Federal-State Joint Board on
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554
CC Docket No, 96-45
Comments of Harris, Skrivan & Associates, LLC
Harris, Skrivan & Associates, LLC (HSA) provides financial and regulatory services to Independent Local Exchange Carriers throughout the United States. These comments represent the position of HSA's Independent Telephone Company clients. These comments represent the positions of the following Independent Telephone Companies; Cross Telephone Company, Cimarron Telephone Company, Pottawatomie Telephone Company, Bixby Telephone Company and Carnegie Telephone Company.
Table of Contents Summary....................................................................3 Section One - Definition of Universal Service..............................5 Section Two - Rural Service Areas are Different than Urban Areas...........7 Section Three - Recovery of Universal Service Funding from Contributors....8 Section Four - the Calculation of Universal Service Support to Recipients..9 Section Five - Recovery of Common Line Costs..............................13 Section Six - Should the Cur-rent USF Cap be Extended?....................15 Section Seven - Advanced Services to Rural Areas..........................16 Section Eight - Measuring Quality.........................................17 Section Nine - Increases to the Federal Subscriber Line Charge............18 Section Ten - Elimination of Long Term Support............................15
The first principle identified in Section 254(b) of the federal Communications Act is, "Quality services should be available at just, reasonable and affordable rates." HSA notes that quality, like universal service itself, is a moving target. Customers clearly expect more now than they did ten years ago. They will expect even more in the next ten years. The best way to measure customer service is through customer surveys. However, the tried and true method of measuring traditional telephone customer service indicators is recommended by HSA. This includes standards for and measurement of, central office blocking, out of service reports, customer service call answer times, operator service call answer times, call completion rates, trouble reports and commission complaints.
The second principle identified in Section 254(b) is, "Access to advanced telecommunications service and information services should be provided in all regions of the Nation." Access to advanced services in rural, insular and high cost areas is a matter of providing high capacity links to hub sites in urban areas. Therefore, the design of universal service support flows, especially to schools, health facilities and libraries, should include provision of high capacity service to a hub site in the nearest urban area with adequate hub sites.
The third principle in Section 254(b) is, (paraphrased) consumers in rural, insular and high cost areas should have services, reasonably comparable in price and scope, to those offered in urban areas. The main obstacle to this goal is the cost of providing such services in rural, insular and high cost areas. Higher costs in these areas are due to higher loop costs, higher switching costs, higher transport costs, higher administrative costs and higher levels of customer service. Each of these areas needs to be addressed in order to meet the needs of the rural, insular and high cost service areas.
The fourth principle in Section 254(b) is, "All providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service." HSA understands this to mean that contributors to interstate Universal Service Funding should include local exchange carriers, interexchange carriers, wireless companies, cable television companies, public payphone providers, providers of inside wiring, providers of customer premise equipment and operator service providers. There may be others. To the extent these providers supply jurisdictionally interstate services, they should support interstate Universal Service Funding. To the extent these providers allocate revenues to the state jurisdiction, such revenues should be used as a basis to support state Universal Service Funding programs. (This addresses issues in paragraphs 117 and 119 of the Notice of Proposed Rulemaking (NPRM).
The fifth principle in Section 254(b) is, There should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service. This means the FCC proposal to extend the USF Cap is inappropriate, inasmuch as it eliminates the predictability and sufficiency of USF revenues.
The sixth principle in Section 254(b) is, "elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced telecommunications services . . ." An adequate method of addressing this requirement would be to make DS-3 service available, with connectivity to a state network, to all rural, insular and high cost areas of the Nation.
DEFINITION OF UNIVERSAL SERVICE
This section responds to Commission requests for comment on issues found in paragraphs 15 through 23 of the Notice of Proposed Rulemaking (NPRM). Universal Service should include the following attributes:
1) voice grade access to the public switched network,
2) touch tone capability,
3) single party service,
4) access to emergency services,
5) access to operator services,
6) toll free access to the local service provider's business office,
7) customer premise equipment,
8) inside wiring,
9) domestic long distance service, and
10) directory listings.
The first five attributes of universal service are network functions, generally provided as regulated service.
The sixth attribute, toll free access to the local service provider's business office, besides being good business practice, is required so that a local service provider cannot discourage residential subscribers from subscribing to its service by charging them to talk to the provider. (This addresses issues in paragraphs 53, 54, 55 and 57 of the NPRM.)
Recommended attributes 7, 8 and 9 are clearly competitive, generally unregulated services. However, these services are important to universal service, and could be a barrier to service for low-income subscribers. Therefore, these services should be included as part of the definition of universal service. (This addresses issues in paragraph 50 of the NPRM.)
HSA recommends that "domestic long distance" should be a component of universal service. The NPRM asks whether toll restrict service should be a part of universal service. If the primary purpose of this service is to keep low-income subscribers on the network, it might be even better to make sure these subscribers have a minimum level of toll service included as part of universal service. This toll would be provided only to low income subscribers and would be funded by the Universal Service Fund. The use of long distance service meets all four of the criteria for inclusion in the definition of universal service found in Section 254(c)(1). It is in the public interest for all subscribers to have at least limited access to remote government, libraries, businesses and personal contacts. (This addresses issues in paragraphs 54 and 55 of the NPRM.)
The last recommended attribute, directory listings, is generally not a problem under today's rules. State rules usually require directory listings, and directory publishers have found it in their own interests to have complete and accurate listings. However, under the new paradigm of local competition, it may require regulatory oversight to ensure each customer is offered a directory listing. Therefore, HSA recommends that directory listings be included as part of the definition of universal service. (This addresses issues in paragraphs 66 and 67 of the NPRM.)
The Commission seeks comments regarding how and when to revisit the definition of universal service. HSA recommends the Commission assign this duty to NARUC, which has an ongoing commitment to universal service and standing committees to address such issues. The Commission should open a proceeding on the definition of universal service upon receipt of a recommendation from NARUC to do so. (This addresses issues in paragraph 66 of the NPRM.)
RURAL SERVICE AREAS ARE DIFFERENT THAN URBAN AREAS
Definition of "Rural"
HSA supports a definition which coincides with federal Act's definition of rural in Section 153 (37) of the Communications Act. (This addresses issues in paragraph 95 of the NPRM.)
Differences in Costs
The costs to provide telecommunications service to rural areas is more expensive than the costs to serve urban areas. There are five reasons why rural service is more expensive.
First, rural areas are generally located a distance from a major city or town. This requires a longer than average transport for less than average traffic volumes. Therefore, the transport costs, especially calculated on a per minute basis, or more expensive.
Second, rural areas have lower subscriber density than is found in urban areas. This results in smaller cables being run longer distances. It also means the cable fill factor will be less than can be achieved in urban areas. Therefore, the common line costs are higher in rural areas, per subscriber, than in urban areas.
Third, the switching equipment in rural areas serves much smaller concentrations of customers. Therefore, the average cost per customer is much higher.
Fourth, the administration of a small rural telephone company takes a certain minimum amount of work, regardless of how few subscribers are being served. Therefore, the administrative costs of serving rural areas will be higher, when measured on a per- subscriber basis, even for the most efficient rural telephone companies.
Fifth, the level of service provided by rural telephone companies is generally higher than what is offered in urban areas, especially for residential customers. Small rural telephone company managers generally live in the communities they serve. Their commitment to service is as much a community effort as it is a business commitment. This higher level of service in rural areas results in higher costs.
RECOVERY OF UNIVERSAL SERVICE FUNDING FROM CONTRIBUTORS
The federal Act requires, "Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." The Act also allows the Commission to require "any other provider of interstate telecommunications" to contribute to the fund as well. The apparent intent of this latter provision would be for the Commission to decide whether private carriers should contribute to the fund, also.
The simplest and most equitable method of determining each carrier's contribution would be to establish the funding requirement and allocate the requirement among all contributors based on the contributors' retail interstate revenue. This methods allows all services to be measured by the value of the services, rather than trying to measure such services in minutes of use, bandwidth, assumed minutes of use, or bits per second. A disadvantage of this method is that private carriers do not have the equivalent of retail revenue. Therefore, if the Commission elected to include this class of interstate telecommunications providers as contributors to universal service funding, an equivalency would have to be calculated, (This addresses issues in paragraphs 10, 117, 121, 122 and 123 of the NPRM.)
For those carriers which have not been subject to separations, such carriers will now have to apportion their revenue between the state and interstate jurisdictions. The intrastate revenue will have to be apportioned among states, for purposes of intrastate (This addresses issues in paragraphs 119 and 125of the universal service funding NPRM.)
THE CALCULATION OF UNIVERSAL SERVICE SUPPORT TO RECIPIENTS
USF should be calculated simply, should count all access lines provided by a local exchange carrier, and the calculation should be based on the actual costs of providing the service. (This addresses issues in paragraph 27 of the NPRM.)
The calculation should be simple. This means that input into the calculation of universal service funding should be mostly available from existing records. The calculation should be easy to verify and be auditable. The calculation should be relevant to universal service, therefore it should include common line costs, switching costs, transport costs, administrative costs and customer service costs. It should not penalize a company for exceeding the minimum standards of customer service.
USF should be based on all access lines served by an eligible local exchange carrier. If certain categories of access lines are excluded from support, the cost studies become quite complex. For example, how should costs be allocated between the primary line to serve a residence and the second line to serve a residence? After the primary line is installed, the cost for the second line is much lower. (This addresses issues in paragraphs 24 and 26 of the NPRM.)
If multi-line businesses are excluded, how are costs per access line to be allocated between a) single-line business and residential and b) multi-line business? The average cost of a multi-line business access line will usually be much less than a single line residential customer. But how much less? Are companies to do studies showing the difference in loop lengths between multi-line businesses and all other access lines? Are companies to do studies showing how much costs are saved per line for multi-line service? This is not simple and it cannot be accurate. Therefore, the only way to handle costs for each subscriber is to include all costs in the study area. (This addresses issues in paragraphs 24 and 26 of the NPRM.)
For large companies, with many exchanges and multi-state operations, it may be appropriate to substitute proxies for actual costs. However, for small companies with only a few exchanges, proxies are inaccurate, inappropriate and unworkable. (This addresses issues in paragraph 31 of the NPPM.)
While we understand the proxy model has continued to be developed and refined, the comments here can only address the model as it was originally filed. The proxy model has several fatal flaws. First, the proxy model bases its entire costing on Census Block Groups (CBGs). CBGs only locate residential customers. Therefore, the Proxy Model will handle downtown Denver as if it were rural, and will build costs-for the entire region as though there were only farmers and ranchers in the area. (This addresses issues in paragraph 34 of the NPRM.)
A second problem with the model is that although it is very complex, It still takes a simplistic approach to important variables. For example, in calculating the cost to bury distribution plant, the model takes hundreds of soil types and condenses them to just two categories, rocky and non-rocky. This averaging may be acceptable for large companies, but for a small company, serving a small geologic area, this averaging may produce anomalous results. For example, how is the model to handle a two exchange company, whose study area is divided by the Arkansas River? Making the model more complex is no answer, since the model already requires 128 Megabits of RAM just to run a small state or a portion of a large state. Even with a Pentium processor it will take several hours to run a calculation, once the data has all been developed.
A third problem with the model, is that it Is too large and complex to audit. There could be a major error in the logic and no one would know it for years, if ever.
A fourth problem with the model is that it is not, and cannot be, technologically neutral. The model not only depends on specific technology, it also uses specific vendors' costs of such technology. (This addresses issues in paragraph 32 of the NPRM.)
Competitive Auctions for Provision of Universal Service
The Commission proposes to use auctions to resolve the issue of universal service. The bidder that requires the least amount of support would presumably win the bid. Under Commission proposed rules, the winning bidder would receive an incentive credit for bidding the lowest and all other service providers would have to settle for the winning bid without any "winners credit". (This addresses issues in paragraph 35 of the NPRM.)
Recent experience with auctions have shown that, whether selling US West Exchanges, GTE Exchanges, or PCS spectrum, an auction is a great way to raise money. The experiment is still young though, and it may turn out that using auctions is a lousy way to provide telephone service. Many recent purchasers of US West exchanges, GTE exchanges and PCS spectrum may find they have more investment in "blue sky" and less money available for customer service improvements.
The proposal to issue a "winner's credit" to the low bidder on USF will make sure everyone has inadequate funds to provide a reasonable quality of service in areas which require USF. This is similar to a ploy used by experienced auctioneers known as "bidder's choice". This technique is used to pit bidders against each other who may not even be bidding for the same item. The auctioneer auctions off a number of similar items, with the winner getting to choose which of the items he wants to buy. The rest of the bidders get to purchase the remaining items at the market price. The result is that bidders, who may not even want the same item, end up bidding against each other, with each paying more than he would otherwise have bid, if each item had been auctioned separately.
State versus Federal Universal Service Support
The Current Method of Calculating Universal Service Support
Under current rules, federal universal service support targets high common line costs of the study areas of small telephone companies. High switching costs are not addressed by universal service funding, but are addressed by other separations factors. High transport costs are not addressed by universal service funding, nor are high costs associated with the relatively higher administrative and customer service costs associated with small rural telephone companies. In many states, the higher transport, administrative and customer service costs are addressed through state high cost funding, usually on a residual basis.
The mechanism of the interstate universal service fund is that common line costs which are 115% higher than the nationwide average receive support. The results of the formula are such that no more than about $17 per customer per month of common line costs are assigned to the state jurisdiction. The interstate assignment of local switching costs varies, depending on traffic patterns. The allocation to the state jurisdiction of local switching costs can be as low as 15% or as high as 80%. The allocation of local transport costs is based on the usage of the underlying facility and will tend to match the traffic carried by the transport facilities. The allocation of administrative costs generally follows the overall allocation of plant facilities. The allocation of customer service costs is primarily to the state jurisdiction, while the small portion that goes to interstate is mostly assigned to the Billing & Collection element and recovery is through detariffed Billing & Collection charges to interexchange carriers.
The current method of interstate universal service funding has served rural telephone companies well. The focus on total common line costs of the interstate universal service fund has provided funding to allow rural companies to upgrade subscriber plant facilities and maintain reasonable local service rates. The predictability of the amount of federal support has allowed state commissions to custom design intrastate high cost funds to address the remaining high costs not addressed by federal mechanisms. The overall result has been a well coordinated effort to bring modem service to rural areas at affordable prices.
One of the reasons it has been acceptable to have an interstate universal service fund is because of the relationship between state and interstate toll rates. In many, if not most, cases, interstate toll rates are lower than state toll rates. It has been reasonable for regulators to try to avoid additional burdens on already high state toll rates. The Commission should understand this reality and consider it reasonable to continue significant interstate support to rural areas.
Recommendations for New Interstate Universal Service Funding
The most important goal of interstate universal service funding is to get support funding to rural, insular and high cost areas of the country. This can be accomplished through universal service funding similar to the present, or through universal service funding which combines common line and local switching funding. The main thing is to get the money where it is needed. Under most state regulations, the state will take care of any residual universal service fund requirements. (This addresses issues in paragraph 82 of the NPRM.)
It is also important for universal service funding to small companies be based on their costs of operations. No benchmark model will produce a proxy as accurate as using actual costs. The use of bidding for universal service is a sure way to reduce the quality of telecommunications in rural, insular and high cost areas.
RECOVERY OF COMMON LINE COSTS
A major issue which must be addressed by the Commission in this Notice and in other related Rulemakings is how Local Exchange Carriers are to recover Common Line costs.
Common Line costs are associated with the loop, or pair of wires, that extends from the Local Exchange Carrier central office to the customer premises. This is defined by Part 69 rules as "Common Line" plant and by Part 36 rules as "Subscriber" plant. It may also be referred to as "non-traffic sensitive" plant or "distribution" plant. The proper method of allocation of this type of investment has been debated for a century. "Board- to-board" separations rules say this investment is local. However, board-to-board rules were overturned by the 1930 decision in Smith vs. Illinois Bell, which resulted in a court decision that Common Line costs must be allocated between jurisdictions. This latter arrangement was known as "station-to-station" separations.
Common Line plant is "jointly-used" plant. It is used for both local and toll calls. The common line plant is needed for both types of calls. There is no correct accounting answer to how common costs should be allocated between services. There is no correct economic answer to how costs should be allocated between services. This dilemma was recognized as early as 1910, when the New York Public Service Commission was deciding a New York Telephone Company rate case and concluded,
"It is impossible to determine the cost of toll service separately from that of the local service for reason that the greater part of the cost of both is joint cost and there is no way of allocating the proper portion of the joint cost to each branch of service." (New York Telephone Company 2P.S.C. (2nd Dist., N.Y.) 710)
When two different groups of customers pay for common plant, each group would like the other group to pay for the common plant. So, the interexchange carriers say that the plant is there for local service and all the costs should be assigned to local. If the local ratepayers had a lobby like the interexchange carriers, they would advance equally persuasive arguments that the loop is there for toll payers and all costs should be assigned to toll.
Many proponents of Total Service Long Run Incremental Costs (TSLRIC) point to this economic pricing theory as proof that no loop costs should be assigned to the interstate jurisdiction. They say that the TSLRIC of a service is calculated by showing what costs go away if a service is discontinued, assuming all other services continue. So, the TSLRIC of interstate toll and access does not include Common Line Costs, since these costs are still required for Local and State toll service. But the argument can be used just as well to show that Common Line Costs should not be in local. If the TSLRIC of Local is defined by all costs that go away when local service is discontinued, assuming all other services continue, then Local Service TSLRIC does not include the Common Line, either. The only proper conclusion from a TSLRIC study is that there is a price floor. The only reasonable answer to allocation of jointly-used plant is for all services to make a contribution to Common Line costs.
If interstate service providers continue to make contributions to the cost of the local loop, does that mean local service is subsidized? No! As long as local service is covering its TSLRIC, it is not being subsidized. And, if the Common Line costs are common costs, then they are excluded from the TSLRIC of local service. Therefore, under TSLRIC theory, Local Service rates are not being subsidized. (This addresses issues in paragraphs 30 and 114 of the NPRM.)
Many economists (hired by interexchange carriers) argue that common line costs should not be recovered from interexchange carriers because such costs are fixed costs. Toll rates, they say, which vary by minute, should not be used to pay for fixed costs. In a competitive market, they say, such things would never occur. An example to the contrary would be the purchase of popcorn in a movie theater. A large bucket of popcorn is about $4.00. Perhaps an economist should go into the movie theater and offer to pay the It additional costs" associated with making the popcorn, plus a reasonable profit. The theater manager would no doubt reply that the TSLRIC of the popcorn was $.25 and the reasonable profit was $3.75, and with tax that will be $4.26 please. And by the way, if you try to unbundle the popcorn from the movie, the manager will confiscate your competitive corn. (This addresses issues in paragraph 113 of the NPRM.)
Perhaps the economist should try getting into a New York cab and discussing the uneconomic nature of the taxi rate structure. The economist could offer to pay for the marginal costs of the operation of the cab. The economist better have a good pair of shoes and an umbrella.
To summarize, it is reasonable for interstate service providers to continue to make contributions to the costs of Common Line investment. It turns out that most subscribers use the Common Line to make and receive telephone calls. Very few subscribers go to the local exchange carrier's central dial office and knock on the door, asking to make or receive a call. If the Common Line is used for toll, there is an economic value to this service and there should be compensation. The current compensation level of less than one cent per minute of use is quite reasonable.
SHOULD THE CURRENT USF CAP BE EXTENDED?
The current USF Cap limits the entire amount of the USF fund. This limitation is based on the prior year USF payments, adjusted for growth in nationwide access lines. The NPRM proposes to extend this cap beyond the current expiration of the cap on July 1, 1996. However, capping of the USF is in violation of the Communications Act. In Section 254, the Communications Act requires interstate Universal Service Support be "specific, predictable and sufficient". The USF Cap violates two of these three requirements. (This addresses issues in paragraph 40 of the NPRM.)
First, the Cap does not allow USF to be predictable. If the Cap is in effect and there is a large retroactive change to the fund, then all participants share in any shortfalls equally. This means an exchange carrier cannot predict its revenue, or even count on its revenue as it is received.
Second, most Independent local exchange carriers that receive USF have intrastate rates based on the receipt of such revenue. To the extent that USF is capped and participants revenue decreased, the Incumbent local exchange carrier is not earning its authorized return and its earnings are not sufficient.
ADVANCED SERVICES TO RURAL AREAS
It is more important for rural subscribers to have advanced telecommunications services than to have competitive alternatives. The Commission should sponsor initiatives that work through existing local exchange carriers to bring advanced services to rural America, before trying to foster competition for competition's sake. (This addresses issues in paragraph 45 of the NPRM.)
Advanced services can be brought to rural America through bringing a high capacity link to the rural area from a hub site. In most cases, the rural area would be well served by bringing DS-3 capacity from the nearest city or town with hub connections to a state telecommunications network for schools, health care facilities and libraries. Universal support should be targeted to make high capacity interconnection available to even the tightest budgets. (This addresses issues in paragraphs 5, 71, 73 and 109 of the NPRM.)
The Commission needs to implement rules that make it easy for such 'Institutions to be connected. It is often difficult for schools, rural health facilities and libraries to get budget approval for telecommunications, even when the value Is fully appreciated. For example, when the rules were implemented for multi-line business subscriber line charges, many rural libraries were required to pay the multi-line business rate because the town had another line at a road maintenance facility. This was difficult to explain to many a concerned town librarian!
The Commission takes a healthy interest in quality of service. This is appropriate, because the implementation of local competition will put pressure on the quality of service provided by incumbent local exchange carriers. Most rural telephone companies place a high priority on providing quality service to their customers. This means they answer the phones, have a business office in the communities they serve, take care of out-of-service problems immediately, offer modem digital switching and treat residential customers as well as business customers. However, when competition hits and the incumbent local exchange carriers see revenue losses from competitive activities, it will be difficult for many incumbent local exchange carriers to maintain their existing commitment to customer service. If costs have to be trimmed, it will not be possible to reduce costs associated with buried plant, central office switching, billing, or office administration. The only place variable and discretionary costs will exist will be in the business office. (This addresses issues in paragraph 69 of the NPRM.)
The best way to measure customer service is through modem customer research and customer surveys. However, this would be difficult to administer on a nationwide basis for all local exchange carriers. Current methods of evaluating customer service rely on engineering and customer service objectives, such as central office blocking, time to clear out-of-service reports, customer service call answer times, operator service call answer times, call completion rates, trouble reports and commission complaints. HSA recommends continuing to use the tried and true method of measuring quality of service by using the traditional telephone customer service indicators. (This addresses issues in paragraph 4 of the NPRM.)
INCREASES TO THE FEDERAL SUBSCRIBER LINE CHARGE
The current federal subscriber line charge is $3.50 for residential and single line customers and $6.00 for multi-line business customers. The NPRM seeks comment on increasing this rate. HSA opposes increasing the subscriber line charge. The subscriber line charge is high enough. There will be additional pressure on local rates that will come from the introduction of local competition and pressures to decrease state toll rates. Some would argue that the recovery of common line costs must be on a flat rate basis. HSA disagrees, but suggests that if common line costs have to be recovered on a flat rate basis, the recovery should come, on a flat rate basis, from interexchange carriers. This solution will satisfy all economic arguments and concerns related to matching cost recovery with cost causation. And, it is consistent with interexchange carrier toll calling plans which require a minimum billing of $5.00 per month per account. (This addresses issues in paragraphs 113 and 114 of the NPRM.)
ELIMINATION OF LONG TERM SUPPORT
HSA opposes the elimination of Long Term Support (LTS). LTS reduces the access rates in rural areas of the Nation. This program complements the Communications Act which requires nationwide average toll rates. To the extent access rates increase in rural areas, this creates additional incentive to interexchange carriers to avoid the effects of the nationwide averaging requirements. For example, while interexchange carriers are required to offer the same toll rates in rural areas as they do in urban areas, nothing in the law requires interexchange carriers to serve rural areas, or to market actively in those rural areas they do serve. The continuation of LTS will reduce incentives to interexchange carriers to avoid providing toll service to rural areas. (This addresses issues in paragraph II 5 of the NPRM.)
Harris, Skrivan & Associates, LLC
Michael T. Skrivan
8801 S. Yale, Suite 220
Tulsa, OK 74137
April 11, 1996