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| **Before the**                                          | ![](media/ |
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| **FEDERAL COMMUNICATIONS COMMISSION**                   | ){width="1 |
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| **Washington, DC 20554**                                | 5555556in" |
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| In the Matter of )                                      | 8395833333 |
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| )                                                       |            |
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| Federal-State Joint Board on ) CC Docket No. 96-45      |            |
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| Universal Service, the Rural Task ) FCC - 01 - 8        |            |
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| Force Recommendation, and the )                         |            |
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| Joint Board's Recommended )                             |            |
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| Decision )                                              |            |
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**Comments of the**

**[Rural Utilities Service]{.underline}**

The Rural Utilities Service (RUS) is a rural development agency of the
United States Department of Agriculture. RUS promotes the universal
availability of a broad range of telecommunications services in rural
America through its Telecommunications Program.

The primary tools used by RUS to extend and improve telecommunications
in rural areas are the Program's telecommunications and broadband loan
programs. In making and servicing loans under these programs, RUS
collects statistical information from approximately 800 rural telephone
companies and cooperatives. This statistical resource was made available
to the Rural Task Force for several types of analyses during its
deliberations. One such analysis was when the Task Force considered
lifting the caps on the high cost fund. In particular, information was
requested which would show the return factors for RUS companies and
cooperatives, which are rural telephone companies.

The Federal Communications Commission (Commission), in considering the
adequacy of support, needs information on the financial strength of
rural Local Exchange Carriers.[^1] The RUS hereby files return on
investment (ROI) information from the latest available Annual
Statistical Report with the Commission.

**[RUS Financed Carrier's Returns on Investment are Not
High]{.underline}**

The following charts show ROI for both average and cost settlement
borrowers. The distribution shows that ROI is consistent and relatively
low for the vast majority of reporting RUS carriers.

The ROIs ranged from a low of negative 38.94% to a high of 62.26% for
cost settlement companies. As can be seen from the graph, ROIs drop off
quickly from that high. Five of the 10 cost settlement carriers with the
highest ROIs received no high cost loop support.

![](media/image2.wmf)

![](media/image3.wmf)

**[Aging Plant is a Primary Cause of High Return on
Investment]{.underline}**

A high ROI is not necessarily a result of a high level of income. It can
also result from low expenses, and in particular, from low investment.
In small companies, construction of the entire system at one time is
often the only efficient way to build plant. Investment commitments are
deferred until a large enough build can be planned and sufficient
capital secured. This denies the small company the rolling replacements
and the possibility of more stable depreciation reserve ratios found in
large companies. Therefore, comparisons of ROIs between small and large
carriers can be misleading. Small carriers, if they build and operate
efficiently, will in the later stages of the life of their plant, have a
relatively low level of investment that results in a relatively high
indicated ROI. When these companies do replace their plant, their ROI
will generally plummet as they replace their older, lower cost
depreciated loop plant. Loop plant, unlike electronics, has continued to
increase in cost over the years and rural carrier's investment is
dominated by loop plant. Increased plant costs are clearly indicated by
increasing telephone plant in service per line shown below.

Although comparisons can be misleading, they are inevitable. The
following tables show the summaries of the RUS statistics regarding ROIs
for average and cost settlement telephone borrowers.

**1999 Return on Investment (ROI) Analysis**

For 279 RUS Borrowers on Average Settlement (Interstate)

  -------------------- ------------ -------------- ------------ ------------
  Weighted             ROI          Depreciation   Net Plant    Net Plant to
  Averages**^a^**      (%)**^b^**   Reserve Ratio  per Line     Assets
                                    (%)**^c^**     (\$)         Ratio(%)

  Mean                 13.00        51.82          1,404        52.80

  2^nd^ and 3^rd^      13.13        52.34          1,404        55.10
  Quartiles                                                     

  1^st^ Quartile       5.93         44.81          1,814        62.29

  4^th^ Quartile       27.88        60.31          930          33.27

  Statistical                                                   
  Measures**^d^**                                               

  Median               12.89        52.66          1,298        46.94

  1^st^ Quartile       8.65         45.33          1,037        35.13

  3^rd^ Quartile       20.16        59.78          1,701        64.75
  -------------------- ------------ -------------- ------------ ------------

For 479 RUS Borrowers on Cost Settlement (Interstate)

  -------------------- ------------ -------------- ------------ ------------
  Weighted             ROI          Depreciation   Net Plant    Net Plant to
  Averages**^a^**      (%)**^b^**   Reserve Ratio  per Line     Assets
                                    (%)**^c^**     (\$)         Ratio(%)

  Mean                 11.28        50.40          1,785        61.96

  2^nd^ and 3^rd^      10.98        48.90          1,803        64.12
  Quartiles                                                     

  1^st^ Quartile       4.90         48.46          2,167        64.31

  4^th^ Quartile       20.20        55.85          1,425        54.58

  Statistical                                                   
  Measures**^d^**                                               

  Median               10.52        49.80          1,895        56.97

  1^st^ Quartile       7.74         44.42          1,373        44.02

  3^th^ Quartile       14.90        59.71          2,925        68.92
  -------------------- ------------ -------------- ------------ ------------

a\. Determined by summing all occurrences in the category before
calculating the percentage.

b\. Return equals total net telecommunications revenues, less operating
expenses, state and local taxes and calculated federal income tax (if
applicable) on net telecommunications income. Investment equals 1999
average net telecommunications plant, less reserves, plus material.

c\. Total depreciation and amortization reserve divided by telephone
plant in service.

d\. Includes all borrowers that reported plant financial data 1998 and
1999.

The relationship between ROI and age of plant is demonstrated by these
tables. For example, the RUS average settlement borrowers with the
highest returns (4^th^ quartile) have the highest depreciation reserve
ratio and the lowest net plant per line. The median for the cost
settlement borrowers is 10.52%, which is below the authorized 11.25%
interstate rate of return. Also, the ROI for RUS borrowers is far below
the Price Cap Companies, which reported a mean of 18.52% (interstate)
for 1999.[^2]

**[Rural LECs are Not Making Too Much, They are Investing Too
Little]{.underline}**

Rural LECs are not making too much on average. To the contrary, they are
investing too little in telephone plant. This can be traced in part to
uncertainties following the changes brought by the Telecommunications
Act of 1996 and, in particular, the concern of rural carriers about the
stability and sufficiency of universal service support. These
uncertainties are reflected in the statistics below which show that the
local exchange carriers facilities are aging (as shown by the steadily
increasing depreciation reserve ratio).

**RUS Borrower Plant Investment (1990-1999)\***

  ------ ------------- -------------- ------------- -------------- --------------
  Year   Total Plant   Depreciation   Access\       Total Plant in Depreciation
         in Service    Reserve (\$)   Lines         Service/Line   Reserve Ratio
         (\$)                                       (\$)           (%)

  1990   13,268,005    5,142,721      5,720,005     2,320          38.8

  1991   14,029,058    5,584,280      5,834,602     2,404          39.8

  1992   14,878,290    6,114,242      6,110,615     2,435          41.1

  1993   14,029,058    5,904,771      5,598,764     2,506          42.1

  1994   14,878,290    6,253,557      5,538,207     2,686          42

  1995   14,143,917    6,275,873      5,107,097     2,769          44.4

  1996   15,369,985    7,076,937      5,380,389     2,857          46

  1997   16,433,030    7,799,571      5,619,649     2,924          47.5

  1998   16,623,970    8,168,903      5,477,668     3,035          49.1

  1999   16,840,752    8,533,143      5,644,699     2,983          50.7
  ------ ------------- -------------- ------------- -------------- --------------

\* Sources: 1990 to 1998 *Statistical Report, Rural Telecommunications
Borrowers,* RUS Informational Publication 300-4 and 1999 Financial and
Statistical Reports for Telecommunications Borrowers. The number of
borrowers varies from year to year and not all data is submitted in time
to be included in the published report. Nevertheless, the trends are
clear.

**[Conclusion]{.underline}**

The carriers that report to RUS and are included in the above
statistics, are representative of the rural carriers in general. These
statistics show that rural carriers are not over-earning, they are
under-earning when compared to price cap companies. In addition, the
infrastructure of the rural carriers is aging. RUS does not believe that
this is a recipe for closing the digital divide in rural America.

The evidence proves that the amounts received under the current system
are not over-compensating carriers, and on a going forward basis, are
insufficient to provide comparable services and access to advanced
services. Reform as recommended by the Rural Task Force is fully
consistent with and necessary to fulfill the vision of Sections 254 and
706 of the Telecommunications Act of 1996.

![](media/image5.png){width="6.7972222222222225in"
height="2.484027777777778in"}

[^1]: 1\. *See* *In the Matter of Federal-State Joint Board on Universal
    Service,* Recommended Decision, CC Docket No. 96-45) rel. Dec. 22,
    2000, at ¶12. This paragraph contains a discussion about whether the
    Recommended Decision provides the proper amount of support:
    "\...While a significant number of commenters urge the Joint Board
    to recommend the Rural Task Force plan without modification, other
    commenters, including some rural carriers, believe that the Rural
    Task Force Recommendation would provide too little support. Still
    other commenters, including several state commissions and carriers,
    believe it would provide too much support. \..."

[^2]: . *See*
    www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/ror99.pdf,
    at 7 (as of Jan.19, 2001).