, underground fiber cable costs, and buried fiber cable costs, respectively. We add these LEC engineering costs to the cable cost estimates derived by using the Huber methodology.  X4168.` ` Splicing Adjustment. The third adjustment to the regression equations that we  X4proposed in the Inputs Further Notice was to account for splicing costs, which also were not  X4included in the RUS data.[hH D6 {O'ԍ See Inputs Further Notice at paras. 81, 91.[ As we explained, Gabel and Kennedy determined that the ratio of splicing costs to copper cable costs (excluding splicing and LEC engineering costs) is 9.4  Xx4percent for RUS companies in the NRRI Study.wixD6 {O'ԍ  Inputs Further Notice at para. 81 n. 164 citing NRRI Study at 29.w Similarly, Gabel and Kennedy determined that the ratio of splicing costs to fiber cable costs (excluding splicing and LEC engineering  XJ4costs) is 4.7 percent.wjJlD6 {Og'ԍ Inputs Further Notice at para. 91 n. 176 citing NRRI Study at 29.w Thus, we tentatively concluded that we should adopt a loading of 9.4 percent for splicing costs for 24gauge aerial copper cable, 24gauge underground copper  X 4cable, and 24gauge buried copper cable.[k D6 {O'ԍ  Inputs Further Notice at paras. 81, 82, 84.[ Correspondingly, we tentatively concluded that we should adopt a loading of 4.7 percent for splicing costs for aerial fiber cable, underground  X 4fiber cable, and buried fiber cablkge.[h D6 {O/ 'ԍ Inputs Further Notice at paras. 91, 93, 95.[  X 4 169.` ` We affirm these tentative conclusions. We find that, based on the record before us, the splicing cost adjustment is appropriate and the levels of the adjustments proposed are reasonable. In reaching this conclusion, we reject the claims of those"L"h0*&&``"  X4commenters that advocate the use of companyspecific data to develop the splicing loadings.oi^D6 {Oy'ԍ See e.g., GTE Inputs Further Notice comments at 32 and 50; Sprint Inputs Further Notice comments at  {OC'27; BellSouth Inputs Further Notice comments, Attachment A at A9 A11, and Attachment B at B8;  {O 'BellSouth Inputs Further Notice reply comments at 67. o For the reasons enumerated above, we find such data unreliable.  X4170.` ` We disagree with GTE's claim that, because the splicing factor is based on the  X4RUS data, it is flawed.YjD6 {OC 'ԍ GTE Inputs Further Notice comments at 49.Y This contention echoes GTE's assertion that we should use companyspecific data. As we explained above, however, we conclude that such data are not reliable. We also disagree with GTE's contention that an analysis of the source contract data  X_4shows that some splicing costs are invalid.Yk_D6 {O 'ԍ GTE Inputs Further Notice comments at 49.Y GTE is mistaken. The RUS cost data from which the regression equations in the NRRI Study and in this Order are derived exclude splicing costs. Cable cost estimates obtained by using this methodology and these data are net of LEC engineering and splicing costs. We add to these cable cost estimates a loading factor for splicing that Gabel and Kennedy developed separately using the RUS data in the NRRI Study without using the regression analysis. In the NRRI Study, Gabel and Kennedy determined the ratio of splicing to cable costs by comparing the cost for splicing and the cost for cable (exclusive of splicing and LEC engineering costs) reflected in the contracts included in the RUS data base. Some of the splicing costs reflected in this database are relatively high and some are relatively low. None of these high or low values is likely to influence significantly this ratio because it reflects a large number of observations. Accordingly, we find it reasonable to apply the splicing ratios developed in the NRRI Study to the cable cost estimates developed separately in this Order by using the Huber methodology with the RUS data.  X4171.` ` We also disagree with AT&T and MCI's contention that, rather than adopting the proposed splicing loadings or the incumbent LEC's loading factors, we should adopt "reasonable values for the costs of cable placing, splicing, and engineering based on the expert  X4opinions submitted in this proceeding."blD6 {O'ԍ AT&T and MCI Inputs Further Notice comments at 16.b As discussed above, we find that these expert opinions are unsupported, and therefore unreliable.  X|4172.` ` For the same reason, we also find unpersuasive AT&T and MCI's claim that  Xe4the loading of 9.4 percent for splicing copper cable is excessive.emeD6 {O$'ԍ AT&T and MCI Inputs Further Notice comments at 1618.e AT&T and MCI estimates that splicing costs vary between 3.4 and 6.9 percent of cable investment in contrast to the"NM6 m0*&&``" proposed rate of 9.4 percent. We find that these estimates, which rely on assumptions concerning the perhour cost of labor, the number of hours required to set up and close the splice, the number of splices per hour, and the distance between splices, are unreliable. AT&T and MCI have provided no evidence other than the unsupported opinions of their experts to substantiate these data. In contrast, Bell Atlantic supports the use of the 9.4 percent  X4loading indicating, that this level is consistent with its own data.vnD6 {O'ԍ Bell Atlantic Inputs Further Notice reply comments, Attachment A at 1.v   X_4173.` ` While Sprint agrees that a splicing loading is required in the NRRI regression, Sprint recommends that a flat dollar "per pair per foot" cost additive should be employed  X14rather than the adjustment we proposed.o1ZD6 {O< 'ԍ Sprint Inputs Further Notice comments at 25. We note that Sprint advocates the use of companyspecific data in the first instance. We disagree. We find that Sprint's flat dollar "per pair per foot" cost additive ignores the differences in setup costs among different cable sizes. In contrast, the percent loading for splicing costs we adopt herein implicitly recognizes such differences because these loadings are applied to cable costs estimates (exclusive of splicing and LEC engineering costs) derived from regression equations that have an intercept term that provides a measure of the fixed cost of cable. Accordingly, we conclude that the percent loading approach is more reasonable.  Xy4174.` ` Sprint also asserts that underground splicing costs are higher due to the need to  Xb4work in manholes.\pbD6 {O'ԍ Sprint Inputs Further Notice comments at 25.\ We agree. The dollar amounts associated with the fixed percentage loadings adopted in this Order for underground copper and fiber cable are generally larger than for aerial and buried copper cable and fiber cable. The dollar amounts that we adopt for splicing are generally larger for underground cable because the costs that we develop from RUS data for underground cable net of splicing and engineering costs are generally larger than the costs that we develop for aerial and buried cable net of splicing and engineering costs. As a result, when the fixed percentage is applied to these cable costs, the dollar amount for splicing is generally larger for underground cable than for aerial and buried  X4cable.qFD6 yO'ԍ There is one instance where the underground cable costs that we develop from RUS data (net of splicing and engineering costs) are not the largest for a given cable size. For the largest fiber cable size, 288 pairs, the costs that we develop for buried cable, $12.07 per foot, are greater than those for underground cable, $11.96 per foot. However, the model is unlikely to frequently place the largest fiber cable size in the network it builds in highcost areas because most highcost areas are in the lowest density zones where use of such a cable provides too much capacity relative to demand.   X|4175.` ` We disagree with those commenters who argue that the splicing costs do not"|N q0*&&``"  X4vary with the cost of cable (net of splicing costs).rD6 {Oy'ԍ See e.g., Sprint Inputs Further Notice reply comments at 16; GTE Inputs Further Notice reply comments 2627. We find that cable costs increase as the size of the cable increases. Splicing costs increase as the size of the cable increases because larger cables require more splicing than small cables. Therefore, splicing costs increase as the cost of the cable increases.  X4176.` ` Finally, we disagree with SBC's claim that the 14 percent splicing factor for  Xv4fiber cable is more appropriate than the 4.7 percent we proposed.Wsv"D6 {OI 'ԍ SBC Inputs Further Notice comments at 9.W We find that the 14 percent factor SBC proposes is unsupported. SBC asserts that this factor is based on an average cost ratio from an analysis using various lengths of underground fiber placement, including placing labor and comparing it to associated splicing costs from current cost dockets. However, SBC has not provided this analysis on the record.   X 4177. ` ` 26Gauge Copper Cable. In the Inputs Further Notice, we explained that, because the NRRI Study did not provide estimates for 26gauge copper cable, we must either use another data source or find a method to derive these estimates from those for 24gauge  X 4copper cable.Rt D6 {O'ԍ Inputs Further Notice at para. 85.R To that end, we tentatively concluded that we should derive cost estimates  X4for 26gauge cable by adjusting our estimates for 24gauge cable.RuFD6 {O'ԍ  Inputs Further Notice at para. 86.R We proposed to estimate these ratios using data on 26gauge and 24gauge cable costs submitted by Aliant and Sprint  Xd4and the BCPM default values for these costs.vdD6 yO'ԍ We did not use the HAI default values in addition to these data to estimate these ratios because the HAI defaults do not have separate values for 26gauge and 24gauge cable costs for each different cable size. We noted, that while we would prefer to develop these ratios based on data from more than these three sources, we tentatively concluded that these were the best data available on the record for this purpose.  X4178.` ` We affirm our tentative conclusion to derive cost estimates for 26gauge cable  X4by adjusting our estimates for 24gauge cable. As we explained in the Inputs Further Notice, we agree with the BCPM sponsors that the cost of copper cable should not be estimated based  X4solely on the relative weight of the cable.Sw0 D6 {O"'ԍ  Inputs Further Notice at para. 86. S Instead, we proposed to use the ordinary least squares regression technique to estimate the ratio of the cost of 26gauge to 24gauge cable for each plant type (i.e., aerial, underground, buried). We conclude that, based on the record before us, this approach, adjusted as described more fully below, is reasonable. "O w0*&&``"Ԍ X4ԙ179.` ` Consistent with their position on estimating the costs of 24gauge cable, many commenters advocate that we use companyspecific data to estimate the costs of 26gauge  X4cable.xD6 {OK'ԍ  See e.g., BellSouth Inputs Further Notice comments at 67, Attachment B at B8 B9; GTE Inputs  {O'Further Notice comments at 48. As we explained above, we have determined that such data are not sufficiently  X4reliable to employ in the model.My$D6 {O'ԍ See supra paragraph 92.M Accordingly, we reject the use of companyspecific data to estimate the costs of 26gauge cable. We note that AT&T and MCI endorse the derivation  X4of cost estimates for 26gauge cable from estimates for 24gauge cable.ezD6 {O 'ԍ AT&T and MCI Inputs Further Notice comments at 1920.e Notwithstanding their support of the general approach we proposed, AT&T and MCI oppose estimating the ratio of costs of 26gauge cable to 24gauge cable using the cable costs submitted by Aliant and Sprint and the BCPM default values. Instead, AT&T and MCI advocate the use of the  X14relative weight of copper to adjust the cost of the 24gauge copper.e{1HD6 {O*'ԍ AT&T and MCI Inputs Further Notice comments at 1920.e AT&T and MCI claim that this approach is the most logical because 26gauge copper costs are directly proportional to the weight of the metallic copper in the cable. We reject AT&T and MCI's recommended approach. We find that, because AT&T and MCI have provided no evidence that the weight differential is approximately equal to the price differential, there is insufficient evidence on the record demonstrating the reasonableness of this approach.  X4180.` ` Many of those commenters advocating the use of companyspecific data contend that there are flaws in the methodology adopted herein to derive cost estimates for 26gauge cable by adjusting our estimates for 24gauge cable. Bell Atlantic and GTE contend  XK4that our methodology results in biased estimates due to statistical error.|KD6 {O'ԍ Bell Atlantic Inputs Further Notice comments, Attachment C at 2627; GTE Inputs Further Notice comments at 2930. We agree and modify our proposed methodology as explained below.  X4181.` ` As we explained in Appendix D of the Inputs Further Notice, in order to derive the 26gauge copper cable costs, we first estimated the cost for 24gauge copper cable for  X4each cable size from the RUS data using the Huber methodology.R}4 D6 {O!'ԍ Inputs Further Notice, Appendix D.R More specifically, we obtained an estimate of the expected or mean value of the cost for 24gauge copper cable (for given values of the independent variables in the regression equation). We then obtained values for the ratio of 24gauge copper cable to 26gauge copper cable for each cable size  X~4using ex parte data obtained from Aliant and Sprint and BCPM default values for the costs"~P }0*&&``" and employing ordinary least squares regression analysis. As a result, we obtained an estimate of the expected value of the ratio of 24gauge copper cable to 26gauge copper cable (for given values of the independent variables in the regression equation). Finally, we multiplied the reciprocal of this ratio by the cost of 24gauge copper cable obtained by using the Huber methodology with RUS data to obtain the proposed 26gauge copper cable cost for each copper cable size. Bell Atlantic and GTE contend, and we agree, that this is a biased estimate of the expected value of the cost for 26gauge copper cable because the expected value of the ratio of two random variables, e.g., 26gauge copper cable cost and 24gauge copper cable, does not equal the ratio of the expected value of the first random variable to the expected value of the second random variable. We note that the magnitude of the bias is larger as the difference grows between the expected value of the ratio of 26gauge copper cable cost to 24gauge copper cable cost and the ratio of the expected value of 26gauge copper cable cost to the expected value of 24gauge copper cable cost.  X 4182.` ` Accordingly, we modify the methodology tentatively adopted in the Inputs  X 4Further Notice to derive estimates of 26gauge copper cable costs from 24gauge copper cable  X4costs that are not biased. As explained in more detail in Appendix B, in addition to estimating the expected value of the cost for 24gauge copper cable for each cable size using the RUS data, we also estimate the expected value of the costs of 24gauge and 26gauge copper cable for each cable size using the data submitted by Aliant and Sprint and the BCPM  X84default values, as well as data submitted by BellSouth,~8D6 {O'ԍ BellSouth Inputs Further Notice reply comments, Attachment A at A22 A23. Ă hereinafter identified in the aggregate as "the nonrural LEC data." We divide the estimate of the expected value for 24gauge copper cable cost derived from the nonrural LEC data into the estimate of the expected value for 26gauge copper cable cost derived from these data for each cable size. The result is a ratio of an estimate of the expected value for 26gauge copper cable cost to an estimate of the expected value for 24gauge cable cost for each cable size. Finally, we multiply this ratio by the estimate of the expected value of the cost for 24gauge copper cable derived from the RUS data to obtain an estimate of the expected value of the cost for 26gauge copper cable for each cable size. We find that this adjustment eliminates the bias identified by the commenters. We conclude, therefore, that these estimates are reasonable and adopt them as inputs for 26gauge copper cable costs.  X$4183.` ` We note that, in adopting these modifications, we find that it is reasonable to rely on the nonrural LEC data for calculating the ratio of the cost for 24gauge copper cable to that for 26gauge copper cable, but not for calculating the absolute cost for 24gauge  X4copper cable and 26gauge copper cable. As discussed above, we find that the nonrural LEC data are not a reliable measure of absolute costs. Notwithstanding this finding, we conclude that it is reasonable to use the nonrural LEC data to determine the relative value of the cost for 24gauge copper cable to that for 26gauge copper cable. We find that it is reasonable to conclude that each LEC used the same methodology to develop both 24gauge and 26gauge"#QZ~0*&&``!" copper cable costs. Accordingly, any bias in the costs for 24gauge and 26gauge copper cable that results from using a given methodology is likely to be in the same direction and of a similar magnitude. As a consequence, the estimate of the expected value of the cost for 26gauge copper cable for each cable size and the estimate of the expected value of the cost for 24gauge copper cable obtained from nonrural LEC data are likely to be biased by approximately the same factor. The ratios of the estimates of these expected values are not likely to be affected significantly because the bias in one estimate approximately cancels the bias in the other estimate when the ratio is calculated.  X14184.` ` GTE also contends that the proposed methodology systematically reduces the  X 4amount of labor associated with placing cable.b D6 {O 'ԍ GTE Inputs Further Notice comments at 4850.b We conclude that the adjustments made in response to GTE and Bell Atlantic's criticisms discussed above render this criticism irrelevant. We find that no systematic bias will result because the ratio of the 24gauge cost of copper cable to the cost of 26gauge copper cable represents the installed cost of 26gauge copper cable including all labor and materials divided by the installed cost of 24gauge copper cable including all labor and materials. Moreover, this ratio is applied to the installed cost of 24gauge copper cable which includes all labor and material costs.  Xb4185.` ` BellSouth claims that neither the data used to develop the ordinary least squares  XK4regression equation we employ in the Inputs Further Notice to estimate the cost of 26gauge  X64copper cable or the computations used to derive that equation have been provided.o6ZD6 {OA'ԍ BellSouth Inputs Further Notice comments, Attachment A at A19.o BellSouth contends that, as a result, it is not possible to confirm or contradict the discount value. We disagree. Contrary to BellSouth's assertion, the data are available. As we  X4explained, the regression equation uses ex parte data submitted by Aliant and Sprint. These data are available subject to the Commission's rules regarding the treatment of confidential material. We also note that the BellSouth data we employ in the adjusted methodology we adopt herein are publicly available. Moreover, the BCPM data are publicly available.   X' 5.` ` Cable Fill Factors   XR'` ` a. Background  X;4  X$4186. ` ` As we explained in the Inputs Further Notice, in determining appropriate cable sizes, network engineers include a certain amount of spare capacity to accommodate  X4administrative functions, such as testing and repair, and some expected amount of growth.SD6 {O$'ԍ Inputs Further Notice at para. 96. S The percentage of the total usable capacity of cable that is expected to be used to meet"R~0*&&``"  X4current demand is referred to as the cable fill factor.6@D6 yOy'ԍ We note that the actual fill factor may be lower than the fill factor used to design the network (sometimes referred to as administrative fill), because cable and fiber are available only in certain sizes. For example, assume a neighborhood with 100 households has a current demand of 120 telephones. Dividing the 120pair demand by an 80 percent administrative fill factor establishes a need for 150 pairs. Cable is not sold, however, in 150pair units. The company would purchase the smallest cable that is sufficient to provide 150 pairs, which is a 200 pair cable. The fill factor that occurs and is measurable, known as the effective fill, would be the number of pairs needed to meet demand, 120 pairs, divided by the number of pairs installed, 200 pairs, or 60 percent.6 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. While carriers may choose to build excess capacity for a variety of reasons, it is necessary to determine the appropriate cable fill factors for use in the federal mechanism. We also explained that, if the fill factors are too low, the resulting excess capacity would increase the model's cost estimates to levels higher than an efficient firm's costs, potentially resulting in excessive universal service support payments. Accordingly, as discussed more fully below, we tentatively selected the HAI defaults for distribution fill factors, the average of the HAI and BCPM default values for copper feeder fill factors, and fiber fill factors of  X 4100 percent.^ D6 {O'ԍ  Inputs Further Notice at paras. 100, 101, 102.^  X 4187. ` ` Variance Among Density Zones. As a preliminary matter, we noted that both the HAI and BCPM sponsors provided default fill factors for copper cable that vary by density zone, and that both agreed that fill factors should be lower in the lowest density  X 4zones. b D6 {O'ԍ Inputs Further Notice at para. 97. As explained below, default values in BCPM 3.1 for distribution cable do not vary by density zone. We explained that the HAI sponsors claimed that an outside plant engineer is more interested in providing a sufficient number of spares than in the ratio of working pairs to  Xy4spares, so the appropriate fill factor will vary with cable size.y D6 {O'ԍ Inputs Further Notice at para. 97 n. 187 citing HAI Dec. 11, 1997 submission, Inputs Portfolio at 39, 63. Because smaller cables are used in lower density zones, HAI recommended that lower fill factors be used in the lowest density zones to ensure there will be enough spares available. Similarly, the BCPM sponsors claimed that less dense areas require lower fill ratios because the predominant plant type is  X4buried and it is costly to add additional capacity after installation.N D6 {O"'ԍ Inputs Further Notice at para. 97 n. 188 citing BCPM 3.1 May 26, 1998 (Preliminary Edition) Loop Inputs Documentation at 51. We tentatively agreed with the HAI and BCPM sponsors that fill factors for copper cable should be lower in the lowest density zones, and reflected this relationship in the fill factors that we proposed in the"S0*&&``"  X4Inputs Further Notice.RD6 {Oy'ԍ  Inputs Further Notice at para. 97.R  X4188. ` ` Distribution Fill Factors. We also noted in the Inputs Further Notice that the fill factors proposed by the HAI sponsors for distribution cable were somewhat lower than for  X4copper feeder cable."ZD6 {O'ԍ Inputs Further Notice at para. 98 n. 189 citing HAI Dec. 11, 1997 submission, Inputs Portfolio at 39, 63. HAI 5.0 default values range from 50 percent in the lowest density zone to 75 percent in the highest density zone for distribution cable sizing fill factors, and range from 65 percent in the lowest density zone to 75 percent in the highest density zone for copper feeder cable sizing fill factors.  In contrast, the BCPM default fill factors for distribution cable are set  X4at 100 percent for all density zones.^DD6 {O 'ԍ Inputs Further Notice at para. 98 n. 190 citing BCPM Dec. 11, 1997 submission. We noted that earlier  {OP 'versions of BCPM, however, had lower fill factors for distribution than for feeder. See, e.g., 1997 Further  {O'Notice at para. 118. Default values in BCPM 3.1 range from 75 to 85 percent for feeder cable.  We explained that this difference is related to the differences between certain assumptions that were made in the HAI and BCPM models. The HAI proponents claimed that the level of spare capacity provided by their default values is  XL4sufficient to meet current demand plus some amount of growth.Lj D6 {Og'ԍ Inputs Further Notice at para. 98 n. 191 citing HAI Dec. 11, 1997 submission, Inputs Portfolio at 39, 63. 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 as defined by HAI. BCPM, on the other hand, designs outside plant with the assumption that every residential location has two lines, which is more than current demand. This reflects the practice of incumbent LECs to build enough distribution plant to meet not only current demand, but also anticipated future demand because it is costly to add  X 4distribution plant at a later point in time.( D6 {Oo'ԍ For example, in an ex parte meeting on March 24, 1999, Ameritech representatives said that Ameritech  {O9'designs distribution plant to meet "ultimate" demand and designs feeder plant that is "growable." See Letter  {O'from Celia Nogales, Ameritech, to Magalie Roman Salas, FCC, dated March 25, 1999 (Ameritech March 25 ex  {O'parte).  X4189. ` ` We also noted that, 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 forwardlooking economic cost of providing the services supported by  XO4the federal mechanism.ROD6 {O!'ԍ  Inputs Further Notice at para. 99.R Ameritech claimed that forwardlooking 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,"!T~0*&&`` "  X4defective copper pairs, and churn.c\D6 {Oy'ԍ  Inputs Further Notice at para. 99 n. 194. Ameritech filed data, subject to the protective order in this proceeding, showing how these considerations are used to calculate the actual and forwardlooking fill factors in  {O 'Ameritech's territory. See Ameritech March 25 ex parte.c  X4190. ` ` We tentatively concluded that the fill factors selected for use in the federal  X4mechanism generally should reflect current demand,D6 yOX'ԍ We define "current demand" to include a reasonable amount of excess capacity to accommodate short  {O 'term growth. Inputs Further Notice at para. 100 n. 195. and not reflect the industry practice of building distribution plant to meet "ultimate" demand. We also tentatively selected the HAI defaults for distribution fill factors and tentatively concluded that they reflect the appropriate  Xv4fill needed to meet current demand.SvFD6 {Om 'ԍ Inputs Further Notice at para. 100.S ` `  XH4191. ` ` Feeder Fill Factors. In the Inputs Further Notice we explained that, in contrast to distribution plant, feeder plant typically is designed to meet only current and short  X 4term capacity needs. D6 {O'ԍ Inputs Further Notice at para. 101 citing Ameritech March 25 ex parte. We noted that 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  X 4industry practice of sizing feeder cable to meet current, rather than long term, demand.S j D6 {O 'ԍ  Inputs Further Notice at para. 101.S We tentatively selected copper feeder fill factors that are the average of the HAI and BCPM default values because both the HAI and BCPM default values assume that copper feeder fill  X 4reflects current demand.S D6 {OV'ԍ Inputs Further Notice at para. 101.S  X{4192. ` ` Fiber Fill Factors. We also explained in the Inputs Further Notice that, because of differences in technology, fiber fill factors typically are higher than copper feeder  XO4fill factors.TO D6 {O'ԍ Inputs Further Notice at para. 102. T 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  X4of a fill factor. D6 yO$'ԍ That is, fiber plant with a 100 percent fill factor has an actual utilization of 50 percent; whereas copper plant with a 50 percent fill factor has an actual utilization of 50 percent. Both the HAI and BCPM models use the standard practice of providing 100"Ux0*&&``" percent redundancy for fiber and set the default fiber fill factors at 100 percent. Accordingly, we tentatively concluded that the input value for fiber fill in the federal mechanism should be  X4100 percent.SD6 {OK'ԍ Inputs Further Notice at para. 102.S  X' b.` ` Discussion   Xv4  193.` ` We affirm our tentative conclusion that fill factors for copper cable should be lower in the lowest density zones. Significantly, those commenters addressing this issue agree  XH4that lower density zones should utilize lower copper cable fill factor inputs.HZD6 {OS 'ԍ Sprint Inputs Further Notice comments at 29; SBC Inputs Further Notice comments at 9; GTE Inputs  {O 'Further Notice comments at 54. We also reject, at the outset, certain assertions made by GTE and others, challenging the overall approach we proposed and adopt herein for determining the appropriate cable fill factors to use in the federal mechanism and reject GTE's assertions that the model is flawed.  X 4194.` ` We disagree with GTE's assertion that the use of generalized fill factors are not proper inputs for a cost model that seeks to estimate the forwardlooking costs of building a network. GTE claims that the use of generalized fill factors disregards how actual distribution plant is designed and that different levels of utilization are observed in different parts of the  Xy4local network.ZyD6 {O'ԍ GTE Inputs Further Notice comments at 53.Z However, we find that GTE's concerns are misplaced. Contrary to GTE's implication, generalized fill factors are an administrative input and are not the sole  XK4determinate of the effective fill factor. As we explained in the Inputs Further Notice, the effective fill factor will vary with the number of customer locations and the available discrete  X4size of cable.YHD6 {O'ԍ Inputs Further Notice at para. 96 n. 135.Y Thus, the effective fill factor will reflect how distribution plant is designed and different levels of utilization that are observed in different parts of the local network.  X4195.` ` Similarly, we disagree with GTE's assertion that companyspecific information  X4should be used to determine appropriate fill factor inputs.X\D6 {ON 'ԍ GTE Inputs Further Notice comments at 54. Ameritech contends that the nationwide fill factors proposed by the Commission are reasonable estimates to use if companyspecific or statespecific fill factors are  {O!'not used. Ameritech Inputs Further Notice comments at 20. X We note that the final effective fill factors are the result of the input of the administrative fill factors and companyspecific customer location data. We also disagree with the contention that administrative fill factors"V 0*&&``"  X4must be companyspecific.D6 {Oy'ԍ See e.g., GTE Inputs Further Notice comments at 54; BellSouth Inputs Further Notice comments, Attachment B at B12 The administrative fill factors are determined per engineering standards and density zone conditions. These factors are independent of an individual company's experience and measured effective fill factors. The administrative fill factors  X4would be the same for every efficient competitive firm.pp  X4196.` ` We reject GTE's contention that the model should be modified to accept the number of pairs per location to determine the required amount of distribution plant rather than  X_4using fill factors.Y_"D6 {O2 'ԍ GTE Inputs Further Notice comments at 54.Y GTE claims that this is necessary because using fill factor inputs produces anomalous results. GTE contends that the use of fill factors causes the number of implicit lines per location to decrease as density increases, in contrast to what occurs in reality. There are, according to GTE, always more business customers in higher density zones; therefore, the number of lines that must be provisioned per location should increase as density increases.  X 4197.` ` We find that there is no need to modify the model to accept pairs per location rather than fill factors, as GTE contends. The number of implicit lines per location does not decrease in the model as GTE claims. On the contrary, the number of implicit lines per location increases as a function of the number of business lines. The model will build to the level of business demand. With business demand increasing as a function of density, the model generates a higher number of lines per location as density increases. In sum, the anomaly that GTE identifies does not exist. GTE's claim reflects a misunderstanding of the model's operation.  X4198.` ` Finally, we disagree with GTE's assertion that there is an error in the way the  X4model calculates density zones that prevents correct application of zonespecific inputs.YD6 {O='ԍ GTE Inputs Further Notice comments at 55.Y As GTE explains, after the model has assigned customer locations to clusters, it constructs a "convex hull" around all locations in the cluster. The model then calculates density as the lines in the cluster divided by the area within the convex hull. GTE claims that the calculated densities will be higher than those observed in the real world because the denominator excludes all land not contained in the convex hull. While we agree with GTE's description of how the model determines cluster density, we find GTE's claim that this methodology is erroneous to be misplaced. In sum, GTE argues that the model employs a restricted definition  X 4of area which causes the model to use excessively high utilization factors.w FD6 yO%'ԍ We note that GTE did not assert that this bias will increase structure costs.w In other words, the issue is whether the model should recognize all of the area around a cluster. We conclude" W0*&&``" that it should not. If the land outside the convex hull were included in the denominator, as GTE implies it should, the denominator would recognize unoccupied areas where no customers reside. As a result, the model would select density zone fill factors that are lower than needed to service the customers in that cluster. There would be a downward bias in the model fill factors. Thus, there is not an error in the way the model calculates density zones, as GTE contends. The model generates density values that correspond to the way the population is dispersed. To do otherwise would introduce a bias and distort the forwardlooking cost estimates generated by the model.  X14199.` ` Distribution Fill Factors. We also affirm our tentative conclusion 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. As  X 4we explained in the Inputs Further Notice, the fact that industry may build distribution plant sufficient to meet demand for ten or twenty years does not necessarily suggest that these costs  X 4should be supported today by the federal universal service support mechanism.S D6 {O9'ԍ Inputs Further Notice at para. 100.S  X4200.` ` We find unpersuasive GTE's assertion that the input values for distribution fill  X{4factors should reflect ultimate demand.\{ZD6 {O'ԍ GTE Inputs Further Notice comments at 5556.\ In concluding that the fill factors should reflect current demand, we recognized that correctly forecasting ultimate demand is a speculative exercise, especially because of rapid technological advances in telecommunications. For example, we note that ultimate demand decreases substantially when computer modem users switch from dedicated lines serving analog modems to digital subscriber lines where one pair of copper wire provides the same function as a voice line and a separate dedicated line.  X4Given this uncertainty, we find that basing the fill factors on current demand rather than ultimate demand is more reasonable because it is less likely to result in excess capacity, which would increase the model's cost estimates to levels higher than an efficient firm's costs and could potentially result in excessive universal service support payments.  X~4201.` ` Significantly, we note that, contrary to GTE's inference, current demand as we  Xg4define it includes an amount of excess capacity to accommodate shortterm growth.\gD6 {O 'ԍ GTE Inputs Further Notice comments at 5556.\ We find that GTE has not provided any evidence that demonstrates that the level of excess capacity to accommodate shortterm growth is unreasonable. Rather, GTE claims that, if distribution is not built to reflect ultimate demand there will be delays in service and increased placement costs due to the need to reinforce distribution plant in established" X~0*&&``"  X4neighborhoods on a regular basis.YD6 {Oy'ԍ GTE Inputs Further Notice comments at 55.Y GTE also contends that telephone companies do not design distribution plant with the expectation that it will require reinforcement because that is  X4rarely the leastcost method of placing plant.YZD6 {O'ԍ GTE Inputs Further Notice comments at 55.Y GTE also claims that, in a competitive  X4environment, facilitiesbased competitors would build plant to serve ultimate demand.YD6 {OX'ԍ GTE Inputs Further Notice comments at 55.Y We find, however, that these unsupported claims do not demonstrate that reflecting ultimate demand in the fill factors more closely represents the behavior of an efficient firm and will not result in the modeling of excess capacity. Finally, we find that we did not misinterpret  X_4the meaning of building distribution plant to serve "ultimate demand," as GTE asserts.Y_~D6 {O 'ԍ GTE Inputs Further Notice comments at 56.Y Rather, we refused to engage in the highly speculative activity of defining "ultimate demand." Moreover, we believe that universal service support will be determined more accurately considering current demand, and not ultimate demand. Although firms may have installed excess capacity, it does not follow that the cost of this choice should be supported by the universal service support mechanism. As growth occurs, however, we anticipate that the  X 4requirement for new capacity will be reflected in updates to the model. D6 yO'ԍ We anticipate beginning a proceeding in the near future to determine how to incorporate changed circumstances such as these into the modeling process.  X 4202.` ` Concomitantly, we adopt the proposed values for distribution fill factors. As  X4we explained in the Inputs Further Notice, the model designs outside plant to meet current  X{4demand in the same manner as the HAI model.S{h D6 {O'ԍ Inputs Further Notice at para. 100.S Accordingly, it is appropriate to choose fill factors that are set at less than 100 percent. We conclude that, based on the record before us, the proposed values reflect the appropriate fill factors needed to meet current demand.  X4203.` ` There is divergence among the commenters with regard to the adoption of the proposed values for the distribution fill factors. Sprint does not object to the use of the proposed values, stating that "they appear to reasonably represent realistic, forwardlooking  X4practices."\ D6 {O"'ԍ Sprint Inputs Further Notice comments at 29.\ As noted above, Ameritech contends that the copper distribution and feeder fill factors are reasonable estimates to use if companyspecific or statespecific fill factors are not  X4used.` D6 {O%'ԍ Ameritech Inputs Further Notice comments at 20. ` In contrast, SBC disagrees with the HAI proponents' claim that the level of spare"Y0*&&``" capacity provided in the proposed values is sufficient to meet current demand plus some  X4amount of growth.XD6 {Ob'ԍ SBC Inputs Further Notice comments at 9.X SBC, however, offers no controverting evidence demonstrating that the proposed values are insufficient to meet current demand plus shortterm growth. We find that the lone fact that SBC disagrees is insufficient to controvert our conclusion that the proposed values reflect the appropriate fill needed to meet current demand. BellSouth contends that the  X4proposed values will significantly understate distribution cable requirements.oZD6 {O'ԍ BellSouth Inputs Further Notice comments, Attachment B at B11.o BellSouth submits instead projected fill factors for its distribution copper, feeder copper, and fiber cables determined by BellSouth network engineers. We find these estimates unsupported. Similarly, Bell Atlantic contends that the proposed fill factors for feeder and distribution are too high  X14and recommends we adopt its proposed fill factors.1D6 {O 'ԍ Bell Atlantic Inputs Further Notice comments, Attachment D at 7 (Proprietary Version); Bell Atlantic  {O'Inputs Further Notice reply comments, Attachment A at A1. We find these recommended fill factors unsupported. We, therefore, select the proposed values for distribution fill factors.  X 4204.` ` We also disagree with AT&T and MCI's contention that the proposed values for the distribution fill factors are too low. AT&T and MCI claim that distribution fill factors  X 4of 1.2 lines per household are more than adequate in a forwardlooking cost study.e HD6 {O'ԍ AT&T and MCI Inputs Further Notice comments at 2223.e We disagree. We find that 1.2 lines per household are inadequate because they simply reflect the existing provision of telephone service and are less than current demand as we define it  Xy4herein.yD6 {O'ԍ See FCC, Common Carrier Bureau, Industry Analysis Division, Trends in Telephone Service at 206 (rel. Sept. 1999). Moreover, AT&T and MCI's claim is belied by their own assertions. AT&T and MCI contend that the "proposed conservative fill factors will ensure sufficient plant capacity  XK4to accommodate potentially unaccounted service needs in the PNR data."aK4 D6 {O0'ԍ AT&T and MCI Inputs Further Notice comments at 8.a AT&T and MCI also state that "[t]he fill levels used in HAI provides more than enough spare capacity for  X4service work, churn, and unforeseen spikes in demand.h D6 {O 'ԍ AT&T and MCI Inputs Further Notice reply comments at 20.h In sum, AT&T and MCI attest to the reasonableness of not only use of the HAI default values for distribution plant, but also the use of the average of the HAI and BCPM default values for copper feeder.  X4205.` ` We also disagree with AT&T and MCI's claim that higher factors are appropriate because the model's sizing algorithm produces effective fill factors that are lower"ZX 0*&&``"  X4than optimal values.bD6 {Oy'ԍ AT&T and MCI Inputs Further Notice comments at 22.b As we explained in the Inputs Further Notice, because cable and fiber are available only in certain sizes, the effective fill factor may be lower than the  X4administrative fill factor adopted as an input.YZD6 {O'ԍ Inputs Further Notice at para. 96 n. 185.Y We find that AT&T and MCI's claim ignores this fact.  X4206.` ` Finally, we note that AT&T and MCI also claim that the factor should be higher because universal service support does not include residential second lines or multiple  Xa4business lines. The Commission has never acted on the recommendation in the First  XL4Recommended Decision that only primary residential lines should be supported.~LD6 {O 'ԍ See First Recommended Decision, 12 FCC Rcd at 9192, 132134, paras. 4, 8992.~ Moreover, we also note that AT&T and MCI's claim ignores the sixth criterion, which requires that: XX` ` The Cost Study or model must estimate the cost of providing service for all businesses and households. . . Such inclusion of multiline business services and multiple residential lines will permit the cost study or model to reflect the economies of scale  X 4associated with the provision of these services.g ~D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 8915, para. 250.g x` In sum, we find AT&T and MCI's claim in this regard unpersuasive.  XQ4207.` ` Feeder Fill Factors. We also affirm our tentative conclusion to adopt copper feeder fill factors that are the average of the HAI and BCPM default values. The divergence among the commenters noted above with regard to the use of the average of the HAI and BCPM default values for the distribution fill factors is reflected in the comments regarding the proposed feeder fill factors. Sprint finds that use of the average of the HAI and BCPM  X4default values for feeder fill factors is reasonable.\D6 {O'ԍ Sprint Inputs Further Notice comments at 29.\ Ameritech's conditional support was noted above. In contrast, BellSouth contends that the average of the HAI and BCPM default  X4values will significantly understate copper feeder cable requirements.oD6 {O"'ԍ BellSouth Inputs Further Notice comments, Attachment B at B11.o As noted above, BellSouth advocates the use of projected fill factors for copper feeder determined by BellSouth network engineers. Similarly, Bell Atlantic contends that the feeder fill factors are"[4 0*&&``"  X4too high.D6 {Oy'ԍ Bell Atlantic Inputs Further Notice comments, Attachment D at 7 (Proprietary Version); Bell Atlantic  {OC'Inputs Further Notice reply comments, Attachment A at A1. We reject the use of these fill projections for copper feeder for the reasons enumerated above. We also reject, for the reasons enumerated above, AT&T and MCI's contention that feeder fill factors based on the average of the HAI and BCPM default values are too low.  X4208.` ` Fiber Fill Factors. Finally, we affirm our tentative conclusion that the input value for fiber fill in the federal mechanism should be 100 percent. The majority of  X_4commenters addressing this specific issue agree with our tentative conclusion.!_$D6 {O4 'ԍ See e.g., AT&T and MCI Inputs Further Notice comments at 22; Sprint Inputs Further Notice comments  {O 'at 30; GTE Inputs Further Notice comments at 56 ; SBC Inputs Further Notice comments at 910.! AT&T and MCI contend that fiber feeder fill factors of 100 percent are appropriate because the allocation of four fibers per integrated DLC site equates to an actual fill of 50 percent, since a redundant  X 4transmit and a redundant receive fiber are included in the four fibers per site.y  D6 yOK'ԍ We note that GTE agrees with a fill factor of 100 percent for fiber as it relates to 100 percent redundancy only if it provides fibers for redundant optical transmit and receive and does not equate to 100 percent fiber utilization. We note that a fill factor of 100 percent for fiber does not equate to 100 percent fiber utilization. y AT&T and MCI explain that, because fiber capacity can easily be upgraded, 100 percent fill factors applied to four fibers per site are sufficient to meet unexpected increases in demand, to accommodate customer churn, and, to handle maintenance issues. Similarly, SBC asserts that fiber fill factors of 100 percent can be obtained because they are not currently subject to daily  X 4service order volatility and are more easily administered.[ h D6 {O'ԍ SBC Inputs Further Notice comments at 910.[ In contrast, BellSouth advocates  X4that we employ projected fills estimated by BellSouth engineers.u D6 {O;'ԍ BellSouth Inputs Further Notice comments, Attachment B at B9 B10.u As noted above, these estimates are unsupported and we reject them accordingly. In sum, we find that the record demonstrates that it is appropriate to use 100 percent as the input value for fiber fill in the federal mechanism.  X' 6.` ` Structure Costs  X'` ` a. Background  X4209. ` ` Outside plant structure refers to the set of facilities that support, house, guide,  X4or otherwise protect distribution and feeder cable.S D6 {O%'ԍ Inputs Further Notice at para. 104.S We explained that aerial structure"\0*&&``5"  X4consists of telephone poles and associated hardware such as anchors and guys. Buried  X4structure consists of trenches.wD6 yOb'ԍ When a plow is used to place buried cable, a separate trench is not required.w Underground structure consists of trenches, conduit, manholes, and pullboxes. Underground cable is placed underground within conduits for added support and protection. Structure costs include the initial capital outlay for physical material associated with outside plant structure, including manholes; conduit, trenches, poles, anchors and guys, and other facilities; the capitalized cost for supplies, delivery, provisioning, right of way fees, taxes, and any other capitalized costs directly attributable to these assets; and the capitalized cost for the labor, engineering, and materials required to install these assets. For example, buried and underground structure costs include capitalized labor, engineering, and material costs for such activities as plowing or trenching, backfilling, boring cable, and cutting and restoring asphalt, concrete, or sod, or any combination of such activities. Generally, the type of structure that is placed will vary depending on the type of plant installed, i.e., the  X 4plant mix.` `  X 4210. ` ` As noted above, the model uses structure cost tables that identify the perfoot 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. We tentatively concluded that we should use, with certain modifications, the estimates in the  X44NRRI Study for the perfoot cost of aerial, underground, and buried structure.S4XD6 {O='ԍ Inputs Further Notice at para. 106.S We noted that, in general, these estimates are derived from regression equations that measure the effect on these costs of density, water, soil, and rock conditions.  X4211. ` ` In the Inputs Further Notice, we rejected the HAI and BCPM sponsors' default  X4input values for structure costs because they were based upon the opinions of their respective  X4experts and lacked supporting data that allowed us to substantiate these values.SD6 {OG'ԍ Inputs Further Notice at para. 105.S As noted above, we have received other structure cost data from a number of LECs, as well as AT&T, including data received in response to the structure and cable cost survey and data submitted  Xg4in ex parte filings.  X;4 212. ` ` In the Inputs Further Notice, we tentatively decided to use the regression equation for aerial structure in the NRRI Study as a starting point for aerial structure input"&]|0*&&``"  X4values.D6 {Oy'ԍ Inputs Further Notice at para. 107. This regression equation was set forth in Appendix D, section III.A  {OC'of the Inputs Further Notice. We proposed to use this equation to develop proposed input values for the labor and material cost for a 40foot, classfour telephone pole. We developed separate pole cost  X4estimates for normal bedrock, soft bedrock, and hard bedrock.k$D6 {O'ԍ See Inputs Further Notice, Appendix D, section III.A.k The regression coefficients estimate the combined cost of material and supplies. The NRRI Study reports that the  X4average material price for a 40foot, classfour pole is $213.94.D6 {O 'ԍ Inputs Further Notice at para. 107 n. 206 citing NRRI Study at 51, Table 211. We noted that this estimate  X4is very close to results obtained from the data submitted in response to the 1997 Data  Xx4Request.  XL4213.` ` We also tentatively concluded 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  X 4this regression equation was derived do not include these costs.S HD6 {O'ԍ Inputs Further Notice at para. 108.S As we noted, Gabel and Kennedy used the RUS data to develop the following cost estimates for anchors, guys and other polerelated items: $32.98 in rural areas; $49.96 in suburban areas; and $60.47 in urban  X 4areas. D6 {Od'ԍ Inputs Further Notice at para. 108 n. 208 citing NRRI Study at 55, Table 214. We tentatively concluded that these are reasonable estimates for the cost of anchors,  X 4guys, and other polerelated items.S l D6 {O'ԍ Inputs Further Notice at para. 108.S  X 4   X4214.` ` We also explained, in the Inputs Further Notice, that in order to obtain proposed input values that can be used in the model, it is necessary to convert the estimated  Xh4pole costs into perfoot costs for each of the nine density zones.Sh D6 {O'ԍ Inputs Further Notice at para. 110.S For purposes of this computation, we proposed to use, for density zones 1 and 2, the perpole cost that we have estimated for rural areas, based on the NRRI Study; for density zones 3 through 7, the perpole cost for suburban areas; and for density zones 8 and 9, the perpole cost for urban areas. We then divided the estimated cost of a pole by the estimated distance between poles. We proposed 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. "^ 0*&&```"Ԍ X4 215. ` ` We also tentatively concluded that we should adopt a methodology to estimate the cost of underground structure that is similar to the one we proposed for the cost of aerial  X4structure.SD6 {OK'ԍ Inputs Further Notice at para. 111.S We tentatively concluded that we should use the equation set forth in Appendix  X4D of the Inputs Further Notice as a starting point for this estimate.HZZD6 {O'ԍ See Inputs Further Notice, Appendix D, section III.B. This regression equation is based on the RUS data, but was developed after the publication of that report. The NRRI Study does not set forth a regression equation for estimating the cost of underground structure.H We proposed to use this equation to develop proposed input values for the labor and material cost for underground cable structure. We developed separate cost estimates for underground structure in normal  Xx4bedrock, soft bedrock, and hard bedrock for density zones 1 and 2.RXx|D6 yO 'ԍ This regression equation was developed using underground cost data for density zones 1 and 2. The variable in this equation that represents the density zone of the geographic area in which the underground costs are incurred is not statistically significant at any standard level of significance.R  XJ4216.` ` We also tentatively concluded that we should use the modified equation for estimating the cost of 24gauge buried copper cable and structure to estimate the cost of  X 4buried structure. D6 {Oi'ԍ This equation is set forth in Appendix D, section III.C of the Inputs Further Notice. We determined that it is necessary to modify this equation because estimates derived from it include labor and material costs for both buried cable and  X 4structure.q . D6 {O'ԍ See Inputs Further Notice, Appendix D, section III.C.q  X 4217.` ` Finally, we determined that, because the RUS data are from companies that operate only in density zones 1 and 2, we were unable to develop estimates from the  X4regression equation for density zones 3 through 9 for underground and buried structure.S D6 {O'ԍ  Inputs Further Notice at para. 112.S We tentatively concluded, therefore, that we should derive cost estimates for density zones 3  Xd4through 9 by extrapolating from the estimates for density zone 2. We sought comment on alternative methods for estimating structure costs for density zones 3 through 9.  X'` ` b. Discussion  X4218.` ` We affirm our tentative conclusions to use the regression equation for aerial structure in the NRRI Study as a starting point for the cost estimate for aerial structure; to use  X4the regression equation for underground structure in the Inputs Further Notice as a starting point for the cost estimate for underground structure for density zones 1 and 2; and to use the"_R 0*&&``\" regression equation for the cost of 24gauge buried copper cable and structure, as modified  X4below, to estimate the cost of buried structure for density zones 1 and 2.D6 {Ob'ԍ See paragraphs 126132 for a discussion of the development of the equation for buried structure. Concomitantly, we affirm our tentative conclusion to add to the estimates for aerial structure the costs of  X4anchors, guys, and other materials that support the poles. As we explained in the Inputs  X4Further Notice, the RUS data from which this regression equation was derived do not include  X4these costs. We also adopt the following values we proposed in the Inputs Further Notice 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.  X74219.` ` As noted above, several commenters advocate that the input values we adopt for structure costs reflect companyspecific data. For the reasons enumerated above, we reject the use of the companyspecific data we have received to estimate the nationwide average input values for structure costs to be used in the model.  X 4220.` ` Notwithstanding this conclusion, we find that it is unnecessary to extrapolate cost estimates for underground and buried structure for density zones 3 through 9 as we  X4proposed. At the time of the Inputs Further Notice, we believed the extrapolated data were the best data available to us at the time for density zones 3 through 9 although we noted our  Xj4preference to use data specific to those density zones.SjZD6 {Ou'ԍ  Inputs Further Notice at para. 112.S Upon further examination, we find that cost data, which include values for density zones 3 through 9, submitted by various state  X<4commissions for use in this proceeding are more reliable than the extrapolated data.-<D6 {O'ԍ In the Universal Service Order, we determined that states could submit their own cost studies to serve as  yO'the basis for calculating federal universal service support in their states, if those studies met the criteria for forwardlooking economic cost determinations. In sum, we required that such cost studies must be based on forwardlooking economic cost principles and supported by publicly available data and computations. In order for the Commission to accept a state cost study for these purposes, we also required that the study be the same cost study that is used by the state to determine intrastate universal service support levels pursuant to 254(f) of  {O'the Act. See Universal Service Order, 12 Fcc Rcd at 891216, paras. 248, 25051. The Commission subsequently adopted the Joint Board's recommendation to estimate forwardlooking costs using a single national  {O'model. See Seventh Report & Order, 14 FCC Rcd at 8103.- Specifically, we reviewed structure cost data from North Carolina, South Carolina, Indiana, Nebraska, New Mexico, Montana, Minnesota, and Kentucky. These data reflect structure  X4costs designed for use in the HAI and BCPM models. D6 yOj"'ԍ The RUS data underlying the NRRI Study reflect structure costs for density zones 1 and 2.  X4221.` ` The structure costs submitted by the state commissions have values for normal rock, soft rock, and hard rock for density zones 3 through 9. We adopt as the buried and"`R 0*&&``" underground structure cost input values for these density zones weighted average structure costs developed from these data based on the number of access lines for the companies to which the state decisions regarding the submitted structure costs apply. We find that these weighted averages represent reasonable estimates for buried and underground structure costs in normal, soft, and hard rock conditions for density zones 3 through 9.  Xv4222.` ` Apart from the criticism of the extrapolation of structure costs for density zones  X_43 through 9 from the estimates for density zone 2,c_D6 {O'ԍ See GTE Inputs Further Notice comments at 53.c the comments we have received regarding the values we proposed for structure costs vary as to the type of structure the commenters address and vary as to the position they take on the reasonableness of the  X 4estimates.OD ZD6 {O% 'ԍ GTE contends that the model should rely on two sizes of poles in estimating aerial costs. GTE Inputs  {O 'Further Notice comments at 51. GTE also recommends that the calculation of the number of poles for a given length of facility be modified. We find that there is insufficient evidence on the record at this time with regard to the type of pole used in a particular density zone to make a determination as to GTE's first recommendation. We may evaluate this, among other factors, and provide parties an opportunity to submit additional evidence on the record in the upcoming proceeding on future changes to the model. We also find that GTE's second recommendation represents a platform change which may be considered in the upcoming proceeding on future changes to the model. O BellSouth states that the values we adopt for aerial structures are "fairly representative of BellSouth's values" but claims that, based on a comparison to its actual data,  X 4the values for underground and buried structure are too low.Z f D6 {O'ԍ GTE Inputs Further Notice comments at 51. Z Cincinnati Bell states that the values we adopt for underground structure never vary from Cincinnati Bell's actual costs by  X 4more than 15 percent.d D6 {Og'ԍ Cincinnati Bell Inputs Further Notice comments at 4.d Sprint claims that our proposed cost of poles are understated but the  X 4costs of anchor and guys appear to be reasonable._ D6 {O'ԍ Sprint Inputs Further Notice comments at 3031._ SBC claims that its actual weighted cost of a 40 foot pole is inconsistent with the loaded cost from the NRRI Study. SBC asserts, however, that the NRRIspecified cost is more closely aligned with SBC's anchor and guy  Xb4costs.YbD6 {O/ 'ԍ SBC Inputs Further Notice comments at 10.Y We find that, given this divergence of positions, the support in the record for some of our proposed values, and lack of backup data to support the arguments opposing our proposals, on balance, the structure cost estimates we adopt for aerial, underground, and buried structure for density zones 1 and 2 are reasonable. Moreover, we find it is reasonable to use the values we adopt for density zones 3 through 9. As we discussed above, these values reflect cost data for density zones 3 through 9 and have been submitted to us by state commissions for use in this proceeding. These values are more reliable than those derived"a0*&&``" through the extrapolation of data reflecting density zones 1 and 2, and for the reasons discussed above, the companyspecific data submitted on the record.  X4223.` ` In reaching these conclusions, we note that AT&T and MCI advocate that we adjust the regressions used to estimate structure costs to reflect the buying power of large  X4nonrural LECs.bD6 {O'ԍ AT&T and MCI Inputs Further Notice comments at 23.b We find that, because AT&T and MCI did not provide any data to support such a determination, the record is insufficient to determine that such an adjustment is necessary. We also reject AT&T and MCI's claim that the costs of underground structure are excessive because they fail to exclude manhole costs from the costs of underground  X14distribution.b1ZD6 {O< 'ԍ AT&T and MCI Inputs Further Notice comments at 24.b Contrary to AT&T and MCI's assertion, we find that manhole costs are necessary to allow for splicing when the length of the distribution cable exceeds minimum distance criteria adopted by the model.  X 4224.` ` Finally, we note, as described more fully above, that we have made adjustments  X 4to certain of the regression equations in the Inputs Further Notice from which we estimate structure costs in order to address certain of the criticisms reflected in the comments and  X4improve the regression equations accordingly.PD6 {O/'ԍ See supra at paragraphs 133138.P   Xd4225.` ` LEC Loading Adjustment. In the Inputs Further Notice, we tentatively concluded that we should add a loading of ten percent to the material and labor cost (net of LEC engineering) for aerial, underground, and buried structure because the cost of LEC engineering was not reflected in the data from which Gabel and Kennedy derived their  X 4estimates. ~D6 {O9'ԍ Inputs Further Notice at paras. 109, 111, 114. We note that this adjustment is consistent with that made to aerial, underground, and buried cable. We find that, based on the record before us, the LEC engineering adjustment is appropriate and the proposed level of the adjustment is reasonable. In reaching this conclusion, we reject at the outset the position of those commenters advocating that the adjustment be based on companyspecific data. As we explained above, we find such data are not the most reliable data on the record.  X4226.` ` As with the LEC adjustment proposed for cable costs discussed above, there is a general consensus on the record among the commenters that an adjustment is necessary. We find, therefore, that an adjustment to reflect the cost of LEC engineering is appropriate. Beyond the general claim that we should adopt companyspecific data, there is divergence among the commenters regarding the appropriate level of this adjustment. GTE claims that the adjustment should be greater than 10 percent based on a comparison to its data for buried" b0*&&``"  X4plant.YD6 {Oy'ԍ GTE Inputs Further Notice comments at 53.Y SBC agrees that 10 percent is appropriate for aerial and buried structure but too low  X4for underground structure.\ZD6 {O'ԍ SBC Inputs Further Notice comments at 1011.\ SBC proposes a loading factor of 20 percent instead for underground structure. Based on our review of the information, it is our judgement that the  X410 percent adjustment is the most reasonable value on the record before us to reflect the cost  X4of LEC engineering.ND6 {OA 'ԍ See supra paragraph 165.N   Xv'  7.` ` Plant Mix    XH'` ` a. Background  X 4227.` ` In the Inputs Further Notice, we explained that plant mix, i.e., the relative  X 4proportions of different types of plant in any given area, plays a significant part in  X 4determining total outside plant investment.S ~D6 {O'ԍ Inputs Further Notice at para. 116.S This is because the costs of cable and outside plant structure differ for aerial, buried, and underground cable and structure. The model provides three separate plant mix tables, for distribution, copper feeder, and fiber feeder,  X 4which can accept different plant mix percentages for each of the nine density zones.   X{4228. ` ` Distribution Plant. In the Inputs Further Notice, we tentatively selected input values for distribution plant mix that more closely reflected the assumptions underlying  XO4BCPM's default values than HAI's default values.OD6 {O'ԍ In the Inputs Further Notice, we distinguished the BCPM default values for distribution plant from those  {O'reflected in the HAI model. Inputs Further Notice at para. 47. As we explained, 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 multistory buildings and "block cable" attached to buildings, rather than to poles. Specifically, we tentatively proposed 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. We tentatively selected input values that more closely reflected the assumptions underlying the BCPM default values because the model does not design outside plant that contains either riser cable or block cable, so we did not believe it would be appropriate to"c0*&&``{" assume that there is as high a percentage of aerial plant in densely populated areas as the HAI default values assume. Moreover, although our proposed plant mix values assumed somewhat less underground structure in the lower density zones than the BCPM default values, we disagreed with HAI's assumption that there is very little underground distribution plant and none in the six lowest density zones.  Xv4229. ` ` Feeder Plant. We tentatively selected input values for feeder plant mix that generally reflect the assumptions underlying the BCPM and HAI default plant mix  XH4percentages, with certain modifications.,HD6 {O 'ԍ As we explained in the Inputs Further Notice, the default plant mix percentages for feeder plant are  {O 'generally similar in the BCPM and the HAI models. Inputs Further Notice at para. 120. Although the BCPM default values vary between normal or soft rock terrain and hard rock terrain, as noted above, 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., We tentatively proposed 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 for aerial plant.  X 4Based on our preliminary review of the structure and cable survey data,h d D6 {O'ԍ See Inputs Further Notice, Appendix C. h the proposed 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 found 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 had proposed plant mix values that vary between copper feeder and fiber feeder, they offered no convincing rationale for doing so. We tentatively concluded that, like the BCPM defaults, our proposed plant mix ratios should not vary between copper feeder and fiber feeder.  X4230.` ` Finally, we sought comment on alternatives to the nationwide plant mix input  X4values we tentatively adopted. As we explained, the Commission tentatively concluded, in the  X41997 Further Notice, that plant mix ratios should vary with terrain as well as density zones.Q D6 {O"'ԍ 1997 Further Notice at para. 122.Q Because the model does not provide separate plant mix tables for different terrain conditions, however, the nationwide plant mix values we proposed do not vary by terrain. We noted that one method of varying plant mix by terrain would be to add separate plant mix tables, as"d 0*&&``" there are in BCPM, to the model. We observed 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. We suggested that another method of varying plant mix would be to use companyspecific or statespecific input values for plant mix, as advocated by the BCPM sponsors and other LECs.  Xv4231. ` ` We also noted that, although we had generally chosen not to use study area specific input values in the federal mechanism, and we recognized that historical plant mix ratios may not reflect an efficient carrier's plant type choice today, historical plant mix might reflect terrain conditions that will not change over time. We explained that our analysis of current ARMIS data reveals a great deal of variability in plant mix ratios among the states. To that end, we recognized that US West had proposed an algorithm in certain state  X 4proceedings for adjusting plant mix to reflect its actual sheath miles as reported in ARMIS.  D6 yOe 'ԍ Structure distance, also known as route distance, measures the distance of the pole line or the trench. Sheath distance measures cable distance. If there is only one cable along a particular route then structure distance and sheath distance are equal. When, however, there is more than one cable along a route, sheath distance will be a multiple of the structure distance. We sought comment on a modified version of this algorithm as an alternative to nationwide  X 4plant mix values. D6 yO'ԍ The proposed algorithm uses ARMIS 4308 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.  ` `  X' ` ` b. DiscussionhhC q  Xb4232.` ` As explained above, although we tentatively chose to adopt nationwide plant mix values, we presented and sought comment on an alternative algorithm based on sheath miles reported in ARMIS to develop plant mix values. Consistent with that alternative, GTE  X4asserts that companyspecific plant mix should be used instead of nationwide input values.YD6 {O"'ԍ GTE Inputs Further Notice comments at 58.Y Similarly, Sprint contends that companyspecific or statespecific plant mix values should be"e0*&&``s"  X4used.\D6 {Oy'ԍ Sprint Inputs Further Notice comments at 34.\ US West asserts that the model should utilize studyarea specific plant mix values  X4that are available in ARMIS as a starting point for plant mix inputs in the model.fZD6 {O'ԍ US West Inputs Further Notice comments at 3236.f  X4233.` ` We find, however, as discussed more fully below, because companies do not report aerial and buried route miles in ARMIS, that it is not possible to develop plant mix factors directly from these data at this time. Moreover, we note that the record does not reflect companyspecific plant mix values for all companies, nor has any commenter presented a methodology that recognizes the fact that plant mix varies across density zones and allocates it accordingly. In sum, we conclude that neither companyspecific nor ARMISderived data represent reasonable alternatives to the use of nationwide inputs. We find, therefore, that the use of nationwide inputs is the most reasonable approach in developing plant mix values on the record before us.  X 4 234.` ` US West claims that the plant mix algorithm we proposed places too much plant in aerial. US West traces this flaw to several alleged errors in the plant mix  X 4algorithm.e D6 {OD'ԍ US West Inputs Further Notice comments, Attachment D.e US West claims that the algorithm erroneously double weights the model plant mix. This is not an error as US West claims. Because the model results used in US West's analysis are based on the low aerial distribution input, we find that the double weight should result in low levels of aerial construction rather than high levels of aerial construction. US  XK4West also identifies several formulaic errors.eK~D6 {Oz'ԍ US West Inputs Further Notice comments, Attachment D.e We find these errors attributable, however, to  X44US West's lack of understanding of how the proposed algorithm works. 4D6 yO'ԍ For example, the ARMIS buried ratio is not the ratio of model buried to the sum of model underground and model aerial as US West claims, but rather the ratio of model buried to the sum of model buried and model aerial. US West claims that the underground ratio is the ratio of ARMIS to model sheath miles. This is  yOM'incorrect. It is the ratio of ARMIS trench miles to model route miles.  We agree, however, with US West that the high aerial results do appear to be a function of incorrectly weighting aerial plant. We find that this problem is a function of treating the aerial plant mix factor as a residual rather than directly estimating an aerial factor. Given this flaw, we  X4conclude that we should not adopt the plant mix algorithm on which we sought comment.  X4235.` ` As noted above, we sought comment on alternatives to nationwide plant mix  X4input values.R D6 {O<%'ԍ  Inputs Further Notice at para. 49.R US West has proposed two algorithms. As explained below, we find that"f 0*&&``" each of these has its own biases and, therefore, that neither is a reasonable alternative to what we have proposed. In brief, US West's first algorithm takes the geometric mean of the national default and a structure ratio to determine the plant mix factor. It defines the structure ratio for underground plant as the ratio of ARMIS trench miles to model route miles; for buried and aerial plant the structure ratio is defined as the relative sheath miles of the structure type multiplied by the model route miles less the ARMIS trench miles. We find that the final result of this algorithm places too much underground structure because, for all but the lowest density zone, the underground plant mix factor is significantly higher than the ARMIS ratio. The second algorithm US West proposes starts with the relative share of ARMIS sheath miles for all three structure types. It then establishes two series of fractions that sum to one. In the first series, the fractions increase as the density zone increases. This series is applied to underground structure and thus places more underground structure in the higher density zones. In the second series, the fractions decrease as the density zones increase. This series is applied to aerial structure, with the result that the percentage of aerial cable declines as density increases. For buried structure, the ARMIS ratio is used for all density zones. We find that this algorithm is flawed because it does not recognize the difference between sheath and route miles. As a consequence, the algorithm produces a biased result. Specifically, it constructs too much underground cable. We find that, until this problem is resolved, relying directly on ARMIS information leads to unreasonable results.  X44236. ` ` Distribution Plant. We adopt the proposed input values for distribution plant  X4mix which are set forth in Appendix A . We conclude that these values for the lowest to the highest density zones, which 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, are the most reasonable estimates of distribution plant mix on the record before us.  X4237.` ` There is divergence among the commenters with regard to the appropriateness  X4of the input values for the distribution plant mix proposed in the Inputs Further Notice. SBC supports the proposed distribution plant mix, noting that it "closely aligns with the embedded  Xg4plant and future outside plant design."YgD6 {O'ԍ SBC Inputs Further Notice comments at 11.Y AT&T and MCI advocate the use of the HAI default values for plant mix because, according to AT&T and MCI, they more properly reflect the  X94use of aerial and underground cable than the proposed distribution plant mix inputs.b9ZD6 {OD 'ԍ AT&T and MCI Inputs Further Notice comments at 25.b AT&T and MCI claim that the proposed inputs reflect too much underground and too little  X 4aerial cable. As we explained in the Inputs Further Notice, the model does not design outside plant that contains either riser cable or block cable. Accordingly, use of the HAI default values, which assume a high percentage of aerial plant in densely populated areas, would be inconsistent with the model platform. AT&T and MCI ignore this fact. "!g0*&&``? "Ԍ X4238. In the Inputs Further Notice, we stated that we disagreed with HAI's assumption that there is very little underground distribution plant and none in the six lowest density  X4zones.SD6 {OM'ԍ  Inputs Further Notice at para. 119.S In support of the HAI values for underground distribution plant, AT&T and MCI proffer the distribution plant mix values for BellSouth, notably the only company to provide such data, showing that its underground distribution plant mix value is very low. We find that, because we are not adopting a companyspecific algorithm, it is not necessary to address this issue. As noted above, we will not adopt an alternative algorithm until the issue of underground structure distances has been resolved. We adhere to employing a national value because we find that, though it may not be exact for every company, it will be reasonable for all companies.  X 4239.` ` Feeder Plant. We also adopt the proposed input values for feeder plant mix which are set forth in Appendix A. We conclude that these values for the lowest to the highest density zones, which range from five percent to 95 percent for underground plant; 50 to zero percent for buried plant; and 45 to five percent for aerial plant, are the most reasonable estimates of distribution plant mix on the record before us. GTE's and Sprint's comments specifically address the specific issue of feeder plant mix inputs. As noted above,  X{4both carriers advocate the use of companyspecific data for plant mix.{ZD6 {O'ԍ GTE Inputs Further Notice comments at 58; Sprint Inputs Further Notice comments at 34. We reject the use of such data for feeder plant mix for the reasons we enumerate above.  X64240.` ` Finally, we affirm our tentative conclusion that the plant mix ratios should not vary between copper feeder and fiber feeder. In reaching our tentative conclusion, we noted that, although the HAI sponsors proposed plant mix values that vary between copper feeder and fiber feeder, they have offered no convincing rationale for doing so. We find such support still lacking. GTE claims that a distinction is necessary because the existing plant mix indicates that the trend for more outofsight construction has already resulted in differing  X4copper and fiber feeder plant mixes.YD6 {OI'ԍ GTE Inputs Further Notice comments at 59.Y In contrast, SBC contends that plant mix ratios should not vary between copper feeder and fiber feeder because existing structure is used whenever  X~4available for fiber and copper placement so the mix ratio would not differ.Y~~D6 {O 'ԍ SBC Inputs Further Notice comments at 11.Y We find neither of these claims to be persuasive. Accordingly, we conclude that, given the absence of controverting evidence, it is reasonable to assume that plant mix ratios should not vary between copper feeder and fiber feeder in the model.  X ' D.Structure Sharing " h0*&&``"Ԍ  X' 1.` ` Background    X4241. ` ` Outside plant structures are generally shared by LECs, cable operators, electric utilities, and others, including competitive access providers and interexchange carriers. To the extent that several utilities place cables in common trenches, or on common poles, it is appropriate to share the costs of these structures among the various users and assign a portion of the cost of these structures to the telephone company.   X14242. ` ` In the Inputs Further Notice, the Commission tentatively adopted structure  X 4sharing values for aerial, buried, and underground structure.S D6 {O 'ԍ Inputs Further Notice at para. 129.S Several comments relating to  X 4these values were filed in response to the Inputs Further Notice. Both the BCPM and HAI models varied the percentage of costs they assume will be shared depending on the type of  X 4structure (aerial, buried, or underground) and line density." ZD6 {O'ԍ See HAI Dec. 11, 1997 submission, Appendix B at 57; BCPM Jan. 31, 1997 submission, Attachment 9. The BCPM sponsors assume that an efficient telephone company will benefit only marginally from sharing. The HAI sponsors assume that utilities will engage in substantial sharing with telephone companies, and generally assigns between 25% and 50% of the cost of shared facilities to the LEC. Commenters differ significantly, however, on their assumptions as to the extent of sharing and, therefore, the percentage of structure costs that should be attributed to the telephone company in a forwardlooking cost  X4model. DD6 {O'ԍ See, e.g., AT&T/MCI Inputs Further Notice comments at 2831; Bell Atlantic Inputs Further Notice  {OS'comments at 18; GTE Inputs Further Notice comments at 57; SBC Inputs Further Notice comments at 11.    Xf' 2.` ` Discussion    X84243. ` ` We adopt the following structure sharing percentages that represent what we find is a reasonable share of structure costs to be incurred by the telephone company. For aerial structure, we assign 50 percent of structure cost in density zones 16 and 35 percent of  X4the costs in density zones 79 to the telephone company. D6 yOD'ԍ The model uses nine density zones, ranging from the lowest density zone (1) to the highest density zone (9). The nine density zones (measured in terms of the number of lines per square mile) are as follows: (1) zero 4.99; (2) 5 99.99; (3) 100 199.99; (4) 200 649.99; (5) 650 849.99; (6) 850 2549.99; (7) 2550 4999.99; (8) 5000 9,999.99; (9) 10,000+. For underground and buried structure, we assign 100 percent of the cost in density zones 12, 85 percent of the cost in density zone 3, 65 percent of the cost in density zones 46, and 55 percent of the cost in  X4density zones 79 to the telephone company. D6 {O%'ԍ See Appendix A for a complete list of the input values that we adopt in this Order. In doing so, we adopt the sharing percentages"i0*&&``"  X4we proposed in the Inputs Further Notice, except for buried and underground structure sharing in density zones 1 and 2, as explained below.   X4244. ` ` Commenters continue to diverge sharply in their assessment of structure  X4sharing. D6 {O'ԍ See, e.g., AT&T/MCI Inputs Further Notice comments at 2831; Bell Atlantic Inputs Further Notice  {O'comments at 18; GTE Inputs Further Notice comments at 57; SBC Inputs Further Notice comments at 11.  As noted by US West, "[s]ince forwardlooking sharing percentages for replacement of an entire network are not readily observable, there is room for reasonable  Xx4analysts to differ on the precise values for those inputs."]x$D6 {OM 'ԍ US West Inputs Further Notice comments at 28.] While commenters engage in lengthy discourse on topics such as whether the model should assume a "scorched node" approach in developing structure sharing values, little substantive evidence that can be verified  X34has been added to the debate., 3D6 yO'ԍ In general, the "scorched node or utilities" debate concerns whether the model should assume that all utilities are nonexistent in developing structure sharing percentages. Commenters contend that if the model assumes that everything is in place except for the telecommunications network, then the sharing percentages used in the model should reflect fewer opportunities for sharing because it would not be possible to coordinate sharing with other utilities in the development of a new network. In particular, opportunities for sharing of underground  {O'and buried structure would be limited. See BellSouth Inputs Further Notice comments at 89; GTE Inputs  {OL'Further Notice comments at 1821; US West Inputs Further Notice comments at 2829. While this may provide an interesting topic for academic debate, we do not believe it to be particularly useful or relevant in determining the structure sharing values in this proceeding. We note that, as part of the logical argument that the entire telephone network is to be rebuilt, it is also necessary to assume that the telephone industry will have at least the same opportunity to share the cost of building plant that existed when the plant was first built. We also note that cable and electric utilities continue to deploy service to new customers and replace existing technologies which provides an opportunity for carriers to share structure. AT&T and MCI contend that the structure sharing  X 4percentages proposed in the Inputs Further Notice assign too much of the cost to the incumbent LEC and fail to reflect the greater potential for sharing in a forwardlooking cost  X 4model.^ D6 {OK'ԍ AT&T/MCI Inputs Further Notice comments at 28.^ In contrast, several commenters contend that the proposed values assign too little  X 4cost to the incumbent LEC and reflect unrealistic opportunities for sharing. <D6 {O'ԍ See, e.g., BellSouth Inputs Further Notice comments, Attachment B at B13; Sprint Inputs Further Notice  {O'comments at 3639; US West Inputs Further Notice comments at 2932. In support of this contention, some LEC commenters propose alternative values that purport to reflect their existing structure sharing percentages, but fail to substantiate those values. SBC, however, claims that the structure sharing percentages we propose reflect its current practice and  X}4concurs with the structure sharing values that we adopt in this Order.Y}D6 {O$'ԍ SBC Inputs Further Notice comments at 11.Y "fj*0*&&``t"Ԍ X4245. ` ` More than with other input values, our determination of structure sharing percentages requires a degree of predictive judgement. Even if we had accurate and verifiable data with respect to the incumbent LECs' existing structure sharing percentages, we would still need to decide whether or not those existing percentages were appropriate starting points  X4for determining the input values for the forwardlooking cost model.D6 yO'ԍ In contrast, when developing inputs for tangible components of the network, we generally begin our analysis with an estimation of the cost of today's technology at today's prices. AT&T and MCI argue that past structure sharing percentages should be disregarded in predicting future structure sharing opportunities. Incumbent LEC commenters argue that sharing in the future will be no more, and may be less, than current practice.  X14246. ` ` In the Inputs Further Notice, we relied in part on the deliberations of a state  X 4commission faced with making similar predictive judgment relating to structure sharing.S D6 {O 'ԍ Inputs Further Notice at para. 130.S The Washington Utilities and Transportation Commission, conducted an examination of these  X 4issues and adopted sharing percentages similar to those we proposed.4\ D6 {OQ'ԍ See Washington USF Proceeding, Tenth Supplemental Order, Docket No. UT980311(a) at para. 108.  {O'See also Washington Utilities and Transportation Commission, Eighth Supplemental Order, Docket No. UT960369 at paras. 7376 (1998).4  X 4247. ` ` In developing the structure sharing percentages adopted in this Order, we find the sharing percentages proposed by the incumbent LECs to be, in some instances, overly conservative. While we do not necessarily agree with AT&T and MCI as to the extent of available structure sharing, we do agree that a forwardlooking mechanism must estimate the structure sharing opportunities available to a carrier operating in the mostefficient manner. As discussed in more detail in this Order, the forwardlooking practice of a carrier does not  X64necessarily equate to the historical practice of the carrier.VZ6D6 {O'ԍ See Washington Utilities and Transportation Commission, Eighth Supplemental Order, Docket No. UT960369 (1998) at para. 73 (proposing a range of sharing values "which reflects the balance between maximum achievable structure sharing and the amount of structure sharing achieved historically.").V Given the divergence of opinion on this issue, and of AT&T and MCI's contention that further sharing opportunities will exist in the future, we have made a reasonable predictive judgment, and also anticipate that this issue will be revisited as part of the Commission's process to update the model in a future proceeding.   X4248. ` ` In the 1997 Further Notice, the Commission tentatively concluded that 100 percent of the cost of cable buried with a plow should be assigned to the telephone"k 0*&&``"  X4company.cD6 {Oy'ԍ 1997 Further Notice, 12 FCC Rcd at 18547, para. 80.c In the Inputs Further Notice, we sought comment on the possibility that some opportunities for sharing existed for buried and underground structure in the least dense areas and proposed assignment of 90 percent of the cost in density zones 12 to the telephone  X4company.XZD6 {O'ԍ Inputs Further Notice at paras. 129132.X Several commenters contend that there are minimal opportunities for sharing of  X4buried and underground structure, particularly in lower density areas.D6 {OC 'ԍ See, e.g., Bell Atlantic Inputs Further Notice comments at 19; BellSouth Inputs Further Notice,  {O 'Attachment B at B14; GTE Inputs Further Notice comments at 5657. In addition, several commenters contend that, to the extent sharing is included in the RUS data, it is inappropriate  Xx4to count that sharing again in the calculation of structure cost.xHD6 {Oq 'ԍ Ameritech Inputs Further Notice comments at 12; Sprint Inputs Further Notice at 38; US West Inputs  {O;'Further Notice comments, Attachment A at 8. While we agree that structure sharing should not be double counted, we note that the RUS data includes little or  XJ4no sharing of underground or buried structure in density zones 12.>JD6 yO'ԍ NRRI Study at 3031.> This does, however, support the contention of commenters that there is, at most, minimal sharing of buried and  X 4underground structure in these density zones. 4 D6 {O'ԍ See GTE Inputs Further Notice comments at 57; Sprint Inputs Further Notice comments at 39 (noting  yO'that the RUS data demonstrates that there are few sharing opportunities in rural areas).  We therefore modify our proposed input value in this instance and assign 100 percent of the cost of buried and underground structure to the telephone company in density zones 12.   X 4249. ` ` We believe that the structure sharing percentages that we adopt reflect a reasonable percentage of the structure costs that should be assigned to the LEC. We note that our conclusion reflects 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  XM4density zones.M D6 {O'ԍ See, e.g., HAI Dec. 11, 1997 submission, Appendix B at 57; BCPM Jan. 31, 1997 submission, Attachment 9; Montana State Cost Study at 4647. The sharing values that we adopt reflect these assumptions. SBC also  X64concurs with our proposed structure sharing values.Y6D6 {O"'ԍ SBC Inputs Further Notice comments at 11.Y In addition, as noted above, the Washington Utilities and Transportation Commission has adopted structure sharing values that"lz0*&&``Y"  X4are similar to those that we adopt.sD6 {Oy'ԍ See Washington USF Proceeding, Docket No. UT980311(a), Appendix D.s We also note that the sharing values that we adopt fall within the range of default values originally proposed by the HAI and BCPM sponsors.   X4 E.Serving Area Interfaces    X' 1.` ` Background    X_4 250.` ` A serving area interface (SAI) is a centrally located piece of network equipment that acts as a physical interface between a feeder cable connecting a wire center  X14and neighborhood distribution copper cables.4 X1ZD6 yO< 'ԍ Generally, when a neighborhood is located near a wire center, copper feeder cable, using analog transmission, is deployed to connect the wire center to the SAI. From the SAI, copper cables of varying gauge extend to all of the customer premises in the neighborhood.4 The model includes appropriate investment for SAIs in all serving areas, whether served by copper or fiber feeder cable.   X 4251. As we explained in the Inputs Further Notice, b oth the sponsors of BCPM and  X 4HAI submitted default input values for indoor and outdoor SAI costs.S  zD6 {O'ԍ Inputs Further Notice at para. 134.S In addition, Sprint  X 4submitted cost estimates for a 7200 pair indoor SAI.  D6 {O}'ԍ Inputs Further Notice at para. 134 n. 242 citing Indoor SAI Cost Analysis, submitted by Sprint Local Telecommunications Division, July 30, 1998. Because the cost of an SAI depends on the cost of its components, we tentatively concluded that, in the absence of contract data  X4between the LECs and suppliers, it was necessary to evaluate the cost of these components.S f D6 {O'ԍ Inputs Further Notice at para. 134.S We posted preliminary ranges of SAI input values on the Commission's Web site to elicit  Xd4comment and empirical data from interested parties on the cost of SAIs.' d D6 {O 'ԍ Workshop Public Notice at 2. We used BCPM default inputs as the low end of the ranges for both indoor and outdoor SAIs, and Sprint's cost estimates as the high end of the range for indoor SAIs. The high end of the range for outdoor SAIs represented our analysis of stateapproved SAI parameters. Our preliminary ranges for SAI costs did not include HAI inputs because staff concluded that HAI had not included all of the materials and splicing required to install this equipment. ' The Bureau also  XM4conducted a workshop on December 11, 1998, to discuss the posted preliminary inputs. (MD6 {O"'ԍ See Common Carrier Bureau Releases Preliminary Common Input Values to Facilitate Selection of Final  {Or#'Input Values for the ForwardLooking Cost Model for Universal Service, Public Notice, CC Docket Nos. 9645,  {O<$'97160, DA 99295 (rel. Feb. 5, 1999) (Preliminary Input Values Public Notice); Workshop Public Notice. See  {O%'also Preliminary Input Values Handouts, dated December 11, 1998.  Accordingly, our analysis began with a review of the data and justifications submitted by the"6m0*&&``b" HAI sponsors and Sprint regarding the cost of the components that comprise a 7200 pair  X4indoor SAI.D6 {Ob'ԍ We noted that the BCPM defaults do not specify estimates for the cost of SAI components. Inputs  {O,'Further Notice at para. 134 n. 243. Specifically, we reviewed 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 crossconnect jumpers/punch down; and placement of distribution blocks. Of these, we tentatively concluded that protector and splicing costs are the main drivers of SAI costs, and crossconnect costs and feeder block and distribution block installation costs greatly contribute to the difference in Sprint's and the HAI  X_4proponents' indoor SAI costs._$D6 {O4 'ԍ  Inputs Further Notice at para. 136. See Inputs Further Notice, Appendix D, section IV for a breakdown of costs for each component calculated to derive the proposed cost of a 7200 pair DLC.   X14  252.` ` In the Inputs Further Notice, we also proposed to determine the costs of the other SAI sizes by extrapolating from the cost of the 7200 pair indoor SAI because we did  X 4not have similar componentbycomponent data for other SAI sizes.S ~D6 {O4'ԍ  Inputs Further Notice at para. 141.S We found that this appeared to be a reasonable approach because of the linear relationship between splicing and  X 4protection costs, which are the main drivers of cost, and the number of pairs in the SAI.`D D6 {O'ԍ As we explained in the Inputs Further Notice, we relied on HAI data to determine the relationship in cost among the various sizes of SAI. Specifically, we developed a ratio of our proposed cost for a 7200 pair indoor SAI to the cost proposed by HAI. We then proposed 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 adopted the cost estimates for indoor and outdoor SAIs. We proposed to use the HAI, rather than BCPM data, in this manner because BCPM had not submitted estimates for all of the SAI sizes used in the model. We noted that using the BCPM data in this way would result in roughly the same cost estimates for indoor and outdoor SAIs.  {O'Inputs Further Notice at para. 141.`   X ' 2.` ` Discussion   X{4 253.` ` We affirm our approach to derive the cost of an SAI on the basis of the cost of its components and adopt a total cost of $21,708 for the 7200 pair indoor SAI. We find that there remains an absence of contract data between the LECs and suppliers with regard to SAIs  X64on the record before us.\6D6 yO"'ԍ BellSouth and Bell Atlantic submitted SAI costs in their comments. However, neither party provided  {O"'any support for these values which reflect total SAI costs. See BellSouth Inputs Further Notice comments at  {O#'Exhibit 1; Bell Atlantic Inputs Further Notice comments, Attachment D at 7. Accordingly, we affirm, as discussed in more detail below, our tentative conclusions with respect to the following issues: (1) the cost per pair for protector material; (2) the appropriate splicing rate and corresponding labor rate; (3) the methodology"n@0*&&``" employed in crossconnecting in a SAI; and (4) the appropriate feederblock and distribution installation rate.   X4254.` ` Based on the record before us, we conclude that $4 per pair is a reasonable  X4estimate of the cost for protected material. As we explained in the Inputs Further Notice, this  X4estimate is based on an analysis of ex parte submissions, which is the only evidence we have  Xz4available to evaluate the cost of SAI components.WzD6 {O'ԍ Inputs Further Notice at para. 134135.W We also noted that Sprint has agreed that  Xc4$4 is a reasonable estimate of the cost.cZD6 {On 'ԍ See Letter from Pete Sywenki, Sprint, to Magalie Roman Salas, FCC, dated February 4, 1999 (Sprint  {O8 'Feb. 4, 1999 ex parte). SBC and AT&T and MCI concur with our  XL4tentative conclusion to adopt the $4 per pair cost.LD6 {O 'ԍ SBC Inputs Further Notice comments at 12. AT&T and MCI support the SAI costs tentatively adopted.  {O}'AT&T and MCI Inputs Further Notice reply comments at 28. In sum, the record fully supports our conclusion that $4 per pair is a reasonable estimate of the cost for protector material.   X 4255.` ` We also conclude that the record demonstrates that a splicing rate of 250 pairs  X 4is reasonable, and adopt it accordingly. As we explained in the Inputs Further Notice, the HAI sponsors proposed a splicing rate of 300 pairs per hour, while Sprint argued for a  X 4splicing rate of 100 pairs per hour.  D6 {O'ԍ  Inputs Further Notice at para. 138 n. 250 citing Letter from Chris Frentrup, MCI WorldCom, to Magalie Roman Salas, FCC, dated January 21, 1999; Letter from Kenneth T. Cartmell, U S West, dated February 8, 1999, to Magalie Roman Salas, FCC; Letter from Pete Sywenki, Sprint, to Magalie Roman Salas, FCC dated  yO'February 4, 1999. On January 20, 1999, the sponsors of HAI provided a demonstration of splicing, in support of their splicing rate.  We believed that HAI's proposed rate was a reasonable splicing rate under optimal conditions, and therefore, we tentatively concluded that Sprint's  X4proposed rate was too low.S D6 {O 'ԍ Inputs Further Notice at para. 138.S We noted that the HAI sponsors submitted a letter from AMP  X4Corporation, a leading manufacturer of wire connectors, in support of the HAI rate.V D6 {O'ԍ  Inputs Further Notice at para. 138 n. 251 citing attachment to letter from Chris Frentrup, MCI WorldCom, to Magalie Roman Salas, FCC, dated January 21, 1999. We recognized, 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 proposed a splicing rate of 250 pairs per hour.   X4256.` ` AT&T and MCI, the proponents of the 300 pairs per hour rate, support our"o0*&&``"  X4tentative conclusion.hD6 {Oy'ԍ AT&T and MCI Inputs Further Notice reply comments at 29.h Sprint takes issue with the splicing rate we proposed.ZD6 {O 'ԍ In its February 9 ex parte noted above, US West proposed a splicing rate of 150 pairs per hour, slightly higher than Sprint's proposed rate. Sprint impugns the evidence, appearing in the form of a letter from AMP Corporation on which we  X4relied in part, to determine a reasonable splicing rate.D6 {O7'ԍ Sprint Inputs Further Notice comments at 40. The letter from AMP Corporation was submitted by the  {O 'HAI sponsors. See Inputs Further Notice at para. 138 n. 251. In sum, Sprint contends the letter  X4represents an "unsupported claim of someone trying to sell equipment."]D6 {O| 'ԍ Sprint Inputs Further Notice comments at 40. ] While Sprint is correct that the proponent is an equipment manufacturer, neither Sprint nor any other commenter provided evidence from any other equipment manufacturer to refute AMP.   X_4257.` ` Sprint also questions the fact that we did not utilize the data available from the  XH4NRRI Study to determine the splicing rate.\HD6 {O'ԍ Sprint Inputs Further Notice comments at 40.\ Sprint maintains that an analysis of that data results in a splicing rate of 58.8 pairs per hour, substantially less than the 300 pairs per hour  X 4we recognized as a ceiling in our analysis. We based our proposed splicing rate on an analysis of such rates as they relate specifically to the installation of a complete and functional SAI. In contrast, although the data to which Sprint refers is for modular splicing, it is not clear, nor does Sprint claim, that such data specifically relates to the installation of SAIs. In sum, the validity of this data as a measure in the derivation of splicing rates for SAI installation is not established on the record. Sprint's critique ignores this fact. Accordingly, we reject the use of the data available from the NRRI Study to determine the splicing rate.  Xb4258.` ` We also conclude that the $60 per hour labor rate we proposed for splicing is  XK4reasonable and adopt it accordingly. Those commenters addressing this specific issue agree.K4 D6 {O0'ԍ See e.g., SBC Inputs Further Notice comments at 12; AT&T and MCI Inputs Further Notice reply comments at 28.  X44As we explained in the Inputs Further Notice, this rate, which equates with the prevalent  X4labor rate for mechanical apprentices, is well within the range of filings on the record.Y  D6 {O^!'ԍ Inputs Further Notice at para. 138. Y  X4 ` `  X4259.` ` We also conclude that the model should assume that a "jumper" method will be used half the time and a "punch down" method will be used the remainder of the time to crossconnect an SAI. A crossconnect is the physical wire in the SAI that connects the feeder and distribution cable."p  0*&&``\"Ԍ  X4260.` ` In the Inputs Further Notice, we tentatively concluded that neither the jumper  X4method nor the punch down method is used exclusively in SAIs.T!D6 {OM'ԍ Inputs Further Notice at para. 139. T We reached this tentative conclusion based on the conflicting assertions of Sprint and the HAI sponsors. We noted that, Sprint asserted that the "jumper" method generally will be employed to crossconnect in a  X4SAI.S"ZD6 {O'ԍ Inputs Further Notice at para. 139.S In contrast, the HAI sponsors claimed that the "punch down" method is generally  Xx4used to crossconnect.S#xD6 {O 'ԍ  Inputs Further Notice at para. 139.S We also noted that, in buildings with high churn rates, such as commercial buildings, carriers may be more likely to use the jumper method. On the other hand, in residential buildings, where changes in service are less likely, carriers may be more likely to use the less expensive punch down method. Thus, we tentatively concluded that it appeared that both methods are commonly used, and that neither is used substantially more  X 4than the other.Y$ ~D6 {O4'ԍ Inputs Further Notice at para. 139.Y   X 4261.` ` Based on the record before us, we affirm our tentative conclusion to assume that the "jumper" method and the "punch down" method will be used an equal portion of the  X 4time.% D6 {Oj'ԍ See Inputs Further Notice, Appendix D, section IV to see how this conclusion is used to determine proposed costs for a 7200 pair SAI. SBC challenges this conclusion, pointing out that it uses the "jumper" method in applications involving hard lug or insulation displacement contact and that it is currently  X{4replacing existing "punch down" interfaces.Z&{j D6 {O'ԍ SBC Inputs Further Notice comments at 12. Z We conclude that SBC's sole claim is not sufficient to demonstrate that the "jumper" method is used substantially more than the "punch down" method. We note also that Sprint contends that the crossconnect proposed by AT&T  X64and MCI is not an SAI, but a building entrance terminal._'6 D6 {O'ԍ Sprint Inputs Further Notice comments at 4041._ We disagree. The design meets the SAI definition of providing an interface between distribution and feeder facilities. In sum, we find that the record demonstrates that it is reasonable for the model to assume that a "jumper" method will be used half the time and a "punch down" method will be used the remainder of the time to crossconnect an SAI.   X4262.` ` We also adopt a feeder block and distribution installation rate of 200 pairs per  X4hour. As we explained in the Inputs Further Notice, we derived this installation factor based"q '0*&&```" on a comparison of Sprint's proposed installation rate of 60 pairs per hour with HAI's  X4proposed 400 pair per hour rate.S(D6 {Ob'ԍ Inputs Further Notice at para. 140.S We concluded that, because neither feeder block installation nor distribution block installation is a complicated procedure, Sprint's rate of 60 pairs per hour is too low. We also recognized that installation conditions are not always ideal. As we explained, feeder block and distribution block installations are not typically accomplished under controlled lighting or on a worktable. We proposed a rate of 200 pairs  Xv4per hour to recognize these variables.)vZD6 {O 'ԍ See Inputs Further Notice, Appendix D, section IV to see how this value is used in the calculation of a 7200 pair SAI.   XH4263.` ` We note that our proposed feeder block and distribution block rates are unchallenged. Significantly, SBC attests that this installation rate aligns with timeinmotion  X 4studies performed in crossconnect building applications.Y* D6 {O'ԍ SBC Inputs Further Notice comments at 12.Y We conclude, therefore, that our proposed rate is reasonable, and adopt input values based upon it accordingly.   X 4  264.` ` W e also adopt the cost estimates for other size indoor and outdoor SAIs  X 4tentatively adopted in the Inputs Further Notice.+ FD6 {O'ԍ  Inputs Further Notice at para. 141. These cost estimates are contained in Appendix A of the Inputs  {O'Further Notice. We conclude that, based on the record before us, the derivation of the costs of the other SAI sizes from the cost of the 7200 pair indoor SAI is reasonable.   Xd4265.` ` GTE takes issue with the derivation of the costs of the other SAIs from the  XM4cost of the 7200 pair indoor SAI.Y,MD6 {O'ԍ GTE Inputs Further Notice comments at 61.Y First, GTE contends that there is no need to extrapolate the costs of other SAIs because the costs of individual SAI sizes and associated labor are  X4readily available.Y-4 D6 {O'ԍ GTE Inputs Further Notice comments at 61.Y We disagree. We concluded that it was necessary to extrapolate the costs of other SAI sizes from the cost of a 7200 pair SAI because of the lack of componentbycomponent data for other SAI sizes on the record. As noted above, we find the record still lacks such data. We also disagree with GTE's contention that SAI costs are not subject to a  X4linear relationship across all sizes as we determined._. D6 {O:$'ԍ  GTE Inputs Further Notice comments at 61._ We find GTE's contention, which relies on GTE's SAI estimates, unpersuasive given the lack of substantiating data supporting"rX .0*&&``"  X4these estimates./D6 yOy'ԍ We note that in contrast to GTE's claim, the SAI costs reflected in BellSouth's comments reflect linearity. In sum, the record demonstrates that the derivation of the costs of the other SAIs from the cost of the 7200 pair indoor SAI is reasonable.  X4 266.` ` US West contends that the costs of a SAI should be determined by the actual cable sizes for the cables entering and leaving the SAI rather than the number of cable pairs  X4entering and leaving the interface.`0 D6 {O^ 'ԍ US West Inputs Further Notice comments at 1516.` We agree. The model has been revised to calculate the costs of an SAI on the basis of actual cable sizes for the cables entering and leaving the SAI.  XH4 267.` ` US West raises an additional issue concerning the sizing of SAIs. US West notes that some clusters created by the clustering module exceed the default line limit of 1800  X 4lines and gives as an example a specific cluster containing 7,900 lines.S1\ D6 {O}'ԍ US West Inputs Further Notice comments at 14;  US West Inputs Further Notice comments at 16; Letter  yOG'from Kenneth T. Cartmell, US West, to Magalie Roman Salas, FCC, dated September 24, 1999 (US West  {O'September 24 ex parte) at 12.S The largest SAI can accommodate only 7200 lines, counting both feeder side and distribution side lines. Therefore, US West contends that, in situations such as this, insufficient SAI plant is deployed by the model. We agree with this analysis. There is no way to guarantee that the line limit of 1800 lines will not be exceeded for some clusters, even though modifications have been made to the cluster algorithm to mitigate this possibility to the greatest possible extent. Therefore, in the current version of the model, we modify the input table for SAI costs so as to allow for serving areas (clusters) in which the capacity of feeder cable plus distribution cable meeting at the interface may exceed 7200. We do this by allowing for line increments of 1800 up to a total line capacity of 28,800. The values in the input table assume that, whenever more than 7200 lines are required in an SAI, two or more standard SAIs are built, one with full capacity of 7200 and the others with capacities equal to 1800, 3600, 5400 or 7200. The input values for each of the multiplyplaced SAIs are then summed.   X4 268.` ` A related issue is raised by US West with respect to drop terminal capacity in  X4the model.[2D6 {OH 'ԍ US West September 24 ex parte at 12. [ In previous versions of the model, drop terminals were sized for residential housing units and small business locations, with a maximum line capacity per drop location equal to 25 lines. For medium size and larger business locations with line demand greater than 25 lines, no specific provision for additional drop terminal capacity was provided, except in situations in which a single business accounted for all of the lines in a single cluster. Again, we agree with the US West analysis of this issue. Accordingly, we have modified the input table for drop terminal costs by adding additional line sizes equal to 50, 100, 200, 400,"7sh 20*&&``_" 600, 900, 1200, 1800, 2400, 3600, 5400, and 7200. At any location requiring a drop terminal with capacity exceeding 25 lines, the model will assume that the location will be served by an indoor SAI, and the cost of the corresponding interface is equal to the corresponding value from the table for SAI costs.   X' F.Digital Loop Carriers   X_'  ` ` 1. Background    X14 269. ` ` A digital loop carrier (DLC) is a piece of network equipment that converts an optical digital signal carried on optical fiber cable to an analog, electrical signal that is carried  X 4on copper cable and is compatible with customers' telephones.3 D6 yO| 'ԍ Optical fiber cable carries a digital signal that is incompatible with most customers' telephone equipment, but the quality of the signal degrades less with distance compared to a signal carried on copper wire. Generally, when a neighborhood is located too far from the wire center to be served by copper cables alone, an optical fiber cable will be deployed to a point within the neighborhood, where a DLC will be placed to convert incoming digital signals to analog signals and outgoing analog signals to digital. From the DLC, copper cables of varying gauge extend to all of the customer premises in the neighborhood. Because of the high cost of DLCs, a single DLC is shared among a number of customers where possible. The model uses fiber cable and DLCs whenever it calculates that this configuration is cheaper than using copper cable or when the distance between the customer and the wire center exceeds the maximum copper loop length. When using DLCs, the model determines the size and number of DLCs that should be installed at a location, based on cost minimization and engineering  Xy4constraints. In designing outside plant, the model uses five different sizes of DLCs.4y@D6 yOj'ԍ The current version of the model supports a fifth DLC size in addition to those already supported. DLC  {O2'capacities currently supported are 2016, 1344, 672, 96, and 24 line facilities.   In order to run the model, a user must input the fixed and perline cost for each of these DLC sizes. The total cost of a particular DLC is determined by multiplying the number of lines connected to the DLC times the perline cost of the DLCs, and then adding the fixed cost of the DLC.   X4 270.` ` In the Inputs Further Notice, w e tentatively concluded that we should estimate the costs for DLCs based on an average of the contract data submitted on the record, adjusted  X4for cost changes over time.S5D6 {O!'ԍ  Inputs Further Notice at para. 144.S These contract data included data submitted to the Commission  X4in response to the 1997 Data Request,86&\, D6 {O#'ԍ In response to the 1997 Data Request, Ameritech, Bell Atlantic (including NYNEX), BellSouth, SBC, US West, GTE, Sprint, ATU, and PRTC originally submitted data to the Commission on DLC costs in 1997.  {O%'Bell South, US West and ATU resubmitted their data on the record of this proceeding subject to the Protective  {O%'Order. See Letter from William W. Jordan, BellSouth, to Magalie Roman Salas, FCC, dated March 15, 1999;"%50*&&%" Letter from Robert B. McKenna, US West, to Magalie Roman Salas, FCC, dated March 8, 1999; Letter from  {OX'Alane C. Weixel, counsel for ATU, to Magalie Roman Salas, FCC, dated May 6, 1999 (ATU May 6, 1999 ex  {O"'parte).8 and in ex parte submissions following the December"t60*&&``"  X411, 1998 workshop we sponsored, to estimate the costs of DLCs in the model.7XD6 yO'ԍ Letter from W. Scott Randolph, GTE, to Magalie Roman Salas, FCC, dated February 11, 1998; Letter from Robert A. Mazer and Albert Shuldiner, Counsel for Aliant, to Magalie Roman Salas, FCC, dated February 8, 1998.  We found  X4these data to be the most reliable proffered at that time.S8 D6 {O 'ԍ Inputs Further Notice at para. 143.S We rejected use of the BCPM and HAI default values because these values are based on the opinions of experts without data to  X4enable us to substantiate those opinions.S9D6 {O 'ԍ  Inputs Further Notice at para. 143.S Additionally, we rejected data submitted by the  X4HAI sponsors following the workshop.T:0 D6 {O'ԍ  Inputs Further Notice at para. 144. T We found the data submitted by the HAI sponsors to be significantly lower than the contract data on the record, and concluded that it would be inappropriate to use the data submitted by the HAI sponsors, especially as no support was  X_4provided to justify use of the data.S;_ D6 {O'ԍ  Inputs Further Notice at para. 144.S   X14271.` ` In reaching our tentative conclusion to use the contract data, we noted that, although we would have preferred to have a larger sampling of data, the contract data represent the costs incurred by several of the largest nonrural carriers, as well as two of the  X 4smallest nonrural carriers.T< T D6 {O'ԍ  Inputs Further Notice at para. 144. T We noted that, throughout this proceeding, the Commission had  X 4repeatedly requested cost data on DLCs, largely to no avail.=^ D6 {Ol'ԍ  Inputs Further Notice at para. 144. In addition to the data submitted in response to the 1997 Data  {O6'Request, and following the December 11, 1998, workshop, the Bureau requested further data on DLC costs in the  {O'1997 Further Notice and in the Inputs Public Notice. See also Preliminary Input Values Public Notice. Finally, we stated our belief that the data on which we relied was the best data available on the record to determine the  X 4cost of DLCs.k> D6 {Od!'ԍ  Inputs Further Notice at para. 144. Only US West, BellSouth, and ATU presented their contract data  {O."'from the 1997 Data Request in a useable format Some of the data and comments that were submitted in  {O"'response to the 1997 Data Request, but not refiled on the record under the Protective Order, could not be used because the data were either inadequate or presented in a format from which we could not extract relevant  {O$'information. Inputs Further Notice at para. 144 n. 262.k  X4 "u>0*&&``"Ԍ X4 272. ` ` In the Inputs Further Notice, we also recognized that the cost of purchasing and  X4installing a DLC changes over time.S?D6 {Od'ԍ  Inputs Further Notice at para. 145.S We explained that 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. Accordingly, we tentatively concluded that it is appropriate to adjust the contract data, which represents the  X4years 19951998, to reflect 1999 prices.S@ZD6 {O'ԍ Inputs Further Notice at para. 146.S We proposed a 2.6 percent annual reduction in both fixed DLC cost and perline DLC cost in order to capture changes in the cost of  Xa4purchasing and installing DLCs over time.SAaD6 {O 'ԍ Inputs Further Notice at para. 146.S We based this rate on the change in cost calculated for electronic digital switches over a four year period. We noted our belief 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 noted that the 2.6 percent figure is a conservative estimate, based on the change in cost of remote switches. Our analysis suggested that the change in cost of host switches over the past four years is much higher. Finally, we noted that use of the current consumer price index results in a  X 4similar figure over four years. YB ~D6 {O'ԍ Inputs Further Notice at para. 146.Y The indexed amount is based on the effective date of the contracts.   X{4  273. ` ` Finally, we also sought comment on the extent, if any, to which we should  Xd4increase our proposed estimates for DLCs to reflect material handling and shipping costs.SCdD6 {O%'ԍ  Inputs Further Notice at para. 145.S We did this in response to comments submitted by ATU. It was unclear whether the DLC data submitted by other parties included these costs. ATU suggested that these costs could  X4represent up to 10 percent of the material cost of a DLC.(DZD6 {Or'ԍ ATU May 6, 1999 ex parte. ATU also suggested that costs for placement, installation, and testing should be added to the DLC material costs it submitted. We note that these site preparation costs are already separately accounted for in the model.(   X' 2.` ` Discussion    X4274. ` ` We adopt an average of the contract data submitted on the record, adjusted for cost changes over time, as the cost estimates for DLCs. This decision is predicated on two conclusions. The first is our determination that the contract data submitted to the Commission  X~4in response to the 1997 Data Request, and in ex parte submissions following the December"~v D0*&&``" 11, 1998, workshop, remains the most reliable data on the record. Significantly, no additional information has been proffered nor has any alternative method been proposed, on which to base our estimate of DLC costs. The second is that we conclude that it is reasonable to reduce both the fixed DLC cost and perline DLC cost reflected in this data by a factor of 2.6 percent per year in order to capture changes in the cost of purchasing and installing DLCs over time.   X_4275.` ` As we explained in the Inputs Further Notice, the contract data submitted to the  XJ4Commission in response to the 1997 Data Request, and in ex parte submissions following the December 11, 1998, workshop, is the most reliable data because, not only is it the only data  X 4on the record, but it reflects the actual costs incurred in purchasing DLCs.SE D6 {O 'ԍ  Inputs Further Notice at para. 143.S Moreover, although we would have preferred a larger sample, the contract data is sufficiently representative of nonrural carriers because it reflects the costs incurred by several of the largest nonrural carriers, as well as two of the smallest nonrural carriers.   X 4276.` ` GTE, Bell Atlantic and Sprint support the use of the contract data in estimating  X4the cost of DLCs.F$ZD6 {O'ԍ GTE Inputs Further Notice comments at 62; Bell Atlantic Inputs Further Notice comments, Attachment D at 89, Chart 12. Sprint attests to the reasonableness of the proposed inputs based on the contract data. Sprint  {O1'Inputs Further Notice comments at 41. Sprint explains that it demonstrated in a June 24, 1999 ex parte that the proposed inputs are in line with Sprint's actual costs including material and handling.  Only AT&T and MCI and SBC challenge the use of these data.GFD6 {O'ԍ AT&T and MCI Inputs Further Notice comments at 3235 (Proprietary Version); SBC Inputs Further  {OU'Notice comments at 13. SBC contends that the contract data is not the most reliable data on DLC costs because labor costs associated with testing, turnup, and delivery of derived facilities are not factored into the  XO4input values.YHOD6 {O'ԍ SBC Inputs Further Notice comments at 13.Y We disagree. The data we identify as "contract data" include these costs. As  X84we explained in the Inputs Further Notice and noted above, we sponsored a workshop on December 11, 1998, to further develop the record on DLC costs in this proceeding. During the workshop, we presented a template of the components of a typical DLC to the attendees. The template provided the respondents the opportunity to identify their contract costs with regard to each of the components. In addition, we requested that the respondents identify, and thereby include, other costs associated with DLC acquisition, including labor costs associated with testing, turnup, and delivery of the DLC. Using this opportunity to submit DLC cost data, GTE and Aliant included such costs in their submissions. Sprint submitted similar data  X4in a September 9, 1998 ex parte filing. These costs were identified and added to the analysis  Xm4of US West's and BellSouth's contract data. We derived these costs from ex parte filings made by these carriers in this proceeding."Xw4 H0*&&``["Ԍ  X4277.` ` AT&T and MCI allege that the contract data overstates the actual costs of DLC  X4equipment and therefore, should not be adopted.zID6 {OK'ԍ AT&T and MCI Inputs Further Notice comments at 3235 (Proprietary Version)z AT&T and MCI instead advocate use of  X4the HAI default values.cJZD6 {O'ԍ AT&T and MCI Inputs Further Notice comments at 34. c AT&T and MCI argue that the contract costs are not only unsupported by any verifiable evidence but, more importantly, are refuted by the contract information from which they were derived. In support, AT&T and MCI submit an analysis of the DLC cost submissions of Bell Atlantic, BellSouth, and Sprint. In each instance, AT&T and MCI assert that these data demonstrate DLC costs that are far below those proposed by the incumbent LECs and the Commission and that are fully consistent with the HAI default values.   X 4278.` ` We disagree with AT&T and MCI's analysis. For example, AT&T and MCI claim that information provided by Bell Atlantic shows that total DLC common equipment costs for DLC systems capable of serving 672, 1344, and 2016 lines are similar to, and  X 4uniformly less than, the corresponding HAI values.{K D6 {O['ԍ AT&T and MCI Inputs Further Notice comments at 3334 (Proprietary Version).{ In reaching this conclusion, however, AT&T and MCI omit the costs for line equipment. As Bell Atlantic points out, the cost of  X4digital line carrier equipment should include these costs, and we agree.gL~D6 {O'ԍ Bell Atlantic Inputs Further Notice reply comments 67.g   Xb4279.` ` Similarly, AT&T and MCI assert that certain of Sprint's costs are significantly inflated and, once adjusted, are similar to and uniformly less than the corresponding HAI  X44values.bM4D6 {O'ԍ AT&T and MCI Inputs Further Notice comments at 34.b We find, however, these adjustments to be unsupported. AT&T and MCI reduce the supply expenses associated with Sprint's DLC costs, more than 66 percent, based on the  X4experience of AT&T and MCI's engineering team members.ND6 {OY'ԍ AT&T and MCI Inputs Further Notice comments, Attachment B at B4 (Proprietary Version) AT&T and MCI offer no evidence, however, other than the opinions of their experts to substantiate this proposed adjustment.   X4280.` ` AT&T and MCI also contend that Sprint applies excessive markups for sales  X4tax.O4 D6 {Ox$'ԍ AT&T and MCI Inputs Further Notice comments, Attachment B at B4 (Proprietary Version). AT&T and MCI argue that, because Sprint operates its own logistics company, there is no reason to apply sales tax to both supply expense and materials. We find that AT&T and"|x O0*&&``=" MCI offer no support to demonstrate that this results in an excessive markup for sales tax. We reach the same conclusion with regard to AT&T and MCI's proposed reduction to Sprint's labor costs. AT&T and MCI contend that Sprint's labor costs are inflated and propose reductions in such costs through a reduction in the number of labor hours associated  X4with DLC installation.PD6 {O'ԍ AT&T and MCI Inputs Further Notice comments, Attachment B at B4 (Proprietary Version). AT&T and MCI provide no support for such a reduction and,  X4therefore, we decline to reduce Sprint's labor costs.Q$ZD6 yO'ԍ AT&T and MCI also claim that Sprint fails to make use of forwardlooking technology such as GR303 {O` 'capable hardware. AT&T and MCI Inputs Further Notice comments, Attachment B at B4 (Proprietary Version). Contrary to AT&T and MCI's assertion, the data supplied by Sprint and reflected in the contract data adopted  {O 'herein reflects the cost of GR303capable hardware. See Sprint Sept. 9, 1998 ex parte.    X_4281.` ` Significantly, AT&T and MCI offer no evidence to controvert our tentative conclusion that the HAI values they employ as a comparative benchmark, and advocate that we adopt, are not more reliable than the contract data. We rejected the use of the HAI and the BCPM default values because they are based on the opinions of experts without  X 4substantiating data.SR FD6 {O'ԍ Inputs Further Notice at para. 143.S Similarly, we rejected data submitted by the HAI sponsors following the December 11, 1998, workshop. We found that data to be significantly lower than the contract data on the record, and concluded that it would be inappropriate to use because it  X 4also lacked support.SS D6 {OG'ԍ Inputs Further Notice at para. 144.S AT&T and MCI have not provided any additional evidence to substantiate the HAI data.   Xy4282.` ` We also affirm our tentative conclusion that it is reasonable to reduce both the fixed DLC costs and perline DLC costs reflected in the contract data in order to capture  XK4changes in the cost of purchasing and installing DLCs. As we explained in the Inputs Further  X64Notice, this reduction recognizes the fact that the cost of purchasing and installing a DLC diminishes over time because of improvements in the methods and components used to produce DLCs, changes in both capital and labor costs, and changes in the functionality  X4requirements of DLCs.STj D6 {O 'ԍ  Inputs Further Notice at para. 146.S The premise that overall DLC costs move downward over time is not disputed on the record.   X4283.` ` We also conclude that the 2.6 percent reduction we proposed in both the fixed  X4DLC costs and perline DLC costs is appropriate. As we explained in the Inputs Further  X4Notice, this is a conservative estimate, based on the change in cost of remote switches, which"y T0*&&``"  X4is a reasonable proxy for changes in DLC cost.UD6 yOy'ԍ None of the commenters challenge the use of this proxy for estimating the change in DLC costs.  More importantly, a comparison of data submitted on the record by Sprint for the years 1997, 1998, and 1999 demonstrates that an overall reduction of 2.6 percent is considerably less than Sprint's actual experience. An analysis undertaken by staff produces an average reduction in DLC costs for Sprint of 9.2 percent per year. We note that this estimate reflects both material and labor costs.   Xv4  284.` ` Only SBC and GTE specifically address the 2.6 percent reduction.VvXD6 {O 'ԍ SBC Inputs Further Notice comments at 13; GTE Inputs Further Notice comments at 6162. SBC supports the 2.6 percent reduction in fixed and perline DLC costs as it applies to material  XH4costs only. In contrast, GTE opposes the adjustment.\WHD6 {O 'ԍ GTE Inputs Further Notice comments at 6162.\ GTE suggests that, as the inputs are  X14adjusted over time, the cost of current technology will be reflected in the revised data.YX1|D6 {O^'ԍ GTE Inputs Further Notice comments at 62.Y GTE is correct that the current cost of technology would be reflected in revised data. The adjustment we proposed and adopt updates cost to current cost. Implicit in SBC's comment is the premise that labor costs will not decrease over time. Although this may be a reasonable assumption, the 2.6 percent reduction we adopt is applied to the overall cost of a DLC. As we explained above, the 2.6 percent reduction is a conservative estimate compared to the actual reductions we have observed in the Sprint data. As a result, we conclude that increases in labor will be offset by reductions in other factors in the cost of DLCs.   Xb4285.` ` Finally, as noted above, we sought comment on the extent, if any, to which we should increase our proposed estimates for DLCs to reflect material handling and shipping costs because it was unclear whether the DLC data submitted by other parties include these costs. On further analysis, we note that material handling and shipping costs are reflected in the proposed DLC estimates we adopt herein. Moreover, we conclude that it is appropriate to include these costs in the cost estimates for DLCs. We note that no comments were filed opposing the inclusion of such costs. ` `  X' VI. SWITCHING AND INTEROFFICE FACILITIES ׃   X|' A. Introduction    XN4286.` ` The central office switch provides the connection between a subscriber's local loop and the outside world. Modern digital switches connect telephones, fax machines, and"7zX0*&&``_"  X4computers to other subscribers on the public switched network.kYXD6 yOy'ԍ The functions performed by the switch for local service include: line termination; line monitoring; usage call processing, routing, and completion; interconnection to other carriers; billing and maintenance; and vertical services and features. We note that not all of these functions are supported by universal service.k In order to accomplish this, a telephone network must connect customer premises equipment to a switching facility, ensure that adequate capacity exists in that switching facility to process calls, and interconnect the switching facility with other switching facilities to route calls to their destination. A wire center is the location of the switching facility and the wire center boundaries define the area in which all customers are connected to a given wire center. The infrastructure to  Xv4interconnect the wire centers is known as the "interoffice" network, and the carriage of traffic  X_4between wire centers is known as "transport."   X14287. ` ` In the Universal Service Order, the Commission stated that "[a]ny network function or element, such as . . . switching, transport or signaling, necessary to provide  X 4supported services must have an associated cost."wZ D6 {O'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250 (criterion two).w In the 1997 Further Notice, the Commission sought comment on issues that affect the input values relating to the forward X 4looking economic cost of switching and interoffice transport.k[ zD6 {O'ԍ 1997 Further Notice, 12 FCC Rcd at 1856066, paras. 12138.k The Switching and Transport  X 4Public Notice established several guidelines relating to switching, the design of the interoffice  X 4network, and interoffice cost attributable to providing supported services.<\| D6 {Ol'ԍ Switching and Transport Public Notice at 26. The Bureau guidelines established that: (1) the models permit individual switches to be identified as host, remote, or standalone; (2) switching investment costs should be separately estimated for host, remote, and standalone switches; (3) models should include switch capacity constraints; (4) all of the lineside port costs and a percentage of usage costs should be assigned to the cost of providing the supported service; and (5) models should accommodate an interoffice network that is capable of connecting switches designated as hosts and remotes in a way that is compatible with capabilities of equipment  {O'and technology that are available today and current engineering practices. Id.< In the Platform  X4Order, the Commission concluded that the federal mechanism should incorporate, with certain  X4modifications, the HAI 5.0a switching and interoffice facilities module.^]P D6 {O'ԍ Platform Order, 13 FCC Rcd at 21354, para. 75.^   XW4288. ` ` Both HAI and BCPM sponsors have provided default input values for  X@4@@estimating the forwardlooking economic cost of switching and interoffice network.^@D6 {O"'ԍ See Letter from Richard N. Clarke, AT&T, to Magalie Roman Salas, FCC, dated February 3, 1998 (HAI Feb. 3 submission) App. B; BCPM April 30, 1998 submission, Switch Model Inputs. On December 1, 1998, the Bureau held a public workshop designed to elicit comment on the"){<^0*&&`` "  X4switching inputs values to be used in the federal mechanism._D6 {Oy'ԍ See Workshop Public Notice. The December 1, 1998 workshop addressed issues relating to switching and expenses.   X4 289. ` ` In the Inputs Further Notice, we tentatively adopted input values associated with switching and interoffice facilities, including values associated with the installation and  X4purchase of new switches.c`"D6 {Oy'ԍ See Inputs Further Notice at paras. 14791, App. A.c In addition, we tentatively adopted the Local Exchange Routing  X4Guide (LERG) database to identify hostremote switch relationships.WaD6 {O 'ԍ Inputs Further Notice at paras. 17478.W  Xa' B. Switch Costs    X3' 1. ` ` Background    X 4!290.` ` In the Inputs Further Notice, we tentatively concluded that we should use publicly available data on the cost of purchasing and installing switches that was compiled by  X 4the Commission, in conjunction with the work of Gabel and Kennedy,[b FD6 {O'ԍ See NRRI Study, supra  note 214.[ and the Bureau of  X 4Economic Analysis (BEA) of the U.S. Department of Commerce.Sc D6 {OK'ԍ Inputs Further Notice at para. 152.S This information was gathered from depreciation reports filed by LECs at the Commission. In order to better  X4estimate the costs of small switches, we tentatively concluded in the Inputs Further Notice to augment the depreciation data with data compiled by the Commission, in conjunction with  Xh4Gabel and Kennedy and the U.S. Department of Agriculture Rural Utility Service (RUS).Sdhj D6 {O'ԍ Inputs Further Notice at para. 162.S This information was gathered from reports made to RUS by LECs.  X#4"291.` ` In order to make the RUS data comparable with the depreciation data, we proposed a series of adjustments to the RUS 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"| d0*&&``\" of connecting each remote switch to its respective host switch; and (4) LEC engineering  X4costs.!e=D6 yOy'ԍ Letter from W. Scott Randolph, GTE, to Magalie Roman Salas, FCC dated December 18, 1998 (GTE  {OA'Dec. 18 ex parte) at 5 and 6; #C\  P6QɒP#NRRI Study at 97 and 102; Letter from Pete Sywenki, Sprint, to Magalie Roman  {O 'Salas, FCC, dated December 22, 1998 (Sprint Dec. 22 ex parte) at 1321; Letter from Richard Clarke, AT&T, to  {O'Magalie Roman Salas, FCC, dated January 7, 1999 (AT&T Jan. 7 ex parte) at 1. ! In order to make the depreciation and RUS information comparable, we proposed in  X4the Inputs Further Notice to add estimates of these four components to the switch costs  X4reported in the RUS information.fD6 {O;'#X\  P6G;ɒP#э Inputs Further Notice at paras. 157161.  X4#292.` ` In order to account for the cost of MDF omitted from the RUS information, we tentatively concluded that $12 per line was a reasonable cost for purchasing and installing  Xa4MDF equipment.Sga_D6 {Oq 'ԍ Inputs Further Notice at para. 158.S In order to account for the cost of power equipment omitted from the RUS information, we tentatively concluded that the cost of purchasing and installing switches with 0999 lines should be increased by $12,000, the cost of purchasing and installing switches with 1,0004,999 lines should be increased $40,000, and the cost of purchasing and  X 4installing switches with 5,00025,000 lines should be increased by $74,500.Sh D6 {O'ԍ Inputs Further Notice at para. 159.S We tentatively concluded that $27,598 should be added to the cost of each RUS remote switch in order to account for cost of connecting the remote switch to the host switch, a cost omitted from the  X 4RUS information.Si D6 {O'ԍ Inputs Further Notice at para. 160.S We further proposed in the Inputs Further Notice that, in order to account for the LEC engineering costs omitted in the RUS information, we should add, after making the above adjustments for power, MDF, and remote connection costs, eight percent to the total cost of each RUS switch.  XO4$293. ` ` In order to determine the reasonable forwardlooking cost of switches, based on  X84the selected data set, we tentatively concluded in the Inputs Further Notice that we should  X#4employ regression analysis.Sj# D6 {O'ԍ Inputs Further Notice at para. 163.S We tentatively concluded that the cost of a switch should be estimated as a linear function of the number of lines connected to the switch and the type of  X4switch installed (i.e., host or remote).k$ D6 {OM"'ԍ Inputs Further Notice at para. 164. In order to estimate the forwardlooking cost of purchasing and installing a switch, switch costs also are estimated as a function of the date of installation. By including information on installation dates, the model produces forwardlooking estimates that account for historical pricing  {O$'trends. Ġ "}k0*&&``"Ԍ X4%294. ` ` In order to capture changes in the cost of purchasing and installing switching  X4equipment over time, we tentatively concluded in the Inputs Further Notice that we should 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  X4switches.SlD6 {O'ԍ Inputs Further Notice at para. 166.S  Xx4&295. ` ` In the Inputs Further Notice, we tentatively concluded that in order to capture the costs associated with the purchase and installation of new switches, and to exclude the costs associated with upgrading switches, we should exclude switch cost data that contained costs reported more than three years after installation. We tentatively concluded that this restriction eliminates switch cost data that contain a significant amount of upgrade costs and,  X 4therefore, do not solely represent the purchase and installation costs of new switches.Sm ZD6 {O'ԍ Inputs Further Notice at para. 170.S  X ' 2. ` ` Discussion    X 4'296. ` ` Switch Cost Estimates. We adopt the fixed cost (in 1999 dollars) of a remote switch as $161,800 and the fixed cost (in 1999 dollars) of both host and standalone switches as $486,700. We adopt the additional cost per line (in 1999 dollars) for remote, host, and  Xf4standalone switches as $87.nfD6 {O'ԍ See Appendix C for regression results, and an explanation of how cost estimates are derived from these results.   X84(297.` ` For the reasons set forth below, we affirm our tentative conclusion to use the publicly available data from LEC depreciation filings, and to supplement the depreciation data with data from LEC reports to the RUS. We also affirm our tentative conclusion that we should not rely on the BCPM and HAI default values, because these values are largely based on nonpublic information or opinions of their experts, without data that enable us adequately to substantiate those opinions.   X4)298. ` ` Switch Cost Data. The depreciation data contains for each switch reported: the model designation of the switch; the year the switch was first installed; and the lines of capacity and bookvalue cost of purchasing and installing each switch at the time the  XR4depreciation report was filed with the Commission.o"RFD6 yOI#'ԍ Until 1996, large incumbent LECs were required to file depreciation rate reports with the Commission pursuant to 47 C.F.R.  43.43. Prior to filing these reports, companies generally would submit depreciation rate  {O$'studies that included data for each digital switch in operation. See Appendix C for a further description of the data set. The RUS data contains, for each switch"R~0 o0*&&``[" reported: the switch type (i.e., host or remote); the number of equipped lines; cost at  X4installation; and year of installation.pD6 yOb'ԍ Many small telephone companies receive financial assistance from RUS, which requires these companies  {O*'to report the payments made for new switches. See Appendix C for a further description of the RUS data.   X4*299. ` ` The sample that we use to estimate switch costs includes 1,085 observations. The sample contains 946 observations selected from the depreciation data, which provide information on the costs of purchasing and installing switches gathered from 20 states. All observations in the depreciation data set are for switches with 1,000 lines or more. In order to better estimate the cost of small switches, we augmented the depreciation data set by adding data from RUS. The RUS sample contains 139 observations which provide information from across the nation on the costs of small switches purchased and installed by rural carriers. Over 80 percent of the observations of switch costs in the RUS data set measure the costs for switches with 1,000 lines of capacity or less. The combined sample represents purchases of both host and remote switches, with information on 490 host switches and 595 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.   Xy4+300. ` ` The depreciation data set proposed in the Inputs Further Notice excluded 26 observations that had been deemed to be outliers by the Bureau of Economic Analysis. Bell  XM4Atlantic criticizes the Commission for excluding these outliers.pqM"D6 {O 'ԍ Bell Atlantic Inputs Further Notice comments at 10 and 11.p The excluded observations  X64were not available in electronic form prior to the release of the Inputs Further Notice. Subsequently, the Bureau obtained these outlying observations from the Bureau of Economic Analysis and reinserted them into the data set used to derive the input values we adopt herein. In addition, several commenters recommend that the depreciation data set also should include switches with fewer than 1,000 lines of capacity. This information, however, is not available  X4in electronic format and, therefore, would be unduly burdensome to include.rD6 yO*'ԍ The Bureau of Economic Analysis, in creating the electronic data set from depreciation filings, did not include observations for switches with fewer than 1,000 lines.   X4,301. ` ` In response to the 1997 Data Request, the Commission received a second set of information pertaining to 1,486 switches. Upon analysis, however, we have 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 affirm our tentative conclusion that the data set we" r0*&&``" use is superior to the data set obtained from the data request, both in terms of the number of usable observations and the number of companies represented in the data set.   X4-302. ` ` Following the December 1, 1998, workshop, three companies voluntarily submitted further data regarding the cost of purchasing and installing switches: BellSouth provided data on switch investments for its entire operating region; Sprint provided similar data for its operations in Nevada, Missouri, and Kansas; and GTE provided switch investment  X_4information for California.s_D6 {O'ԍ BellSouth January 29, 1999 ex parte; Sprint February 5, 1999 ex parte; and GTE February 22, 1999 ex  {O 'parte. When consolidated, this information forms a data set of  XH4approximately 300 observations representing the costs of new switches.tH$D6 yO 'ԍ Some of the switch cost values provided in the voluntary submissions include the costs associated with upgrading switching equipment. The voluntary information does not, however, contain information that would allow us to identify the upgrade components associated with these additional costs. For example, postinstallation investments are not identified as investments in additional line capacity, additional software, and so forth. After removing the information where new switch costs and the costs associated with post installation  yO'upgrades are inextricably linked, using the process outlined in Appendix C , fewer than 300 observations remain. As AT&T has  X14noted, however, the information submitted contains some inconsistencies.}uZ1D6 yO~'ԍ AT&T points out that the data submitted by Sprint contains records that are either missing or inconsistent with other records, records that are old or do not reflect equipment used exclusively to provide end office  {O'switching, and records that contain ambiguous information. See AT&T Mar. 10, 1999 ex parte.} Considering these inconsistencies, the limited number of companies represented, and the size of this voluntarily submitted data set, we conclude that the data set we use is preferable.   X 4.303. ` ` BellSouth suggests that we merge either the information received in response to  X 4the 1997 Data Request, the information from the voluntary submissions, or both, with the data  X 4set we use.pv D6 {O'ԍ BellSouth Inputs Further Notice comments at B14 and B15.p We reject this suggestion because there are significant inconsistencies between the different data sets. For example, in its voluntary submission, GTE provides the amount of total investment for each of its California switches at the time these switches were installed, but reports associated line counts only for October 1998. This information is not consistent with the data set used by the Commission, which contains aggregate investment and line counts measured at the same point in time. Second, our analysis of the information provided in both the voluntary submissions and the data request reveals, based on simple linear regression, inconsistencies between these two data sets and the data set employed by the  X4Commission.wXzP D6 yO#'ԍ A yearbyyear analysis of the deprecation data and the RUS data reveals that the fixed cost of a host switch is significantly more than the fixed cost of a remote switch. Our analysis examining the deprecation data reveals that the difference is statistically significant and positive in four of the seven years covered by the"%v0*&&%" Commission data set. In 1995, there are only nine observations including only one host switch, and therefore,  yOX'there is insufficient data to draw any conclusion for 1995. In the other two remaining years , 1993 and 1994, the difference has a large positive magnitude but is not statistically significant (the "tstatistics" for these years are  {O'0.68 and 0.99). In contrast, the fixed cost of host switches in the data from the 1997 Data Request do not differ statistically from the fixed costs of remote switches, nor is there a large difference in the magnitudes of the estimated costs. Similarly, yearbyyear analysis of the voluntary data provided by the carriers does not reveal any systematic difference between host fixed costs and remote fixed costs.  Our analysis reveals that both alternative data sets contain information that is" w0*&&``w"  X4inconsistent with the comments in this proceeding.+x& D6 yO'ԍ As noted in the previous footnote, the fixed cost of host switches exceeds the fixed cost of remote  {O 'switches in the data set we have chosen. This is consistent with comments from this proceeding. See BellSouth  {OM 'Inputs Further Notice comments at B15; Sprint Inputs Further Notice comments at 46; and Letter from Richard  {O 'Clarke, AT&T, to Magalie Roman Salas, FCC, dated January 7, 1999 (AT&T Jan. 7 ex parte) at 1. +  X4  X4/304.` ` Adjustments to the Data. As discussed above, in the Inputs Further Notice, we proposed certain adjustments to the RUS data to account for the cost of MDF and power  X4equipment, which were omitted from the RUS information.Dy D6 {OO'ԍ See supra para. 291.D Specifically, we proposed increasing the cost of purchasing and installing switches by $12 per line for MDF and $12,000, $40,000, or $74,500, depending upon switch size, for power costs. Commenters who address this issue agree that the RUS data must be modified to account for the costs of MDF and power to make the RUS data consistent with the depreciation data, which include  X34these costs.z$3 D6 {On'ԍ See, e.g., AT&T/MCI Inputs Further Notice comments at 38; Sprint Inputs Further Notice comments at  {O8'44; but cf. GTE Inputs Further Notice comments at 65. GTE appears to be confused about our use of the power adjustment to make the RUS data comparable to the depreciation data and incorrectly assumes we only use the depreciation data for switches with more than 25,000 lines. Some commenters who address these adjustments claim that we should use different values for MDF and power costs, but provide little or no information we can use to  X 4verify their suggested values.{& vD6 yO,'ԍ SBC claims that our proposed $12 per line for MDF is too low and argues a more reasonable estimate is  {O'$30 per line. SBC Inputs Further Notice comments at 13. Sprint, AT&T and MCI, on the other hand, agree  {O'that $12 cost per line for MDF is reasonable. AT&T/MCI Inputs Further Notice comments at 38; Sprint Inputs  {O'Further Notice comments at 44. Sprint, for example, claims our power costs are too low and provides a breakdown of power costs, but does not supply any data to support their higher  X 4proposed values for power costs.#|\ dD6 {O!'ԍ Sprint Inputs Further Notice comments at 44, attachment 7. GTE also claims its power investment is  {O"'higher than our proposed values, but offers no data to support this claim. GTE Inputs Further Notice comments at 66.# AT&T and MCI claim our proposed power costs should  X 4be reduced because they are substantially higher than those proposed by their experts.^} D6 {O%'ԍ AT&T/MCI Inputs Further Notice comments at 38.^" }0*&&`` "Ԍ X4ԙ0305. ` ` We find that we need not attempt to resolve disagreement over the reasonableness of our proposed values, in the absence of any additional information, because we adopt an alternative methodology for estimating MDF and power costs. We find that we should adjust the RUS data for MDF and power equipment costs in a way that is more consistent with the way in which these costs are estimated in the depreciation data set. In the depreciation data, MDF and power equipment costs are estimated as a percentage of the total cost of the switch, as are all other components of the switch. Based on the estimates of  X_4Technology Futures, Inc., we find that these costs were eight percent of total cost.~_D6 {O'ԍ Lawrence K. Vanston, Ray L. Hodges, Adrian J. Poitras, Technology Futures, Inc., Transforming the  {O 'Local Exchange Network: Analyses and Forecast of Technology Change 149 (2d ed. 1997) (TFI Study). The terminology used in the TFI study differs somewhat. What TFI calls "shell" is "the common equipment, such as cabling and power equipment, that is not modular and lasts the life of the switch entity." TFI Study at 136. This includes MDF and power investment. Because we are adjusting the RUS data so that they are comparable with the depreciation data, we find it is appropriate to use a comparable method to estimate the portion of total costs attributable to MDF and power equipment. Accordingly, in order to account for the cost of MDF and power equipment omitted from the RUS information, we conclude that the cost of switches reported in the RUS data should be increased by eight percent.   X 41306. ` ` In the Inputs Further Notice, we tentatively concluded, based on an estimate provided by Gabel and Kennedy, that $27,598 should be added to the cost of each remote  X4switch reported in the RUS data.r|D6 {O'ԍ Inputs Further Notice at para. 160 (citing NRRI Study at 102104).r SBC recommends that remote termination costs should be added to remote switch costs on a perline basis, but provides no estimates of the perline cost  Xd4of remote termination._dD6 {O#'ԍ SBC Inputs Further Notice comments at 13._ Sprint provides remote termination estimates of $22,636 for termination of remote switches with less than 641 lines and $46,332 for termination of remote  X64switches with between 641 and 6,391 lines..Z6D6 {O'ԍ See Sprint Inputs Further Notice comments at 45. Sprint also provided an estimate of the cost of terminating remote switches with over 6,390 lines. We note, however, that there are no remote switches in the RUS data with over 6,390 lines. . Using Sprint's methodology, the average cost  X4of terminating a RUS remote switch on a RUS host switch is $29,840.Z D6 yO 'ԍ Sprint estimates the average cost of terminating its own remotes on its own host switches as $61,700. Its tiered cost estimates indicate, however, that for remotes in the RUS data set, which do not include any remote  {O""'switches with over 6,390 lines, the average cost is $29,840. See Sprint Inputs Further Notice comments at 45. Sprint's estimate is consistent in magnitude with Gabel and Kennedy's estimate. Therefore, because Sprint's tiered estimates captures differences between remote termination costs associated with remote switch size, we adopt Sprint's estimates. "0*&&``X"Ԍ X42307. ` ` Based upon Gabel and Kennedy recommendations, derived from data analysis undertaken by RUS, we conclude that the cost of switches reported in the RUS data should be  X4increased by eight percent in order to account for the cost of LEC engineering.3D6 {OK'ԍ Id.3 We conclude, however, that this adjustment should not be added to the cost of power and MDF, because these estimates already include the costs of LEC engineering.   Xv43308. ` ` Methodology. Consistent with our tentative conclusions in the Inputs Further  Xa4Notice, we employ regression analysis. In this Order, we also adopt our tentative conclusion to use a linear function based on examination of the data and statistical evidence.   X 44309. ` ` Sprint recommends using a nonlinear function, such as the loglog function, to take into account the declining marginal cost of a switch as the number of lines connected to  X 4it increases. ZD6 {O'#C\  P6QɒP#э Sprint Dec. 22 ex parte at 12. Sprint criticized the Commission's preliminary switch regression presented in the December 1998 workshop based on the "Rsquared" statistical goodness of fit criterion. After adjusting for data transformations associated with moving to a loglog specification, however, the Rsquared of a  XU4loglog regression (0.56) suggested by Sprint is lower than the Rsquared in the linear regression#XP\  P6QynXP# #C\  P6QɒP#(0.73). Specifically, we note that the Rsquared measure resulting from a regression employing a loglog functional form is not directly comparable to the Rsquared measure from a linear regression. In order for the two measures to be comparable, the Rsquared measure computed from the loglog regression must be computed using observed and predicted cost measures, not the logs of these measures. We also note that the loglog regression we  yO^'employed is of the form:#XP\  P6QynXP#  X4 #5\  P6Q مP#Ln(Cost) = a1 + a2*Ln(Lines) + a3*Host + a4*Ln(Time) + a5*Ln(Lines)*Ln(Time) + a6*Host*Ln(Time) + e# C\  P6QɒP# where Ln(x) denotes the natural log of x. Because Sprint did not make these necessary adjustments, we believe that its criticism of the use of a linear function is misplaced. For a discussion of the "Rsquared" statistical  {OP'goodness of fit criterion and a discussion of loglog specifications, see William H. Greene, Econometric Analysis, 192193 and 251 (1990). We affirm our tentative conclusion that the linear function we adopt provides a better fit with the data than the loglog function. A discussion of the effect of time and type of switch on switch cost is presented below.   X45310. ` ` Based upon an analysis of the data and the record, we conclude that the fixed cost (i.e., the base getting started cost of a switch, excluding costs associated with connecting  Xf4lines to the switch) of host switches and remote switches differ, but that the perline variable cost (i.e., the costs associated with connecting additional lines to the switch) of host and  X84remote switches are approximately the same. This is consistent with statistical evidence8 D6 {O#'#C\  P6QɒP#э#C\  P6QɒP# See General Wald Test for omitted variables in Ramu Ramanathan, Introductory Econometrics with  {O$'Applications 170 (1989). and"8e0*&&``"  X4the comments of Sprint, BellSouth, and the HAI sponsors.#XP\  P6QynXP#D6 {Oy'#C\  P6QɒP#э See Sprint Inputs Further Notice comments at 46. See also Letter from Richard Clarke, AT&T, to  {OC'Magalie Roman Salas, FCC, dated January 7, 1999 (AT&T Jan. 7 ex parte) at 1. XThe primary difference between a host switch and remote switch is in the extent and complexity of the `getting started equipment,' associated with each type of switch (e.g., switch central processor functions, SS7 nonscaleable equipment, maintenance and testing, call recording for billing purposes, etc.). Because most of these functions for lines terminating a remote switch are performed at that switch's host, very little of this type of `getting started' equipment is required at the remote. In contrast, the scaleable equipment used to terminate lines and trunks and to perform basic call processing is essentially the same at the host and remote. In fact, the line units used by Lucent 5E Remote Switching Modules are identical to those used by 5E host or standalone switches. Similarly, the line cards used in Nortel DMS 100 host or standalone switches are the same as those used in DMS 100 remotes, or in DMS  yO '10 host or remote switches.   {O5'Id. BellSouth notes in its Inputs Further Notice comments that "BellSouth finds that the per line costs are slightly different because hosts' lines also bear the costs of some umbilical trunking and control that is not provided at the remotes. Still it is a reasonable simplification to allow host and remote per line costs to be the  {O'same." BellSouth Inputs Further Notice comments at B15.#XP\  P6QynXP#   X46311. ` ` 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  X_4installing switching equipment over time, we affirm our tentative conclusion in the Inputs  XJ4Further Notice 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.   X 47312. ` ` To the extent that the general level of prices in the economy changes 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 economywide inflationary effects, we multiply the cost of purchasing and installing each switch in the data set by the gross X4domesticproduct chaintype price index}\pD6 yO '#C\  P6QɒP#э#C\  P6QɒP# The grossdomesticproduct chaintype price index, which tracks economywide inflation, is published  {O}!'monthly by the Bureau of Economic Analysis of the U.S. Department of Commerce in the Survey of Current  {OG"'Business. } for 1997 and then divide by the grossdomesticproduct chaintype price index for the year in which the switch was installed, thereby"}0*&&``"  X4converting all costs to 1997 values.D6 yOy'ԍ Switch costs are adjusted after estimation for both realized and expected inflation between 1997 and  {OA'1999. See Appendix C for an explanation of these adjustments.   X48313. ` ` In order to account for cost changes unique to switching equipment, we enter  X4time terms directly into the regression equation. "D6 yO'ԍ Time was added to the regression in reciprocal form as an independent variable to measure fixed cost changes unique to remote switches. Then, a time term was added in conjunction with the host identifier variable to measure the fixed cost changes unique to host switches. A time term was also added in conjunction with the line variable, in order to measure cost changes unique to line additions on switches. US West agrees that the costs of the equipment, such as switches and multiplexers, used to provide telecommunications services  X4are declining, and that the perunit cost of providing more services on average is declining.f D6 {OH 'ԍ US West Inputs Further Notice comments at 6465.f Bell Atlantic and GTE, however, contend that the cost of switches is not currently declining  X_4and therefore pricing declines should not be expected to continue into the future._D6 {O'ԍ See Bell Atlantic Inputs Further Notice comments at 20, 21; GTE Inputs Further Notice Reply comments at 32. As evidence, they cite their own fixedcost contracts. As AT&T notes, however, "[i]f Bell Atlantic in fact agreed to switching contracts that effectively froze prices on switching  X 4equipment, those prices would reflect its idiosyncratic business judgement . . ."p D6 {O'ԍ AT&T/MCI Inputs Further Notice Reply comments at 35, n.54.p 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  X 4specifications overstate the decline in switch costs. D6 {O'#C\  P6QɒP#э GTE Dec. 18 ex parte at 4.#C\  P6QɒP#ј As noted in the Inputs Further Notice, the HAI sponsors also caution that the large percentage price declines in switch prices seen in  X 4recent years may not continue. D6 {Ot'#C\  P6QɒP#э See Inputs Further Notice at para. 168. See also AT&T Jan. 7 ex parte at 4.#C\  P6QɒP# We affirm our tentative conclusion that the reciprocal form of time in the regression equation satisfies these concerns by yielding projections of switch  X{4purchase and installation costs that are positive yet declining over time.X{D6 yO 'ԍ Although the log specification of time proposed in the December 1, 1998, workshop yields similar results, it produces investments for host switch "getting started" costs that become negative in 2000 and consequently overstates pricing declines.    XM49314. ` ` Ameritech and GTE advocate the use of the Turner Price Index to convert the embedded cost information contained in the depreciation data to costs measured in current"60*&&``|"  X4dollars.ZD6 {Oy'#C\  P6QɒP#э See Ameritech Dec. 16, 1998 comments at 5; #C\  P6QɒP#GTE Dec. 18, 1998 ex parte at 4.#C\  P6QɒP# The Turner Price Index is an index designed to measure the changing cost of telecommunications plant published semiannually by AUS  yO 'consultants.#C\  P6QɒP# 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 affirm our tentative conclusion that it is not necessary to rely on this index to convert switch costs to current dollars. Rather, as described in the preceding paragraph, we will account for cost changes over time explicitly in the estimation process, rather than adopting a surrogate such as the Turner Price Index.   X_4:315. ` ` Treatment of Switch Upgrades. The bookvalue 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 bookvalue costs in instances where the bookvalue costs of purchasing and installing switching equipment are reported well after the initial installation date of the switch. We affirm our tentative conclusion that, in order to estimate the costs associated with the purchase and installation of new switches, and to exclude the costs associated with upgrading switches, we should remove from the data set those switches installed more than three years prior to the reporting of their associated book X4value costs.SD6 {O+'ԍ Inputs Further Notice at para. 170.S We believe that this restriction will 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 shortrun demand.  X44;316. ` ` Bell Atlantic criticizes the Commission for excluding a large percentage of the  X4observations from the initial depreciation data set.i|D6 {OJ'ԍ Bell Atlantic Inputs Further Notice comments at 12.i As noted in the preceding paragraph, however, the observations that have been excluded do not accurately represent the price of a new switch.  X4<317. ` ` We reject the suggestions of Ameritech, Bell Atlantic, BellSouth, GTE, and Sprint that the costs associated with purchasing and installing switching equipment upgrades  X4should be included in our cost estimates.D6 {OR!'#C\  P6QɒP#э Ameritech Dec. 16, 1998 comments at 45; GTE Dec. 18, 1998 ex parte at 45; Sprint Dec. 22, 1998 ex  {O"'parte at 57; GTE Inputs Further Notice comments at 68; Bell Atlantic Inputs Further Notice comments,  {O"'Affidavit of Harold Ware and Christian Michael Dippon at 913; Bell Atlantic Inputs Further Notice comments  {O#'at 813; BellSouth Inputs Further Notice comments at B15 and B16; Sprint Inputs Further Notice comments at 47 and 48. The model platform we adopted is intended to use the most costeffective, forwardlooking technology available at a particular period in"| 0*&&``" time. The installation costs of switches estimated above reflect the most costeffective forwardlooking technology for meeting industry performance requirements. Switches, augmented by upgrades, may provide carriers the ability to provide supported services, but do so at greater costs. Therefore, such augmented switches do not constitute costeffective forwardlooking 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 analysis reflect such changes over time, as do the timetrended cost estimates.   X14=318. ` ` 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  X 4vendorspecific identifiers.\ D6 {Oe '#C\  P6QɒP#э GTE Dec. 18, 1998 ex parte at 5; Sprint Dec. 22, 1998 ex parte at 13; Ameritech Dec. 16, 1998  {O/'comments at 6; Bell Atlantic Inputs Further Notice#X\  P6G;ɒP# comments, Affidavit of Harold Ware and Christian Michael  yO'Dippon at 17 and 18.#\  P6G;dP# For the purposes of this analysis, our 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 standalone switches. State and regional identifiers are not included in the regression because we only have depreciation data on switches from 20 states. Thus, we could not accurately estimate regionwide or statewide differences in the cost of switching. Our model specification also does not include vendorspecific variables, because  XK4the model platform does not distinguish between different vendors' switches.UXKD6 yO'ԍ Moreover, even if the model platform were changed, we do not believe that it would be appropriate to use vendorspecific input values for switch costs. The model is intended to estimate the leastcost, mostefficient technology being deployed, not the technology available from a particular vendor.U   X4>319. ` ` Switch Cost Estimates. A number of commenters criticize the switch cost  X4estimates contained in the Inputs Further Notice and suggest that they should be dismissed or substantially revised. For example, Sprint suggests that we dismiss the results because the  X4data are collinear and the model is misspecified. D6 yO'ԍ In Appendix C, we discuss the issues of multicollinearity and misspecification identified by Sprint in its comments. Bell Atlantic and BellSouth suggest that the Commission underestimates the cost of switches, while AT&T and MCI suggest that the  X4Commission overestimates the cost of switches.9d D6 {O"'ԍ AT&T/MCI Inputs Further Notice comments at 36; Bell Atlantic Inputs Further Notice comments at 10 {O#'11; Sprint Inputs Further Notice comments at 46; BellSouth Inputs Further Notice comments at B15.9 The Commission's estimates, however, are based upon the most complete, publiclyavailable information on the costs of purchasing and installing new switches and therefore represent the Commission's best estimates of the cost of"~ 0*&&``"  X4host and remote switches. In the preceding paragraphs and in Appendix C , we have addressed the specific objections that have been raised by parties with regard to the methodology, data set, or other aspects of the approach we adopt to derive switch cost estimates, and for the reasons given there, we reject those objections. We conclude that the remaining evidence provided as grounds for dismissing or substantially revising these estimates is largely anecdotal or unconfirmed and undocumented and does not lead us to  Xv4believe that our estimates should be altered. We conclude, therefore, that the switch cost estimates we adopt are the best estimates of forwardlooking cost.   X1' C. Use of the Local Exchange Routing Guide (LERG)    X 4?320. ` ` In the Inputs Further Notice, we tentatively concluded that the Local Exchange Routing Guide (LERG) database should be used to determine hostremote switch relationships  X 4in the federal highcost universal service support mechanism.! D6 {OP'Ѝ Inputs Further Notice at para. 174. The LERG is a database of switching information maintained by  yO'Telecordia Technologies (formerly Bellcore) that includes the existing hostremote relationships. The HAI proponents have placed on the record the portion of the LERG that identifies the hostremote relationships. Letter from Chris Frentrup, MCI Worldcom, to Magalie Roman Salas, FCC, dated September 14, 1998 (MCI  {Or'Sept. 14 ex parte).! We now affirm that  X 4conclusion. In the 1997 Further Notice, the Commission requested "engineering and cost data to demonstrate the most costeffective deployment of switches in general and hostremote  X4switching arrangements in particular."g|D6 {O'ԍ 1997 Further Notice, 12 FCC Rcd at 1856061, para. 122.g In the Switching and Transport Public Notice, the Bureau concluded that the model should permit individual switches to be identified as host,  Xh4remote, or standalone switches."hD6 {O''ԍ Switching and Transport Public Notice at 2. Switches can be designated as host, remote, or standalone switches. Both a host and a standalone switch can provide a full complement of switching services without relying on another switch. A remote switch relies on a host switch to supply a complete array of switching functions and to interconnect with other switches. The Bureau noted that, although standalone switches are a standard component of networks in many areas, current deployment patterns suggest that  X:4hostremote arrangements are more costeffective than standalone switches in certain cases.]: D6 {O'ԍ Switching and Transport Public Notice at 23.] No party has placed on the record in this proceeding an algorithm that will determine whether  X 4a wire center should house a standalone, host, or remote switch.^  D6 {OG"'ԍ Platform Order, 13 FCC Rcd at 21355, para. 76.^ We therefore affirm our conclusion to use the LERG to determine hostremote switch relationships.   X4@321. ` ` In the Platform Order, we concluded that the federal mechanism should incorporate, with certain modifications, the HAI 5.0a switching and interoffice facilities"0*&&``5"  X4module.aD6 {Oy'ԍ Platform Order, 13 FCC Rcd at 2135455, para. 75.a In its default mode, HAI assumes a blended configuration of switch technologies,  X4incorporating both hosts and remotes, to develop switching cost curves.aZD6 yO'ԍ HAI Feb. 3, 1998 submission, Model Description at 58. a HAI also allows the user the option of designating, in an input table, specific wire center locations that house host, remote, and standalone switches. When the hostremote option is selected, switching curves that correspond to host, remote, and standalone switches are used to determine the appropriate switching investment. The LERG database could be used as a source to identify  Xv4the hostremote 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 hostremote  X 4configurations."^ D6 {O'ԍ Platform Order, 13 FCC Rcd at 21355, para. 76.^   X 4A322. ` ` The majority of commenters throughout this proceeding have supported the use of the LERG database as a means of determining the deployment of host and remote  X 4switches.r^ |D6 {O'ԍ See, e.g., BellSouth Inputs Further Notice reply comments at 17; Sprint Inputs Further Notice comments  {O'at 48. See also Aliant Switching and Transport Public Notice comments at 2; Bell Atlantic Switching and  {O'Transport Public Notice reply comments at 2.r These commenters contend that the use of the LERG to determine hostremote relationships will incorporate the accumulated knowledge and efficiencies of many LECs and  X4engineering experts in deploying the existing switch configurations.D6 {O'ԍ Bell Atlantic Switching and Transport Public Notice reply comments, Attachment 1 at 2; BellSouth et al.  {O'Switching and Transport Public Notice reply comments, Attachment 1 at 23. Sprint contends that there are many intangible variables that can not be easily replicated in determining host Xd4remote relationships.\d D6 {O'ԍ Sprint Inputs Further Notice comments at 48.\ Commenters also contend that an algorithm that realistically predicts this deployment pattern is not feasible using publicly available data and would be  X64unnecessarily "massive and complex."6 D6 {Ow 'ԍ See, e.g., AT&T/MCI Switching and Transport Public Notice comments at 6; BellSouth et al. Switching  {OA!'and Transport Public Notice reply comments, Attachment 1 at 2. AT&T and MCI argue, however, that use of the LERG to identify hostremote relationships may reflect the use of embedded technology,"0*&&``2"  X4pricing, and engineering practices.&D6 {Oy'ԍ AT&T/MCI Inputs Further Notice comments at 4445. Although AT&T and MCI oppose the use of the LERG, they have taken steps to ensure that the LERG database is compatible with use in the switching module  {O 'of the synthesis model. See MCI Sept. 14 ex parte; Letter from Richard N. Clarke, AT&T, to Magalie Roman  {O'Salas, FCC, dated September 16, 1998 (AT&T Sept. 16 ex parte).   X4B323. ` ` We conclude that the LERG database is the best source set forth in this proceeding to determine hostremote switch relationships in the federal highcost universal service support mechanism. As noted above, no algorithm has been placed on the record to determine whether a wire center should house a standalone, host, or remote switch. In addition, many commenters contend that development of such an algorithm independently  X_4would be difficult using publicly available data.^_D6 {O 'ԍ See, e.g., Ameritech Switching and Transport Public Notice comments at 3; AT&T/MCI Switching and  {O 'Transport Public Notice comments at 6; BellSouth et al. Switching and Transport Public Notice comments  {OZ'Attachment 1 at 12; GTE Switching and Transport Public Notice at 1112. While GTE suggests that the best source  XH4of hostremote relationships would be a file generated by each company, we note that no such  X14information has been submitted in this proceeding.Y1D6 {O'ԍ GTE Inputs Further Notice comments at 69.Y In addition, GTE's proposal would impose administrative burdens on carriers. We conclude that the use of the LERG to identify the hostremote 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 conclude that use of the LERG is the most feasible alternative currently available to incorporate the efficiencies of hostremote relationships in the federal highcost universal service support mechanism.   Xy' D. Other Switching and Interoffice Transport Inputs    XK4C324. ` ` General. In the Inputs Further Notice, we proposed several minor  X64modifications to the switching inputs to reflect the fact that the studies on which the Commission relied to develop switch costs include all investments necessary to make a switch  X4operational.Tn D6 {O''ԍ Inputs Further Notice at para. 178. T These investments include telephone company engineering and installation, the main distribution frame (MDF), the protector frame (often included in the MDF), and power  X4costs.i D6 {O"'ԍ AT&T Jan. 7 ex parte; Sprint Dec. 22 ex parte at 9.i To avoid double counting these investments, both as part of the switch and as separate input values, the commenters agree that the MDF/Protector investment per line and" 0*&&``X"  X4power input values should be set at zero.D6 {Oy'ԍ AT&T Inputs Further Notice comments at 40; GTE Dec. 18 ex parte at 56; Sprint Inputs Further Notice comments at 49. In addition, commenters agree that the Switch  X4Installation Multiplier should be set at 1.0."D6 {O'ԍ See, e.g., AT&T Inputs Further Notice comments at 40; GTE Dec. 18 ex parte at 6; Sprint Inputs  {O'Further Notice comments at 49. 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 adopt these values.   X4D325. ` ` Analog Line Offset. In the Inputs Further Notice, we tentatively concluded  Xx4that the "Analog Line Circuit Offset for Digital Lines" input should be set at zero.Sx~D6 {O 'ԍ Inputs Further Notice at para. 179.S We now affirm that conclusion. AT&T and MCI contend that the switch investment in the model should be adjusted downward to reflect the cost savings associated with terminating digital,  X34rather than analog, lines.3D6 {O'ԍ AT&T/MCI Inputs Further Notice comments at 4142. AT&T/MCI contend that the cost of terminating digital lines is significantly less expensive than terminating analog lines. AT&T and MCI assert that this cost savings is due primarily to the elimination of a MDF and protector frame termination. AT&T and MCI further contend that the model produces, on average, 40 percent digital lines, while the data used to determine  X 4switch costs reflect the use of only approximately 18 percent digital lines.d j D6 {O 'ԍ AT&T/MCI Inputs Further Notice comments at 41.d In contrast, GTE contends that the model may calculate more analog lines than carriers have historically placed  X 4due to the use of an 18,000 feet maximum copper loop length.Y D6 {Om'ԍ GTE Inputs Further Notice comments at 66.Y  X4E326. ` ` AT&T and MCI suggest that the analog line offset input should reflect a $12 MDF and $18 switch port termination savings per line in switch investment for terminating  Xd4digital lines in the model.^d D6 {O'ԍ AT&T/MCI Inputs Further Notice comments at 42.^ Several commenters disagree and recommend setting the analog  XM4line offset to zero.M D6 {O!'ԍ BellSouth Inputs Further Notice comments at 16; GTE Inputs Further Notice comments at 6667; Sprint  {O!'Inputs Further Notice comments at 49. Sprint contends that the analog line offset is inherent in the switching curve in the model, thus making this input unnecessary and, therefore, justified only if the  X4switch cost curve is based on 100 percent of analog line cost.b|D6 {OL%'ԍ Sprint Inputs Further Notice comments at 49.b Sprint argues that an"0*&&``Y" unknown mixture of analog and digital lines are taken into consideration in developing the  X4switch curve.ND6 {Ob'ԍ Sprint Dec. 22 ex parte at 12.N   X4F327. ` ` 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. AT&T and MCI's proposed analog line offset 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 AT&T and MCI's estimate of the digital line usage in the "historical" data. In the absence of more explicit support of AT&T and MCI's position, we conclude that the Analog Line Circuit Offset for Digital Lines should be set at zero.   X 4G328. ` ` Switch Capacity Constraints. In the Inputs Further Notice, we proposed to adopt the HAI default switch capacity constraint inputs as proposed in the HAI 5.0a model  X4documentation.WZD6 yO'ԍ HAI Feb. 3, 1998 submission, App. B at 3839.W We now adopt that proposal. The forwardlooking cost mechanism contains switch capacity constraints based on the maximum line and traffic capabilities of the switch. In their most recent filings on this issue, AT&T and MCI recommend increasing the switch line and traffic capacity constraints above the HAI input default values for those  X64inputs.6D6 {O'ԍ AT&T Jan. 7 ex parte. The HAI proponents included the updated switch capacity constraints in a table  {O'attached to the Jan. 7 ex parte. AT&T and MCI contend that the default input values no longer reflect the use of  X4the most current technology.GFD6 {O'ԍ AT&T Jan. 7 ex parte. G For example, AT&T and MCI recommend that the maximum  X4equipped line size per switch should be increased from 80,000 to 100,000 lines.HD6 {O'ԍ AT&T Jan. 7 ex parte. H   X4H329. ` ` We conclude that the original HAI switch capacity constraint default values are reasonable for use in the federal mechanism. We note that Sprint, the only commenter to  X4respond to this issue, supports this conclusion.\j D6 {O"'ԍ Sprint Inputs Further Notice comments at 49.\ 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"~ 0*&&``"  X4used."_D6 {Oy'ԍ See HAI Dec. 11 submission, Model Inputs at 80._ AT&T and MCI therefore originally supported the 80,000 line limitation as the maximum equipped line size value with the knowledge that the full capacity of the switch  X4may be higher.1ZD6 yO'ԍ In addition, we note that a decision to adopt the revised HAI values for maximum equipped lines per switch would have only a minimal impact on the overall forwardlooking cost estimation because fewer than 2 percent of wire centers have more than 80,000 lines. A review of the data indicates that, of the 12,506 wire centers served by nonrural LECs, only 189 (1.5 percent) have more than 80,000 lines and 57 (0.5 percent) have  {O'more than 100,000 lines. See HAI Feb. 3, 1998 model submission.1   X4I330. ` ` Switch Port Administrative Fill. In the Inputs Further Notice, we proposed a  X4switch port administrative fill factor of 94 percent.S D6 {OL 'ԍ Inputs Further Notice at para. 184.S We now adopt that proposed value. The HAI model documentation 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  XJ4switch."_JD6 yO'ԍ HAI Dec. 11, 1997 submission, Inputs Portfolio at 80._ HAI assigns a switch port administrative fill factor of 98 percent in its default  X34input values._3. D6 yO'ԍ HAI Dec. 11, 1997 submission, Inputs Portfolio at 80._ The BCPM default value for the switch percent line fill is 88 percent.X3 D6 yO'ԍ BCPM April 30, 1998 submission, Switch Model Inputs at 2021. BCPM defines Switch Percent Line Fill as the ratio between the number of working lines on the switch and the total number of lines for which the switch is engineered.   X 4J331. ` ` Bell Atlantic contends that switches have significant unassigned capacity due to  X 4the fact that equipment is installed at intervals to handle growth.j D6 {O}'ԍ Bell Atlantic Inputs Further Notice comments at 89.j Sprint recommends an  X 4average fill factor of 80 percent.b pD6 {O'ԍ Sprint Inputs Further Notice comments at 50.b US West contends that its actual average fill factor is 78  X 4percent. D6 {Os 'ԍ See Letter from Pete Sywenki, Sprint, to Magalie Roman Salas, FCC, dated Jan. 8, 1999 (attachment  {O=!'includes US West switch data) (Sprint Jan. 8 ex parte). AT&T and MCI contend that the switching module currently applies the fill factor input against the entire switch when it should be applied only to the line port portion of the  X4switch.^^D6 {O$'ԍ AT&T/MCI Inputs Further Notice comments at 43.^ AT&T and MCI therefore contend that, either the formula should be modified, or the input needs to be adjusted upward so that the overall switching investment increase"{0*&&`` "  X4attributable to line fill will be the same as if the formula were corrected.^D6 {Oy'ԍ AT&T/MCI Inputs Further Notice comments at 43.^   X4K332. ` ` 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  X4Consulting Group, a consultant of BellSouth.&ZD6 {O'ԍ BellSouth Inputs Public Notice reply comments at Exhibit 213; Commonwealth of Kentucky, An Inquiry  {Oy'Into Universal Service and Funding Fees, Administrative Case No. 360, App. F at 13 ; Louisiana Public Service  {OC 'Commission, State ForwardLooking Cost Studies for Federal Universal Service Support (May 19, 1998) (Louisiana Cost Study). 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  X_4"allowances for growth over an engineering time horizon of several years."g_HD6 yOX'ԍ BCPM April 30, 1998 submission, Switch Model Inputs at 2021.g Sprint has provided no substantiated evidence to support its revised value of 80 percent. US West's average fill factor of 78 percent is based on data that include switches with unreasonably low  X 4fill factors.* D6 yO'ԍ For example, switches with installed lines of 65,001, 48,818, 11,520, 12,288, 74,039, 12,800, and 36,897 were listed as having, 1,1, 2, 10, 10, 21, and 26 working lines, respectively, or collectively, an average fill factor  {O3'of .027 percent. See Sprint Jan. 8 ex parte. Our analysis of the US West data indicated that, after eliminating the observations with unreasonably low fill factors, the majority of US West switches had fill factors ranging from 88 percent to 98 percent. * Regarding AT&T and MCI's contention that the switching module currently applies the fill factor input against the entire switch rather than the line port portion of the switch, we note that this occurs only when the hostremote option is not utilized in the switch module. As noted above, we are using the hostremote option and therefore no adjustment to the switch fill factor is required. We therefore adopt a switch port administrative fill factor of 94 percent.   Xy4L333. ` ` Trunking. In the Inputs Further Notice, we tentatively concluded 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 adopted the proposed input value of $100.00 for the trunk port  X4investment.S D6 {OZ!'ԍ Inputs Further Notice at para. 187.S We now affirm these tentative conclusions and adopt this approach.   X4M334. ` ` The HAI switching and interoffice module developed switching cost curves using the Northern Business Information (NBI) publication, "U.S. Central Office Equipment"0*&&``{"  X4Market: 1995 Database."bD6 yOy'ԍ HAI Dec. 11, 1997 submission, Model Description at 52. b These investment figures were then reduced per line to remove  X4trunk port investment based on NBI's implicit line to trunk ratio of 6:1.`XD6 yO'ԍ HAI Dec. 11, 1997 submission, Model Description at 53.` The actual number of trunks per wire center is calculated in the transport calculation, and port investment for these trunks is then added back into the switching investments.   X4N335. ` ` Sprint notes that, under the HAI trunk investment approach, raising the pertrunk investment leads to a decrease in the switch investment per line, "despite a reasonable  X_4and expected increase" in the investment per line.N_D6 {O 'ԍ Sprint Dec. 22 ex parte at 10.N GTE also notes that the selection of the trunk port input value creates a dilemma in that it is used to reduce the end office investment,  X14as noted above, and to develop a tandem switch investment.J1zD6 {O\'ԍ GTE Dec. 18 ex parte at 6.J GTE and Sprint recommend that the switch module be modified by disabling the computation that reduces the end office investment by the difference in the computed interoffice trunks and the 6:1 line to trunk  X 4ratio.} D6 {O'ԍ GTE Dec. 18 ex parte at 6; Sprint Inputs Further Notice comments at 50.} MCI agrees that the trunk port calculation should be deactivated in the switching  X 4module. D6 yO$'ԍ Letter from Chris Frentrup, MCI Worldcom, to Magalie Roman Salas, FCC, dated Feb. 9, 1999 (MCI  {O'Worldcom Feb. 9 ex parte) at 24.   X 4O336. ` ` In the Inputs Further Notice, we agreed with commenters that the trunk port  X4input creates inconsistencies in reducing the end office investment.S D6 {O;'ԍ Inputs Further Notice at para. 190.S Consistent with the suggestions made by GTE and MCI, we 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. Sprint, the only commenter to  X64address this issue in response to the Inputs Further Notice, agrees with our conclusion.\6 D6 {Oq 'ԍ Sprint Inputs Further Notice comments at 50.\   X 4P337. ` ` Because the trunk port input value is also used to determine the tandem switch  X4investment, we must determine the trunk port investment.D6 yO$'ԍ HAI defines this input as the "per trunk equivalent investment in switch trunk port at each end of a trunk." HAI Dec. 11, 1997 submission, Appendix B (HM 5.0 Inputs, Assumptions, and Default Values) at 46. In the Inputs Further Notice, we"t0*&&``"  X4proposed an input value for trunk port investment per end of $100.00.SD6 {Oy'ԍ Inputs Further Notice at para. 191.S SBC and Sprint  X4contend that this value should be higher ranging from $150.00 to $200.00.ZD6 {O'ԍ SBC Inputs Further Notice comments at 14; Sprint Inputs Further Notice comments at 50. BellSouth has  X4filed information on the record that supports our proposed trunk port investment value.D6 yOo'ԍ Letter from William W. Jordan, BellSouth, to Magalie Roman Salas, FCC, dated August 7, 1998,  {O7'Attachment to Question 1 at 5, 9, 13, 17 (dated July 15, 1998) (BellSouth Aug. 7 ex parte). BellSouth notes that the four states that have issued orders addressing the cost of the trunk  X4port for universal serviceFD6 {O 'ԍ BellSouth Aug. 7 ex parte, Attachment to Question 1 at 5, 9, 13, 17. The four states are Kentucky, Louisiana, North Carolina, and South Carolina. have chosen estimates of the cost of the trunk port that range  X4from $62.73 to $110.77.|D6 {O'ԍ BellSouth Aug. 7 ex parte, Attachment to Question 1 at 5, 9, 13, 17. | We conclude that the record supports the adoption of a trunk port investment per end of $100.00, as supported by the HAI default values. As noted above, this value is consistent with the findings of several states and BellSouth. In addition, we note that SBC and Sprint provide no data to support their higher proposed trunk port investment value. We therefore adopt the HAI suggested input value of $100.00 for the trunk port investment, per end.   X 4J VII. EXPENSES ׃   X ' A.Introduction   X4#footnote reference#)footnote reference)#footnote reference#Q338. ` ` In this section, we consider the inputs to the model related to expenses and  Xy4general support facilities (GSF) investment. Consistent with the Universal Service Order's seventh criterion, we select input values that result in a reasonable allocation of joint and common costs for nonnetworkrelated costs, such as GSF, plant nonspecific expenses, corporate operations expenses, and customer services expenses. The Commission's methodology for estimating these types of expenses is designed to "ensure that the forwardlooking economic cost [calculated by the model] does not include an unreasonable share of  X4the joint and common costs for nonsupported services."2 D6 {O '#X\  P6G;ɒP#э Universal Service Order, 12 FCC Rcd at 8915, para. 250, criterion 7; see also 47 U.S.C.  254 (k). Consistent with the Universal  X4Service Order's first and third criteria, we also select input values for plantspecific operations  X4expenses that reflect the cost of maintaining a forwardlooking network. D6 {O<$'ԍ See Universal Service Order, 12 FCC Rcd at 8913, para. 250, criteria 1, 3; see also infra para. 351. "V 0*&&``"Ԍ X4R339. ` ` GSF costs include the investment and expenses related to vehicles, land, buildings, and general purpose computers. Other expenses include: plantspecific operations  X4expenses,~XD6 yOK'ԍ #X\  P6G;ɒP#Plant specific operations expenses (that are not associated with GSF) include the cost of maintaining telecommunications plant and equipment. These network related expenses are not considered to be "joint and common costs." In ARMIS accounts, plantspecific operations expenses include GSF expenses.~ plant nonspecific expenses,D6 yOk'ԍ #X\  P6G;ɒP#Plant nonspecific expenses include the costs of engineering, network operations, and power expenses. corporate operations expenses,xD6 yO'ԍ #X\  P6G;ɒP#Corporate operations expenses include the costs of administration, human resources, legal, and accounting expenses. and customer  X4services expenses.D6 yO< 'ԍ #X\  P6G;ɒP#Customer services expenses include the costs of marketing, billing, and directory listing expenses. For purposes of this Order, costs associated with common support services (often called overhead expenses) refer to plant nonspecific expenses, corporate operations expenses, and customer services expenses.   X_4S340. ` ` In the Platform Order, the Commission adopted HAI's algorithm for calculating expenses and GSF costs, as modified to provide some additional flexibility in  X34calculating expenses offered by the BCPM sponsors.3` D6 {OD'ԍ #X\  P6G;ɒP#Platform Order, 13 FCC Rcd at 21357, para. 81. With this added flexibility, the model allows the user to estimate expenses as either a perline amount or as a percentage of investment. We noted that many of the questions regarding how best to calculate expenses  X 4would be resolved in the input selection phase of this proceeding. D6 {O'ԍ #X\  P6G;ɒP#Platform Order, 13 FCC Rcd at 21360, para. 87. In the Inputs Further  X 4Notice, we tentatively concluded that the input values for plantspecific operations expenses  X 4should be calculated as a percentage of investment,S D6 {O'ԍ Inputs Further Notice at para. 204.S and that the input values for common  X 4support services expenses should be estimated on a perline basis.S D6 {Ot'ԍ Inputs Further Notice at para. 213.S In addition, we tentatively concluded that we should adopt input values that reflect the average expenses that  X4will be incurred by nonrural carriers, rather than companyspecific expense estimates.YD6 {O 'ԍ Inputs Further Notice at paras. 198, 214.Y As described below, we proposed methodologies for calculating these expenses. In addition, we proposed a methodology for estimating the GSF investment that should be allocated to the  X:4supported services.W::D6 {O%%'ԍ Inputs Further Notice at paras. 21011.W":0*&&``U"Ԍ  X' B.PlantSpecific Operations Expenses    X' 1. ` ` Background    X4T341.` ` Plantspecific operations expenses are the expense costs related to the  Xv4maintenance of specific kinds of telecommunications plant.vD6 yO'ԍ #X\  P6G;ɒP#Plantspecific operations expenses correspond to the following ARMIS 4303 report accounts: 6110 Network Support Expense 6120 General Support Expense 6210 COE Switch XX` ` 6212 COE Digital Electronic Switch only (#` 6220 Operator Systems 6230 COE Transmission XX` ` 6231 Radio Systems (#` XX` ` 6232 COE Circuit DDS(#` XX` ` 6232 COE Circuit Other than DDS(#` X6310 Information Origination/Termination(# XX` ` 6311 Station Apparatus (only)(#` X6341 Large PBX(# X6351 Public Telephone(# X6362 Other Terminal Equipment(# 6411 Poles 6421.1 Aerial Cable Metallic (Copper) 6421.2 Aerial Cable Fiber 6422.1 Underground Cable Metallic (Copper) 6422.2 Underground Cable Fiber 6423.1 Buried Cable Metallic (Copper) 6423.2 Buried Cable Fiber 6441 Conduit Systems  In the Inputs Further Notice,  Xa4we proposed a methodology for estimating expensetoinvestment ratios consisting of four  XJ4steps.XJPD6 {OK'ԍ Inputs Further Notice at paras. 205208.X First, we obtained accountspecific current cost to book cost (currenttobook) ratios for the related investment accounts, for the years ending 1995 and 1996, from Ameritech, Bell  X 4Atlantic, BellSouth, GTE, and SBC.| D6 {O 'ԍ #X\  P6G;ɒP# Inputs Further Notice at para. 205. For each account or subaccount, a currenttobook ratio is developed by first revaluing each type of equipment at its current replacement cost. The sum of these current costs is then divided by the total, embedded cost account balance. The resulting currenttobook 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. The currenttobook ratios submitted by Ameritech, Bell Atlantic, BellSouth, GTE, and SBC are proprietary  {O$'information subject to provisions in the Protective Order and therefore are not reproduced here. Although we would prefer to have data from more companies, the other ARMISfiling carriers informed us that they either no"c%0*&&[%" longer maintain this type of information, or never used currenttobook ratios for accounting purposes. Second, we calculated two sets of composite current" X0*&&``"ԫtobook ratios (year end 1995 and 1996) for each account based on composite currenttobook  X4ratios for each of the five companies. XD6 {O'ԍ Inputs Further Notice at para. 206. For each study area of the five holding companies that provided currenttobook ratios, we obtained yearend 1995 and 1996 investment balances from ARMIS for the plant accounts consistent with the aforementioned plantspecific expense accounts. Study areaspecific currenttobook ratios for the two periods were multiplied by the 1995 and 1996 ARMIS investments in each account to derive the forwardlooking, "current," yearend 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 currenttobook ratios (year end 1995 and 1996).  Third, we applied these composite currenttobook ratios to the yearend 1995 and 1996 investment account balances from the ARMIS 4303 reports for all ARMISfiling companies and averaged the 1995 and 1996 adjusted balances for  X4each account.* D6 {O'ԍ Inputs Further Notice at para. 207. To calculate the expensetoinvestment ratios for the plantspecific operations expense accounts, we obtained total, yearend 1995 and 1996 investment account balances from the ARMIS 4303 reports for all ARMISfiling companies. To make these embedded account balances forwardlooking, we next multiplied each investment account balance for each year by the currenttobook ratios for the same year developed earlier. The resulting yearend 1995 and yearend 1996 "current" account balances were then averaged by adding the two years together and dividing by two. Fourth, we calculated expensetoinvestment ratios for each plantspecific operations expense account by dividing the total 1996 account balance for all ARMISfiling  Xv4companies by the current average investment calculated previously.lZvD6 {O'ԍ Inputs Further Notice at para. 208. From the 1996 ARMIS 4303 report, we obtained the 1996 balances for each plantspecific operations expense account for all ARMISfiling companies. The expense account balances were divided by their respective average "current" investment to obtain expensetoinvestment ratios.l We tentatively concluded that these expensetoinvestment ratios should be applied to the modelderived investment balances to obtain forwardlooking plantspecific operations expense estimates.   X 4U342. ` ` In the Inputs Further Notice, we proposed adopting input values that reflect the average expenses that will be incurred by nonrural carriers, rather than a set of company X 4specific maintenance expense estimates, for several reasons.S D6 {Oe'ԍ Inputs Further Notice at para. 198.S We stated that using nationwide expensetoinvestment ratios is consistent with the views of the states as reflected  X 4in the state Joint Board staff recommendations. XD6 {O"'ԍ See State Members' Report on the Use of Cost Proxy Models, March 26, 1997, at 22. In addition, our proposed methodology requires some method of converting booked cost investment to current investment in order to estimate forwardlooking plant specific operations expenses based on present day replacement cost, rather than historic, financial account balances. We noted that we have not been able to"{0*&&``p" obtain currentcosttobookcost ratios for each nonrural ARMIS reporting firm, which would  X4be necessary to calculate company or study area specific expensetoinvestment ratios.SD6 {Ob'ԍ Inputs Further Notice at para. 198.S We tentatively concluded that averages are more consistent with the forwardlooking nature of the highcost model because less efficient firms are not rewarded if they have higher than average costs. In seeking comment on these proposals and tentative conclusions, we requested that parties advocating the use of companyspecific values or other alternatives to nationwide or regional estimates identify the method and data readily available that could be used to estimate plantspecific expenses and indicate how their proposal is consistent with the goal of  XH4estimating forwardlooking costs.SHZD6 {OS 'ԍ Inputs Further Notice at para. 198.S   X 4V343. ` ` In reaching our tentative conclusions, we recognized that parties have argued that maintenance expenses vary widely by geographic area and type of plant, while others  X 4have argued that plantspecific expenses are highly dependent on regional wage differences.S D6 {O'ԍ Inputs Further Notice at para. 199.S We explained that the synthesis model takes into account the variance in maintenance cost by type of plant installed because, as investment in a particular type of plant varies, the  X 4associated expense cost also varies.S ~D6 {O'ԍ Inputs Further Notice at para. 199.S We noted that we had been unable to verify significant regional differences among study areas or companies based solely on labor rate variations using the publicly available ARMIS expense account data for plantspecific maintenance costs. Nonetheless, we sought comment on the degree to which regional wage rate differentials exist and are significant, and asked parties to suggest independent data sources on variations of wage rates between regions and a methodology that permits such distinctions without resorting  X4to selfreported information from companies.SD6 {O'ԍ Inputs Further Notice at para. 199.S In addition, we sought specific comment on a possible method of estimating regional wage differences by using indexes calculated by the  X4President's Pay Agent.\D6 {OB'ԍ#X\  P6G;ɒP# Inputs Further Notice at para. 200. These indexes are used to calculate locality pay differentials for  {O 'federal employees. See Report on Localitybased Comparability Payments for the General Schedule, Annual  yO 'Report of the President's Pay Agent, Appendix II, 1995.#x6X@`7X@#   X4W344. ` ` We also tentatively concluded that we should not adopt different expense  X4estimates for small, medium, and large nonrural companies on a perline basis.S D6 {O!%'ԍ Inputs Further Notice at para. 201.S We"X 0*&&``\" explained that we had tested whether significant differences in maintenance expenses per line could be discerned from segmenting companies into carriers serving less than 500,000 access lines, carriers serving between 500,000 and 5,000,000 access lines, and carriers serving over  X45,000,000 access lines.SD6 {O4'ԍ Inputs Further Notice at para. 201.S Because we found no significant differences in the expense factor perline or perinvestment estimates based on these criteria, we determined that economies of  X4scale should not be a factor in estimating plantspecific expenses.SZD6 {O'ԍ Inputs Further Notice at para. 201.S   X_4X345. ` ` Finally, we noted that we used data from 1995 and 1996 in the proposed methodology and tentatively concluded that it is appropriate to adjust these data to account for inflation and changes in productivity by obtaining revised 1997 currenttobook ratios from  X 4those companies providing data.S D6 {O'ԍ Inputs Further Notice at para. 209.S In addition, we tentatively concluded that we should use the most current ARMIS data available for the maintenance factor methodology. We sought comment on using the most current data available in the final computation of expense  X 4estimates.S ~D6 {O'ԍ Inputs Further Notice at para. 209.S   X ' 2.` ` Discussion    Xy4Y346. ` ` Consistent with our tentative conclusions, we adopt input values that reflect the average expenses that will be incurred by nonrural carriers, rather than a set of company XK4specific maintenance expense estimates. We adopt our proposed fourstep methodology for  X44estimating expensetoinvestment ratios using revised currenttobook ratios and 1997 and 1998 ARMIS data. We clarify that the ARMIS investment and expense balances used to calculate the expensetoinvestment ratios in steps three and four should be based on the  X4accounts for all nonrural ARMISfiling companies. Although some rural companies file ARMIS reports, the mechanism we adopt today will be used, beginning January 1, 2000, to determine highcost support only for nonrural carriers. We find, therefore, that it is appropriate to include only data from the nonrural ARMISfiling companies in calculating  X4these expensetoinvestment ratios. D6 yOV!'ԍ Our proposed expensetoinvestment ratios were based on ARMIS data for 91 study areas. The input values we adopt herein are based on ARMIS data for 80 nonrural study areas. We note that there generally is little or no difference between the expense ratios calculated using total ARMIS expense and investment accounts and nonrural ARMIS expense and investment. Where there are differences, the ratios based on nonrural data are higher for all categories except network support and general support.  "~ 0*&&``"Ԍ X4Z347. ` ` Current Data. Parties commenting on whether we should update our methodology using more current ARMIS data agree that we should use the most currently  X4available data.D6 {OK'ԍ See, e.g., GTE Inputs Further Notice comments at 76; Sprint Inputs Further Notice comments at 59. We obtained accountspecific currenttobook ratios for the related plant investment accounts, for the years ending 1997 and 1998, from Ameritech, Bell Atlantic,  X4BellSouth, GTE, and SBC.ZD6 yO'ԍ Due to the manner in which SBC develops currenttobook ratios for each year (average beginning and endofyear current investment divided by average beginning and endofyear embedded investment) yearend 1998 currenttobook ratios are not available for SBC. Therefore, we applied yearend 1997 currenttobook ratios to both SBC's yearend 1997 and yearend 1998 investment in developing 1998 expensetoinvestment ratios. Accordingly, we adopt input values using these updated currenttobook ratios and 1997 and 1998 ARMIS data to calculate the expensetoinvestment ratios that we use to obtain plantspecific operations expense estimates for use in the federal mechanism. These input values and the nonproprietary data used to calculate the expenseto XH4investment ratios are set forth in Appendix D.FH D6 {O'ԍ See Appendix D at D4.F   X 4[348. ` ` Nationwide Estimates. As discussed in this section, we adopt nationwide average values for estimating plantspecific operations expenses rather than companyspecific values for several reasons. We reject the explicit or implicit assumption of most LEC commenters that the cost of maintaining incumbent LEC embedded plant is the best predictor of the forwardlooking cost of maintaining the network investment predicted by the model.  X 4We find that, consistent with the Universal Service Order's criteria, forwardlooking expenses should reflect the cost of maintaining the leastcost, mostefficient, and reasonable technology being deployed today, not the cost of maintaining the LECs' historic, embedded plant. We recognize that variability in historic expenses among companies is due to a variety of factors and does not simply reflect how efficient or inefficient a firm is in providing the supported services. We reject arguments of the LECs, however, that we should capture this variability by using companyspecific data in the model. We find that using companyspecific data for federal universal service support purposes would be administratively unmanageable and  X4inappropriate. Moreover, we find that averages, rather than companyspecific data, are better predictors of the forwardlooking costs that should be supported by the federal highcost mechanism. In addition, we find that using nationwide averages will reward efficient companies and provide the proper incentives to inefficient companies to become more efficient over time, and that this reward system will drive the national average toward the cost that the competitive firm could achieve. Accordingly, we affirm our tentative conclusion that we should adopt nationwide average input values for plantspecific operations expenses.   X94\349. ` ` AT&T and MCI agree with our tentative conclusion that we should adopt input values that reflect the average expenses incurred by nonrural carriers, rather than company""0*&&``"ԫspecific expenses. They argue that the universal service support mechanism should be based  X4on the costs that an efficient carrier could achieve, not on what any individual carriers has  X4achieved.^D6 {OM'ԍ AT&T/MCI Inputs Further Notice comments at 45.^ In contrast, incumbent LEC commenters argue that we should use company X4specific values.ZD6 {O'ԍ See, e.g., Bell Atlantic Inputs Further Notice comments at 2021; BellSouth Inputs Further Notice  {O'comments at B16, B18; GTE Inputs Further Notice comments at 7576.   X4]350. ` ` BellSouth, for example, contends that the approach suggested by AT&T and MCI conflicts with the third criterion for a cost proxy model, which states that "[t]he study or model, however, must be based upon an examination of the current cost of purchasing  XJ4facilities and equipment . . .."JD6 {O 'ԍ See BellSouth Inputs Further Notice reply comments at 17 (citing Universal Service Order, 12 FCC Rcd at 8913, para. 250, criterion three). BellSouth argues that the "only logical starting point for  X34estimating forwardlooking expenses is the current actual expenses of the ILECs."h3D6 {O'ԍ BellSouth Inputs Further Notice reply comments at 1718.h We agree that we should start with current actual expenses, as we do, in estimating forwardlooking maintenance expenses. We do not agree with the inferences made by the incumbent LEC commenters, however, that our input values should more closely match their current maintenance expenses.   X 4^351. ` ` BellSouth's reliance on criterion three fails to quote the first part of that criterion, which states:  ` ` Only longrun forwardlooking economic cost may be included. The longrun period must be a period long enough that all costs may be treated as variable and avoidable. The costs must not be  X4the embedded cost of facilities, functions, or elements.yD6 {Or'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250 (criterion three).yx`  Thus, the model's forwardlooking expense estimates should not reflect the cost of  X4maintaining the incumbent LEC's embedded plant. The Universal Service Order's first criterion specifies that "[t]he technology assumed in the cost study or model must be the leastcost, most efficient, and reasonable technology for providing the supported services that is  X4currently being deployed."m4 D6 {O|$'ԍ Universal Service Order, 12 FCC Rcd at 8913, para. 250.m As we explained in the Inputs Further Notice, while the synthesis model uses existing incumbent LEC wire center locations in designing outside plant," 0*&&``"  X4it does not necessarily reflect existing incumbent LEC loop plant.RD6 {Oy'ԍ Inputs Further Notice at para. 50.R Indeed, as the  X4Commission stated in the Platform Order, "[e]xisting incumbent LEC plant is not likely to  X4reflect forwardlooking technology or design choices."X\ZD6 {O'ԍ Platform Order, 12 FCC Rcd at 21350, para. 66. "Instead, incumbent LECs' existing plant will tend to reflect choices made at a time when different technology options existed or when the relative cost of equipment  {Oq'to labor may have been different than it is today." Id.X Thus, for example, the model may design outside plant with more fiber and DLCs and less copper cable than has been deployed historically in an incumbent LEC's network. We find that the forwardlooking maintenance expenses also should reflect changes in technology.   Xa4_352. ` ` GTE argues that expensetoinvestment ratios should not be developed as national averages, because no national average can reflect the composition of each company's  X34market demographics and plant.[3~D6 {Ob'ԍ GTE Inputs Further Notice comments at 76. [ GTE argues further that costs vary by geographic area and that this variability reflects operating difficulties due to terrain, remoteness, cost of labor, and  X 4other relevant factors.[ D6 {O'ԍ GTE Inputs Further Notice comments at 73. [ GTE contends that "[u]sing national average operating expenses will either understate or overstate the forwardlooking costs of providing universal service for each  X 4carrier, depending on the variability of each company to the average."Y D6 {O*'ԍ GTE Inputs Further Notice comments at 72.Y GTE claims that the  X 4use of the national average penalizes efficient companies that operate in highcost areas.[ 4 D6 {O'ԍ GTE Inputs Further Notice comments at 73. [   X4`353. ` ` Similarly, Sprint contends that the use of nationwide estimated data does not  X{4accurately depict the realities of operating in Sprint's service territories.\{ D6 {O'ԍ Sprint Inputs Further Notice comments at 51.\ Sprint claims that the national averages are far below Sprint's actual costs, because the Commission's methodology for estimating plantspecific expense inputs is heavily weighted toward the Bell  X64companies' urban operating territories.\6X D6 {O?!'ԍ Sprint Inputs Further Notice comments at 51.\ According to Sprint, the Bell companies have a much higher access line density than Sprint, and the expense data from such companies with a higher density of customers will result in expense levels that are much lower than the expense  X4levels experienced by smaller carriers._D6 {O%'ԍ Sprint Inputs Further Notice comments at 5152._ AT&T and MCI respond by showing that a"|0*&&``" particular small carrier, serving a lower density area than Sprint, has plantspecific expenses  X4that, on a perline basis, are less than half of Sprint's expenses.iD6 {Ob'ԍ AT&T/MCI Inputs Further Notice reply comments at 38 n.58.i AT&T and MCI claim that "the most significant driver of cost differences between carriers in the ARMIS study area data  X4is efficiency."iZD6 {O'ԍ AT&T/MCI Inputs Further Notice reply comments at 38 n.58.i Like other LECs, SBC argues that the costs for LECs vary dramatically, based on various factors including size, operating territories, vendor contracts, relationships  X4with other utility providers and the willingness to accept risk.X D6 {O, 'ԍ SBC Inputs Further Notice comments at 4.X SBC asserts that "[t]hese  Xx4differences are not in all instances attributable to inefficient operations."X x~D6 {O 'ԍ SBC Inputs Further Notice comments at 4.X   XJ4a354. ` ` We agree with SBC that not all variations in costs among carriers are due to inefficiency. Although we believe that some cost differences are attributable to efficiency, we are not convinced by AT&T and MCI's example that Sprint is less efficient than the small carrier they identify. Sprint could have higher maintenance costs because it provides higher quality service. But we also are not convinced by Sprint's argument that maintenance expenses necessarily are inversely proportional to density. Sprint provides no evidence linking higher maintenance costs with lower density zones, and we can imagine situations where there are maintenance costs in densely populated urban areas that are not faced by carriers in low density areas. For example, busy streets may need to be closed and traffic rerouted, or work may need to be performed at night and workers compensated with overtime pay.   X64b355. ` ` We cannot determine from the ARMIS data how much of the differences among companies are attributable to inefficiency and how much can be explained by regional differences or other factors. BellSouth's consultant concedes that there is nothing in the ARMIS expense account data that would enable the Commission to identify significant  X4regional differences. D6 {O'ԍ BellSouth Inputs Further Notice comments, Attachment A at A13. (comments of Georgetown Consulting Group, Inc.). GTE concedes that it may be difficult to analyze some data because companies have not been required to maintain a sufficient level of detail in their publicly  X4available financial records._ j D6 {O"'ԍ GTE Inputs Further Notice comments at 73._ GTE's proposed solution for reflecting variations among states  X4is simply to use companyspecific data._  D6 {OB%'ԍ GTE Inputs Further Notice comments at 73._ Indeed, none of the LECs propose a specific" 0*&&``9"  X4alternative to using selfreported information from companies.D6 yOy'ԍ In its reply comments, Sprint argues that inputs should vary by company size and region, but does not  {OA'provide a specific methodology for doing so. See Sprint Inputs Further Notice reply comments at 34. For example, SBC argues  X4we should use companyspecific expenses provided pursuant to the Protective Order to develop companyspecific costs, because these are the costs that will be incurred by the  X4providers of universal service.\"D6 {O'ԍ SBC Inputs Further Notice comments at 1415.\   X4c356. ` ` While reliance on companyspecific data may be appropriate in other contexts, we find that, for federal universal service support purposes, it would be administratively unmanageable and inappropriate. The incumbent LECs argue that virtually all model inputs should be companyspecific and reflect their individual costs, typically by state or by study  X34area. 3D6 {O'ԍ See, e.g., Bell Atlantic Inputs Further Notice comments at 2021; BellSouth Inputs Further Notice  {Ob'comments, Attachment B at B16, B18; GTE Inputs Further Notice comments at 7576.  As parties in this proceeding have noted, selecting inputs for use in the highcost  X 4model is a complex process.v D6 {O'ԍ See, e.g., AT&T/MCI Inputs Further Notice reply comments at 37.v Selecting different values for each input for each of the fifty states, the District of Columbia, and Puerto Rico, or for each of the 94 nonrural study areas,  X 4would increase the Commission's administrative burden significantly.2 D6 yOA'ԍ There are 94 nonrural study areas. As noted above, the expensetoinvestment ratios were calculated using ARMIS data for 80 nonrural study areas. There are more nonrural study areas than there are nonrural study areas for which we have ARMIS data because some nonrural companies do not file ARMIS data (Roseville, North State, and Contel of Minnesota) and some ARMISfiling companies file consolidated data for  {Oa'combined study areas (Puerto Rico, some GTE companies). See supra note 756.2 Unless we simply accept the data the companies provide us at face value, we would have to engage in a lengthy process of verifying the reasonableness of each company's data. For example, in a typical tariff investigation or state rate case, regulators examine company data for onetime high or low costs, pro forma adjustments, and other exceptions and direct carriers to adjust their rates accordingly. Scrutinizing companyspecific data to identify such anomalies and to make the appropriate adjustments to the companyproposed input values would be exceedingly time  XM4consuming and complicated given the number of inputs to the model.-ZMT D6 yOR 'ԍ As discussed below, when the Commission has had the opportunity to scrutinize carriers' companyspecific costs, as with the local number portability tariffs, we use companyspecific input values in the model.  {O!'See infra at para. 408.- We recognize that such anomalies invariably exist in the ARMIS data, but we find that, by using averages, high and low values will cancel each other out.   X4d357. ` ` Where possible, we have tried to account for variations in cost by objective"v0*&&``"  X4means. As we stated in the Inputs Further Notice, we believe that expenses vary by the type  X4of plant installed.SD6 {Od'ԍ Inputs Further Notice at para. 199.S The model takes this variance into account because, as investment in a  X4particular type of plant varies, the associated expense cost also varies. The model reflects differences in structure costs by using different values for the type of plant, the density zone, and soil conditions.   Xx4e358. ` ` As discussed above, we cannot determine from the ARMIS data how much of the differences among companies are attributable to inefficiency and how much can be explained by regional differences or other factors. To the extent that some cost differences are attributable to inefficiency, using nationwide averages will reward efficient companies and provide the proper incentives to inefficient companies to become more efficient over time.  X 4 We find that it is reasonable to use nationwide input values for maintenance expenses because they provide an objective measure of forwardlooking expenses. In addition, we find that using nationwide averages in consistent with our forwardlooking economic cost methodology, which is designed to send the correct signals for entry, investment, and innovation.   X4f359. ` ` Bell Atlantic contends that using nationwide averages for plant specific expenses, rather than ARMIS data disaggregated to the study area level, defeats the purpose  Xd4of a proxy model because it averages highcost states with lowcost states.cdZD6 {Oo'ԍ Bell Atlantic Inputs Further Notice comments at 20.c Bell Atlantic argues that we should use the most specific data inputs that are available, whether region X64wide, company specific, or studyarea specific.c6D6 {O'ԍ Bell Atlantic Inputs Further Notice comments at 20.c Conceding that data are not always available at fine levels of disaggregation, Bell Atlantic contends there is no reason to throw  X4out data that more accurately identify the costs in each area.c~D6 {O7'ԍ Bell Atlantic Inputs Further Notice comments at 20.c Bell Atlantic argues that, even if the Commission does not have currenttobook ratios for all of the ARMIS study areas, it  X4could use average currenttobook ratios and apply them to companyspecific ARMIS data.cD6 {O'ԍ Bell Atlantic Inputs Further Notice comments at 20.c   X4g360. ` ` Contrary to Bell Atlantic's contention, we do not find that using nationwide average input values in the federal highcost mechanism is inconsistent with the purpose of using a cost model. In addition to the administrative difficulties outlined above, we find that nationwide values are generally more appropriate than companyspecific input values for use in the federal highcost model. In using the highcost model to estimate costs, we are trying to establish a national benchmark for purposes of determining support amounts. The model assumes, for example, that all customers will receive a certain quality of service whether or""0*&&``c"  X4not carriers actually are providing that quality of service.D6 yOy'ԍ In contrast, if we were determining the rates a carrier could charge for a particular service, the quality of service the carrier actually was providing could be a relevant factor. Because differences in service quality can cause different maintenance expense levels, by assuming a consistent nationwide quality of service, we control for variations in companyspecific maintenance expenses due to variations in quality of service. Clearly, we are not attempting to identify any particular  X4company's cost of providing the supported services. We are, as AT&T and MCI suggest,y D6 {Ou'ԍ See supra para. 349; AT&T/MCI Inputs Further Notice comments at 45.y estimating the costs an efficient provider would incur in providing the supported services. We are not attempting to replicate past expenses, but to predict what support amounts will be sufficient in the future. Because highcost support is portable, a competitive eligible telecommunications carrier, rather than the incumbent LEC, may be the recipient of the support. We find that using nationwide averages is a better predictor of the forwardlooking costs that should be supported by the federal highcost mechanism than any particular  X 4company's costs.Z D6 yOf'ԍ As noted above, the Commission has not considered what type of input values, companyspecific or nationwide, nor what specific input values, would be appropriate for any other purposes and caution parties from  {O'making any claims in other proceedings based upon the input values we adopt in this Order. See supra para. 32.  X 4h361. ` ` Estimating regional wage differences. We do not adjust our nationwide input values for plantspecific operations expenses to reflect regional wage differences. Most LEC  X 4commenters advocate the use of companyspecific data to reflect variations in wage rates. D6 {O,'ԍ See, e.g., Bell Atlantic Inputs Further Notice comments at 20; GTE Inputs Further Notice comments at  {O'7475; Sprint Inputs Further Notice comments at 54. GTE, for example, claims that regional wage rate differentials are reflected in the company Xy4specific data available from ARMIS.\y0 D6 {OZ'ԍ GTE Inputs Further Notice comments at 7475.\ GTE complains that our proposed input values suggest there is no difference in labor and benefits costs between a company operating in Los  XK4Angeles and one operating in Iowa.\K D6 {O'ԍ GTE Inputs Further Notice comments at 7475.\ As discussed above, the publicly available ARMIS expense account data for plantspecific maintenance expenses do not provide enough detail to permit us to verify significant regional differences among study areas or companies based  X4solely on labor rate variations.JT D6 {O #'ԍ See supra para. 355.J For the reasons discussed above, we find that we should not use companyspecific ARMIS data to estimate these expenses, but instead use input values"0*&&``"  X4that reflect nationwide averages.J D6 {Oy'ԍ See supra para. 356.J  X4i362. ` ` Although they would prefer that we use companyspecific data, some LEC commenters suggest that the wage differential indexes used by the President's Pay Agent, on which we sought comment, would be an appropriate method of disaggregating wagerelated  X4ARMIS expense data.!ZD6 {O'ԍ Bell Atlantic Inputs Further Notice comments at 21; Sprint Inputs Further Notice comments at 54. GTE, on the other hand, contends that these indexes are not relevant to the telecommunications industry, because they are designed for a specific labor sector, that  X_4is, federal employees.Y"_D6 {O 'ԍ GTE Inputs Further Notice comments at 75.Y GTE claims that there are numerous publicly available sources of labor statistics and that, if we adopt an index factor, it should be specific to the  X14telecommunications industry.Y#1~D6 {O`'ԍ GTE Inputs Further Notice comments at 75.Y  X 4j363. ` ` We agree with GTE that, if we were to use an index to adjust our input values for regional wage differences, it would be preferable to use an index specific to the telecommunications industry. We looked at other publicly available sources of labor statistics, however, and were unable to find a data source that could be adapted easily for making meaningful adjustments to the model input values for regional wage differences. Specifically, we looked at U.S. Department of Labor, Bureau of Labor Statistics (BLS) information on wage rate differentials for communications workers comparing different regions of the  Xb4country.$zbD6 {O#'ԍ See Bureau of Labor Statistics, Employment Cost Trends, Employment Cost Index, June 1999, at http://www.bls.gov/news.releases/eci.toc.htm. In particular, we looked at the following tables: Table 4, Compensation (not seasonally adjusted), Employment Cost Index for total compensation, private industry workers, by bargaining status, region and area; Table 5, Wages and Salaries (not seasonally adjusted), Employment Cost Index for wages and salaries only, civilian, and state and local government workers, by industry and occupational group; and Table 7, Wages and Salaries (not seasonally adjusted) Employment Cost Index for wages and salaries only, private industry workers, by bargaining status, regional and area. The Employment Cost Indexes calculated by BLS identify changes in compensation costs for communications workers as compared to other industry and occupational groups. In a number of the indexes, communications is not broken out separately, but is included with other serviceproducing industries: transportation, communication, and public utilities; wholesale and retail trade; insurance, and real estate; and service industries. In making regional comparisons, the Employment Cost Indexes divide the nation into four regions: northeast, south, midwest, and west. There also are separate indexes comparing metropolitan areas to other areas.  X4k364. ` ` We find that the regions used in the BLS data are too large to make any"R $0*&&``" significant improvement over our use of nationwide average numbers. For example, Wyoming is in the same region as California, but we have no reason to believe that wages in those two states are more comparable than wages rates in California and Iowa. That is, there is no simple way to use the BLS data to make the type of regional wage adjustments suggested by GTE. We note that no party has suggested a specific data source or methodology that would be useful in making such adjustments. Accordingly, we decline to adopt a method for adjusting our nationwide input values for plantspecific operations expenses to reflect regional wage differences.   X14l365. ` ` Methodology. As discussed in this section, we adopt our proposed methodology for calculating expensetoinvestment ratios to estimate plantspecific operations expenses. We reject arguments of some LEC commenters that this methodology inappropriately reduces these expense estimates.   X 4m366. ` ` Several LEC commenters generally support our methodology for calculating expensetoinvestment ratios to estimate plantspecific operations expenses, although, as discussed above, only if we use companyspecific input values. For example, GTE agrees with our tentative conclusion that input values for each plantspecific operations expense account can be calculated as the ratio of booked expense to current investment, but only if  XK4this calculation is performed on a companyspecific basis.a%KD6 {O'ԍ GTE Inputs Further Notice comments at 72, 7576. a BellSouth states that "[t]he methodology proposed by the Commission for plantspecific expenses is very similar to the  X4methodology employed by BellSouth."p&ZD6 {O('ԍ BellSouth Inputs Further Notice comments, Attachment B at B16. p   X4n367. ` ` Other LEC commenters object to our use of currenttobook ratios to convert historic account values to current cost. Although their arguments differ somewhat, they essentially claim that the effect of our methodology is to reduce forwardlooking maintenance expenses and that this is inappropriate because the input values are lower than their current  X4maintenance expenses.'D6 {O0'ԍ See SBC Inputs Further Notice comments at 1418; Sprint Inputs Further Notice comments at 5559; US  {O'West Inputs Further Notice comments at 2126. AT&T and MCI counter that, if there is any problem with our maintenance expense ratios, it is that they reflect the servicing of too much embedded plant, which has higher maintenance costs, and too little forwardlooking plant, which has lower  XN4maintenance costs.d(NHD6 {OG#'ԍ AT&T/MCI Inputs Further Notice reply comments at 38.d   X 4o368. ` ` US West asserts that, while in theory it is correct to adjust expensetoinvestment ratios using currenttobook ratios, in practice there is a problem because the" (0*&&``" currenttobook ratio is based on reproduction costs and the model estimates replacement  X4costs.`)D6 {Ob'ԍ US West Inputs Further Notice comments at 2324.` US West defines reproduction cost as the cost of reproducing the existing plant using todays prices and replacement cost as the cost of replacing the existing plant with equipment  X4that harnesses new technologies and is priced at todays prices.`*ZD6 {O'ԍ US West Inputs Further Notice comments at 2324.` US West claims that our methodology actually increases the mismatch between historic and forwardlooking investment  X4levels because the reproduction costs are not the same as the replacement costs.a+D6 {O* 'ԍ US West Inputs Further Notice comments at 2324. a We agree that reproduction costs are not the same as replacement costs because the mix of equipment and technology will differ, but we disagree with US West's characterization of this as a mismatch.   X 4p369. ` ` US West estimates that applying currenttoto book ratios to existing investment  X 4would generate reproduction costs that are 141 percent higher than historic costs.M, ~D6 {O2'ԍ US West Inputs Further Notice comments at 2425. US West indicates that it used the Telephone Plant Index (TPI) to derive the 141 percent figure. US West implies, therefore, that the TPI is a reproduction cost index. This raises questions with respect to how a reproduction index deals with old technology that cannot be purchased today at any price. Without detailed knowledge about the TPI, we cannot say whether it reflects only reproduction costs or may also reflect replacement costs when new technology has replaced old technology.M US West claims that, in contrast, forwardlooking models generally show that the cost of replacing those facilities would be slightly less than historic costs, if new technologies were deployed. US West's claim that our methodology results in a mismatch because of these cost differences, however, is wrong. Rather, the differences between reproduction costs and replacement costs merely show that the mix of technologies has changed. The hypothetical example US West uses to illustrate its argument fails to account for changes in technology. The following hypothetical example illustrates how changes in the mix of technology will  XK4change maintenance expenses.-K0 D6 yO,'ԍ The values used in this example are hypothetical and do not represent actual input values. If historic investment on a company's books consists of 100 miles of copper plant, at a cost of $10 per mile, and 10 miles of fiber plant, at a cost of $1 per mile, then the historic cost is $1010. If current maintenance costs are $10 for the copper plant and $0.10 for the fiber plant, the total maintenance expense is $10.10. If the price of copper increases to $15 per mile and the price of fiber decreases to 80 cents per mile, then the reproduction costs would increase to $1508. If the forwardlooking model designs a network with 60 miles of copper and 50 miles of fiber, the resulting replacement cost is  X4$940.. D6 yO%'ԍ Our hypothetical example reflects US Wests contention that reproduction costs are significantly higher than replacement costs and that replacement costs are only slightly lower than historic costs. Using our methodology, we use the currenttobook ratios of 1.5 ($15/$10) and .8".0*&&``5" (80 cents divided by $1) to revalue the copper and fiber investment, respectively, at current prices, and the resulting maintenance expense for the forwardlooking plant would be $6.58  X4rather than $10.10./D6 yOK'ԍ To revalue the copper investment, we multiply $1000 by 1.5 (=$1500); then to calculate the expensetoinvestment ratio, we divide current maintenance expenses for copper by the adjusted copper investment ($10/$1500 = .0067). Similarly, to revalue the fiber investment, we multiply $10 by .8(=$8); then to calculate the expensetoinvestment ratio, we divide current maintenance expenses for fiber by the adjusted fiber investment ($.10/8=.0125). Finally, we apply these adjusted expensetoinvestment ratios to the forwardlooking plant to derive the forwardlooking maintenance expenses: $900 x .0067 ($6.03) + $40 x .0125(.50) = $6.58. This does not result in a mismatch. In our hypothetical example, the maintenance costs for fiber were substantially less on a permile basis than they were for copper. Thus, we would expect the forwardlooking plant with considerably more fiber and less copper to have lower maintenance costs than the current plant, which has more copper. Because the mix of plant changes, the Commission should not, as US West suggests, simply adjust book investment to current dollars to derive maintenance expenses for the forwardlooking plant estimated by the model.   X 4q370. ` ` Sprint argues that we should simply divide the current year's actual expense for  X 4each account by the average plant balance associated with that expense.\0 @D6 {O'ԍ Sprint Inputs Further Notice comments at 55.\ Sprint claims that, when this ratio is applied to the investment calculated by the model, forwardlooking expense reductions occur in two ways: (1) the investment base is lower due to the assumed economies of scale in reconstructing the forwardlooking network all at one time; and (2) greater use of fiber in the forwardlooking network reduces maintenance costs because less maintenance is  X4required of fiber than of the copper in embedded networks.\1D6 {O'ԍ Sprint Inputs Further Notice comments at 55.\ Sprint claims that reducing maintenance for a currenttobook ratio as well as for technological factors constitutes a  Xb4"doubledip" in maintenance expense reduction.\2bd D6 {Ow'ԍ Sprint Inputs Further Notice comments at 55.\   X44r371. ` ` Sprint's claim that our methodology constitutes a "double dip" in reducing maintenance expenses is misleading because the effect of using currenttobook ratios depends upon whether current costs have risen or fallen relative to historic costs. Currenttobook ratios are used to restate a company's historic investment account balances, which reflect investment decisions made over many years, in present day replacement costs. Thus, if current costs are higher than historic costs for a particular investment account, the currenttobook ratio will be greater than one, and the expensetoinvestment ratio for that account will decrease when the investment (the denominator in the ratio) is adjusted to current replacement" 20*&&``"  X4costs.x3 D6 yOy'ԍ For example, if a pole cost $200 to install in 1980, and $400 today, the currenttobook ratio is $400/$200 = 2.0. If the maintenance expense associated with the pole is $20, the expensetoinvestment ratio on the books is $20/$200 = .10; and the expensetoinvestment ratio adjusted by the currenttobook ratio is $20/$400 = .05.x Sprint calls this double dipping because copper costs have risen and the model uses less copper plant than that which is reflected on Sprint's books. If current costs are lower than historic cost, however, the currenttobook ratio will be less than one and the adjusted expensetoinvestment ratio for that account will increase when the investment (the denominator in the ratio) is adjusted to current replacement costs. Fiber cable and digital switching costs, for example, have fallen relative to historic costs. Sprint essentially is arguing that our methodology is wrong because it understates Sprint's historical costs. The input values we select are not intended to replicate a particular company's historic costs, for  XH4the reasons discussed above.D4HD6 {O 'ԍ See supra para. 351.D   X 4s372. ` ` SBC disputes our assumption that the model takes into account variations in the type of plant installed because, as investment in a particular type of plant varies, so do the  X 4associated expense costs.Y5 BD6 {O'ԍ SBC Inputs Further Notice comments at 15.Y SBC argues that expenses do not vary simply because investment  X 4varies.Y6 D6 {OZ'ԍ SBC Inputs Further Notice comments at 15.Y Nonetheless, SBC believes that developing a ratio of expense to investment and applying it to forwardlooking investments is a reasonable basis for identifying forward X 4looking plant specific expenses.Y7 f D6 {O'ԍ SBC Inputs Further Notice comments at 15.Y SBC complains that our methodology is inconsistent, however, because it has defined two completely different sets of forwardlooking investments: one based on historical ARMIS investments adjusted to current amounts; and another derived  Xb4on a bottomup basis employing the cost model.Y8b D6 {O 'ԍ SBC Inputs Further Notice comments at 16.Y Until we reconcile these "inconsistencies," SBC recommends that we use unadjusted historical investment amounts in developing plant  X44specific expense factors, because they are closer to SBC's historical plant specific expenses.94 D6 {Oo 'ԍ SBC Inputs Further Notice comments at 1617, Attachment A (comparing Southwestern Bell/Texas costs of 5.96 percent of related investments to the Commission's proposed 3.08 percent of related investment).   X4t373. ` ` Although they characterize the issue somewhat differently, US West, Sprint, and SBC essentially argue that our methodology is wrong because it understates their historical costs. AT&T and MCI counter that a forwardlooking network often will result in lower costs than an embedded network and that the trend in the industry has been to develop"90*&&``"  X4equipment and practices to minimize maintenance expense.d:D6 {Oy'ԍ AT&T/MCI Inputs Further Notice reply comments at 38.d AT&T and MCI claim that, if there is any problem with our maintenance expense ratios, it is that they reflect the servicing of too much embedded plant, which has higher maintenance costs, and too little forward X4looking plant, which has lower maintenance costs.d;ZD6 {O'ԍ AT&T/MCI Inputs Further Notice reply comments at 38.d AT&T and MCI further claim that, if our analysis had been based exclusively on financial information that reflected equipment consistent with the mostefficient forwardlooking practices, the maintenance expenses would  Xv4have been lower.d<vD6 {O 'ԍ AT&T/MCI Inputs Further Notice reply comments at 38.d   XH4u374. ` ` None of the commenters provide a compelling reason why we should not use currenttobook ratios to adjust historic investment to current costs. SBC in fact suggests that the Commission consider using the Telephone Plant Index (TPI) in future years to convert  X 4expense estimates to current values.Y= ~D6 {O2'ԍ SBC Inputs Further Notice comments at 15.Y SBC appears to be confusing the effect of measuring inputs in current dollars, which it recognizes is reasonable, and the end result of the calculation, which includes the impact of measuring all inputs in current dollars, changes in the mix of inputs, the impact of leastcost optimal design used by the model, and the model's engineering criteria. The relationship between maintenance costs and investment in the Commission's methodology is related to all of these factors.   Xb4v375. ` ` Sprint also claims that our methodology understates maintenance costs, because it assumes new plant and the average maintenance rate will be higher than the rate in an  X44asset's first year.\>4D6 {O'ԍ Sprint Inputs Further Notice comments at 55.\ AT&T and MCI dispute Sprint's claim that maintenance costs per unit of  X4plant increase over time.d?D6 {Op'ԍ AT&T/MCI Inputs Further Notice reply comments at 38.d Sprint provides an example which purports to show that an asset with a ten year life, a ten percent maintenance fee in the first year, and annual costs increasing annually at three percent, would result in an average maintenance rate of 11.55  X4percent.o@4 D6 {O!'ԍ Sprint Inputs Further Notice comments at 5557, Attachment 10a.o Sprint's example, however, does not consistently apply our methodology. Sprint's example fails to apply the currenttobook ratio to the total and average plant in service estimates used in the example. When the currenttobook ratio is applied to the total and average plant in service estimates, the resulting maintenance rate is ten percent for all years. "| @0*&&``="Ԍ X4w376. ` ` BellSouth argues that the investment calculated by the model is unrealistically low because sharing assigned to the telephone company is unrealistically low and fill factors  X4are unrealistically high.pAD6 {OK'ԍ BellSouth Inputs Further Notice comments, Attachment B at B19.p BellSouth argues that, because it has shared in cost of trenching, this does not mean the maintenance cost for buried cable would be less, and in fact, the costs  X4may be higher.qBZD6 {O'ԍ BellSouth Inputs Further Notice comments, Attachment B at B16. q BellSouth apparently is confused about the Commission's methodology, because the sharing percentages apply only to the costs of structure, not the costs of the cable.   X_' C.Common Support Services Expenses    X1' 1.` ` Background    X 4x377. ` ` Common support services expenses include corporate operations expenses, customer service expenses, and plant nonspecific expenses. Corporate operations expenses are those costs associated with general administrative, executive planning, human resources, legal, and accounting expenses for total company operations. Customer services expenses  X 4include marketing, billing, operator services, directory listing, and directory assistance costs./C D6 yOD'ԍ#X\  P6G;ɒP# Corporate operations and customer service expenses include the following ARMIS accounts and their subaccounts: X` ` 6610 Marketing Total(# ` `  6611 Product Management ` `  6612 Sales ` `  6613 Product Advertising ` ` 6620 Service Expense Total ` `  6621 Call Completion (Operator Service Expense) ` `  6622 Number Services (Directory Publishing Expense) ` `  6623 Customer Services ` ` 6710 Executive and Planning Total ` `  6711 Executive ` `  6712 Planning ` ` 6720 General and Administrative ` `  6721 Accounting and Finance ` `  6722 External Relations ` `  6723 Human Resources ` `  6724 Information Management ` `  6725 Legal ` `  6726 Procurement ` `  6727 Research and Development  yOt$'` `  6728 Other General and Administrative#x6X@`7X@#/ Plant nonspecific expenses are common network operations and maintenance types of"C0*&&``E" expenses, including engineering, network operations, power, and testing expenses, that are  X4considered general or administrative overhead to plant operations. D D6 yOb'ԍ #X\  P6G;ɒP# Plant nonspecific expenses include the following ARMIS expense accounts: ` ` 6510 Other Property Plant and Equipment Expense ` ` 6530 Network Operations    X4y378. ` ` In the Inputs Further Notice, we proposed a methodology using regression analysis to estimate common support services expenses on a perline basis. We noted that, unlike plantspecific expenses, common support services expenses are costs that cannot readily  Xx4be associated with any particular maintenance expense or investment account.TExD6 {O 'ԍ Inputs Further Notice at para. 213. T In the  Xa4regression methodology, we used publicly available 1996 ARMIS expense dataF aBD6 yOT'ԍ #C\  P6QɒP#Data was taken from 1996 ARMIS 4301, Subject to Separations (Column F) for Accounts 6610, 6620, 6710 and 6720. Data was taken from 1996 ARMIS 4303, Subject to Separations (Column M) for Accounts 6510 and 6530. Line counts were taken from 1996 ARMIS 4308, Table III, Total Switched Lines (Column DJ) and Total Access Lines (Column DM).  and minutes  XJ4of use information from NECA,GJ* D6 yO%'ԍ #C\  P6QɒP#Dial Equipment Minutes of Use (DEMs) for 1996 were taken from NECA and are available on the Commission's Web site at http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCCState_Link/neca.html. by study area, to estimate the portion of these company X34wide expenses that should be supported by the federal highcost mechanism.SH3 D6 {Of'ԍ Inputs Further Notice at para. 217.S Specifically, we used the average of the estimates from two specifications that estimated total expenses per line as a function of the percentage of switched lines, the percentage of special lines, and toll minutes per line, either in combination (Specification 1) or separated between intrastate and  X 4interstate toll minutes (Specification 2).I" D6 {O'ԍ #C\  P6QɒP#See Inputs Further Notice at para. 21819. Specification 1 used the following regression equation:  yOf[Expense/Total Lines = 1 (Switched Lines/Total Lines)+ 2 (Special Lines/Total Lines)+ 3 (Toll Minutes/Total  yO.[Lines). Specification 2 used the following equation: Expense/Total Lines = 1 (Switched Lines/Total Lines)+  yO[2 (Special Lines/Total Lines)+ 3 (State Toll Minutes/Total Lines)+ 4 (Interstate Toll Minutes/Total Lines). The specifications were designed to separate the portion of expenses attributable to special access lines and toll usage, which are not supported by the federal highcost mechanism, from the portion of expenses attributable to switched lines and local usage, which are supported.   Xd4z379. ` ` As with plantspecific operations expenses, we tentatively concluded that input values for corporate operations, customer service, and plant nonspecific expenses should be  X64estimated on a nationwide basis, rather than a more disaggregated basis.WJ6D6 {O%'ԍ See Inputs Further Notice at para. 214.W In reaching this"6J0*&&``." tentative conclusion, we recognized that parties have argued that these types of expenses may vary as a result of companyspecific plant configurations, geographic and labor demographic variables, onetime exogenous costs, and nonrecurring adjustments such as reengineering  X4expenses.SKD6 {O4'ԍ Inputs Further Notice at para. 215.S We observed that we had not been able to distinguish significant differences in regional wage differentials for administrative services based solely on ARMIS expense data  X4for these accounts.SLZD6 {O'ԍ Inputs Further Notice at para. 215.S Moreover, costs associated with corporate overhead and customer service accounts are not directly linked to a specific company's investment levels. We tentatively concluded that these types of administrative and service expenses are less dependent on carrier physical plant or geographic differentials than on factors that also  X14correlate to company size (number of lines) and demand (minutes of use).SM1D6 {O 'ԍ Inputs Further Notice at para. 215.S   X 4{380. ` ` After estimating common support services expenses using the regression methodology, we made certain adjustments to remove additional portions of those expenses attributable to services that are not supported by the federal universal service support mechanism. The expenses we removed were associated with services that could be identified  X 4and estimated from ARMIS expense data.SN ~D6 {O'ԍ Inputs Further Notice at para. 223.S We tentatively concluded that 95.6 percent of marketing expenses should be attributed to nonsupported services, based on an Economics  Xy4and Technology, Inc. (ETI) analysis.SOyD6 {O:'ԍ Inputs Further Notice at para. 224.S In addition, we adjusted the estimates for nonsupported service costs related to coin operations and collection, published directory, access  XK4billing, interexchange carrier office operation, and service order processing.SPKD6 {O'ԍ Inputs Further Notice at para. 225.S We noted that nonrecurring expenses for corporate operations can be significant and that our estimates  X4should be adjusted to account for these onetime charges.WQ4 D6 {O'ԍ Inputs Further Notice at para. 220222.W We explained, however, that we had been unable to find an objective public data source or discern a systematic method for  X4excluding these costs from the ARMIS expense data used in the regression methodology.SR D6 {Of"'ԍ Inputs Further Notice at para. 221.S We sought comment on how to identify, estimate, and remove these onetime nonrecurring  X4expenses.SSX D6 {O%'ԍ Inputs Further Notice at para. 222.S"S0*&&``"Ԍ  X4|381. ` ` We also adjusted our estimates for common support services expenses by  X4converting the values, which were based on 1996 ARMIS data, to 1999 values.STD6 {OK'ԍ Inputs Further Notice at para. 226.S Specifically, we reduced the estimated expenses by a 6.0 percent productivity factor for each year (1997 and 1998) and added an inflation factor based on the fixed weighted Gross Domestic Product Price Index (GDPPI) for 1997 (2.1120 percent) and for 1998 (2.1429  Xv4percent).SUvZD6 {O 'ԍ Inputs Further Notice at para. 226.S That is, we proposed a net reduction of 3.888 percent for 1997 and 3.8571 percent for 1998, and sought comment on this method for converting expenses to 1999  XH4values.SVHD6 {O 'ԍ Inputs Further Notice at para. 226.S   X ' 2.` ` Discussion    X 4}382. ` ` Consistent with our tentative conclusions, we adopt input values that estimate the average common support services expenses that will be incurred by nonrural carriers on a  X 4perline basis, rather than a set of companyspecific common support services expenses.W` ~D6 yO'ԍ Aggregate ARMIS AccountshhCq Expense Input Values  yO'  yO}'6510 Other Property, Plant, and Equipmentpp $ (0.05)  yOE'6530 Network OperationshhCqpp  1.48  yO '6610 Marketing hhCqpp  0.09  yO'6620 Service Expense/Customer Operationspp  3.62  yO'6700 Executive, Planning, General, and Administrativepp  2.18   yO-'Total Common Support Services Expenses Per Line, Per Month $ 7.32 Rather than using the $7.32 directly as an input value, the model uses this amount, annualized and adjusted for uncollectibles, or $92.46316, which appears in cell C33 of the per line tab of the wire center expense module. We affirm our tentative conclusion that input values for corporate operations, customer service, and plant nonspecific expenses should be estimated on a nationwide basis, rather than a more disaggregated basis. As noted above, we find that for universal service purposes  Xb4nationwide averages are more appropriate than companyspecific values.DXbD6 {O!'ԍ See supra para. 348.D We conclude that we should use Specification 1 of our proposed regression methodology to estimate expenses for ARMIS accounts 6510 (Other Property, Plant, and Equipment); 6530 (Network Operations); 6620 (Service Expense/Customer Operations); and 6700 (Executive, Planning,"8X0*&&``"  X4General, and Administrative).Y"D6 yOy'ԍ Specifically, we adopt estimates using results solely from the Specification 1 regression equation:  yOA'Expense/Total Lines = 1 (Switched Lines/Total Lines) + 2 (Special Lines/Total Lines) + 3 (Toll Minutes/Total Lines) rather than an average of results from two model specifications,  {O'as proposed. See Inputs Further Notice at para. 218. As discussed below, we use an alternative methodology to  X4estimate expenses for ARMIS account 6610 (Marketing).IZD6 {OL'ԍ See infra paras. 403407.I We conclude that we should use 1998 ARMIS data in both methodologies, and an estimate of 1998 Dial Equipment Minutes of Use (DEMs) in the regression equation, to calculate these input values. We clarify that the  X4ARMIS data we use to calculate these estimates are based on ARMIS accounts for all non X4rural ARMISfiling companies. We find that it is appropriate to include only data from the nonrural ARMISfiling companies in calculating the expense per line for common support  Xc4services expenses.![cDD6 yOX'ԍ As noted above, although some rural companies file ARMIS reports, the mechanism we adopt today will  {O 'be used, beginning January 1, 2000, to determine highcost support for nonrural carriers. See supra para. 346. !   X54~383. ` ` Current Data and Use of Productivity Factor. The input values we adopt in this Order are explained more fully in Appendix D, which contains a summary of the perline, permonth input values for plant nonspecific expenses, corporate operations expenses, and customer services expenses, including regression results, calculations, and certain adjustments  X 4made to the data based on the methodologies described below.F\ D6 {O('ԍ See Appendix D at D5.F Because we used 1996 ARMIS data in our regression methodology to estimate our proposed input values for common support services expenses, we proposed a method of converting those estimates to  X41999 values.R]0 D6 {Ou'ԍ Inputs Further Notice at para. 226R Specifically, we proposed using a productivity factor of 6.0 percent for the  X}4years 1997 and 1998 to reduce the estimated input values.R^} D6 {O'ԍ Inputs Further Notice at para. 226R We further proposed adjusting the expense data for those years with an inflation factor based on the Gross Domestic Product  XO4Price Index (GDPPI) in order to bring the input values up to current expenditure levels.R_OT D6 {OT 'ԍ Inputs Further Notice at para. 226R   X!4384. ` ` AT&T and MCI claim that the 6.0 productivity factor is too low,k`!D6 {O#'ԍ See AT&T/MCI Inputs Further Notice comments at 4647.k while most"!x`0*&&``2"  X4LEC commenters contend that it is too high.;aD6 {Oy'ԍ See e.g., Aliant Inputs Further Notice comments at 23; Bell Atlantic Inputs Further Notice comments at  {OC'22; BellSouth Inputs Further Notice comments at B21B23; USTA Inputs Further Notice comments at 2.; Sprint argues that expenses should not be adjusted for a productivity or an inflation factor and that  X4we should use 1998 data.`b$D6 {O'ԍ Sprint Inputs Further Notice comments at 60, 68.` GTE argues that no productivity adjustments are necessary, if we  X4use current, companyspecific ARMIS data to develop input values.YcD6 {O" 'ԍ GTE Inputs Further Notice comments at 88.Y Although we generally decline to adopt companyspecific input values for common support services expenses, we agree that using the most currently available ARMIS data (1998) obviates the need to adjust our estimates for either productivity gains or an inflation factor at this time. We believe, however, that there should be an incentive for increased productive efficiency among carriers receiving highcost universal service support. Accordingly, we believe that a reasonable productivity measure or some other type of efficiency incentive to decrease costs associated with common support services expenses should be incorporated into the universal service highcost support mechanism in the future. We intend to address this issue in the proceeding on the future of the model.   X 4385. ` ` The input values we adopt in this Order are estimates of the portion of  X 4companywide expenses that should be supported by the federal highcost mechanism.GdX HD6 yO'ԍ #C\  P6QɒP#Data were taken from 1998 ARMIS 4303, Total Regulated (Column I) for Accounts 6610, 6620, 6710, 6720, 6510, and 6530. Line counts were taken from 1998 ARMIS 4308, Table III, Total Switched Lines (Column DJ) and Total Access Lines (Column DM). G We derive the estimates using standard economic analysis and forecasting methods. The analysis relies on publicly available 1998 ARMIS expense data and the most current minutes of use information from NECA. This data is organized by study area. The estimate of 1998 DEMs  XK4is based on a calculated growth rate of 1997 to 1996 DEMs reported by NECA.4eKh D6 yOd'ԍ Dial Equipment Minutes of Use (DEMS) for 1996 and 1997 were taken from NECA, available on the Commission's web site at http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCCState_Link/neca.html. Estimated 1998 DEMs were calculated by multiplying the number of 1997 DEMs for each study area by the ratio of 1997 DEMs to 1996 DEMs for that study area. Actual 1998 DEMs classified by local, interstate and intrastate toll minutes needed for use as variables in the regression analysis are not currently available from NECA.4 As a result of deleting rural ARMISfiling companies and including company study area changes since 1996, pooling of the 1998 data sets provides expense, minutes of use, and line count data for  X480 study areas.FfD6 {O$'ԍ See Appendix D at D1.F This is in comparison to the 91 study areas resulting from pooling the 1996"rf0*&&``"  X4data described in the Inputs Further Notice.SgD6 {Oy'ԍ Inputs Further Notice at para. 217.S  X4386. ` ` Some parties object to our using data at the study area level, because they claim that ARMISfiling companies report data in two distinct ways. Ameritech and US West argue that parent companies generally assign a significant portion of plant nonspecific and customer operations expenses across their operating companies on the basis of an allocation  Xx4mechanism.hxZD6 {O 'ԍ See Ameritech Inputs Further Notice comments at 28; US West Inputs Further Notice comments, Attachment A at 27. As a result, they claim that a simple regression on the study area observations will produce coefficients that reflect a blend of two relationships: the costbased relationship  XJ4and the allocationbased relationship, of which only the former is appropriate to measure.iJD6 {O 'ԍ  See Ameritech Inputs Further Notice comments at 28; US West Inputs Further Notice comments at Attachment A, 27. They argue further that it is necessary to model the allocation method explicitly, to net out the latter data, or to aggregate the data to the parent company level. Although we acknowledge that our accounting rules provide carriers with some flexibility, we expect that the allocation mechanism used by the parent company represents underlying cost differences among its study  X 4areas.j D6 yO'ԍ To the extent a particular company believes that its ARMIS filings do not represent cost differences among its study areas, we would be interested in receiving more detailed information. We find that it is reasonable to assume that the companies use allocation mechanisms that are based on cost relationships to allocate costs among their study areas. Accordingly, we find that it is reasonable to use ARMIS data at the study area level in the  X4regression methodology.)footnote reference)#footnote reference#   Xd4387. ` ` Regression Methodology. As described in the Inputs Further Notice, we adopt standard multi-variate regression analysis to determine the portion of corporate operations expenses, customer services expenses, and plant nonspecific expenses attributable to the  X!4services that should be supported by the federal highcost mechanism.k!f D6 yO8'ԍ Standard multivariate regression analysis uses ordinary least squares with more than one variable. We adopt an equation (Specification 1) which estimates total expenses per line as a function of the  X4percentage of switched lines, the percentage of special lines, and toll minutes per line.l D6 yO!'ԍ Expense/Total Lines = 1 (Switched Lines/Total Lines) + 2 (Special Lines/Total Lines) + 3 (Toll Minutes/Total Lines). We use this regression methodology to estimate the expenses attributable to universal service for the following accounts:  ` ` Other Property, Plant, and Equipment (6510);"N l0*&&``9"Ԍ` ` Network Operations (6530); ` ` Service Expense/Customer Operations (6620); and ` ` Executive, Planning, General and Administrative (6700). We adopt this specification, rather than an average of the two specification estimates  X4suggested in the Inputs Further Notice, 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  Xa4federal highcost mechanism, from switched lines and local usage.maD6 {O'ԍ See US West Inputs Further Notice comments, Attachment A at 22 (claiming it is inappropriate to average the two specifications). As explained below, we use an adjusted weighted average of study areas to estimate the support expense attributable to Account 6610, Marketing.  X 4388. ` ` Several parties contend that our regression analysis is flawed.>n\ "D6 {O'ԍ See, e.g., Ameritech Inputs Further Notice comments at 2528; GTE Inputs Further Notice comments at  {O'7982; Sprint Inputs Further Notice comments at 6165; US West Inputs Further Notice comments at 5357, Attachment A at 2027.> Sprint, for example, claims that we have exaggerated the significance of our statistical findings beyond a level justified by the regression result; and have made the oftencommitted error of  X 4interpreting our regression results in a way that implies causality.\o FD6 {O'ԍ Sprint Inputs Further Notice comments at 61.\ US West argues that, although there is a causal relationship between the level of expenses and the variables we use  X4in the regression, the coefficient of determination or R2 is fairly low, which implies that the  X{4causal relationship only explains a small portion of the total costs.]p{D6 {O'ԍ US West Inputs Further Notice comments at 55.] GTE claims that our regression is misspecified because it utilizes only the mix of output as explanatory variables, and excludes important variables related to differences in input prices and production  X64functions.Yq6j D6 {OQ'ԍ GTE Inputs Further Notice comments at 81.Y Because of this misspecification and the omitted variables, GTE also claims that  X4our equations have a low predictive ability, as measured by the R2s.Yr D6 {O'ԍ GTE Inputs Further Notice comments at 81.Y  X4389. ` ` We disagree with commenters who claim that there is little explanatory value in  X4our regression analysis.sX  D6 yO$'ԍ According to our calculations using the 1998 data, the R2s for the four regressions are: "%r0*&&%"Ԍ yO'Account: 6620hhC6700 q6510 pp6530  yOX' R2:` `  0.96 hhC0.92 q0.20 pp0.95 We note that the commenters' analysis was based on the 1996 ARMIS data. In accounts 6620, 6700, 6530 the regressions explain a high degree"s0*&&``"  X4of the variability in the expense variables.wtD6 yOa'ԍ As we discuss below, we no longer use the regression for the 6610 account. w Only account 6510 (Other Property, Plant, and  X4Equipment) has a low R2, which is not surprising given the reported data in this account. Based on the 1998 ARMIS data, the resulting regression coefficient for this expense category is negative due to the numerous negative expenses reported by carriers in 1998. Because the ARMIS reports represent actual 1998 expenses incurred by the nonrural telecommunications companies within their various study areas, we find that it is appropriate to include this negative expense in our calculations. We note, however, that inclusion of this account in our calculations represents less than one percent of the total expense input for common support  XH4services expenses.uH@D6 yO9'ԍ We calculate an expense input value of $0.05 for Account 6510 (Other Property, Plant, and Equipment) and a total expense input value of $7.32 for total common support services expenses, per line, per month.  X 4390. ` ` We believe that our regressions represent a cost-causative relationship, and that common support services expenses are a function of the number of total lines served, plus the volume of minutes. Because in the long run, all costs are variable, we disagree with commenters who suggest that our methodology is flawed because we do not include an  X 4intercept term in our regression equation to represent fixed or startup costs.wv D6 {O'ԍ See, e.g., Sprint Inputs Further Notice comments at 6264 & n.15.w As discussed above, the model is intended to estimate longrun forwardlooking cost over a time period  X4long enough so that all costs may be treated as variable and avoidable.Dw* D6 {Ok'ԍ See supra para. 351.D Moreover, the federal highcost mechanism calculates support on a perline basis, which is distributed to eligible carriers based upon the number of lines they serve. We would not provide support to carriers with no lines. Nor would we vary support, which is portable, between an incumbent and a competitive eligible telecommunications carrier, based on differences in their fixed or startup costs. We explicitly assume, therefore, that if a company has zero lines and zero minutes, it should have zero expenses. Thus, we have no constant or fixed cost in our regressions. We also believe that these expenses are driven by the number of channels, not the number of physical lines.  X4391. ` ` That is, our assumptions imply that expenses are a linear function of lines and  X4minutes.bx D6 yO&[ԍ Expenses = 1 Lines + 2 DEMS + . b We next need to separate out the common support services expenses related to"L x0*&&``" special access lines and toll minutes, because these services are not supported by the federal highcost mechanism. Therefore, we split the lines variable into switched and special access lines, and we split the minutes variable into local and toll minutes. In this modified equation, expenses are a function of switched lines, plus special access lines, plus local minutes, plus  X4toll minutes.yD6 yO[ԍ Expenses = 1 Switched Lines + 2 Special Lines + 3 Local DEMS + 4 Toll DEMs + . We believe that changes in local minutes, however, should not cause changes in common support services expenses that are not already reflected in the expenses associated with switched lines. We find that it is reasonable to assume that local calls do not increase these overheard costs in the same way that toll minutes do. For example, in most jurisdictions local calls are a flatrated service and additional local calling requires no additional information on the customer's bill. With toll calling, however, even subscribers that have some kind of a calling plan receive detailed information about those calls. It is reasonable to assume that adding an additional line on a subscriber's bill for a toll call causes overhead costs that are not caused by local calls. Moreover, toll calling outside a carrier's serving area involves the costs associated with completing that call on another carrier's network. As discussed below, we tested our assumption that local calls do not affect costs in the same way that toll calls do by running the regressions to include local minutes. Based on theory and our analysis, we decided to drop the local minutes variable, so that expenses are a  Xy4function of switched lines, plus special access lines, plus toll minutes.zyXD6 yO[ԍ Expenses = 1 Switched Lines + 2 Special Lines + 3 Toll DEMs + . Because we are calculating a perline expense estimate, we divide all the variables by the total number of lines to derive our final equation: expenses divided by total lines equals the percentage of  X44switched lines, plus the percentage of special lines, plus toll minutes divided by total lines.{4D6 yO[ԍ Expenses/Total Lines = 1 (Switched Lines/Total Lines) + 2 (Special Lines/Total Lines) + 3 (Toll  yO'DEMs/Total Lines) + '.  X4392. ` ` US West claims that our regressions may not be based on appropriate costcausative relationships, because we count special access lines by channels and not by physical  X4pairs.|D@D6 {O'ԍ US West Inputs Further Notice comments at Attachment A, 21. US West also claims that our regression analysis estimates a common support per minute of access of $0.02, which does not include any of the capital or maintenance costs associated with the switching investment used to provide access. Because the traffic sensitive common costs associated with access services alone exceeds the current access charge rate of approximately $.01 to $.02 per minute, US West claims that are analysis shows that access charges are priced below costs. US  {O!'West Inputs Further Notice comments at 5657. The coefficient for toll is an estimate of the increase in expenses due to an increase in 1000 toll minutes. Summing across all accounts and dividing by 1000, according to our calculations an estimate of the expense cost per toll minute is equal to $ 0.0006331807. The ARMIS data used in the regressions count special lines as channels. That is, special access lines are counted as DS0 equivalents: a DS1 has 24 channels, and a DS3 has 672 channels. US West contends that it is far from clear how this method of counting special access lines reflects how these services cause expenses, because it is clear that DS1s and DS3s"L |0*&&``" are not priced as if they cause 24 and 672 times the amount of expenses as a narrowband  X4line.k}D6 {Ob'ԍ US West Inputs Further Notice comments, Attachment A at 21.k   X4393. ` ` The fact that DS1s and DS3s are priced differently in the current marketplace does not imply that it is improper to count lines as channels. US West's suggested alternative, counting special lines as physical pairs, would assume that a residential customer with two lines causes the same amount of overhead expenses as a special access customer with one DS1 line. To the contrary, we find that it is reasonable to assume that more overhead expenses are devoted to winning and keeping the DS1 customer than the residential customer. Further, we expect that more overhead expenses are related to customers using higher capacity services than those using lower capacity services. Accordingly, we find that it  X 4is reasonable to use channel counts in our regression equations.~ ZD6 yO'ԍ We note that we also count switched business lines as channels in our regression equations.  X 4394. ` ` Some commenters also criticized our regression analysis on the grounds that  X 4variables are highly correlated and that the predicted coefficients are not stable. D6 {OY'ԍ See, e.g., Ameritech Inputs Further Notice comments at 2728; GTE Inputs Further Notice comments at  {O#'7980; US West Inputs Further Notice comments, Attachment A at 2122. In particular, US West claims that the confidence intervals and standard errors are large and that  X4a dividingthesample experiment leads to drastically different results.wFD6 {O'ԍ US West Inputs Further Notice comments at 5357, Attachment A at 2027.w While these commenters are correct that the correlation values are high for the raw variables, the values  Xb4are not high once the variables under consideration are adjusted by dividing by total lines.xbD6 yO'ԍ The correlation matrix for the variables under consideration is: X` hp x (#%'0*,.8135@8: