Cost Proxy Models in Rural Telephone Companies

Abstract

The Federal-State Joint Board on Universal Service, CC Docket 96-45 (“Joint Board”) published its Recommended Decision on November 8, 1996. Among other topics considered in that document, the Joint Board discussed the use of cost proxy models to determine the cost of network construction and by extension the cost of unbundled network elements. The Joint Board specified that the “technology assumed in [a cost proxy] model should be the least-cost, most efficient and reasonable technology for providing the supported services that is currently available for purchase.”1 Furthermore, the Joint Board specified that: “All underlying data should be verifiable, engineering assumptions reasonable, and outputs plausible.”

Subsequent reports by the FCC and filings by interested parties have documented widespread and deep-rooted philosophical concerns within the telecommunications industry regarding cost proxy models per se. The cost proxy models created to date may be appropriate for the larger, urban area-based, incumbent local exchange carriers (ILECs) such as the former Bell operating companies and GTE; no opinion on that issue is offered here. However, it is clear that the cost proxy model procedures and unit prices proposed by the FCC are wholly unsuitable for use in rural areas. This report summarizes several areas in which this fact is evident, with particular emphasis on unit price input choices.