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Robert F. Austin, Ph.D. & Porter E. Childers Austin Communications Education Services, Inc. 2937 Landmark Way Palm Harbor, FL 34684-5019 USA austincomm@aol.com |
| Introduction
The
actual cost of providing telecommunications services in rural America is
generally higher, per customer, than is the cost of providing these services
in urban areas. This difference is due in part to the lower density of
population of rural areas. Rural carriers, in contrast to urban carriers,
have fewer customers to share basic fixed costs (for example, switches)
and these customers are separated by greater distances, increasing outside
plant costs, than are their urban counterparts. The disparity in costs
is also related to the economies of scale and economies of skill enjoyed
by large urban carriers that are not available to rural carriers. For example,
the Federal Communications Commission’s forward-looking economic cost model
shows a cost of $866.27, without adjustment for overhead costs, to provide
a local loop in a Wyoming wire center, compared to a cost of $9.97 to provide
a local loop in a New York City wire center.
During
the era of monopoly service, the disparity in costs between rural and non-rural
service was addressed through implicit subsidies between geographic areas
and classes of service. Between 1984 and 1996, a series of opinions, rulings
and regulations began to coalesce and focus attention on the need to restructure
these subsidies. The Telecommunications Act of 1996 had three primary goals:
to promote competition, to reduce regulation, and to ensure all Americans
receive the benefits of telecommunications (that is, to ensure universal
service). Under the provisions of the Act, universal service would continue
to be subsidized, satisfying the third of these goals, but the previously
implicit subsidies would be transformed into explicit subsidies. This transformation
would also further the first goal by making federal universal service support
portable to all certified eligible telecommunications carriers.
Federal
universal service support consists of three categories of support, with
a fourth category scheduled for implementation in the near future. The
first category is High Cost Loop Support, or HCLS. This category focuses
on the costs associated with high-cost local loop outside plant costs.
The second category is Long Term Support, or LTS. This category provides
support for the interstate loop cost of rate-of-return carriers that participate
in the National Exchange Carrier Association (NECA) common line pool. The
FCC tentatively has concluded that LTS should be merged with Interstate
Common Line Support (ICLS) as of July 1, 2003, after which participation
in the NECA common line pool would not be required for receipt of support.
The third category is Local Switching Support, or LSS. As its name suggests,
this category focuses on the relatively higher costs for carriers with
fewer than 50,000 access lines of providing basic switching services. All
three categories of support are affected by a process known as the “averaging”
of support.
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| Averaging
of Support
Under
existing embedded cost mechanisms, federal universal service high-cost
support for rural carriers is averaged across all lines served by a carrier
within its study area. The FCC’s definition of a “study area” confirms
a specific service territory and states that “[study area boundaries shall
be frozen as they are on November 15, 1984” to reflect “[a] telephone holding
company’s operations within a single state. Figure 1 represents an hypothetical
study area with a centrally located town (the shaded oval). The difficulty
with averaging support across all lines served by a carrier within a study
area is that the support in low-cost areas of a study area may exceed the
cost of serving those areas while support in high-cost areas may be insufficient
to offset the higher cost of serving those areas.
The
Rural Task Force (RTF), an independent advisory panel appointed by the
Federal–State Joint Board on Universal Service to provide guidance on universal
service issues affecting rural telephone companies, produced a series of
six white papers detailing the results of its inquiry and its recommendations
to the Federal Communications Commissions (FCC), which culminated in an
FCC Order.[1]
Two of these white papers were dedicated to the question of averaging support.
The RTF recommended that rural carriers should be permitted to depart from
study area averaging and to disaggregate and target per-line high-cost
universal service support (that is, HCLS, LTS and LSS) to geographic areas
below (that is, smaller than) the study area level. Disaggregation
to this finer level of granularity would define per-line support that would
reflect the actual cost of providing service in particular geographic sub-areas
within the study area.
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| Disaggregation
Paths
The
RTF stated that rural carriers needed flexibility in the manner in which
federal high-cost universal service support is disaggregated and targeted
due to variations in the characteristics and operating environments of
rural carriers. To provide this flexibility, the RTF recommended
a disaggregation system that consisted of three options or “paths.”
These paths would allow rural carriers to identify zones of relative cost
variation (if any) and to develop appropriate methods of specifying which
zones should receive more support.
The
FCC adopted the RTF’s recommendation of three paths for disaggregation
and targeting of high-cost universal service support. The FCC agreed
that there should be flexibility in the manner in which support was disaggregated
and targeted for rural carriers. The FCC confirmed that support should
be disaggregated and targeted below the study area level to ensure that
per-line level of support would be more closely associated with the cost
of providing services.
Path One allows a carrier to certify to the state commission or other appropriate regulatory authority that it does not want to disaggregate support (Figure 2). However, a state could require disaggregation and targeting of support, either on its own motion or on the motion of an interested party, in which case the carrier would be required to disaggregate its support zones. After selection, the plan will remain in effect until a state commission or appropriate regulatory authority requires, on its own motion or upon petition by an interested party (including the affected carrier), a change to a different disaggregation and targeting methodology. The rationale for these restrictions was the desire to eliminate “gaming” of the system. Path Two is available to carriers that want state commission review and approval of a relatively complex disaggregation plan. Path Two allows a carrier to disaggregate and target support to multiple levels below a wire center. A disaggregation and targeting method can be tailored with precision, subject to state approval, to the cost and geographic characteristics of the carrier and the competitive and regulatory environment (Figure 3). The plan must show a per-line amount of support for each element in each disaggregation zone. Path Two provides the most flexibility in the development of a disaggregation plan, but also provides for regulatory approval to ensure that the methodology implemented is competitively neutral. Path Three would permit carriers to self-certify a method of disaggregation with the state commission or other appropriate regulatory authority. Path Three Permits carriers to choose 1) a disaggregation plan of up to two cost zones per wire center (Figure 4) or 2) a disaggregation plan that complies with a prior regulatory determination. Under the terms of Path Three, self-certifying carriers must provide state regulators (or other appropriate regulatory authority) and the Universal Service Administrative Company (USAC) with a description of the rationale used to disaggregate support, including the methods and data, and a discussion of how the plan complies with the self-certification guidelines. If the plan uses a benchmark, it must be generally consistent with how the total study area level of support for each category of costs (HCLS, LSS and LTS) is derived, to enable a competitor to compare the disaggregated costs used to determine support for each zone. The plan must show a per-line amount of support for each element in each disaggregation zone. |
| Levels
of Support
The
FCC order requires that an incumbent carrier’s total support for a given
study area using the chosen disaggregated method must equal the total support
available in that study area on a non-disaggregated (that is, averaged)
basis. In this way, the FCC sought to limit the impact of disaggregation
on the universal service funding requirements.
The
FCC also requires that the relative per-line support relationships between
disaggregation zones for each disaggregated category of support must remain
fixed over time and that such relationships must be made publicly available.
That is, the FCC requires that the per-line support for each category of
support (HCLS, LTS & LSS) in each disaggregation zone must be determined
so the relative support relationships between zones will be maintained.
The
FCC recognized that there is some variation in costs with different categories
of support. Specifically, the HCLS and LTS mechanisms support loop
costs and therefore share similar cost characteristics. Carriers
would be required to allocate the same ratio of HCLS and LTS to each disaggregation
zone. However, a carrier’s local switching cost characteristics might
differ from its loop cost characteristics in different disaggregation zones.
Therefore, it would be allowed to allocate a different ratio for LSS to
the extent that the cost characteristics of providing loop and switching
service in disaggregation zones differ.
The
FCC requires that the product of all of the ILEC’s lines for each cost
zone multiplied by the per-line support for those zones when added together
must equal the sum of the ILEC’s total level of support. FCC requires
that per-line support amounts for each zone must be recalculated whenever
an ILEC’s total annual support changes. The recalculated support
amount must be based on the changed support amounts and lines at that point
in time.
After
a CLEC is designated as a competitive eligible telecommunications carrier
(CETC) in a rural study area, determination of per-line amounts of support
for the CLEC will be based on the ILEC’s total support levels, lines and
disaggregated support relationships.
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| Timeframes
In
its order, the FCC directed carriers to choose a disaggregation path within
270 days of the effective date of the rules adopted in the order.
The order stated that carriers that failed to do so would not be permitted
to disaggregate and target support unless ordered to by an appropriate
regulatory authority. This requirement meant that carriers were required
to submit their disaggregation plans to USAC no later than March 18, 2002.
The FCC’s Multi-Association Group (MAG) Order extended this date to May
15, 2002. (We note in passing that this extension resolved an ambiguity
in the original order that in at one case suggested a date of March 15,
rather than March 18.)
A
carrier electing Path Two or Path Three must, by May 15, 2002, file with
the relevant state regulatory authority its proposed disaggregation plan
or its self-certified disaggregation plan. State approval of a carrier’s
proposed disaggregation plan pursuant to Path Two would not be required
by that date, but the disaggregation plan could not go into effect until
approval was received.
After
selection, the Path will remain in effect until a state commission or appropriate
regulatory authority requires a change to a different disaggregation and
targeting methodology. Such a requirement could be based on its own
motion or on petition by an interested party (including the affected carrier).
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| Restrictions
The
FCC adopted several general restrictions for all paths.
For study areas in which a CLEC was designated as a CETC prior to the effective date of these rules, an ILEC could elect Path Three only to the extent that it was self-certifying a disaggregation and targeting plan that had already been approved by the state. In all other instances in which an eligible CLEC had been designated as a CETC prior to the effective date of these rules, the ILEC must seek prior state approval of its disaggregation and targeting plan under Path Two. Rural
ILECs must submit to USAC maps in which the boundaries of the designated
disaggregation zones of support are clearly specified, which USAC will
make available for public inspection by competitors and other interested
parties.
FCC required that, when submitting information in support of self-certification, a carrier must provide USAC with publicly available information that allowed competitors to verify and reproduce the algorithm used to determine zone support levels. The carrier also must demonstrate that the underlying rationale is reasonably related to the cost of providing service for each cost zone within each disaggregated category. FCC
requires carriers electing Path One to submit to USAC a copy of the certification
to the state commission or appropriate regulatory authority certifying
that it will not disaggregate and target support.
Carriers selecting Path Two must submit a copy to USAC of the order approving
the disaggregation plan submitted by the carrier to the state commission
or appropriate regulatory authority. Carriers selecting Path Two
also must submit a copy of the disaggregation plan approved by the state
commission or appropriate regulatory authority.
Carriers selecting Path Three must provide the state and USAC with a description
of the rationale used to disaggregate support, including the methods and
data, and a discussion of how the plan complies with the self-certification
guidelines. The plan must show a per-line amount of support for each
element in each disaggregation zone.
The
initial purpose of the disaggregation and targeting Paths was to allocate
appropriate levels of support to geographic sub-areas within a study area.
This purpose has been extended, at least by implication, as a result of
the MAG Plan’s application of the same zones.[2]
In the MAG Plan Order, the FCC ordered that the RTF system for geographic
disaggregation and targeting below the study area level would also apply
to the newly-defined Interstate Common Line Support (ICLS) category of
portable high-cost universal service support. The FCC noted that
disaggregation by allowing ILECs to target explicit universal service support
to regions within a study area that costs relatively more to serve would
ensure that a competitive entrant would receive targeted support only if
it also serves the high-cost region. Disaggregation would prevent
the competitive entrant from receiving greater support than was needed
to serve relatively low-cost regions, a circumstance that would give the
competitive carrier a potential price advantage over the incumbent.
The FCC noted that the same three paths would be available for the disaggregation
of ICLS as for other types of support defined in the RTF Order. The
MAG Plan Order extended the deadline for selecting a path to May 15, 2002
and reaffirmed that after that date a carrier would not be permitted to
disaggregate and target support unless ordered to do so by a state commission
or other appropriate regulatory authority.
The MAG Plan order confirmed that a carrier’s choice of disaggregation
paths would remain in place for four years, unless a state commission or
other appropriate regulatory authority ordered disaggregation and targeting
of support in a different manner. Rate-of-return carriers would be
required to select identical disaggregation zones for all forms of high-cost
universal service support, with the exception of forward-looking intrastate
high-cost support received by non-rural carriers that are also rate-of-return
carriers. For example, if a rural rate-of-return carrier self-certified
two cost zones per wire center under Path Three, it would be required to
disaggregate all forms of high-cost universal service support -- HCLS,
LTS, LSS and ICLS -- to the same two cost zones per wire center.
The FCC noted that there was no reason why support should be allocated
differently in different disaggregation zones.
The FCC reaffirmed that there is some variation in costs with different
categories of support. The HCLS, LTS and ICLS mechanisms support
loop costs and share similar cost characteristics; carriers are required
to allocate the same ratio of HCLS, LTS and ICLS to each disaggregation
zone. However, a carrier’s local switching cost characteristics might
differ from its loop cost characteristics in different disaggregation zones.
Therefore, it would be allowed to allocate a different ratio for LSS to
the extent that the cost characteristics of providing loop and switching
service in disaggregation zones differ.
The FCC rules for the disaggregation and targeting of portable ICLS and
LTS apply to both rural and non-rural rate-of-return carriers. Non-rural
rate-of-return carriers are required to adopt a disaggregation and targeting
path only for their receipt of ICLS and LTS. Non-rural intrastate
high-cost support, including forward-looking high-cost support and interim
hold-harmless support, will continue to be targeted to high-cost wire centers,
consistent with FCC rules for targeting such support to high-cost wire
centers.
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Conclusion
Although
the deadline for filing a disaggregation plan may have passed by the time
this article appears, that deadline may have been extended as it was with
the release of the MAG Plan. In any event, any carrier may file a
request with the appropriate regulatory authority to investigate a change
in disaggregation at any time. Therefore, it remains appropriate
to consider whether, and how, a rural rate-of-return carrier should disaggregate
and target support.
The
range of specific circumstances that rural carriers face prevents us from
offering a general recommendation regarding an approach to disaggregation.
The significant amounts of support fund that are affected by this issue
justify careful analysis of each individual case to ensure the availability
of all appropriate support.
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Figure 1. Typical Study Area |
Figure
2. Homogeneous Costs
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Figure
3. Path 2 – Multiple Cost Levels
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 Figure
4. High Cost and Higher Cost Zones
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