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| 1020 Nineteenth Street, N.W.           | ![](media/image1.jpeg){w    |
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| Suite 700                              | hei                         |
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| Washington, DC 20036                   |                             |
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| 303 896-1446                           |                             |
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| fax: 202 296-5157                      |                             |
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| **John W. Kure**                       |                             |
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| Executive Director - Federal Policy    |                             |
| and Law                                |                             |
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November 16, 2001

Magalie Roman Salas, Secretary

Federal Communications Commission

445 12^th^ Street, S.W.

Room TW-A325

Washington, DC 20554

### Re: Cost Review Proceeding for Residential and Single-Line Business Subscriber Line Charge (SLC) Caps -- CC Docket Nos. 96-262, 94-1

Dear Ms. Salas:

Qwest Corporation ("Qwest") hereby respectfully submits the cost
information requested by the Federal Communications Commission
("Commission") for reviewing the residential and single-line business
subscriber line charge ("SLC") caps.[^1] In this submission, Qwest
supplies forward looking cost information demonstrating that increases
of its residential and single-line business SLC caps as provided for in
the Commission's rules are warranted.[^2]

In the *CALLS Order*, the Commission stated that it would require price
cap local exchange carriers ("LEC") to submit forward looking cost
information so the Commission could verify that increases to residential
and single-line business SLC caps above \$5.00 are appropriate and
reflect higher costs where they are to be applied.[^3] In this
submission, Qwest provides detailed forward looking cost information
that justifies such increases.

The SLC recovers the interstate portion of local loop and line switch
port costs from an end user. Because Qwest currently computes a separate
SLC for each of its study areas, Qwest is providing forward looking cost
information for the loop and switch port in each Qwest study area. These
costs are then multiplied by jurisdictional separations factors to
determine the interstate portions of these costs. The SLC also recovers
marketing expenses as defined in Section 69.156 of the Commission\'s
rules. Because of their unique origin, Qwest has not included marketing
expenses in its forward looking cost studies, but rather has added the
marketing expense from its 2001 Annual Price Cap Filing directly to the
separated forward looking cost information.[^4]

Attachment 1 summarizes the results of Qwest's cost study. In
particular, Attachment 1 identifies the interstate portion of the
forward looking cost of the loop and port, plus marketing expenses, for
each Qwest study area, as well as such costs on a total company basis.
Attachments 2, 3 and 4 provide a breakdown of the forward looking cost
for the loop and the port in each Qwest study area.

In the following sections, Qwest describes the methodologies used to
compute appropriate costs for loops, switch ports, and marketing, and
discusses how the results of these methodologies compare to current CMT
per line.

###### I. LOOP COSTS

A local loop includes feeder facilities, digital loop carrier systems,
serving area interfaces, distribution facilities, drop wires, and
network interface devices. Qwest uses its LoopMod model to estimate the
forward looking cost of its investment in each of these components of
the loop. LoopMod applies forward looking design principles and
incorporates customer location and demand quantities to develop the
network components required to provide local telephone service in a
given area. The program "builds" cables and associated network hardware
to connect distant customer locations to the central office serving
those locations. It establishes cable sizes, cable types (*e.g*., copper
versus fiber), and structure types (*e.g*., underground versus buried)
based on user-controlled inputs. LoopMod is specifically designed to
account for the unique characteristics and demographics of Qwest's study
areas. The Investment Cost Calc-Loop pages in Attachment 2 provide a
summary of the results of the LoopMod program for each study area.

After computing loop investments, Qwest used a computer program called
the Retail Cost Program to convert these investments into monthly
recurring costs. The Retail Cost Program applies cost factors to
investments to generate monthly recurring costs for the loop. For this
filing, Qwest uses economic cost factors that are based on Qwest's
regulated accounts and its forward looking cost of money for the Third
Quarter of 2001. Qwest's current cost of money, which is a weighting of
debt and equity costs, is 11.7 % per annum.[^5] The Investment Cost
Calc-Loop and the Total Product Cost-Loop pages in Attachment 2 set
forth the factors and calculations in the Retail Cost Program for each
study area. As shown in Attachment 1, Qwest calculated the interstate
portion of the loop cost using the current separations factor of 25% of
total loop cost.

**II. SWITCH PORT COSTS**

The cost of the switch port consists of two categories: (1) costs of
Non-Traffic Sensitive Central Office Equipment ("NTS-COE"), which are
shown in Attachment 3, and (2) a right-to-use (or "RTU") fee and
associated costs for switch applications software, which are found in
Attachment 4.[^6]

The NTS-COE is equipment that is required to terminate a loop in the
central office. The most significant parts of this investment are the
line card in the switch and the Main Distribution Frame. Qwest uses its
Switch Cost Model to compute the forward looking investment for this
equipment in each study area, based on Qwest's most current contracts
with its switch vendors. As it did in computing monthly loop cost, Qwest
used the Retail Cost Program to convert NTS-COE investment into monthly
recurring costs. For this computation, Qwest also used the same economic
cost factors that it used for loop costs, including a cost of money of
11.7 % per annum. The Total Product Cost-NTS-COE pages of Attachment 3
set forth these factors and calculations for each study area. Qwest
allocated the NTS-COE cost to the interstate jurisdiction based on
actual interstate versus total minutes of use. The interstate portion
varies by study area and ranges from 12% to 35% based on year 2000
records. These calculations are shown in Attachment 1.

The "right-to-use" fee is the cost of switch applications software
obtained from switch vendors. Qwest finances the acquisition of such
software rights through capital leases. To calculate the forward looking
cost of a right-to-use fee, Qwest converted the capital value of its
most recent right-to-use capital leases to a monthly capital lease
payment assuming current financing costs. This gross monthly capital
lease payment was then divided by total working lines to yield the
per-line direct expense shown in line 5 of Attachment 4. The Retail Cost
Program was then used to load this direct expense with appropriate
network support, directly attributable, and common costs, as shown in
Attachment 4. Qwest allocated a portion of the RTU cost to the
interstate jurisdiction, and to the port, based on data from the 2000
ARMIS 43-01 report by Study Area.[^7] This attributable portion of the
RTU cost varies from 12% to 18%, as shown in Attachment 1.

**III. MARKETING EXPENSES**

Prior to 1997, the marketing expenses that are currently allocated to
the CMT basket were spread among the common line and traffic sensitive
price cap baskets, and the switched services within the trunking basket.
At that time, the Commission moved these expenses to a new marketing
basket.[^8] Pursuant to the rules applicable to the 2000 annual
filing,[^9] Qwest added the expenses that remained in the marketing
basket to the CMT basket to be recovered via the common line rate
elements. Clearly, the marketing expenses currently in the CMT basket
were not, and are not, associated with any particular rate elements.
Indeed, the Commission assigned these costs to a separate basket in 1997
because the costs were not specifically associated with marketing the
services in the baskets to which they had previously been allocated, but
instead were a residual of the Part 32 accounting and Part 36
separations processes. Given this history, it would be inappropriate to
compute a cap on the SLC using a forward looking estimate of marketing
expenses associated solely with the services in the CMT basket.
Accordingly, Qwest has not attempted to do a forward looking cost study
for this portion of the CMT and also has not included any marketing in
the forward looking cost studies for the loop and port. To create an
'apples to apples' comparison of costs to rates, Qwest uses the
marketing expenses reflected in its 2001 annual price cap filing and
shown in Attachment 1.[^10]

##### CONCLUSION

By this filing, Qwest has complied with the Commission's request for
forward looking cost information. Qwest has also demonstrated that those
costs support the current common line rates and justify increases of the
residential and single-line business SLCs to the caps currently
specified in the Commission's rules. By raising the SLCs as allowed by
the current rules and in concert with the Commission's goals and the
mandates of the Telecommunications Act of 1996, Qwest will be able to
remove much of any subsidy running from multi-line business subscribers
to residential and single-line business subscribers in the form of PICCs
paid by interexchange carriers.[^11]

Please call if you have any questions.

> Sincerely,
>
> John W. Kure

Attachments (including Certificate of Service)

[^1]: *See Initiation of Cost Review Proceeding for Residential and
    Single-Line Business Subscriber Line Charge (SLC) Caps; Pleading
    Cycle Established*, *Public Notice*, CC Docket Nos. 96-262, 94-1, DA
    01-2163 (rel. Sept. 17, 2001). *See also Limited Extension of Time
    to File Cost Submissions, Comments, and Reply Comments in the Cost
    Review Proceeding for Residential and Single-Line Business
    Subscriber Line Charge (SLC) Caps*, *Public Notice*, CC Docket Nos.
    96-262, 94-1, DA 01-2327 (Oct. 5, 2001); *Limited Extension of Time
    to File Comments and Reply Comments in the Cost Review Proceeding
    for Residential and Single-Line Business Subscriber Line Charge
    (SLC) Caps, Public Notice*, CC Docket Nos. 96-262, 94-1, DA 01-2547
    (Nov. 1, 2001).

[^2]: Under the Commission's current rules, the SLC cap for primary
    residential and single-line business lines will increase to \$6.00
    on July 1, 2002, and \$6.50 on July 1, 2003. However, the maximum
    SLC in a particular area would be the lesser of the SLC cap and the
    Average Price Cap CMT Revenue per Line month. *See* 47 C.F.R. §
    69.152(d)(1).

[^3]: *In the Matter of* *Access Charge Reform; Price Cap Performance
    Review for Local Exchange Carriers; Low-Volume Long-Distance Users;
    Federal-State Joint Board On Universal Service*, *Sixth Report and
    Order in CC Docket Nos. 96-262 and 94-1, Report and Order in CC
    Docket No. 99-249, Eleventh Report and Order in CC Docket No.
    96-45*, 15 FCC Rcd. 12962, 12994 ¶  83 (2000) ("*CALLS Order*"),
    *aff'd in part and remanded in part on other grounds sub nom., Texas
    Office of Pub. Util. Counsel v. FCC*, 265 F.3d 313 (5^th^ Cir.
    2001).

[^4]: Through application of the Commission's rules, Qwest has
    eliminated its Transport Interconnection Charge ("TIC"). Thus, such
    a charge is not recovered in Qwest's SLCs.

[^5]: Qwest updates its cost of money figures quarterly, based on
    objective data sources and widely-accepted financial models. Qwest
    derives its cost of money analysis from other companies in its
    industry as well as companies with similar risk profiles. The equity
    portion of cost of money is based on financial models such as the
    Capital Asset Pricing Model and the Discounted Cash Flow Model.

[^6]: Qwest's Switch Cost Model, which was used to generate port costs,
    is designed to compute costs for Qwest's service territory in an
    entire state, rather than in each study area. As a result, Qwest has
    computed a single set of port costs for its two study areas in
    Idaho.

[^7]: The assignment of the costs that are associated with the port to
    the interstate jurisdiction is based on the Commission's Part 36 and
    Part 69 rules. In particular, Qwest calculated the "RTU % Interstate
    Allocation" in Attachment 1 by dividing the Amortizable Asset
    Investment from Row 1680, Column M (Common Line Interstate) by the
    value in Row 1680, Column F (Subject to Separations).

[^8]: *In the Matter of Access Charge Reform; Price Cap Performance
    Review for Local Exchange Carriers; Transport Rate Structure and
    Pricing; End User Common Line Charges*, CC Docket Nos. 96-262, 94-1,
    91-213, 95-72, *First Report and Order*, 12 FCC Rcd. 15982 (1997),
    *aff'd sub nom.*, *Southwestern Bell Tel. Co. v. FCC*, 153 F.3d 523
    (8^th^ Cir. 1998).

[^9]: 47 C.F.R. § 69.156.

[^10]: Qwest derived the marketing expenses reflected in Attachment 1
    and the 2001 annual filing by multiplying the ratio of marketing
    expenses to total CMT in its initial CALLS filing by the total CMT
    in the 2001 annual filing.

[^11]: *See CALLS Order*, 15 FCC Rcd. at 13006 ¶ 111.