*Pages 1--107 from  FCC 99-120*
 Federal  Communications  Commission  FCC  99-  120 
 1 
 Before  the 
 FEDERAL  COMMUNICATIONS  COMMISSION 
 Washington,  D.  C.  20554 

 In  the  Matter  of  ) 
 ) 
 Federal-  State  Joint  Board  on  )  CC  Docket  No.  96-  45 
 Universal  Service  ) 
 ) 
 Forward-  Looking  Mechanism  )  CC  Docket  No.  97-  160 
 for  High  Cost  Support  for  ) 
 Non-  Rural  LECs  ) 

 FURTHER  NOTICE  OF  PROPOSED  RULEMAKING 
 Adopted:  May  27,  1999  Released:  May  28,  1999 
 By  the  Commission:  Commissioner  Furchtgott-  Roth  dissenting  and  issuing  a  statement  at  a  later 
 date. 

 Comment  Date:  July  2,  1999 
 Reply  Date:  July  16,  1999 

 TABLE  OF  CONTENTS 

 para. 
 I.  INTRODUCTION  .......................................................  1 
 II.  PROCEDURAL  HISTORY  ................................................  4 
 A.  Universal  Service  Order  ..........................................  4 
 B.  Further  Notice  and  the  Input  Value  Development  Process  ................  6 
 C.  Platform  Order  and  Second  Recommended  Decision  ....................  9 

 III.  ESTIMATING  FORWARD-  LOOKING  ECONOMIC  COST  ....................  11 
 A.  Designing  a  Forward-  Looking  Wireline  Local  Telephone  Network  .........  11 
 B.  Synthesis  Model  ...............................................  16 
 C.  Selecting  Forward-  Looking  Input  Values  ............................  20 

 IV.  DETERMINING  CUSTOMER  LOCATIONS  ................................  23 
 A.  Background  ..................................................  23 
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 Federal  Communications  Commission  FCC  99-  120 
 2 
 B.  Issues  for  Comment  ............................................  25 
 1.  Geocode  Data  ...........................................  25 
 2.  Road  Surrogate  Customer  Locations  ..........................  29 
 3.  Methodology  for  Estimating  the  Number  of  Customer  Locations  ....  35 

 V.  OUTSIDE  PLANT  INPUT  VALUES  .......................................  48 
 A.  Background  ..................................................  48 
 B.  Copper  and  Fiber  Cable  .........................................  51 
 1.  Background  ............................................  51 
 2.  Issues  for  Comment  ......................................  54 
 C.  Structure  Costs  ...............................................  103 
 1.  Background  ...........................................  103 
 2.  Issues  for  Comment  .....................................  106 
 D.  Structure  Sharing  .............................................  126 
 1.  Background  ...........................................  126 
 2.  Issues  for  Comment  .....................................  129 
 E.  Serving  Area  Interfaces  ........................................  133 
 1.  Background  ...........................................  133 
 2.  Issues  for  Comment  .....................................  136 
 F.  Digital  Loop  Carriers  ..........................................  142 
 1.  Background  ...........................................  142 
 2.  Issues  for  Comment  .....................................  143 

 VI.  SWITCHING  AND  INTEROFFICE  FACILITIES  ............................  147 
 A.  Background  .................................................  147 
 B.  Issues  for  Comment  ...........................................  151 
 1.  Switch  Costs  ...........................................  151 
 2.  Use  of  the  Local  Exchange  Routing  Guide  (LERG)  .............  174 
 3.  Other  Switching  and  Interoffice  Transport  Inputs  ...............  178 

 VII.  EXPENSES  ........................................................  192 
 A.  Background  .................................................  193 
 B.  Issues  for  Comment  ...........................................  196 
 1.  Plant  Specific  Operations  Expenses  ..........................  197 
 2.  Common  Support  Service  Expenses  .........................  212 

 VIII.  CAPITAL  COSTS  ...................................................  228 
 A.  Depreciation  .................................................  229 
 1.  Background  ...........................................  229 
 2.  Issues  for  Comment  .....................................  231 
 B.  Cost  of  Capital  ...............................................  237 
 C.  Annual  Charge  Factors  .........................................  240 
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 Federal  Communications  Commission  FCC  99-  120 
 1  Pub.  L.  No.  104-  104,  110  Stat.  56.  The  1996  Act  amended  the  Communications  Act  of  1934,  47  U.  S.  C.   
 151  et.  seq.  (Act).  Hereinafter,  all  citations  to  the  Act  will  be  to  the  relevant  section  of  the  United  States  Code 
 unless  otherwise  noted. 

 2  Federal-  State  Joint  Board  on  Universal  Service,  Report  and  Order,  CC  Docket  No.  96-  45,  12  FCC  Rcd  8776 
 (1997)  (Universal  Service  Order),  as  corrected  by  Federal-  State  Joint  Board  on  Universal  Service,  Errata,  CC 
 Docket  No.  96-  45,  FCC  97-  157  (rel.  June  4,  1997),  appeal  pending  in  Texas  Office  of  Public  Utility  Counsel  v. 
 FCC  and  USA,  No.  97-  60421  (5th  Cir.  1997). 

 3 

 IX.  OTHER  ISSUES  RELATED  TO  THE  HIGH  COST  MECHANISM  ..............  243 
 A.  Alternatives  to  the  Forward-  Looking  Cost  Model  .....................  243 
 B.  Proposed  Modification  to  Procedures  for  Distinguishing  Rural  and  Non-Rural 
 Companies  .............................................  244 
 1.  Background  ...........................................  244 
 2.  Issues  for  Comment  .....................................  246 

 X.  PROCEDURAL  MATTERS  AND  ORDERING  CLAUSE  .......................  256 
 A.  Ex  Parte  Presentations  ..........................................  256 
 B.  Initial  Regulatory  Flexibility  Act  ..................................  257 
 C.  Initial  Paperwork  Reduction  Act  Analysis  ............................  272 
 D.  Deadlines  and  Instructions  for  Filing  Comments  .......................  273 
 E.  Ordering  Clauses  ..............................................  276 

 Appendix  A  (Proposed  Input  Values)  ..........................................  A-  1 
 Appendix  B  (Description  of  PNR's  Methodology  to  Estimate  the  Number  of  Customer 
 Locations)  .........................................................  B-  1 
 Appendix  C  (Outside  Plant  Structure  and  Cable  Costs  Survey)  .......................  C-  1 
 Appendix  D  (Description  of  Proposed  Methodology  for  Estimating  Outside  Plant  Costs)  ...  D-  1 
 Appendix  E  (Description  of  Switching  Costs)  ....................................  E-  1 
 Appendix  F  (Description  of  Proposed  Methodology  for  Estimating  Expenses)  ............  F-  1 

 I.  INTRODUCTION 
 1.  In  the  Telecommunications  Act  of  1996  (1996  Act),  1  Congress  directed  this 
 Commission  and  the  states  to  take  the  steps  necessary  to  establish  support  mechanisms  to  ensure 
 the  delivery  of  affordable  telecommunications  service  to  all  Americans.  In  response  to  this 
 directive,  the  Commission  has  taken  action  to  put  in  place  a  universal  service  support  system  that 
 will  be  sustainable  in  an  increasingly  competitive  marketplace.  In  the  Universal  Service  Order, 
 the  Commission  adopted  a  plan  for  universal  service  support  for  rural,  insular,  and  high  cost  areas 
 to  replace  longstanding  federal  subsidies  to  incumbent  local  telephone  companies  with  explicit, 
 competitively  neutral  federal  universal  service  support  mechanisms.  2  The  Commission  adopted 
3
 Federal  Communications  Commission  FCC  99-  120 
 3  Universal  Service  Order,  12  FCC  Rcd  at  8888,  para.  199.  The  Commission  also  determined  that  high  cost 
 support  for  rural  carriers  should  continue  essentially  unchanged  and  should  not  be  based  on  forward-  looking  costs 
 until  2001,  at  the  earliest.  Universal  Service  Order,  12  FCC  Rcd  at  8889,  para.  203.  The  Commission  adopted  the 
 Joint  Board's  recommendation  to  define  "rural  carriers"  as  those  carriers  that  meet  the  statutory  definition  of  a 
 "rural  telephone  company."  Universal  Service  Order,  12  FCC  Rcd  at  8943,  para.  310  (citing  47  U.  S.  C.    153(  37)). 

 4  Federal-  State  Joint  Board  on  Universal  Service,  Fifth  Report  and  Order,  CC  Docket  Nos.  96-  45,  97-  160,  13 
 FCC  Rcd  21323  (1998)  (Platform  Order). 

 5  Appendix  A  contains  a  complete  list  of  the  input  values  that  we  propose  in  this  Further  Notice. 

 6  Federal-  State  Joint  Board  on  Universal  Service,  Access  Charge  Reform,  Seventh  Report  and  Order  and 
 Thirteenth  Order  on  Reconsideration  in  CC  Docket  No.  96-  45;  Fourth  Report  and  Order  in  CC  Docket  No.  96-  262; 
 and  Further  Notice  of  Proposed  Rulemaking,  CC  Docket  Nos.  96-  45,  96-  262,  FCC  99-  119  (rel.  May  28,  1999) 
 (Companion  Order). 

 7  Id. 

 4 

 the  recommendation  of  the  Federal-  State  Joint  Board  on  Universal  Service  (Joint  Board)  that  an 
 eligible  carrier's  level  of  universal  service  support  should  be  based  upon  the  forward-  looking 
 economic  cost  of  constructing  and  operating  the  network  facilities  and  functions  used  to  provide 
 the  services  supported  by  the  federal  universal  service  support  mechanisms.  3 

 2.  Our  plan  to  adopt  a  mechanism  to  estimate  forward-  looking  cost  has  proceeded  in 
 two  stages.  On  October  28,  1998,  with  the  release  of  the  Platform  Order,  the  Commission 
 completed  the  first  stage  of  this  proceeding:  the  selection  of  the  model  platform.  The  platform 
 encompasses  the  aspects  of  the  model  that  are  essentially  fixed,  primarily  the  assumptions  about 
 the  design  of  the  network  and  network  engineering.  4  In  this  Further  Notice,  we  move  toward 
 completion  of  the  second  stage  of  this  proceeding,  by  proposing  input  values  for  the  model,  such 
 as  the  cost  of  cables,  switches,  and  other  network  components,  in  addition  to  various  capital  cost 
 parameters.  For  the  most  important  inputs,  we  provide  a  description  of  the  methodology  we  have 
 used  to  arrive  at  the  proposed  values.  5  In  addition,  we  seek  to  supplement  the  record  regarding 
 certain  inputs  to  the  model. 

 3.  The  forward-  looking  cost  of  providing  supported  services  estimated  by  the  model 
 will  be  used  to  determine  high  cost  support  for  non-  rural  carriers  beginning  January  1,  2000.  6  The 
 Commission  is  adopting  a  companion  Order  and  Further  Notice  that  establishes  the  framework  for 
 determining  federal  high  cost  support  levels  and  seeks  comment  on  the  details  of  that  mechanism.  7 

 II.  PROCEDURAL  HISTORY 

 A.  Universal  Service  Order 
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 Federal  Communications  Commission  FCC  99-  120 
 8  Although  the  existing  high  cost  loop  fund  has  historically  been  known  as  the  "Universal  Service  Fund,"  we 
 will  avoid  this  terminology  because  of  the  confusion  it  may  create  with  the  new  universal  service  support 
 mechanisms  that  the  Commission  has  created  pursuant  to  section  254  of  the  Communications  Act. 

 9  The  Commission's  rules  governing  these  programs  are  set  forth  at  47  C.  F.  R.    36.601  et.  seq.  (high  cost  loop 
 fund);  47  C.  F.  R.    36.125(  b)  (DEM  weighting);  and  47  C.  F.  R.    69.105,  69.502,  69.603(  e),  69.612  (LTS). 

 10  47  U.  S.  C.    254(  b)(  3). 

 11  47  U.  S.  C.    254(  a). 
 12  Federal-  State  Joint  Board  on  Universal  Service,  Recommended  Decision,  CC  Docket  No.  96-  45,  12  FCC 
 Rcd  87  (1996)  (First  Recommended  Decision). 

 13  Universal  Service  Order,  12  FCC  Rcd  at  8890,  para.  206.  In  the  Universal  Service  Order,  the  Commission 
 concluded  that  the  federal  universal  service  support  mechanism  would  support  25  percent  of  the  difference  between 
 the  forward-  looking  economic  cost  of  providing  the  supported  service  and  a  nationwide  revenue  benchmark.  See 
 Universal  Service  Order,  12  FCC  Rcd  at  8888,  para.  201.  In  response  to  issues  raised  by  commenters  and  state 
 Joint  Board  members,  the  Commission  referred  back  to  the  Joint  Board  questions  related  to  how  federal  support 
 should  be  determined.  See  Federal-  State  Joint  Board  on  Universal  Service,  Order  and  Order  on  Reconsideration, 

 5 

 4.  Prior  to  the  1996  Act,  three  explicit  universal  service  programs  were  in  place  to 
 provide  assistance  to  small  incumbent  local  exchange  carriers  (LECs)  and  LECs  that  served  rural 
 and  high  cost  areas:  high  cost  loop  support,  8  dial  equipment  minutes  (DEM)  weighting,  and  the 
 Long-  Term  Support  (LTS)  program.  9  Other  mechanisms  also  have  historically  contributed  to 
 maintaining  affordable  rates  in  rural  areas,  including  subsidies  implicit  in  geographic  toll  rate 
 averaging,  intrastate  rates,  and  interstate  access  charges.  In  the  1996  Act,  Congress  codified  the 
 Commission's  long-  standing  commitment  to  ensuring  universal  service  and  directed  that 
 "[  c]  onsumers  .  .  .  in  rural,  insular,  and  high  cost  areas  should  have  access  to  telecommunications 
 and  information  services  .  .  .  that  are  reasonably  comparable  to  those  services  provided  in  urban 
 areas  and  that  are  available  at  rates  that  are  reasonably  comparable  to  [those]  in  urban  areas."  10 
 The  1996  Act  also  directed  the  Commission  to  reform  universal  service  support  mechanisms  to 
 ensure  that  they  are  compatible  with  the  pro-  competitive  goals  of  the  1996  Act.  Section  254 
 required  the  Commission  to  institute  a  Joint  Board  on  universal  service  and  implement  the 
 recommendations  from  the  Joint  Board  by  May  8,  1997.  11  After  receiving  the  recommendations 
 of  the  Joint  Board  on  November  7,  1996,  12  the  Commission  adopted  the  Universal  Service  Order 
 on  May  7,  1997. 

 5.  In  the  Universal  Service  Order,  the  Commission  adopted  a  forward-  looking 
 economic  cost  methodology  to  calculate  support  for  non-  rural  carriers.  Under  this  methodology, 
 a  forward-  looking  economic  cost  mechanism  selected  by  the  Commission,  in  consultation  with  the 
 Joint  Board,  would  be  used  to  calculate  non-  rural  carriers'  forward-  looking  economic  cost  of 
 providing  the  supported  services  in  high  cost  areas.  13 
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 Federal  Communications  Commission  FCC  99-  120 
 CC  Docket  No.  96-  45,  13  FCC  Rcd  13749  (1998)  (Referral  Order).  See  also  Federal-  State  Joint  Board  on 
 Universal  Service,  Second  Recommended  Decision,  CC  Docket  No.  96-  45,  13  FCC  Rcd  24744  (1998)  (Second 
 Recommended  Decision). 

 14  Federal-  State  Joint  Board  on  Universal  Service,  Forward-  Looking  Mechanism  for  High  Cost  Support  for 
 Non-  Rural  LECs,  CC  Docket  Nos.  96-  45,  97-  160,  Further  Notice  of  Proposed  Rulemaking,  12  FCC  Rcd  18514  at 
 18519,  para.  5  (1997)  (1997  Further  Notice). 

 15  Generally,  there  is  a  platform  component  for  each  portion  of  the  exchange  network  being  modeled. 
 Examples  of  platform  design  issues  are  the  establishment  of  switch  capacity  limitations  and  the  routing  of  feeder 
 and  distribution  cables.  Examples  of  input  values  are  the  price  of  various  network  components,  their  associated 
 installation  and  placement  costs,  and  capital  cost  parameters  such  as  debt-  equity  ratios.  See  1997  Further  Notice, 
 12  FCC  Rcd  at  18516-  18,  paras.  17-  18. 

 16  See  generally  1997  Further  Notice. 

 17  Guidance  to  Proponents  of  Cost  Models  in  Universal  Service  Proceeding:  Switching,  Interoffice  Trunking, 
 Signaling,  and  Local  Tandem  Investment,  Public  Notice,  CC  Docket  Nos.  96-  45,  97-  160,  DA  97-  1912  (rel.  Sep.  3, 
 1997)  (Switching  and  Transport  Public  Notice);  Guidance  to  Proponents  of  Cost  Models  in  Universal  Service 
 Proceeding:  Customer  Location  and  Outside  Plant,  Public  Notice,  CC  Docket  Nos.  96-  45,  97-  160,  DA  97-  2372 
 (rel.  Nov.  13,  1997)  (Customer  Location  &  Outside  Plant  Public  Notice). 

 18  Common  Carrier  Bureau  Requests  Further  Comment  On  Selected  Issues  Regarding  The  Forward-  Looking 
 Economic  Cost  Mechanism  For  Universal  Service,  Public  Notice,  CC  Docket  Nos.  96-  45,  97-  160,  DA  98-  848  (rel. 

 6 

 B.  Further  Notice  and  the  Input  Value  Development  Process 
 6.  In  a  July  18,  1997  Further  Notice  of  Proposed  Rulemaking,  the  Commission 
 established  a  multi-  phase  plan  to  develop  a  federal  mechanism  that  would  send  the  correct  signals 
 for  entry,  investment,  and  innovation.  14  The  1997  Further  Notice  divided  questions  related  to  the 
 cost  models  into  "platform  design"  issues  and  "input  value"  issues.  15  The  1997  Further  Notice 
 subdivided  each  of  the  platform  and  input  issues  into  four  topic  groups,  and  sought  comment  on 
 each  group  separately  in  order  to  develop  a  focused  dialogue  among  interested  parties.  The  four 
 groups  were:  (1)  customer  location;  (2)  outside  plant  design;  (3)  switching  and  interoffice;  and 
 (4)  general  support  facilities  (GSF)  and  expense  issues.  16 

 7.  After  reviewing  the  comments  received  in  response  to  the  1997  Further  Notice, 
 the  Common  Carrier  Bureau  (Bureau)  released  two  public  notices  to  guide  parties  wishing  to 
 submit  cost  models  for  consideration  as  the  federal  mechanism.  17 

 8.  In  addition  to  the  1997  Further  Notice,  the  Bureau  has  solicited  comment  and 
 allowed  interested  parties  the  opportunity  to  participate  in  the  development  of  the  input  values  to 
 be  used  in  the  forward-  looking  mechanism.  On  May  4,  1998,  the  Bureau  released  a  Public  Notice 
 to  update  the  record  on  several  input-  related  issues.  18  The  Bureau  also  issued  data  requests 
6
 Federal  Communications  Commission  FCC  99-  120 
 May  4,  1998)  (Inputs  Public  Notice). 
 19  Federal-  State  Joint  Board  on  Universal  Service,  Order,  CC  Docket  No.  96-  45,  12  FCC  Rcd  9803  (1997) 
 (1997  Data  Request). 

 20  Common  Carrier  To  Hold  Three  Workshops  On  Input  Values  To  Be  Used  To  Estimate  Forward-  Looking 
 Economic  Costs  For  Purposes  Of  Universal  Service  Support,  Public  Notice,  CC  Docket  Nos.  96-  45,  97-  160,  DA 
 98-  2406  (rel.  Nov.  25,  1998)  (Workshop  Public  Notice). 

 21  See,  e.  g.,  Letter  from  W.  Scott  Randolph,  GTE,  to  Magalie  Roman  Salas,  FCC,  dated  March  2,  1999;  Letter 
 from  Pete  Sywenki,  Sprint,  to  Magalie  Roman  Salas,  FCC,  dated,  February  26,  1999;  Letter  from  Chris  Frentrup, 
 MCI,  to  Magalie  Roman  Salas,  FCC,  dated  February  9,  1999. 

 22  Platform  Order,  13  FCC  Rcd  at  21325,  para.  4. 

 23  Submission  in  CC  Docket  Nos.  96-  45  and  97-  160  by  BellSouth  Corporation,  BellSouth  Telecommunications, 
 Inc.,  U  S  WEST,  Inc.,  and  Sprint  Local  Telephone  Company  (BCPM  proponents),  dated  Dec.  11,  1997  (BCPM 
 Dec.  11,  1997  submission). 

 24  Letter  from  Richard  N.  Clarke,  AT&  T,  to  Magalie  Roman  Salas,  FCC,  dated  Dec.  11,  1997  (HAI  Dec.  11, 
 1997  submission).  HAI  was  submitted  by  AT&  T  and  MCI  (HAI  proponents).  Versions  of  HAI  filed  before 
 February  3,  1998,  were  known  as  the  Hatfield  Model.  The  proponents  refer  to  the  February  3,  1998  submission  as 
 HAI.  We  refer  to  this  model  as  HAI  throughout  this  Report  and  Order. 

 25  HCPM  was  developed  by  Commission  staff  members  William  Sharkey,  Mark  Kennet,  C.  Anthony  Bush,  Jeff 
 Prisbrey,  and  Commission  contractor  Vaikunth  Gupta  of  Panum  Communications.  Common  Carrier  Bureau 
 Announces  Release  of  HCPM  Version  2.0,  Public  Notice,  DA  97-  2712  (rel.  Dec.  29,  1997).  United  States 
 Government  Memo  from  W.  Sharkey,  FCC,  to  Magalie  Roman  Salas,  FCC,  dated  Feb.  6,  1998. 

 7 

 designed  to  acquire  information  that  may  be  useful  in  determining  the  final  input  values,  19  and 
 conducted  a  series  of  public  workshops  designed  to  elicit  further  comment  from  interested  parties 
 in  selecting  final  input  values.  20  Finally,  the  Bureau  conducted  numerous  ex  parte  meetings  with 
 interested  parties  throughout  this  proceeding.  21 

 C.  Platform  Order  and  Second  Recommended  Decision 
 9.  In  the  Platform  Order  released  on  October  28,  1998,  the  Commission  adopted  the 
 forward-  looking  cost  model  to  be  used  in  determining  federal  universal  service  high  cost  support 
 for  non-  rural  carriers.  22  The  model  platform  that  the  Commission  adopted  combined  elements 
 from  each  of  the  three  models  under  consideration  in  this  proceeding:  (1)  the  BCPM,  Version  3.0 
 (BCPM);  23  (2)  the  HAI  Model,  Version  5.0a  (HAI);  24  and  (3)  the  Hybrid  Cost  Proxy  Model, 
 Version  2.5  (HCPM).  25  In  the  Platform  Order,  the  Commission  also  specified  several  issues  that 
 would  be  addressed  in  the  inputs  stage  of  this  proceeding.  These  issues  include:  (1)  the  geocode 
7
 Federal  Communications  Commission  FCC  99-  120 
 26  Platform  Order,  13  FCC  Rcd  at  21338,  para.  34. 
 27  Platform  Order,  13  FCC  Rcd  at  21341,  para.  41. 
 28  Platform  Order,  13  FCC  Rcd  at  21355,  para.  76.  The  LERG  is  a  database  of  switching  information 
 maintained  by  Bellcore  that  includes  the  existing  host-  remote  relationships. 

 29  Second  Recommended  Decision,  13  FCC  Rcd  at  24746,  para.  5. 

 30  Second  Recommended  Decision,  13  FCC  Rcd  at  24746,  para.  5. 
 31  Second  Recommended  Decision,  13  FCC  Rcd  at  24746-  47,  para.  5. 
 32  Second  Recommended  Decision,  13  FCC  Rcd  at  24757,  para.  28. 
 33  We  also  note  that  technologies  such  as  wireless  services  are  likely  to  become  more  important  over  time  in 
 providing  universal  service.  We  will  continue  to  review  suggestions  for  incorporating  such  technologies  into  the 
 forward-  looking  mechanism  for  future  years.  See,  e.  g.,  Letter  from  David  L.  Sieradzki,  on  behalf  of  Western 
 Wireless,  to  Magalie  Roman  Salas,  FCC,  dated  January  26,  1999  (submitting  the  "Wireless  Cost  Model"). 

 8 

 data  source  to  determine  customer  locations;  26  (2)  the  road  surrogate  method  to  determine  the 
 location  of  non-  geocoded  customer  locations;  27  and  (3)  the  use  of  the  local  exchange  routing 
 guide  (LERG)  to  identify  the  existing  host-  remote  switch  relationships.  28 

 10.  On  November  25,  1998,  the  Joint  Board  released  the  Second  Recommended 
 Decision,  in  which  it  recommended  that  the  Commission  compute  federal  high  cost  support  for 
 non-  rural  carriers  through  a  two-  step  process.  29  First,  the  Joint  Board  recommended  that  the 
 Commission  should  estimate  the  total  support  amount  necessary  in  those  areas  considered  to  have 
 high  costs  relative  to  other  areas.  Second,  the  Commission  should  consider,  in  a  consistent 
 manner  across  all  states,  any  particular  state's  ability  to  support  high  cost  areas  within  the  state.  30 
 The  Joint  Board  recommended  that  federal  support  should  be  provided  to  the  extent  that  the  state 
 would  be  unable  to  support  its  high  cost  areas  through  its  own  reasonable  efforts.  31  In  addition, 
 the  Joint  Board  recommended  that  the  Commission  continue  to  work  with  the  Joint  Board  to 
 select  the  input  values  to  complete  a  forward-  looking  cost  model  and  to  finalize  the  methodology 
 for  distributing  federal  high  cost  support.  32 

 III.  ESTIMATING  FORWARD-  LOOKING  ECONOMIC  COST 
 A.  Designing  a  Forward-  Looking  Wireline  Local  Telephone  Network 
 11.  To  understand  the  assumptions  made  in  the  mechanism,  it  is  necessary  to 
 understand  the  layout  of  the  current  wireline  local  telephone  network.  33  In  general,  a  telephone 
 network  must  allow  any  customer  to  connect  to  any  other  customer.  In  order  to  accomplish  this, 
 a  telephone  network  must  connect  customer  premises  to  a  switching  facility,  ensure  that  adequate 
8
 Federal  Communications  Commission  FCC  99-  120 
 34  The  Universal  Service  Order  established  ten  criteria  to  ensure  consistency  in  calculations  of  federal  universal 
 service  support.  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250.  Criterion  1  requires  that  a  model  must 
 include  incumbent  LECs'  wire  centers  as  the  center  of  the  loop  network  and  the  outside  plant  should  terminate  at 
 incumbent  LECs'  current  wire  centers. 

 9 

 capacity  exists  in  that  switching  facility  to  process  all  customers'  calls  that  are  expected  to  be 
 made  at  peak  periods,  and  then  interconnect  that  switching  facility  with  other  switching  facilities 
 to  route  calls  to  their  destinations.  A  wire  center  is  the  location  of  a  switching  facility.  The  wire 
 center  boundaries  define  the  area  in  which  all  customers  are  connected  to  a  given  wire  center. 
 The  Universal  Service  Order  required  the  models  to  use  existing  incumbent  LEC  wire  center 
 locations  in  estimating  forward-  looking  cost.  34 

 12.  Within  the  boundaries  of  each  wire  center,  the  wires  and  other  equipment  that 
 connect  the  central  office  to  the  customers'  premises  are  known  as  outside  plant.  Outside  plant 
 can  consist  of  either  copper  cable  or  a  combination  of  optical  fiber  and  copper  cable,  as  well  as 
 associated  electronic  equipment.  Copper  cable  generally  carries  an  analog  signal  that  is 
 compatible  with  most  customers'  telephone  equipment,  but  thicker,  more  expensive  cables  or 
 loading  coils  must  be  used  to  carry  signals  over  greater  distances.  Optical  fiber  cable  carries  a 
 digital  signal  that  is  incompatible  with  most  customers'  telephone  equipment,  but  the  quality  of  a 
 signal  carried  on  optical  fiber  cable  is  superior  at  greater  distances  when  compared  to  a  signal 
 carried  on  copper  wire.  Generally,  when  a  neighborhood  is  located  too  far  from  the  wire  center 
 to  be  served  with  copper  cables  alone,  an  optical  fiber  cable  will  be  deployed  to  a  point  within  the 
 neighborhood,  where  a  piece  of  equipment  will  be  placed  that  converts  the  digital  light  signal 
 carried  on  optical  fiber  cable  to  an  analog,  electrical  signal  that  is  compatible  with  customers' 
 telephones.  This  equipment  is  known  as  a  digital  loop  carrier  remote  terminal,  or  DLC.  From  the 
 DLC,  copper  cables  of  varying  gauge  extend  to  all  of  the  customer  premises  in  the  neighborhood. 
 Where  the  neighborhood  is  close  enough  to  the  wire  center  to  serve  entirely  on  copper  cables,  a 
 copper  trunk  connects  the  wire  center  to  a  central  point  in  the  serving  area,  called  the  serving  area 
 interface  (SAI),  and  copper  cables  will  then  connect  the  SAI  to  the  customers  in  the  serving  area. 
 The  portion  of  the  loop  plant  that  connects  the  central  office  with  the  SAI  or  DLC  is  known  as 
 the  feeder  plant,  and  the  portion  that  runs  from  the  DLC  or  SAI  throughout  the  neighborhood  is 
 known  as  the  distribution  plant. 

 13.  The  model's  estimate  of  the  cost  of  serving  the  customers  located  within  a  given 
 wire  center's  boundaries  includes  the  calculation  of  switch  size,  the  lengths,  gauge,  and  number  of 
 copper  and  fiber  cables,  and  the  number  of  DLCs  required.  These  factors  depend,  in  turn,  on  how 
 many  customers  the  wire  center  serves,  where  the  customers  are  located  within  the  wire  center 
 boundaries,  and  how  they  are  distributed  within  neighborhoods.  Particularly  in  rural  areas,  some 
 customers  may  not  be  located  in  neighborhoods  at  all  but,  instead,  may  be  scattered  throughout 
 outlying  areas.  In  general,  the  model  divides  the  area  served  by  the  wire  center  into  smaller  areas 
 known  as  serving  areas.  For  serving  areas  sufficiently  close  to  the  wire  center,  copper  feeder 
9
 Federal  Communications  Commission  FCC  99-  120 
 35  SONET  is  a  set  of  standards  for  optical  (fiber  optic)  transmission.  It  was  developed  to  meet  the  need  for 
 transmission  speeds  above  the  T3  level  (45  Mbps)  and  is  generally  considered  the  standard  choice  for  transmission 
 devices  used  with  broadband  networks.  BCPM  Dec.  11  submission,  Model  Methodology  at  68. 

 36  See  Platform  Order,  13  FCC  Rcd  at  21357-  61,  paras.  81-  91. 

 37  Platform  Order,  13  FCC  Rcd  at  21357-  58,  para.  82. 
 38  Platform  Order,  13  FCC  Rcd  at  21337,  para.  33.  See  also  discussion  of  customer  location  data,  infra. 

 10 

 cable  extends  from  the  wire  center  to  a  SAI  where  it  is  cross-  connected  to  copper  distribution 
 cables.  If  the  feeder  is  fiber,  it  extends  to  a  DLC  terminal  in  the  serving  area,  which  converts 
 optical  digital  signals  to  analog  signals.  Individual  circuits  from  the  DLC  are  cross-  connected  to 
 copper  distribution  cables  at  the  adjacent  SAI. 

 14.  The  model  assumes  that  wire  centers  are  interconnected  with  one  another  using 
 optical  fiber  networks  known  as  Synchronous  Optical  Network  (SONET)  rings.  35  The 
 infrastructure  to  interconnect  the  wire  centers  is  known  as  the  interoffice  network,  and  the 
 carriage  of  traffic  among  wire  centers  is  known  as  transport.  In  cases  where  a  number  of  wire 
 centers  with  relatively  few  people  within  their  boundaries  are  located  in  close  proximity  to  one 
 another,  it  may  be  more  economical  to  use  the  processor  capacity  of  a  single  switch  to  supervise 
 the  calls  of  the  customers  in  the  boundaries  of  all  the  wire  centers.  In  that  case,  a  full-  capacity 
 switch  (known  as  a  host)  is  placed  in  one  of  the  wire  centers  and  less  expensive,  more  limited-capacity 
 switches  (known  as  remotes)  are  placed  in  the  other  wire  centers.  The  remotes  are  then 
 connected  to  the  host  with  interoffice  facilities.  Switches  that  are  located  in  wire  centers  with 
 enough  customers  within  their  boundaries  to  merit  their  own  full-  capacity  switches  and  that  do 
 not  serve  as  hosts  to  any  other  wire  centers  are  called  stand-  alone  switches. 

 15.  There  are  also  a  number  of  expenses  and  general  support  facilities  (GSF)  costs 
 associated  with  the  design  of  a  forward-  looking  wireline  telephone  network.  36  GSF  costs  include 
 the  investment  related  to  vehicles,  land,  buildings,  and  general  purpose  computers.  Expenses 
 include:  plant  specific  expenses,  such  as  maintenance  of  facilities  and  equipment  expenses;  plant 
 non-  specific  expenses,  such  as  engineering,  network  operations,  and  power  expenses;  customer 
 service  expenses,  such  as  marketing,  billing,  and  directory  listing  expenses;  and  corporate 
 operations  expenses,  such  as  administration,  human  resources,  legal,  and  accounting  expenses.  37 

 B.  Synthesis  Model 
 16.  The  "synthesis"  model  adopted  in  the  Platform  Order  allows  the  user  to  estimate 
 the  cost  of  building  a  telephone  network  to  serve  subscribers  in  their  actual  geographic  locations, 
 to  the  extent  these  locations  are  known.  38  To  the  extent  that  the  actual  geographic  locations  of 
 customers  are  not  available,  the  Commission  determined  that  the  synthesis  model  should  assume 
10
 Federal  Communications  Commission  FCC  99-  120 
 39  Platform  Order,  13  FCC  Rcd  at  21340-  41,  para.  40.  See  also  discussion  of  road  surrogating  method,  infra. 
 40  Platform  Order,  13  FCC  Rcd  at  21342,  para.  44. 
 41  Platform  Order,  13  FCC  Rcd  at  21346,  para.  55. 
 42  Platform  Order,  13  FCC  Rcd  at  21348,  para.  61. 
 43  Platform  Order,  13  FCC  Rcd  at  21354-  55,  para.  75. 
 44  Platform  Order,  13  FCC  Rcd  at  21355,  para.  76. 
 45  Platform  Order,  13  FCC  Rcd  at  21357,  para.  81. 
 46  Platform  Order,  13  FCC  Rcd  at  21329,  para.  13. 
 47  Platform  Order,  13  FCC  Rcd  at  21329,  para.  13. 

 11 

 that  customers  are  located  near  roads.  39 
 17.  Once  the  customer  locations  have  been  determined,  the  model  employs  a  clustering 
 algorithm  to  group  customers  into  serving  areas  in  an  efficient  manner  that  takes  into 
 consideration  relevant  engineering  guidelines.  40  After  identifying  efficient  serving  areas,  the  model 
 designs  outside  plant  to  the  customer  locations.  41  In  doing  so,  the  model  employs  a  number  of 
 cost  minimization  principles  designed  to  determine  the  most  cost-  effective  technology  to  be  used 
 under  a  variety  of  circumstances,  such  as  varying  terrain  and  density.  42 

 18.  The  Commission  concluded  that  the  federal  universal  service  mechanism  should 
 incorporate,  with  certain  modifications,  the  HAI  5.0a  switching  and  interoffice  facilities  module 
 to  estimate  the  cost  of  switching  and  interoffice  transport.  43  The  Commission  noted  that  it  would 
 consider  adopting  the  LERG  at  the  inputs  stage  of  this  proceeding  to  determine  the  deployment  of 
 host  and  remote  switches.  44  In  addition,  the  Commission  adopted  the  HAI  platform  module  for 
 calculating  expenses  and  capital  costs,  such  as  depreciation.  45 

 19.  The  Commission  noted  that  technical  improvements  to  the  cost  model  will 
 continue,  both  before  implementation  of  the  model  for  non-  rural  carriers  and  on  an  ongoing  basis, 
 as  necessary.  46  The  Commission  therefore  delegated  to  the  Bureau  the  authority  to  make  changes 
 or  direct  that  changes  be  made  to  the  model  platform  as  necessary  and  appropriate  to  ensure  that 
 the  platform  of  the  federal  mechanism  operates  as  described  in  the  Platform  Order.  47  As 
 contemplated  in  the  Platform  Order,  Commission  staff  and  interested  parties  have  continued  to 
 review  the  model  platform  to  ensure  that  it  operates  as  intended.  As  a  result,  some  refinements 
11
 Federal  Communications  Commission  FCC  99-  120 
 48  Common  Carrier  Bureau  To  Post  On  The  Internet  Modifications  To  The  Forward-  Looking  Economic  Cost 
 Model  For  Universal  Service  Support,  Public  Notice,  CC  Docket  Nos.  96-  45,  97-  160,  DA  98-  2533  (rel.  Dec.  15, 
 1998).  All  changes  to  the  model  platform  have  been  posted  on  the  Commission's  Web  site 
 (http://  www.  fcc.  gov/  ccb/  apd/  hcpm). 

 49  Universal  Service  Order,  12  FCC  Rcd  at  8913-  16,  para.  250. 

 50  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250  (criterion  one). 
 51  See  infra  at  para.  50. 
 52  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250  (criterion  three). 
 53  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250  (criterion  three). 
 54  See  infra  para.  166. 
 55  See,  e.  g.,  infra  paras.  198,  214. 

 12 

 have  been  made  to  the  model  platform  adopted  in  the  Platform  Order.  48 
 C.  Selecting  Forward-  Looking  Input  Values 
 20.  In  the  Universal  Service  Order,  the  Commission  adopted  ten  criteria  to  be  used  in 
 determining  the  forward-  looking  economic  cost  of  providing  universal  service  in  high  cost  areas.  49 
 These  criteria  provide  specific  guidance  for  our  selection  of  input  values  for  use  in  the  synthesis 
 model.  Rather  than  reflecting  existing  incumbent  LEC  facilities,  the  technology  assumed  in  the 
 model  "must  be  the  least-  cost,  most-  efficient,  and  reasonable  technology  for  providing  the 
 supported  services  that  is  currently  being  deployed."  50  As  noted  below,  existing  LEC  plant  does 
 not  necessarily,  or  even  likely,  reflect  forward-  looking  technology  or  design  choices.  51  Similarly, 
 the  input  values  we  tentatively  select  in  this  Notice  are  not  intended  to  replicate  any  particular 
 company's  embedded  or  book  costs.  Criterion  three  directs  that  "costs  must  not  be  the  embedded 
 cost  of  the  facilities,  functions,  or  elements."  52  Rather,  the  model  "must  be  based  upon  an 
 examination  of  the  current  cost  of  purchasing  facilities  and  equipment."  53 

 21.  As  discussed  in  detail  in  sections  V-  VIII  below,  we  generally  have  proposed  using 
 nationwide,  rather  than  company-  specific  input  values  in  the  federal  mechanism.  In  many  cases, 
 the  only  data  for  various  inputs  on  the  record  in  this  proceeding  are  embedded  cost,  company-specific 
 data.  We  have  used  various  techniques  to  convert  these  data  to  forward-  looking  values. 
 For  example,  we  propose  modifying  the  switching  data  to  adjust  for  the  effects  of  inflation  and  the 
 cost  changes  unique  to  the  purchase  and  installation  of  digital  switches.  54  We  propose  nationwide 
 averages,  rather  than  company-  specific  values,  to  mitigate  the  rewards  to  less  efficient 
 companies.  55 
12
 Federal  Communications  Commission  FCC  99-  120 
 56  See  infra  paras.  122,  199-  200. 
 57  State  commissions,  for  example,  may  find  that  it  is  not  appropriate  to  use  nationwide  values  in  determining 
 state  universal  service  support  or  prices  for  unbundled  network  elements  and  may  choose  instead  to  use  statewide 
 or  company  specific  values. 

 58  See  1997  Further  Notice,  12  FCC  Rcd  at  18535,  para.  44. 

 59  Platform  Order,  13  FCC  Rcd  at  21337,  para.  31. 
 60  See,  e.  g.,  1997  Further  Notice,  12  FCC  Rcd  at  18535,  para.  44;  Inputs  Public  Notice  at  3-  4;  Common 
 Carrier  Bureau  Seeks  Comment  On  Model  Platform  Development,  Public  Notice,  CC  Docket  Nos.  96-  45,  97-  160, 
 DA  98-  1587  (rel.  Aug.  7,  1998)  (Platform  Public  Notice)  at  2-  4. 

 13 

 22.  Although  the  BCPM  sponsors  have  provided  nationwide  default  values,  they  and 
 other  LECs  generally  advocate  company-  specific  input  values.  For  purposes  of  determining 
 federal  universal  service  support  amounts,  we  believe  that  nationwide  default  values  generally  are 
 more  appropriate  than  company-  specific  values.  Under  the  new  mechanism,  support  is  based  on 
 the  estimated  costs  that  an  efficient  carrier  would  incur  to  provide  the  supported  services,  rather 
 than  on  the  specific  carrier's  book  costs.  There  may  be  some  categories  of  inputs,  however, 
 where  company-  specific  or  state  specific  input  values  might  be  appropriate  for  use  in  the  federal 
 mechanism.  We  seek  comment  on  specific  alternatives  to  nationwide  values  for  certain  input 
 values,  as  discussed  below.  56  We  make  no  finding  with  respect  to  whether  nationwide  values 
 would  be  appropriate  for  purposes  other  than  determining  federal  universal  service  support.  57 

 IV.  DETERMINING  CUSTOMER  LOCATIONS 
 A.  Background 
 23.  The  determination  of  customer  locations  relative  to  the  wire  center  heavily 
 influences  a  forward-  looking  cost  model's  design  of  outside  plant  facilities.  This  is  because 
 assumptions  about  the  locations  of  customers  will  determine  the  predicted  loop  length,  which  in 
 turn  will  have  a  large  impact  on  the  cost  of  service.  58  Each  of  the  models  under  consideration  in 
 the  Platform  Order  provided  a  methodology  for  determining  customer  locations.  59  The  Bureau 
 sought  comment  on  these  proposals  and  solicited  alternative  proposals  for  locating  customers 
 from  interested  parties.  60 

 24.  In  the  Platform  Order,  the  Commission  concluded  that  HAI's  proposal  to  use 
 actual  geocode  data,  to  the  extent  that  they  are  available,  and  BCPM's  proposal  to  use  road 
 network  information  to  create  "surrogate"  customer  locations  where  actual  data  are  not  available, 
13
 Federal  Communications  Commission  FCC  99-  120 
 61  Platform  Order,  13  FCC  Rcd  at  21337,  para.  31.  Although  surrogating  methods,  and  even  customer  location 
 data  provided  by  the  Census  Bureau,  constitute  geocode  data,  for  purposes  of  clarity,  we  will  use  the  term 
 "geocode"  data  to  refer  only  to  actual  precise  latitude  and  longitude  data,  unless  we  specifically  refer  to  the  data  as 
 "surrogate  geocode"  data. 

 62  Platform  Order,  13  FCC  Rcd  at  21337-  38,  para.  34. 

 63  Platform  Order,  13  FCC  Rcd  at  21340-  41,  para.  40. 
 64  Platform  Order,  13  FCC  Rcd  at  21337,  para.  33. 
 65  Platform  Order,  13  FCC  Rcd  at  21337-  38,  para.  34. 

 14 

 provided  the  most  reasonable  method  for  determining  customer  locations.  61  The  Commission 
 concluded  that  "the  source  or  sources  of  geocode  data  to  use  in  determining  customer  location 
 will  be  decided  at  the  inputs  phase  of  this  proceeding."  62  The  Commission  also  concluded  that 
 "the  selection  of  a  precise  algorithm  for  placing  road  surrogates  pursuant  to  these  conclusions 
 should  be  conducted  in  the  inputs  stage  of  this  proceeding  as  part  of  the  process  of  selecting  a 
 geocode  data  set  for  the  federal  mechanism."  63 

 B.  Issues  for  Comment 
 1.  Geocode  Data 
 25.  While  we  affirm  our  conclusion  in  the  Platform  Order  that  geocode  data  should  be 
 used  to  locate  customers  in  the  federal  mechanism,  we  tentatively  conclude  that  at  this  time  we 
 cannot  adopt  any  particular  source  of  geocode  data  because  interested  parties  have  not  had 
 adequate  access  or  time  to  review  such  data.  We  tentatively  conclude  below  that  a  road  surrogate 
 algorithm  will  be  used  to  locate  customers  in  the  federal  mechanism  until  a  source  of  geocode 
 data  is  selected  by  the  Commission.  We  reiterate  our  expectation,  however,  that  we  will  identify 
 and  select  a  source  of  accurate  and  verifiable  geocode  data  in  the  future  for  use  in  the  federal 
 mechanism. 

 26.  In  the  Platform  Order,  we  concluded  that  a  model  is  most  likely  to  select  the  least-cost, 
 most-  efficient  outside  plant  design  if  it  uses  the  most  accurate  data  for  locating  customers 
 within  wire  centers,  and  that  the  most  accurate  data  for  locating  customers  within  wire  centers  are 
 precise  latitude  and  longitude  coordinates  for  those  customers'  locations.  64  We  noted  that 
 commenters  generally  support  the  use  of  accurate  geocode  data  in  the  federal  mechanism  where 
 available.  65  We  further  noted  that  the  only  geocode  data  in  the  record  were  those  prepared  for 
 HAI  by  PNR  Associates  (PNR),  but  that  "our  conclusion  that  the  model  should  use  geocode  data 
 to  the  extent  that  they  are  available  is  not  a  determination  of  the  accuracy  or  reliability  of  any 
14
 Federal  Communications  Commission  FCC  99-  120 
 66  Platform  Order,  13  FCC  Rcd  at  21338,  para.  34. 
 67  Platform  Order,  13  FCC  Rcd  at  21338,  para.  34. 
 68  Universal  Service  Order,  12  FCC  Rcd  at  8915,  para.  250  (criterion  eight). 
 69  See  Federal-  State  Joint  Board  on  Universal  Service,  Protective  Order,  CC  Docket  Nos.  96-  45,  97-  160,  13 
 FCC  Rcd  13910  (1998)  (Protective  Order).  See  also  Inputs  Public  Notice  at  3-  4. 

 70  BIN  files  are  the  output  of  the  clustering  routine  in  the  synthesis  model  platform  derived  from  the  actual 
 geocode  customer  locations  and,  as  such,  do  not  reveal  the  actual  geocoded  customer  locations.  The  BIN  files 
 allow  users  to  run  all  aspects  of  the  model  except  for  the  clustering.  PNR  has  made  the  BIN  files  available  to 
 interested  parties  for  a  fee  of  $25.00,  pursuant  to  the  terms  of  the  Protective  Order.  See  Letter  from  William  M. 
 Newman,  PNR,  to  Magalie  Roman  Salas,  FCC,  dated  December  17,  1998  (PNR  Dec.  17  ex  parte). 

 71  See  PNR  Dec.  17  ex  parte. 

 72  See,  e.  g.,  Bell  Atlantic  Petition  for  Reconsideration  at  5-  6;  BellSouth  Petition  for  Reconsideration  at  3-  4; 
 GTE  Petition  for  Reconsideration  at  21. 

 15 

 particular  source  of  the  data."  66  Although  commenters  support  the  use  of  accurate  geocode  data, 
 several  commenters  question  whether  the  PNR  geocode  data  are  adequately  available  for  review 
 by  interested  parties.  67 

 27.  In  the  Universal  Service  Order,  the  Commission  required  that  the  "model  and  all 
 underlying  data,  formulae,  computations,  and  software  associated  with  the  model  must  be 
 available  to  all  interested  parties  for  review  and  comment."  68  In  an  effort  to  comply  with  this 
 requirement,  the  Commission  has  made  significant  efforts  to  encourage  parties  to  submit  geocode 
 data  on  the  record  in  this  proceeding.  69  PNR  took  initial  steps  to  comply  with  this  requirement  in 
 December  1998  by  making  available  the  "BIN"  files  70  derived  from  the  geocoded  points  to 
 interested  parties  pursuant  to  the  Protective  Order.  71  In  addition,  PNR  has  continued  to  provide 
 access  to  the  underlying  geocode  data  at  its  facility  in  Pennsylvania.  Several  commenters,  in 
 petitions  for  reconsideration  of  the  Platform  Order,  have  argued  that  the  availability  of  the  BIN 
 data  alone  is  not  sufficient  to  comply  with  the  requirements  of  criterion  eight,  particularly  in  light 
 of  the  expense  and  conditions  imposed  by  PNR  in  obtaining  access  to  the  geocode  point  data.  72 

 28.  We  tentatively  conclude  that  interested  parties  have  not  had  an  adequate 
 opportunity  to  review  and  comment  on  the  accuracy  of  the  PNR  geocode  data.  We  note  that  a 
 nationwide  customer  location  database  will,  by  necessity,  be  voluminous,  relying  on  a  variety  of 
 underlying  data  sources.  In  order  to  comply  with  criterion  eight,  all  underlying  data  must  be 
 reasonably  available  to  interested  parties  for  review.  In  light  of  the  concerns  expressed  by  several 
 commenters  relating  to  the  conditions  and  expense  in  obtaining  data  from  PNR,  we  find  that  no 
 source  of  geocode  data  has  been  made  adequately  available  for  review.  We  anticipate  that  a 
 source  of  accurate  and  verifiable  geocode  data  can  be  selected  for  use  in  the  federal  mechanism  in 
15
 Federal  Communications  Commission  FCC  99-  120 
 73  PNR  Dec.  17  ex  parte  at  1. 
 74  Platform  Order,  13  FCC  Rcd  at  21338,  para.  34. 
 75  Platform  Order,  13  FCC  Rcd  at  21340-  41,  para.  40. 
 76  Platform  Order,  13  FCC  Rcd  at  21340-  41,  para.  40. 
 77  Platform  Order,  13  FCC  Rcd  at  21340-  41,  para.  40. 
 78  Platform  Order,  13  FCC  Rcd  at  21341,  para.  41. 

 16 

 the  future  and  we  encourage  parties  to  make  continued  efforts  to  ensure  that  all  underlying 
 geocode  data  are  available  for  review.  For  example,  we  note  that  PNR  has  contacted  its  data 
 vendors  for  the  purpose  of  making  additional  underlying  data  more  freely  available  to  parties  in 
 this  proceeding.  73  As  noted  in  the  Platform  Order,  we  recognize  that  more  comprehensive 
 geocode  data  are  likely  to  be  available  in  the  future  and  encourage  parties  to  continue 
 development  of  a  data  source  that  complies  with  the  criteria  outlined  in  the  Universal  Service 
 Order  for  use  in  the  federal  mechanism.  74  We  therefore  seek  further  comment  on  a  source  of 
 geocode  customer  locations  that  will  comply  with  the  Commission's  criteria  for  use  in  the  federal 
 mechanism.  In  addition,  we  seek  comment  on  the  availability  for  review  of  the  PNR  geocode 
 data,  including  any  further  measures  necessary  to  ensure  that  the  PNR  geocode  data  are 
 sufficiently  available  for  review  by  the  public. 

 2.  Road  Surrogate  Customer  Locations 
 29.  We  tentatively  conclude  that  the  road  surrogating  algorithm  proposed  by  PNR 
 should  be  used  to  develop  road  surrogate  customer  locations  for  the  federal  universal  service 
 mechanism.  In  the  Platform  Order,  we  concluded  that,  in  the  absence  of  actual  geocode 
 customer  location  data,  BCPM's  rationale  of  associating  road  networks  and  customer  locations 
 provides  the  most  reasonable  approach  for  determining  customer  locations.  75  As  anticipated  in 
 the  Platform  Order,  once  a  source  of  geocode  data  has  been  selected,  the  road  surrogate 
 customer  locations  will  be  used  only  in  the  absence  of  geocode  customer  location  data.  76 

 30.  As  noted  in  the  Platform  Order,  "associating  customers  with  the  distribution  of 
 roads  is  more  likely  to  correlate  to  actual  customer  locations  than  uniformly  distributing 
 customers  throughout  the  Census  Block,  as  HCPM  proposes,  or  uniformly  distributing  customers 
 along  the  Census  Block  boundary,  as  HAI  proposes."  77  We  therefore  concluded  in  the  Platform 
 Order  that  the  selection  of  a  precise  algorithm  for  placing  road  surrogates  should  be  conducted  in 
 the  inputs  stage  of  this  proceeding.  78 

 31.  Currently,  there  are  two  road  surrogating  algorithms  on  the  record  in  this 
 proceeding  -  those  proposed  by  PNR  and  Stopwatch  Maps.  On  March  2,  1998,  the  HAI 
16
 Federal  Communications  Commission  FCC  99-  120 
 79  Letter  from  Michael  Lieberman,  AT&  T,  to  Magalie  Roman  Salas,  FCC,  dated  March  2,  1998  (AT&  T  March 
 2  ex  parte). 

 80  Letter  from  William  M.  Newman,  PNR,  to  Magalie  Roman  Salas,  FCC,  dated  January  27,  1999  (PNR  Jan. 
 27  ex  parte).  PNR  has  made  available  by  mail  to  interested  parties  the  road  surrogate  point  data  for  a  fee  of 
 $25.00,  pursuant  to  the  terms  of  the  Protective  Order. 

 81  Letter  from  Charles  A.  White,  PNR,  to  Magalie  Roman  Salas,  FCC,  dated  February  22,  1999  (PNR  Feb.  22 
 ex  parte). 

 82  PNR  Feb.  22  ex  parte  at  1.  A  road  segment  is  a  length  of  road  between  two  intersections.  The  Census 
 Bureau  classifies  and  numbers  each  of  these  road  segments.  PNR  uses  a  slightly  modified  version  of  the  Census 
 Bureau  road  classifications.  Id.  at  2 

 83  The  PNR  National  Access  Line  Model  is  used  to  determine  the  number  of  residential  and  business  customer 
 locations  in  a  given  wire  center.  See  PNR  Feb.  22  ex  parte  at  1. 

 84  PNR  Feb.  22  ex  parte  at  2. 

 85  PNR  Feb.  22  ex  parte  at  2. 
 86  PNR  Feb.  22  ex  parte  at  2. 

 17 

 proponents  provided  a  description  of  the  road  surrogate  methodology  developed  by  PNR  for 
 locating  customers.  79  On  January  27,  1999,  PNR  made  available  for  review  by  the  Commission 
 and  interested  parties,  pursuant  to  the  terms  of  the  Protective  Order,  the  road  surrogate  point 
 data  for  all  states  except  Alaska,  Iowa,  Virginia,  Puerto  Rico  and  eighty-  four  wire  centers  in 
 various  other  states.  80  On  February  22,  1999,  PNR  filed  a  more  detailed  description  of  its  road 
 surrogate  algorithm.  81 

 32.  In  general,  the  PNR  road  surrogate  algorithm  utilizes  the  Census  Bureau's 
 Topologically  Integrated  Geographic  Encoding  and  Referencing  (TIGER)  files,  which  contain  all 
 the  road  segments  in  the  United  States.  82  For  each  Census  Block,  PNR  determines  how  many 
 customers  and  which  roads  are  located  within  the  Census  Block.  83  For  each  Census  Block,  PNR 
 also  develops  a  list  of  road  segments.  The  total  distance  of  the  road  segments  within  the  Census 
 Block  is  then  computed.  Roads  that  are  located  entirely  within  the  interior  of  the  Census  Block 
 are  given  twice  the  weight  as  roads  on  the  boundary.  This  is  because  customers  are  assumed  to 
 live  on  both  sides  of  a  road  within  the  interior  of  the  Census  Block.  In  addition,  the  PNR 
 algorithm  excludes  certain  road  segments  along  which  customers  are  not  likely  to  reside.  84  For 
 example,  PNR  excludes  highway  access  ramps,  alleys,  and  ferry  crossings.  85  The  total  number  of 
 surrogate  points  is  then  divided  by  the  computed  road  distance  to  determine  the  spacing  between 
 surrogate  points.  Based  on  that  distance,  the  surrogate  customer  locations  are  uniformly 
 distributed  along  the  road  segments.  86 
17
 Federal  Communications  Commission  FCC  99-  120 
 87  See  Letter  from  Pete  Sywenki,  Sprint,  to  Magalie  Roman  Salas,  FCC,  dated  December  11,  1998  (Sprint  Dec. 
 11  ex  parte). 

 88  Platform  Order,  13  FCC  Rcd  at  21341,  para.  41. 

 89  We  also  note  that  PNR  has  made  the  road  surrogate  data  points  available  to  interested  parties  pursuant  to  the 
 provisions  of  the  Protective  Order  in  this  proceeding.  See  PNR  Jan.  27  ex  parte;  PNR  Feb.  9  ex  parte;  PNR  Feb. 
 22  ex  parte. 

 90  See  Letter  from  Chris  Frentrup,  MCI,  to  Magalie  Roman  Salas,  FCC,  dated  February  19,  1999. 

 91  Letter  from  William  M.  Newman,  PNR,  to  Magalie  Roman  Salas,  FCC,  dated  February  9,  1999  (PNR  Feb.  9 
 ex  parte). 

 92  See  PNR  Feb.  9  ex  parte  at  1. 

 18 

 33.  Stopwatch  Maps  has  compiled  road  surrogate  customer  location  files  for  six  states 
 suitable  for  use  in  the  federal  mechanism.  87  We  tentatively  conclude,  however,  that  until  a  more 
 comprehensive  data  set  is  made  available,  the  Stopwatch  data  set  will  not  comply  with  the 
 Universal  Service  Order's  criterion  that  the  underlying  data  are  available  for  review  by  the  public. 
 In  addition,  we  note  that  the  availability  of  only  six  states  is  of  limited  utility  in  a  nationwide 
 model. 

 34.  We  tentatively  conclude  that  the  PNR  road  surrogate  algorithm  is  a  reasonable 
 method  for  locating  customers  in  the  absence  of  actual  geocode  data.  We  note  that  PNR's 
 methodology  of  excluding  certain  road  segments  is  consistent  with  the  Commission's  conclusion 
 in  the  Platform  Order  that  certain  types  of  roads  and  road  segments  should  be  excluded  because 
 they  are  unlikely  to  be  associated  with  customer  locations.  88  In  addition,  we  note  that  PNR's 
 reliance  on  the  Census  Bureau's  TIGER  files  ensures  a  degree  of  reliability  and  availability  for 
 review  of  much  of  the  data  underlying  PNR's  road  surrogate  algorithm,  in  compliance  with 
 criterion  eight  of  the  Universal  Service  Order.  89  We  note  that  the  HAI  proponents  contend  that 
 use  of  a  surrogate  algorithm  may  overstate  the  amount  of  plant  necessary  to  provide  supported 
 services.  90  We  seek  comment  on  the  validity  of  this  contention.  We  also  note  that  PNR  has 
 indicated  that  it  intends  to  finalize  a  number  of  improvements  to  the  road  surrogate  algorithm  and 
 data.  91  For  example,  PNR  states  that  the  new  release  will  incorporate  any  new  input  requirements 
 relating  to  an  authoritative  wire  center  list,  housing  units  versus  households,  and  treatment  of 
 phone  penetration  rates.  In  addition,  the  new  release  will  include  data  for  all  fifty  states, 
 Washington,  D.  C.,  and  Puerto  Rico.  92  We  seek  comment  on  our  tentative  conclusion  to  adopt  the 
 PNR  road  surrogate  algorithm  to  determine  customer  locations,  and  to  adopt  the  PNR  road 
 surrogate  data  set  for  use  in  the  model  beginning  on  January  1,  2000.  We  also  seek  comment  on 
 any  changes  that  should  be  made  to  the  PNR  methodology  to  improve  the  accuracy  of  the 
 customer  locations  it  generates. 
18
 Federal  Communications  Commission  FCC  99-  120 
 93  Universal  Service  Order,  12  FCC  Rcd  at  8915,  para.  250  (criterion  6). 
 94  Inputs  Public  Notice  at  4-  6. 
 95  We  note  that  the  question  of  which  residential  and  business  locations  should  be  included  for  purposes  of 
 estimating  the  forward-  looking  cost  of  providing  the  supported  services  is  distinct  from  the  question  of  which  lines 
 should  be  supported.  See  Universal  Service  Order,  12  FCC  Rcd  at  8829,  paras.  95-  96  (declining  to  adopt  the  Joint 
 Board's  recommendation  to  restrict  universal  service  high  cost  support  to  primary  residential  and  single-  line 
 businesses). 

 96  These  definitions  reflect  the  Census  Bureau's  methodology  for  housing  unit  and  household  estimates.  See 
 http://  www.  census.  gov/  population/  methods/  sthhmet.  txt. 

 97  HAI  Dec.  11,  1997  submission,  Model  Description  at  21.  PNR  has  agreed  to  review  and  explain  the  process 
 used  in  developing  the  National  Access  Line  Model  with  interested  parties,  pursuant  to  the  terms  of  the  Protective 
 Order,  at  its  location  in  Pennsylvania.  See  Letter  from  Charles  A.  White,  PNR,  to  Thomas  Mitchell,  Collier, 
 Shannon,  Rill  &  Scott,  dated  April  29,  1999. 

 19 

 3.  Methodology  for  Estimating  the  Number  of  Customer  Locations 
 35.  In  addition  to  selecting  a  source  of  customer  data,  we  also  must  select  a 
 methodology  for  estimating  the  number  of  customer  locations  within  the  geographic  region  that 
 will  be  used  in  developing  the  customer  location  data.  We  also  must  determine  how  demand  for 
 service  at  each  location  should  be  estimated  and  how  locations  should  be  allocated  to  each  wire 
 center. 

 36.  In  the  Universal  Service  Order,  the  Commission  concluded  that  a  "model  must 
 estimate  the  cost  of  providing  service  for  all  businesses  and  households  within  a  geographic 
 region."  93  In  the  Inputs  Public  Notice,  the  Bureau  sought  comment  on  the  appropriate  method 
 for  defining  "households,"  or  residential  locations,  for  the  purpose  of  calculating  the  forward-looking 
 cost  of  providing  supported  services.  94  Model  proponents  and  interested  parties  have 
 proposed  alternative  methods  to  comply  with  this  requirement.  95 

 37.  The  HAI  sponsors  propose  that  we  use  the  methodology  devised  by  PNR,  which  is 
 based  upon  the  number  of  households  in  each  Census  Block,  while  the  BCPM  sponsors  propose 
 that  we  use  a  methodology  based  upon  the  number  of  housing  units  in  each  Census  Block.  A 
 household  is  an  occupied  residence,  while  housing  units  include  all  residences,  whether  occupied 
 or  not.  96 

 38.  Specifically,  the  HAI  sponsors  advocate  the  use  of  the  PNR  National  Access  Line 
 Model  to  estimate  the  number  of  customer  locations  within  Census  Blocks  and  wire  centers.  97 
 The  PNR  National  Access  Line  Model  uses  a  variety  of  information  sources,  including:  survey 
 information,  the  LERG,  Business  Location  Research  (BLR)  wire  center  boundaries,  Dun  & 
19
 Federal  Communications  Commission  FCC  99-  120 
 98  HAI  Dec.  11,  1997  submission,  Model  Description  at  21. 
 99  Customer  locations  in  unserved  areas,  as  reflected  by  BLR  wire  center  boundaries,  are  not  associated  with 
 particular  wire  centers.  See  Letter  from  Charles  A.  White,  PNR,  to  Magalie  Roman  Salas,  FCC,  dated  April  12, 
 1999. 

 100  BCPM  April  30,  1998  documentation,  Model  Methodology  at  26-  27. 

 101  AT&  T  and  MCI  ex  parte,  Dec.  23,  1997. 

 20 

 Bradstreet's  business  database,  Metromail's  residential  database,  Claritas'  demographic  database, 
 and  U.  S.  Census  estimates.  PNR's  model  uses  these  sources  to  estimate  the  number  of  residential 
 and  business  locations,  and  the  number  of  access  lines  demanded  at  each  location.  The  model 
 makes  these  estimations  for  each  Census  Block,  and  for  each  wire  center  in  the  United  States.  98 

 39.  At  the  conclusion  of  PNR's  process  for  estimating  the  number  of  customer 
 locations:  (1)  PNR's  estimate  of  residential  locations  is  greater  than  or  equal  to  the  Census 
 Bureau's  estimate  of  households,  by  Census  Block  Group,  and  its  estimate  is  disaggregated  to  the 
 Census  Block  level,  (2)  PNR's  estimate  of  demand  for  both  residential  and  business  lines  in  each 
 study  area  is  greater  than  or  equal  to  the  number  of  access  lines  in  the  Automated  Reporting  and 
 Management  Information  System  (ARMIS)  for  that  study  area,  and  the  estimates  are  available  by 
 location  at  the  Block  level,  and  (3)  each  customer  location  is  associated  with  a  particular  wire 
 center.  99 

 40.  The  BCPM  sponsors  rely  on  many  of  the  same  data  sources  as  those  used  in  PNR's 
 National  Access  Line  Model.  For  example,  BCPM  3.1  uses  wire  center  data  obtained  from  BLR 
 and  business  line  data  obtained  from  PNR.  100  In  estimating  the  number  of  residential  locations, 
 however,  the  BCPM  sponsors  use  Census  data  that  include  household  and  housing  unit  counts 
 from  the  1990  Census,  updated  based  upon  1995  Census  statistics  regarding  household  growth  by 
 county.  In  addition,  rather  than  attempting  to  estimate  demand  by  location  at  the  Block  level,  the 
 BCPM  model  builds  two  lines  to  every  residential  location  and  at  least  six  lines  to  every  business. 

 41.  The  synthesis  model  currently  calculates  the  average  cost  per  line  by  dividing  the 
 total  cost  of  serving  customer  locations  by  the  current  number  of  lines.  Because  the  current 
 number  of  lines  is  used  in  this  average  cost  calculation,  the  HAI  sponsors  argue  that  the  total  cost 
 should  be  determined  by  using  the  current  number  of  customer  locations.  The  HAI  sponsors 
 contend  that  "the  key  issue  is  the  consistency  of  the  numerator  and  denominator"  in  the  average 
 cost  calculation.  The  HAI  sponsors  argue  that  other  approaches  are  inconsistent  because  they 
 select  the  highest  possible  cost  numerator  and  divide  by  the  lowest  possible  line  denominator,  and 
 therefore  result  in  larger  than  necessary  support  levels.  101  The  HAI  sponsors  argue  that,  in  order 
 to  be  consistent,  housing  units  must  be  used  in  the  determination  of  total  lines  if  they  are  used  in 
20
 Federal  Communications  Commission  FCC  99-  120 
 102  Letter  from  Chris  Frentrup,  MCI,  to  Magalie  Roman  Salas,  FCC,  dated  March  5,  1999  (MCI  March  5  ex 
 parte). 

 103  MCI  March  5  ex  parte  (Issues  1  and  2). 

 104  See,  e.  g.,  BCPM  Joint  Sponsors  Inputs  Public  Notice  comments  at  7;  GTE  Inputs  Public  Notice  comments 
 at  9;  RUS  Inputs  Public  Notice  comments  at  2. 

 105  BCPM  Joint  Sponsors  Inputs  Public  Notice  comments  at  6-  7. 

 106  See,  e.  g.,  BCPM  Joint  Sponsors  Inputs  Public  Notice  comments  at  7;  GTE  Inputs  Public  Notice  comments 
 at  9;  RUS  Inputs  Public  Notice  comments  at  2. 

 107  See,  e.  g.,  BCPM  Joint  Sponsors  Inputs  Public  Notice  comments  at  7;  GTE  Inputs  Public  Notice  comments 
 at  9;  RUS  Inputs  Public  Notice  comments  at  2. 

 108  See  Appendix  B  for  a  complete  description  of  the  PNR  methodology  for  estimating  the  number  of  customer 
 locations. 

 21 

 the  determination  of  total  costs.  102  The  HAI  sponsors  contend  that  "[  i]  f  used  consistently  in  this 
 manner,  building  to  housing  units  as  GTE  proposes  is  unlikely  to  make  any  difference  in  cost  per 
 line."  103 

 42.  In  contrast,  the  BCPM  sponsors  and  other  commenters  contend  that  the  total  cost 
 should  include  the  cost  of  providing  service  to  all  possible  customer  locations,  even  if  some 
 locations  currently  do  not  receive  service.  104  Furthermore,  the  BCPM  sponsors  contend  that  if 
 total  cost  is  based  on  a  smaller  number  of  locations,  support  will  not  be  sufficient  to  enable 
 carriers  to  meet  their  carrier-  of-  last-  resort  obligations.  The  BCPM  sponsors  also  argue  that 
 basing  the  estimate  of  residential  locations  on  households  instead  of  housing  units  will 
 underestimate  the  cost  of  building  a  network  that  can  provide  universal  service.  105  The  BCPM 
 sponsors,  as  well  as  some  other  commenters,  contend  that  residential  locations  should  be  based  on 
 the  number  of  housing  units  -  whether  occupied  or  unoccupied.  106  These  commenters  contend 
 that  only  this  approach  reflects  the  obligation  to  provide  service  to  any  residence  that  may  request 
 it  in  the  future.  107 

 43.  We  tentatively  conclude  that  PNR's  process  for  estimating  the  number  of  customer 
 locations  should  be  used  for  developing  the  customer  location  data.  We  also  tentatively  conclude 
 that  we  should  use  PNR's  methodology  for  estimating  the  demand  for  service  at  each  location, 
 and  for  allocating  customer  locations  to  wire  centers.  108  We  believe  that  the  PNR  methodology  is 
 a  reasonable  method  for  determining  the  number  of  customer  locations  to  be  served  in  calculating 
 the  cost  of  providing  supported  services.  To  the  extent  that  the  PNR  methodology  includes  the 
 cost  of  providing  service  to  all  currently  served  households,  we  tentatively  conclude  that  this  is 
 consistent  with  a  forward-  looking  cost  model,  which  is  designed  to  estimate  the  cost  of  serving 
 current  demand.  As  noted  by  the  HAI  sponsors,  adopting  housing  units  as  the  standard  would 
21
 Federal  Communications  Commission  FCC  99-  120 
 109  AT&  T  and  MCI  ex  parte,  Dec.  23,  1997. 
 110  After  developing  more  fully  the  record  on  this  issue,  we  will  be  better  able  to  determine  whether  such 
 unserved  areas  should  receive  federal  universal  service  support.  Companion  Order  at  para.  92. 

 22 

 inflate  the  cost  per  line  by  using  the  highest  possible  numerator  (all  occupied  and  unoccupied 
 housing  units)  and  dividing  by  the  lowest  possible  denominator  (the  number  of  customers  with 
 telephones).  109 

 44.  In  addition,  we  do  not  believe  that  including  the  cost  of  providing  service  to  all 
 housing  units  will  promote  universal  service  to  unserved  customers  or  areas.  We  note  that  there 
 is  no  guarantee  that  carriers  would  use  any  support  derived  from  the  cost  of  serving  all  housing 
 units  to  provide  service  to  these  customers.  Many  states  permit  carriers  to  charge  substantial  line 
 extension  or  construction  fees  for  connecting  customers  in  remote  areas  to  their  network.  If  that 
 fee  is  unaffordable  to  a  particular  customer,  raising  the  carrier's  support  level  by  including  the 
 costs  of  serving  that  customer  in  the  model's  calculations  would  have  no  effect  on  whether  the 
 customer  actually  receives  service.  In  fact,  as  long  as  the  customer  remains  unserved,  the  carriers 
 would  receive  a  windfall.  We  recognize  that  serving  unserved  customers  in  such  circumstances  is 
 an  important  universal  service  goal.  As  discussed  in  the  companion  Order  and  Further  Notice 
 adopted  today,  we  will  initiate  a  separate  proceeding  in  July  1999  to  investigate  the  issue  of 
 unserved  areas.  110 

 45.  If  we  were  to  calculate  the  costs  of  a  network  that  would  serve  all  potential 
 customers,  it  would  not  be  consistent  to  calculate  the  cost  per  line  by  using  current  demand.  In 
 other  words,  it  would  not  be  consistent  to  estimate  the  cost  per  line  by  dividing  the  total  cost  of 
 serving  all  potential  customers  by  the  number  of  lines  currently  served.  We  note,  however,  that 
 the  level  and  source  of  future  demand  is  uncertain.  Future  demand  might  include  not  only 
 demand  from  currently  unoccupied  housing  units,  but  also  demand  from  new  housing  units,  or 
 potential  increases  in  demand  from  currently  subscribing  households.  We  also  recognize  that 
 population  or  demographic  changes  may  cause  future  demand  levels  in  some  areas  to  decline. 
 Given  the  uncertainty  of  future  demand,  we  are  concerned  that  including  such  costs  may  not 
 reflect  forward-  looking  costs  and  may  perpetuate  the  system  of  implicit  support. 

 46.  We  recognize,  however,  that  additional  comment  would  be  helpful  with  regard  to 
 certain  issues.  For  example,  if  a  currently  vacant  unit  will  again  receive  service  in  the  near  future, 
 one  might  argue  that  it  should  be  included  in  the  calculation  of  total  cost.  It  is  also  possible  that 
 housing  stock  is  subject  to  a  type  of  churn  that  could  inflate  the  number  of  households  used  in 
 determining  total  cost  without  affecting  the  total  number  of  lines.  That  is,  a  certain  percentage  of 
 housing  units  may  be  repeatedly  vacated  and  then  reoccupied,  with  the  specific  households 
 involved  constantly  changing.  At  any  given  time,  a  certain  number  of  housing  units  might  be 
 unoccupied  as  a  result.  Under  the  Census  definition,  such  units  are  not  considered  households 
22
 Federal  Communications  Commission  FCC  99-  120 
 111  As  explained  in  Appendix  B,  PNR  uses  two  databases,  Metromail  and  Claritas,  to  estimate  the  number  of 
 residential  locations  and  uses  whichever  number  is  greater.  Claritas  uses  updated  Census  estimates  of  the  number 
 of  households,  so  in  cases  where  the  Claritas  number  is  larger,  PNR's  estimate  would  not  include  unoccupied 
 housing  units.  In  cases  where  the  Metromail  number  is  larger,  PNR's  estimate  could  include  unoccupied  housing 
 units,  but  these  housing  units  would  have  an  associated  telephone  number. 

 112  As  explained  in  Appendix  B,  the  Metromail  counts  used  by  PNR  have  an  associated  telephone  number. 
 The  Claritas  household  counts,  on  the  other  hand,  are  not  restricted  to  households  with  telephones. 

 113  See  supra  note  99. 

 114  HAI  Dec.  11,  1997  submission,  Model  Description  at  21. 
 115  See  Sprint  Dec.  11,  1998  ex  parte,  attachment  at  1. 
 116  Letter  from  Charles  A.  White,  PNR,  to  Magalie  Roman  Salas,  FCC,  dated  April  12,  1999. 
 117  Platform  Order,  13  FCC  Rcd  at  21335,  para.  27. 

 23 

 and  therefore  may  not  be  included  in  the  number  of  residential  locations  estimated  by  PNR.  111  We 
 seek  comment  on  whether  the  costs  associated  with  providing  service  to  these  housing  units 
 should  be  included  in  the  total  cost  by  identifying  an  additional  number  of  unoccupied  units.  The 
 PNR  methodology  may  provide  an  estimate  of  the  number  of  residential  locations  that  is  greater 
 than  the  number  that  currently  receive  telephone  service,  however.  112  Therefore  PNR's 
 methodology  may  already  account  for  at  least  some  portion  of  housing  units  subject  to  this  type 
 of  churn.  We  seek  comment  on  this  issue. 

 47.  We  also  note  that  locations  outside  of  existing  wire  centers  will  not  be  included 
 under  the  PNR  methodology.  113  Therefore  the  accuracy  of  the  wire  center  boundaries  is  of 
 importance  in  estimating  the  number  of  customer  locations.  PNR  currently  uses  BLR  wire  center 
 information  to  estimate  wire  center  boundaries.  114  As  noted  above,  the  BCPM  model  also  uses 
 BLR  wire  center  boundaries,  as  does  Stopwatch  Maps  in  its  road  surrogate  customer  location 
 files.  115  PNR  has  indicated  its  intent  to  evaluate  alternative  sources  of  wire  center  boundaries  to 
 be  used  in  the  customer  location  data.  116  We  therefore  seek  comment  on  the  accuracy  of  the  BLR 
 wire  center  boundaries  and  any  possible  alternatives  to  establish  more  accurate  wire  center 
 boundaries. 

 V.  OUTSIDE  PLANT  INPUT  VALUES 
 A.  Background 
 48.  As  the  Commission  noted  in  the  Platform  Order,  outside  plant,  or  loop  plant, 
 constitutes  the  largest  portion  of  total  network  investment,  particularly  in  rural  areas.  117  Outside 
 plant  investment  includes  the  copper  cables  in  the  distribution  plant  and  the  copper  and  optical 
23
 Federal  Communications  Commission  FCC  99-  120 
 118  As  discussed  below,  cable  installation  costs  for  buried  cable  often  are  included  with  the  structure  costs. 
 119  The  phrase  "plant  mix"  refers  to  the  ratio  of  outside  plant  that  is  aerial,  underground,  or  buried  in  a  network 
 or  particular  area. 

 120  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250. 

 121  See  supra  para.  11;  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250. 
 122  Platform  Order,  12  FCC  Rcd  at  21350,  para.  66.  "Instead,  incumbent  LECs'  existing  plant  will  tend  to 
 reflect  choices  made  at  a  time  when  different  technology  options  existed  or  when  the  relative  cost  of  equipment  to 
 labor  may  have  been  different  than  it  is  today."  Id. 

 123  If  we  look  at  current  deployment,  an  incumbent  LEC  may  be  deploying  even  more  fiber  and  DLCs  today 
 than  the  optimizing  routines  in  the  synthesis  model  would  predict.  For  example,  a  LEC  building  a  network  that  is 
 capable  of  delivering  video  and  broadband  services  may  deploy  less  copper  than  the  synthesis  model  would 
 estimate  is  the  optimum  amount  needed  to  provide  the  services  supported  by  the  federal  mechanism. 

 24 

 fiber  cables  in  the  feeder  plant  that  connect  the  customers'  premises  to  the  central  office.  Cable 
 costs  include  the  material  costs  of  the  cable,  as  well  as  the  costs  of  installing  the  cable.  118 

 49.  Outside  plant  consists  of  a  mix  of  aerial,  underground,  and  buried  cable.  119  Aerial 
 cable  is  strung  between  poles  above  ground.  Underground  cable  is  placed  underground  within 
 conduits  for  added  support  and  protection.  Buried  cable  is  placed  underground  but  without  any 
 conduit.  A  significant  portion  of  outside  plant  investment  consists  of  the  poles,  trenches, 
 conduits,  and  other  structure  that  support  or  house  the  copper  and  fiber  cables.  In  some  cases, 
 electric  utilities,  cable  companies,  and  other  telecommunications  providers  share  structure  with 
 the  LEC  and,  therefore,  only  a  portion  of  the  costs  associated  with  that  structure  are  borne  by  the 
 LEC.  Outside  plant  investment  also  includes  the  cost  of  the  SAIs  and  DLCs  that  connect  the 
 feeder  and  distribution  plant. 

 50.  The  Universal  Service  Order's  first  criterion  specifies  that  "[  t]  he  technology 
 assumed  in  the  cost  study  or  model  must  be  the  least-  cost,  most  efficient,  and  reasonable 
 technology  for  providing  the  supported  services  that  is  currently  being  deployed."  120  Thus,  while 
 the  synthesis  model  uses  existing  incumbent  LEC  wire  center  locations  in  designing  outside 
 plant,  121  it  does  not  necessarily  reflect  existing  incumbent  LEC  loop  plant.  Indeed,  as  the 
 Commission  stated  in  the  Platform  Order,  "[  e]  xisting  incumbent  LEC  plant  is  not  likely  to  reflect 
 forward-  looking  technology  or  design  choices."  122  If  the  prices  of  fiber  cable  and  DLCs  have 
 decreased  over  time  relative  to  the  cost  of  copper  cable,  for  example,  the  synthesis  model  would 
 design  outside  plant  with  more  fiber  and  DLCs  and  less  copper  cable  than  has  been  deployed 
 historically  in  an  incumbent  LEC's  network.  123 

 B.  Copper  and  Fiber  Cable 
24
 Federal  Communications  Commission  FCC  99-  120 
 124  1997  Further  Notice,  12  FCC  Rcd  at  18544. 
 125  1997  Further  Notice,  12  FCC  Rcd  at  18544.  The  BCPM  and  HAI  default  values  are  the  default  input  values 
 for  the  user-  adjustable  input  values  in  the  BCPM  and  HAI  models,  respectively.  Although  we  have  chosen  a  model 
 platform  and  therefore  are  no  longer  considering  adoption  of  the  BCPM  and  HAI  models,  we  continue  to  consider 
 the  BCPM  and  HAI  default  input  values  in  this  phase  of  the  proceeding.  For  some  inputs,  these  are  the  only  values 
 on  the  record.  Although  the  BCPM  model  includes  nationwide  default  values,  the  BCPM  sponsors  generally 
 advocate  company-  specific  values  and  in  some  cases  have  proposed  such  values. 

 126  1997  Further  Notice,  12  FCC  Rcd  at  18544. 

 127  1997  Further  Notice,  12  FCC  Rcd  at  18544. 
 128  Inputs  Public  Notice  at  7.  See  David  Gabel  &  Scott  Kennedy,  Estimating  the  Cost  of  Switching  and  Cables 
 Based  on  Publicly  Available  Data  (National  Regulatory  Research  Institute  NRRI  98-  09,  April  1998)  (NRRI 
 Study).  Dr.  Gabel  and  Mr.  Kennedy  are  consultants  for  the  Commission  in  this  proceeding. 

 129  See  Workshop  Public  Notice.  The  December  1,  1998  workshop  addressed  issues  relating  to  switching  and 
 expenses. 

 130  After  numerous  discussions  with  industry  during  development  of  the  survey,  staff  distributed  a  final  version 
 on  December  14,  1998,  and  requested  responses  by  January  14,  1999. 

 25 

 1.  Background 
 51.  In  the  1997  Further  Notice,  the  Commission  sought  comment  on  the  input  values 
 that  the  model  should  use  for  cable  material  and  installation  costs.  124  The  Commission  specifically 
 sought  comment  on  the  accuracy  of  the  default  values  in  the  BCPM  and  HAI  models  and 
 encouraged  companies  to  submit  data  to  support  their  positions.  125  The  Commission  tentatively 
 concluded  that  cable  material  and  installation  costs  should  be  separately  identified  by  both  density 
 zone  and  terrain  type.  126  Because  the  Commission  had  received  no  documentation  confirming  that 
 feeder  and  distribution  cable  installation  costs  should  differ,  the  Commission  tentatively  concluded 
 that  the  federal  mechanism  should  adopt  HAI's  assumption  that  such  costs  are  identical.  127 

 52.  In  the  Inputs  Public  Notice,  the  Bureau  sought  comment  on  the  analysis  of  David 
 Gabel  and  Scott  Kennedy  on  data  from  the  Rural  Utilities  Service  (RUS)  regarding  the  cost  of 
 installing  cables.  128  On  December  11,  1998,  the  Bureau  held  a  public  workshop  designed  to  elicit 
 comment  on  the  input  values  for  materials  costs.  129  At  the  workshop,  Dr.  Gabel  presented  the 
 methodology  used  by  the  Commission  staff  to  derive  preliminary  values  for  cable  costs  based  on 
 his  earlier  analysis  of  the  RUS  data. 

 53.  Commission  staff  sought  to  supplement  the  record  with  respect  to  outside  plant 
 structure  and  cable  costs  by  requesting  additional  data  from  LECs,  including  competitive  LECs.  130 
25
 Federal  Communications  Commission  FCC  99-  120 
 131  BellSouth,  Ameritech,  Pacific  Bell,  Nevada  Bell,  Southwestern  Bell,  Sprint,  GTE,  Aliant,  SNET,  and 
 AT&  T  submitted  data  in  response  to  the  structure  and  cable  cost  survey.  Several  companies  requested  additional 
 time  to  complete  and  submit  their  data.  After  receiving  and  reviewing  the  data,  staff  found  that,  despite  detailed 
 survey  instructions,  further  discussions  with  a  number  of  companies  were  required  before  staff  could  assemble  the 
 data  for  comparison  and  analysis.  In  a  number  of  cases,  respondents  filed  revised  data  or  clarified  the  data  they 
 had  submitted. 

 132  Platform  Order,  13  FCC  Rcd  at  21352-  53,  para.  70. 

 26 

 A  copy  of  the  outside  plant  structure  and  cable  cost  survey  is  attached  in  Appendix  C.  Ten 
 companies  eventually  responded  to  the  voluntary  survey,  somewhat  fewer  than  the  number  that 
 had  indicated  they  would  be  willing  to  provide  data.  131  Because  of  the  delay  in  receiving  the  data 
 and  the  time  necessary  to  review  and  revise  the  data,  staff  has  not  completed  its  analysis  of  the 
 survey  data. 

 2.  Issues  for  Comment 
 54.  We  now  examine  the  inputs  needed  to  determine  outside  plant  cable  costs  in  the 
 synthesis  model.  The  synthesis  model  uses  several  tables  to  calculate  cable  costs,  based  on  the 
 cost  per  foot  of  cable,  which  may  vary  by  cable  size  (i.  e.,  gauge  and  pair  size)  and  the  type  of 
 plant  (i.  e.,  underground,  buried,  or  aerial).  There  are  four  separate  tables  for  copper  distribution 
 and  feeder  cable  of  two  different  gauges,  and  one  table  for  fiber  cable.  The  engineering 
 assumptions  and  optimizing  routines  in  the  model,  in  conjunction  with  the  input  values  in  the 
 tables,  determine  which  type  of  cable  is  used. 

 55.  After  the  synthesis  model  has  grouped  customer  locations  in  clusters,  it 
 determines,  based  on  cost  minimization  and  engineering  considerations,  the  appropriate 
 technology  type  for  the  cluster  and  the  correct  size  of  cables  in  the  distribution  network.  Every 
 customer  location  is  connected  to  the  closest  SAI  by  copper  cable.  The  copper  cable  used  in  the 
 local  loop  typically  is  either  24-  or  26-  gauge  copper.  Twenty-  four  gauge  copper  is  thicker  and 
 therefore  is  expected  to  be  more  expensive  than  26-  gauge  copper.  Twenty-  four  gauge  copper 
 also  can  carry  signals  greater  distances  without  degradation  than  26-  gauge  copper  and,  therefore, 
 is  used  in  longer  loops.  In  the  synthesis  model,  if  the  maximum  distance  from  the  customer  to  the 
 SAI  is  less  than  or  equal  to  the  copper  gauge  crossover  point,  then  26-  gauge  cable  is  used. 
 Feeder  cable  is  either  copper  or  fiber.  Fiber  is  used  for  loops  that  exceed  18,000  feet,  the 
 maximum  copper  loop  length  permitted  in  the  model,  as  determined  in  the  Platform  Order.  132 
 When  fiber  is  more  cost  effective,  the  model  will  use  it  to  replace  copper  for  loops  that  are  shorter 
 than  18,000  feet. 

 a.  Engineering  Assumptions  and  Optimizing  Routines 
 56.  Before  we  consider  our  proposed  input  values  for  cable  costs,  we  discuss  certain 
26
 Federal  Communications  Commission  FCC  99-  120 
 133  The  synthesis  model  always  optimizes  feeder  plant.  See  C.  A.  Bush,  et  al.,  The  Hybrid  Cost  Proxy  Model 
 Customer  Location  and  Loop  Design  Modules,  Dec.  15,  1998  (HCPM  Dec.  15,  1998  documentation)  at  13. 

 134  Id.  at  11. 

 135  Since,  under  full  optimization,  the  model  chooses  the  least  cost  of  the  full  optimization  algorithm  or  the  rule 
 of  thumb  algorithm,  a  comparison  run  as  described  above  can  show  how  well  the  full  optimization  performs  as  a 
 function  of  density. 

 136  See  C.  A.  Bush,  et  al.,  The  Hybrid  Cost  Proxy  Model  Customer  Location  and  Loop  Design  Modules  (Dec.  15, 
 1998)  at  30-  31;  see  also  Design  History  of  HCPM,  April  6,  1999  at  http://  www.  fcc.  gov/  ccb/  apd/  hcpm. 

 27 

 input  values  related  to  the  engineering  assumptions  and  optimizing  routines  in  the  synthesis  model 
 that  affect  outside  plant  costs.  Specifically,  we  must  determine:  (1)  whether  optimization  in  the 
 synthesis  model  should  be  turned  on  or  off;  (2)  whether  the  model  should  use  T-  1  technology;  and 
 (3)  whether  the  model  should  use  rectilinear  or  airline  distances  and  the  value  of  the 
 corresponding  "road  factor." 

 i.  Optimization 
 57.  In  the  synthesis  model,  the  user  has  the  option  of  optimizing  distribution  plant 
 routing  via  a  minimum  cost  spanning  tree  algorithm  discussed  in  the  model  documentation.  133  The 
 algorithm  functions  by  first  calculating  distribution  routing  using  an  engineering  "rule  of  thumb" 
 and  then  comparing  the  cost  with  the  spanning  tree  result,  choosing  the  routing  that  minimizes 
 annualized  cost.  134  The  user  also  has  the  option  of  not  using  the  distribution  optimization  feature, 
 thereby  saving  a  significant  amount  of  computation  time,  but  reporting  network  costs  that  may  be 
 significantly  higher  than  with  the  optimization.  In  addition,  the  user  has  the  option  of  using  the 
 distribution  optimization  feature  only  in  the  lowest  density  zones. 

 58.  We  tentatively  conclude  that  the  synthesis  model  should  be  run  with  the 
 optimization  turned  on  when  the  model  is  used  to  calculate  the  forward  looking  cost  of  providing 
 the  services  supported  by  the  federal  mechanism.  We  point  out  that  the  optimization  approach 
 represents  what  a  network  planning  engineer  would  attempt  to  accomplish  in  developing  a 
 forward-  looking  network.  This  approach  also  complies  with  criterion  one's  requirement  that  the 
 model  must  assume  the  least-  cost,  most  efficient,  and  reasonable  technology  for  providing  the 
 supported  service  that  is  currently  being  deployed.  We  note,  however,  that  the  optimization  can 
 substantially  increase  the  model's  run  time.  Preliminary  staff  analysis  of  comparison  runs  with  full 
 optimization  versus  runs  with  no  optimization  indicate  that,  for  clusters  with  line  density  greater 
 than  500,  the  rule  of  thumb  algorithm  results  in  the  same  or  lower  cost  for  nearly  all  clusters.  135 
 We  seek  comment  on  whether  an  acceptable  compromise  to  full  optimization  would  be  to  set  the 
 optimization  factor  at  "-  p500,"  as  described  in  the  model  documentation.  136  With  this  setting  the 
 model  will  optimize  distribution  plant  whenever  the  density  of  a  cluster  is  less  than  or  equal  to  500 
 lines  per  square  mile.  For  purposes  of  further  analysis  of  the  proposed  input  values,  we  also 
27
 Federal  Communications  Commission  FCC  99-  120 
 137  HCPM  Dec.  15,  1998  documentation  at  10. 
 138  See  Letter  from  Richard  N.  Clarke,  AT&  T,  to  Magalie  Roman  Salas,  dated  March  17,  1999,  at  Attachment 
 A. 

 139  HDSL  (high  data  rate  digital  subscriber  line)  transmits  1.544  Mbps  or  2.048  Mbps  in  bandwidths  ranging 
 from  80  kilohertz  (kHz)  to  240  kHz,  rather  than  in  a  bandwidth  of  1.5  megahertz  (mHz)  required  for  traditional  T-1 
 services.  See  www.  adsl.  com/  general_  tutorial. 

 140  The  HAI  sponsors  provide  default  values  for  T-  1  technology  including  the  cost  of  repeaters  and  remote  T-  1 
 terminals.  See  HAI  Inputs  Portfolio  at  45-  48. 

 28 

 anticipate  that  parties  may  wish  to  run  the  model  without  optimization  turned  on  to  save 
 computing  time.  After  staff  has  completed  its  analysis  of  comparison  runs,  we  intend  to  make 
 available  a  spreadsheet  showing  the  estimated  percentage  change,  for  each  non-  rural  study  area, 
 between  running  the  model  with  the  distribution  optimization  disabled  and  running  the  model  with 
 the  distribution  optimization  enabled. 

 ii.  T-  1  Technology 
 59.  A  user  of  the  synthesis  model  also  has  the  option  of  using  T-  1  technology  as  an 
 alternative  to  copper  feeder  or  fiber  feeder  in  certain  circumstances.  T-  1  is  a  technology  that 
 allows  digital  signals  to  be  transmitted  on  two  pairs  of  copper  wires  at  1.544  Megabits  per  second 
 (Mbps).  If  the  T-  1  option  is  enabled,  the  optimizing  routines  in  the  model  will  choose  the  least 
 cost  feeder  technology  among  three  options:  analog  copper,  T-  1  on  copper,  and  fiber.  137  For 
 serving  clusters  with  loop  distances  below  the  maximum  copper  loop  length,  the  model  could 
 choose  among  all  three  options;  between  18,000  feet  and  the  fiber  crossover  point,  which  earlier 
 versions  of  HCPM  set  at  24,000  feet,  the  model  could  choose  between  fiber  and  T-  1;  and  above 
 the  fiber  crossover  point,  the  model  would  always  use  fiber.  In  the  HAI  model,  T-  1  technology  is 
 used  to  serve  very  small  outlier  clusters  in  locations  where  the  copper  distribution  cable  would 
 exceed  18,000  feet.  The  BCPM  sponsors  and  other  LECs  contend  that  T-  1  is  not  a  forward 
 looking  technology  and,  therefore  should  not  be  used  in  the  synthesis  model.  The  HAI  sponsors 
 contend  that  current  advertisements  show  that  T-  1  is  being  used  currently.  138 

 60.  As  noted,  a  number  of  parties  contend  that  the  T-  1  on  copper  technology  is  not 
 forward  looking.  Other  sources  indicate  that  advanced  technologies,  like  HDSL,  potentially  can 
 be  used  on  T-  1  technology  to  transmit  information  at  T-  1  or  higher  rates.  139  We  seek  comment 
 on  this  issue.  We  also  seek  comment  on  the  extent  to  which  HDSL  technology  presently  is  being 
 used  on  T-  1. 

 61.  The  only  input  values  for  T-  1  costs  on  the  record  in  this  proceeding  are  the  HAI 
 default  values.  140  Because  the  synthesis  model  and  the  HAI  model  use  T-  1  differently,  we 
 tentatively  find  that  the  HAI  default  values  would  not  be  appropriate  for  use  in  the  synthesis 
28
 Federal  Communications  Commission  FCC  99-  120 
 141  In  short,  this  means  that  telephone  plant  will  be  built  on  north-  south  and  east-  west  routes,  rather  than  "as 
 the  crow  flies." 

 142  See  Robert  F.  Love,  James  G.  Morris,  and  George  O.  Wesolowsky,  Facilities  Location:  Models  and 
 Methods,  Chapter  10  (Elsevier  Science  Publishing  Co.  1988)  (Facilities  Location  Models). 

 143  Such  a  road  factor  could  be  calculated  as  follows.  First,  using  the  wire  center  boundaries  from  the  customer 
 location  data,  we  would  determine  which  Census  Blocks  are  contained  within  each  wire  center.  Second,  we  would 
 extract  the  TIGER  files  containing  road  coordinates  and  distances  for  each  of  these  Census  Blocks.  Third,  we 
 would  create  a  database  matching  a  sample  set  of  coordinates  of  road  intersections  within  the  wire  center,  the  road 
 distance  to  an  adjoining  intersection,  and  the  coordinates  of  the  adjoining  intersection.  Using  a  formula  for 
 approximating  airline  distance,  see  Facilities  Locations  Models  at  270,  we  could  create  a  column  containing 
 airline  distances.  Fourth,  we  would  regress  road  distance  on  airline  distance  to  obtain  the  appropriate  road  factor 
 for  the  wire  center. 

 144  See  Facilities  Location  Models,  Chapter  10.  The  authors  find  that  the  goodness-  of-  fit  of  a  model  similar 
 to  airline  distance  is  significantly  better  than  one  incorporating  rectilinear  distance. 

 29 

 model.  In  light  of  the  fact  that  T-  1  may  not  be  a  forward  looking  technology  and  the  lack  of 
 appropriate  input  values,  we  tentatively  conclude  that  we  should  not  use  the  T-  1  option  in  the 
 synthesis  model.  We  seek  comment  on  our  tentative  conclusion.  We  ask  that  parties  who 
 disagree  with  our  tentative  conclusion  and  recommend  that  the  T-  1  function  be  used  in  the 
 synthesis  model  propose  input  values  that  will  accurately  estimate  the  cost  of  this  technology, 
 including  what  values  are  needed  for  the  costs  of  shielded  copper,  repeaters,  and  terminals. 

 iii.  Distance  Calculations  and  Road  Factor 
 62.  We  tentatively  conclude  that  the  synthesis  model  should  use  rectilinear  distance, 
 rather  than  airline  distance,  in  calculating  outside  plant  distances,  141  because  this  more  accurately 
 reflects  the  routing  of  telephone  plant  along  roads  and  other  rights  of  way.  In  fact,  research 
 suggests  that,  on  average,  rectilinear  distance  closely  approximates  road  distances.  142  As  a  result, 
 we  tentatively  conclude  that  the  road  factor  in  the  model,  which  reflects  the  ratio  between  route 
 distance  and  road  distance,  should  be  set  equal  to  1.  We  seek  comment  on  these  tentative 
 conclusions. 

 63.  We  also  note  that  airline  distance  could  be  used  in  the  model,  if  we  were  to  derive 
 accurate  road  factors.  We  seek  comment  on  this  alternative.  Specifically,  we  seek  comment  on 
 whether  we  should  use  airline  miles  with  wire  center  specific  road  factors.  143  Research  has  shown 
 that  the  airline  distance  metric  with  an  appropriate  road  factor  is  more  accurate  than  the  rectilinear 
 metric.  144  We  seek  comment  on  this  alternative  approach. 

 b.  Cost  of  Copper  Cable 
29
 Federal  Communications  Commission  FCC  99-  120 
 145  HAI  Inputs  Portfolio  at  20. 
 146  BCPM  Sept.  24,  1997  comments  at  13.  We  also  note  that  the  BCPM  default  values  now  include  the  same 
 costs  for  feeder  and  distribution  copper  cable. 

 147  The  HAI  sponsors  assert  that  these  costs  include  "engineering,  installation,  and  delivery,  as  well  as  the  cable 
 material  itself."  HAI  Inputs  Portfolio  at  20.  The  BCPM  sponsors  represent  that  their  default  values  for  cable  costs 
 include  the  material  cost,  supply  cost,  taxes,  placing,  splicing,  and  engineering  costs.  BCPM,  Loop  Inputs 
 Documentation  at  15. 

 148  HAI  Inputs  Portfolio  at  23. 

 30 

 i.  Preliminary  Issues 
 64.  The  synthesis  model  uses  tables  that  show  the  cost  per  foot  of  copper  cable,  by 
 pair  size.  In  selecting  input  values  for  the  cost  of  copper  cables,  we  must  first  address  a  number 
 of  preliminary  issues:  the  extent  to  which  24-  and  26-  gauge  copper  cable  should  be  used  in  the 
 synthesis  model;  whether  cable  installation  costs  should  differ  between  feeder  and  distribution 
 cable;  and  whether  cable  installation  costs  should  vary  for  underground,  buried,  and  aerial  cable. 

 65.  Use  of  24-  and  26-  Gauge  Copper.  The  HAI  default  values  assume  that  all  copper 
 cable  below  400  pairs  in  size  is  24-  gauge  and  all  copper  cable  of  400  pairs  and  larger  is  26- 
 gauge.  145  The  BCPM  default  values  include  separate  costs  for  24-  and  26-  gauge  copper  of  all 
 sizes.  We  tentatively  reject  the  HAI  sponsors'  argument  that  26-  gauge  copper  costs  should  be 
 used  for  all  larger  pair  sizes  of  copper  cable.  We  tentatively  conclude  that  the  model  should  use 
 both  24-  gauge  and  26-  gauge  copper  in  all  available  pair-  sizes.  Based  on  a  preliminary  analysis  of 
 the  results  of  the  structure  and  cable  cost  survey,  it  appears  that  a  significant  amount  of  24-  gauge 
 copper  cable  in  larger  pair  sizes  currently  is  being  deployed.  We  seek  comment  on  these  tentative 
 conclusions. 

 66.  Distinguishing  Feeder  and  Distribution  Cable  Costs.  We  reaffirm  the 
 Commission's  tentative  conclusion  in  the  1997  Further  Notice  that  the  same  input  values  should 
 be  used  for  copper  cable  whether  it  is  used  in  feeder  or  in  distribution  plant.  Although  the  BCPM 
 sponsors  previously  disagreed  with  this  tentative  conclusion,  146  they  have  not  provided  persuasive 
 data  for  this  position.  We  seek  comment  on  this  tentative  conclusion. 

 67.  Distinguishing  Underground,  Buried,  and  Aerial  Installation  Costs.  The  HAI  and 
 BCPM  sponsors  both  claim  that  their  proposed  values  for  cable  costs  include  the  cost  of 
 installation.  147  The  BCPM  defaults  provide  separate  cost  estimates  for  aerial,  buried,  and 
 underground  cable.  The  HAI  default  cable  costs  do  not  vary  by  type  of  plant  and,  therefore, 
 appear  to  assume  that  installation  costs  are  the  same  for  aerial,  underground,  and  buried  cable. 
 For  buried  copper  cable,  the  HAI  defaults  include  a  multiplier  to  estimate  the  additional  cost  of 
 the  filling  compound  used  in  buried  cable  to  protect  the  cable  from  moisture.  148  For  underground 
30
 Federal  Communications  Commission  FCC  99-  120 
 149  HAI  Inputs  Portfolio  at  24. 
 150  See  supra  note  128. 
 151  An  earlier  version  of  HCPM  calculated  24-  gauge  copper  cable  by  multiplying  the  values  for  26-  gauge  copper 
 cable  by  1.17.  See  HCPM  Dec.  15,  1998  model  description  at  19. 

 152  Letter  from  Chris  Frentrup,  MCI  Worldcom,  to  Magalie  Roman  Salas,  FCC,  dated  Feb.  9,  1999  (MCI  Feb. 
 9,  1999  ex  parte). 

 31 

 cable,  HAI  adds  a  per  foot  material  cost  for  the  conduit  material.  149 
 68.  We  tentatively  conclude  that  we  should  adopt  separate  input  values  for  the  cost  of 
 aerial,  underground,  and  buried  cable.  Based  on  our  analysis  of  cable  cost  data,  we  have  found 
 considerable  differences  in  the  per  foot  cost  of  cable,  depending  upon  whether  the  cable  was 
 strung  on  poles,  pulled  through  conduit,  or  buried.  We  seek  comment  on  this  tentative 
 conclusion. 

 ii.  Cost  Per  Foot  of  Copper  Cable 
 69.  We  now  turn  to  the  cost  per  foot  of  24-  and  26-  gauge  copper  cable.  Both  the  HAI 
 and  BCPM  sponsors  provide  default  input  values  for  copper  cable  costs  that  are  based  upon  the 
 opinions  of  their  respective  experts,  but  without  data  that  enable  us  to  substantiate  those  opinions. 
 In  addition,  the  Commission  received  cable  cost  data  from  a  number  of  LECs,  including  data 
 received  in  response  to  the  structure  and  cable  cost  survey  developed  by  staff,  which  staff  is 
 continuing  to  analyze,  as  noted  above. 

 70.  At  the  December  11,  1998  workshop,  Commission  staff  described  how  they  had 
 estimated  the  preliminary  copper  cable  costs,  by  pair  size  and  by  plant  type  (i.  e.,  aerial,  buried,  or 
 underground),  that  had  been  posted  on  the  Commission's  Web  site  prior  to  the  workshop.  For 
 copper  cable,  the  staff  estimated  high  and  low  values  for  the  cost  of  the  smallest  pair  size  of  26- 
 gauge  copper  cable  based  on  an  analysis  of  the  HAI  default  values  and  the  values  submitted  by 
 states  filing  cost  models  in  this  proceeding.  These  estimates  were  adjusted  for  larger  pair  sizes  of 
 26-  gauge  cable  and  different  structure  types  using  estimates  in  Gabel  and  Kennedy's  analysis  of 
 RUS  data,  which  was  published  by  the  National  Regulatory  Research  Institute  (NRRI  Study).  150 
 The  cost  of  24-  gauge  copper  cable  was  estimated  by  applying  a  multiplier  to  the  26-  gauge 
 estimates  based  on  the  relative  weight  of  the  copper  in  these  two  gauges.  151 

 71.  While  the  HAI  sponsors  support  using  the  publicly  available  RUS  data  in  the 
 NRRI  Study  to  estimate  cable  costs,  152  Sprint  questions  the  reliability  and  suitability  of  this  data, 
31
 Federal  Communications  Commission  FCC  99-  120 
 153  Letter  from  Pete  Sywenki,  Sprint,  to  Magalie  Roman  Salas,  FCC,  dated  Jan  29,  1999  (Sprint  Jan.  29,  1999 
 ex  parte). 

 154  Sprint  Jan.  29,  1999  ex  parte  at  8-  9. 

 155  See  infra  paras.  85-  86. 
 156  Sprint  Jan.  29  ex  parte,  attachment  at  5. 
 157  Sprint  Jan.  29  ex  parte,  attachment  at  7. 
 158  To  develop  these  estimates,  Gabel  and  Kennedy  first  developed  from  the  raw  data  reflected  on  these 
 contracts  a  data  base  that  contains  outside  plant  structure  and  cable  costs.  The  outside  plant  structure  and  cable 
 cost  data  in  this  data  base  are  derived  from  171  contracts  for  57  companies  in  27  states,  adjusted  to  1997  dollars. 
 NRRI  Study  at  2. 

 32 

 and  urges  us  instead  to  use  the  cable  cost  data  provided  by  incumbent  LECs.  153  As  Sprint  points 
 out,  the  RUS  data  contain  information  from  only  the  two  lowest  density  zones.  154  Because  loops 
 are  longer  in  sparsely  populated  areas,  lower  gauge  copper  often  is  used. 

 72.  We  tentatively  conclude  that  we  should  use,  with  certain  modifications,  the 
 estimates  in  the  NRRI  Study  for  the  per  foot  cost  of  aerial,  underground,  and  buried  24-  gauge 
 copper  cable.  As  described  below,  155  we  also  tentatively  conclude  that  we  should  estimate  the 
 cost  of  26-  gauge  copper  cable  by  adjusting  our  24-  gauge  estimates  with  ratios  derived  from  cost 
 data  submitted  by  several  non-  rural  LECs.  The  proposed  cost  estimates  for  24-  and  26-  gauge 
 aerial,  underground,  and  buried  copper  cable  in  various  pair  sizes  are  shown  in  Appendix  A.  We 
 seek  comment  on  these  tentative  conclusions  and  proposed  values. 

 73.  Although  the  RUS  data  were  collected  from  the  two  lowest  density  zones,  we  note 
 that  none  of  the  models  considered  by  the  Commission  has  the  capability  of  varying  cable  costs  by 
 density  zones.  Nor  have  parties  proposed  cable  cost  values  that  vary  by  density  zone.  We  also 
 believe  that  Sprint  has  mischaracterized  the  analysis  of  the  RUS  data  in  the  NRRI  Study.  For 
 example,  Sprint  challenges  the  validity  of  the  study  because  some  of  the  observations  have  zero 
 values  for  labor  or  material,  while  failing  to  recognize  that  these  values  were  excluded  from  Gabel 
 and  Kennedy's  regression  analysis.  156  Similarly,  Sprint's  complaint  that  Gabel  and  Kennedy  do  not 
 analyze  the  components  of  total  cable  costs,  labor  and  material,  separately  overlooks  that  Gabel 
 and  Kennedy's  regression  analysis  is  designed  to  explain  the  variation  in  total  costs.  157 

 74.  The  NRRI  Study  provides  estimates  for  outside  plant  structure  and  cable  costs 
 using  cost  data  derived  from  construction  contracts  supplied  by  the  RUS  for  a  sample  of 
 companies  that  operate  under  various  soil,  weather,  and  population  density  conditions.  158  In 
 generating  these  estimates,  Gabel  and  Kennedy  used  standard  regression  techniques  to  measure 
32
 Federal  Communications  Commission  FCC  99-  120 
 159  In  these  regression  analyses,  Gabel  and  Kennedy  used  data  from  the  HAI  model  on  line  counts  and  rock, 
 soil,  and  water  conditions  for  the  geographic  region  in  which  each  company  in  the  data  base  operates.  NRRI  Study 
 at  34-  36.  Regression  analysis  is  a  standard  method  used  to  study  the  dependence  of  one  variable,  the  dependent 
 variable,  on  one  or  more  other  variables,  the  explanatory  variables.  It  is  used  to  predict  or  forecast  the  mean  value 
 of  the  dependent  variable  on  the  basis  of  known  or  expected  values  of  the  explanatory  variables.  For  a  discussion 
 of  regression  analysis,  see  William  H.  Greene  (1990),  Econometric  Analysis,  New  York:  MacMillan  Publishing 
 Company. 

 160  Statistical  outliers  are  values  that  are  much  higher  or  lower  than  other  data  in  the  data  set. 

 161  For  the  robust  regression  of  the  pole  cost  equation,  the  value  of  the  F-  statistic  was  not  statistically  significant 
 at  the  five  percent  level. 

 33 

 the  effect  of  geological  and  density  conditions  on  cable  and  structure  costs.  159  In  general,  the 
 econometric  formulations  that  Gable  and  Kennedy  developed  to  estimate  cable  costs  measure  the 
 effect  on  these  costs  of  cable  size  and  the  placement  of  two  or  more  cables  on  the  same  route. 

 75.  We  tentatively  conclude  that  one  substantive  change  should  be  made  to  Gabel  and 
 Kennedy's  analysis.  Gabel  and  Kennedy  used  the  ordinary  least  squares  statistical  technique  to 
 estimate  the  cost  of  structure  and  cables.  The  ordinary  least  squares  technique  fits  a  straight  line 
 to  the  data  by  minimizing  the  sum  of  squared  prediction  errors.  The  ordinary  least  squares 
 technique  is  efficacious,  however,  only  for  a  data  set  lacking  statistical  outliers.  160  Such  outliers 
 have  an  undue  influence  on  regression  results,  since  the  residual  associated  with  each  outlier  is 
 squared  in  calculating  the  regression.  In  order  to  mitigate  the  influence  of  such  outlier  values, 
 statisticians  have  developed  so-  called  robust  regression  techniques  for  estimating  regression 
 equations.  We  tentatively  conclude  that  a  robust  regression  technique  should  be  used  for 
 analyzing  the  RUS  data.  We  seek  comment  on  this  tentative  conclusion. 

 76.  Specifically,  we  tentatively  conclude  that  the  robust  regression  technique  proposed 
 by  Huber  should  be  applied  to  the  RUS  data.  Essentially,  this  algorithm  uses  a  standard  statistical 
 criterion  to  determine  the  most  extreme  outliers,  and  excludes  them.  Thereafter,  as  suggested  by 
 Huber,  it  iteratively  performs  a  regression,  then  for  each  observation  calculates  an  observation 
 weight  based  on  the  absolute  value  of  the  observation  residual.  Finally,  the  procedure  performs  a 
 weighted  least  squares  regression  using  the  calculated  weights.  This  process  is  repeated  until  the 
 values  of  the  weights  effectively  stop  changing.  We  have  used  the  robust  regression  parameter 
 estimates  for  cable,  conduit,  and  buried  structure.  The  use  of  robust  estimation  did  not  improve 
 the  statistical  properties  of  the  estimators  for  pole  costs,  so  we  tentatively  conclude  that  the 
 ordinary  least  squares  technique  is  appropriate  for  pole  costs.  161  We  seek  comment  on  these 
 tentative  conclusions  and  analysis. 

 77.  24-  Gauge  Aerial  Copper  Cable.  We  tentatively  conclude  that  we  should  use  the 
 regression  equation  in  the  NRRI  Study,  as  modified  by  the  Huber  methodology  described  above, 
33
 Federal  Communications  Commission  FCC  99-  120 
 162  This  modified  regression  equation  is  set  forth  in  Appendix  D,  section  I.  A.  The  appendix  also  includes  an 
 example  of  how  we  propose  to  use  this  equation  to  estimate  the  cost  of  24-  gauge  aerial  copper  cable. 

 163  NRRI  Study  at  47. 

 164  NRRI  Study  at  29. 

 34 

 to  estimate  the  cost  of  24-  gauge  aerial  copper  cable,  with  three  adjustments.  162 
 78.  First,  we  propose  to  adjust  the  equation  to  reflect  the  superior  buying  power  that 
 non-  rural  LECs  may  have  in  comparison  to  the  LECs  represented  in  the  RUS  data.  We  seek 
 comment  on  whether  an  adjustment  for  superior  bargaining  power  is  necessary,  and,  if  so,  how 
 such  an  adjustment  should  be  made. 

 79.  Based  on  data  entered  into  the  record  in  a  proceeding  before  the  Maine  Public 
 Utilities  Commission,  Gabel  and  Kennedy  determined  that  Bell  Atlantic's  material  costs  for  aerial 
 copper  cable  are  approximately  15.2  percent  less  than  these  costs  for  the  RUS  companies.  163  We 
 tentatively  conclude  that  this  figure  represents  a  reasonable  estimate  of  the  difference  in  the 
 material  costs  that  non-  rural  LECs  pay  in  comparison  to  those  that  the  RUS  companies  pay.  To 
 reflect  this  degree  of  buying  power  in  the  cable  cost  estimates  that  we  derive  for  non-  rural  LECs, 
 we  propose  to  reduce  the  regression  coefficient  for  the  number  of  copper  pairs  by  15.2  percent 
 for  aerial  copper  cable.  This  coefficient  measures  the  incremental  or  additional  cable  cost 
 associated  with  one  additional  copper  pair  and  therefore  largely  reflects  the  material  cost  of  the 
 cable.  We  seek  comment  on  this  proposed  adjustment.  We  also  invite  parties  to  suggest 
 alternative  methods  for  capturing  the  impact  of  superior  buying  power. 

 80.  Second,  we  propose  to  adjust  the  equation  in  the  NRRI  Study  to  account  for  LEC 
 engineering  costs,  which  were  not  included  in  the  RUS  cable  data.  The  BCM2  default  values 
 include  a  loading  of  five  percent  for  engineering.  The  HAI  sponsors  claim  that  engineering 
 constitutes  approximately  15  percent  of  the  cost  of  installing  outside  plant  cables.  This 
 percentage  includes  both  contractor  engineering  and  LEC  engineering.  The  cost  of  contractor 
 engineering  already  is  reflected  in  the  RUS  cable  cost  data.  Based  on  the  record,  we  tentatively 
 conclude  that  we  should  add  a  loading  of  10  percent  to  the  material  and  labor  cost  of  the  cable 
 (net  of  LEC  engineering  and  splicing  costs)  to  approximate  the  cost  of  LEC  engineering.  We 
 seek  comment  on  this  tentative  conclusion  and  invite  commenters  to  justify  an  alternative  loading 
 factor  for  LEC  engineering. 

 81.  Third,  we  propose  to  adjust  the  equation  to  account  for  splicing  costs,  which  also 
 were  not  included  in  the  RUS  data.  In  the  NRRI  Study,  Gabel  and  Kennedy  determined  that  the 
 ratio  of  splicing  costs  to  copper  cable  costs  (excluding  splicing  and  LEC  engineering  costs)  is  9.4 
 percent  for  RUS  companies.  164  We  tentatively  conclude  that  we  should  adopt  a  loading  of  9.4 
 percent  for  splicing  costs.  We  seek  comment  on  this  tentative  conclusion. 
34
 Federal  Communications  Commission  FCC  99-  120 
 165  See  Appendix  D,  section  I.  B. 
 166  Based  on  data  entered  into  the  record  in  the  aforementioned  proceeding  before  the  Maine  Commission, 
 Gabel  and  Kennedy  determined  that  Bell  Atlantic's  material  costs  for  underground  copper  cable  are  approximately 
 16.3  percent  less  than  these  costs  for  the  RUS  companies.  See  NRRI  Study  at  47. 

 167  See  Appendix  D,  section  I.  C. 

 168  MCI  Feb.  9,  1999  ex  parte. 
 169  Letter  from  Pete  Sywenki,  Sprint,  to  Magalie  Roman  Salas,  FCC,  dated  Feb.  26,  1999  (Sprint  Feb.  26,  1999 
 ex  parte). 

 35 

 82.  24-  Gauge  Underground  Copper  Cable.  We  tentatively  conclude  that  we  should 
 use  the  regression  equation  in  the  NRRI  Study,  as  modified  by  the  Huber  methodology  described 
 above,  to  estimate  the  cost  of  24-  gauge  underground  copper  cable.  We  also  tentatively  conclude 
 that  we  should  use  the  same  three  adjustments  proposed  for  24-  gauge  aerial  copper  cable,  with 
 one  exception.  165  We  tentatively  conclude  that  we  should  reduce  the  regression  coefficient  for  the 
 number  of  copper  pairs  by  16.3  percent,  to  reflect  superior  buying  power,  based  on  the  analysis  in 
 the  NRRI  study.  166  We  seek  comment  on  the  use  of  this  equation  and  the  proposed  adjustments. 

 83.  24-  Gauge  Buried  Copper  Cable.  We  tentatively  conclude  that  it  is  necessary  to 
 modify  the  regression  equation  in  the  NRRI  Study,  as  modified  by  the  Huber  methodology 
 described  above,  to  estimate  the  cost  of  a  24-  gauge  buried  copper  cable,  because  the  equation  in 
 the  study  includes  labor  and  material  costs  for  both  buried  cable  and  structure.  Appendix  D 
 provides  further  detail  on  this  proposed  equation.  167  We  seek  comment  on  this  tentative 
 conclusion  and  proposed  equation. 

 84.  We  propose  to  make  the  same  three  adjustments  to  this  equation  as  we  proposed 
 for  24-  gauge  aerial  and  underground  cables,  with  the  exception  of  the  adjustment  for  superior 
 buying  power.  Because  the  NRRI  Study  does  not  include  a  recommendation  for  such  an 
 adjustment  for  buried  cable,  we  tentatively  conclude  we  should  use  15.2  percent,  which  is  the 
 lower  of  the  reductions  used  for  aerial  and  underground  cable.  We  seek  comment  on  the  use  of 
 these  adjustments  for  24-  gauge  buried  cable. 

 85.  26-  Gauge  Copper  Cable.  Because  the  NRRI  Study  did  not  provide  estimates  for 
 26-  gauge  copper  cable,  we  must  either  use  another  data  source  or  find  a  method  to  derive  these 
 estimates  from  those  for  24-  gauge.  The  HAI  sponsors  support  the  proposal  presented  by 
 Commission  staff  at  the  workshop  to  use  the  relative  weight  of  copper  to  adjust  the  24-  gauge 
 copper  costs  to  derive  26-  gauge  copper  costs,  although  they  would  make  further  adjustments  to 
 reflect  the  cost  of  26-  gauge  copper  for  cable  sizes  of  400  pairs  and  larger.  168  The  BCPM 
 sponsors  challenge  the  assumption  that  the  cost  of  copper  cable  is  closely  tied  to  the  relative 
 weight  of  the  copper  in  the  cable.  169  Both  the  HAI  sponsors  and  the  BCPM  sponsors  argue  that 
35
 Federal  Communications  Commission  FCC  99-  120 
 170  MCI  Feb.  9,  1999  ex  parte  at  6-  7;  Sprint  Feb.  26,  1999  ex  parte,  attachment  at  6. 
 171  We  are  not  able  to  use  the  HAI  default  values  in  addition  to  these  data  to  estimate  these  ratios  because  the 
 HAI  defaults  do  not  have  separate  values  for  26-  gauge  and  24-  gauge  cable  costs  for  each  different  cable  size. 

 172  See  Appendix  D,  sections  I.  D,  E,  F. 

 36 

 the  cost  of  splicing  is  not  directly  a  function  of  investment,  but  rather  is  primarily  a  function  of  the 
 number  of  pairs  to  be  spliced,  and  the  distance  between  splices.  170  Although  they  agree  that 
 splicing  costs  should  be  estimated  using  the  average  cost  per  pair-  foot,  they  disagree  over  what 
 those  costs  should  be. 

 86.  We  tentatively  conclude  that  we  should  derive  cost  estimates  for  26-  gauge  cable 
 by  adjusting  our  estimates  for  24-  gauge  cable.  We  agree  with  the  BCPM  sponsors  that  the  cost 
 of  copper  cable  should  not  be  estimated  based  solely  on  the  relative  weight  of  the  cable.  Instead, 
 we  propose  to  use  the  ordinary  least  squares  regression  technique  to  estimate  the  ratio  of  the  cost 
 of  26-  gauge  to  24-  gauge  cable  for  each  plant  type  (i.  e.,  aerial,  underground,  buried).  We  propose 
 to  estimate  these  ratios  using  data  on  26-  gauge  and  24-  gauge  cable  costs  submitted  by  Aliant  and 
 Sprint  and  the  BCPM  default  values  for  these  costs.  171  While  we  would  prefer  to  develop  these 
 ratios  based  on  data  from  more  than  these  three  sources,  we  tentatively  conclude  that  these  are 
 the  best  data  available  on  the  record  for  this  purpose.  We  seek  comment  on  these  tentative 
 conclusions  and  proposed  analysis,  including  the  regression  techniques  described  in  Appendix 
 D.  172  We  invite  parties  to  propose  alternative  methods  of  deriving  cost  estimates  for  26-  gauge 
 cable. 

 c.  Cost  of  Fiber  Cable 
 87.  In  selecting  input  values  for  fiber  cable  costs,  we  must  determine  values  for  the 
 cost  per  foot  of  fiber  for  various  strand  sizes  for  aerial,  underground,  and  buried  cable.  Both  the 
 HAI  and  BCPM  sponsors  provide  default  input  values  for  fiber  cable  costs  that  are  based  upon 
 the  opinions  of  their  respective  experts,  without  data  enabling  us  to  substantiate  those  opinions. 
 In  addition,  the  Commission  received  cable  cost  data  from  a  number  of  LECs,  including  data 
 received  in  response  to  the  structure  and  cable  cost  survey,  which  staff  is  continuing  to  analyze,  as 
 noted  above. 

 88.  At  the  December  11,  1998  workshop,  Commission  staff  described  how  they  had 
 computed  the  preliminary  fiber  cable  costs,  by  pair  size  and  by  plant  type  (aerial,  buried,  or 
 underground)  that  had  been  posted  on  the  Commission's  Web  site  prior  to  the  workshop.  Using  a 
 methodology  similar  to  the  one  used  for  copper  cable,  staff  estimated  the  cost  of  the  smallest  size 
 fiber  cable  based  on  an  analysis  of  proposed  values  and  used  the  analysis  in  the  NRRI  Study  to 
 derive  costs  for  larger  sizes. 
36
 Federal  Communications  Commission  FCC  99-  120 
 173  This  modified  regression  equation  is  set  forth  in  Appendix  D,  section  II.  A.  The  appendix  also  includes  an 
 example  of  how  we  propose  to  use  this  equation  to  estimate  the  cost  of  aerial  fiber  cable. 

 174  Based  on  data  entered  into  the  record  in  the  aforementioned  proceeding  before  the  Maine  Commission, 
 Gabel  and  Kennedy  determined  that  Bell  Atlantic's  material  costs  for  fiber  cable  are  approximately  33.8  percent 
 less  than  these  costs  for  the  RUS  companies.  See  NRRI  Study  at  47. 

 175  See  supra  para.  80. 

 176  NRRI  Study  at  29. 
 177  See  Appendix  D,  section  II.  B. 

 37 

 89.  We  tentatively  conclude  that  we  should  use  the  RUS  data  and  the  analysis  in  the 
 NRRI  Study,  with  certain  adjustments,  to  estimate  fiber  cable  costs.  For  the  reasons  discussed 
 above  for  copper  cable,  we  also  tentatively  conclude  that  the  cost  of  fiber  cable  will  vary  for 
 aerial,  underground,  and  buried  plant.  We  tentatively  select  the  input  values  for  the  per  foot  cost 
 of  aerial,  underground,  and  fiber  cable  in  various  strand  sizes,  as  shown  in  Appendix  A.  We  seek 
 comment  on  these  tentative  conclusions  and  proposed  values. 

 90.  Aerial  Fiber  Cable.  We  tentatively  conclude  that  we  should  use  the  regression 
 equation  in  the  NRRI  Study,  as  modified  by  the  Huber  methodology  described  above,  to  estimate 
 the  cost  of  aerial  fiber  cable,  with  three  adjustments  similar  to  those  made  for  copper  cable.  173  We 
 seek  comment  on  this  tentative  conclusion. 

 91.  As  noted,  we  propose  three  adjustments  to  the  equation  used  in  the  NRRI  Study 
 to  estimate  the  cost  of  aerial  fiber  cable.  First,  based  on  the  NRRI  Study,  we  propose  to  reduce 
 by  33.8  percent  the  regression  coefficient  for  the  number  of  fiber  strands,  to  reflect  the  superior 
 buying  power  of  non-  rural  LECs.  174  Second,  for  the  reasons  described  earlier,  175  we  tentatively 
 conclude  that  we  should  add  a  loading  of  10  percent  to  the  material  and  labor  cost  of  the  cable 
 (net  of  LEC  engineering  and  splicing  costs)  to  approximate  the  cost  of  LEC  engineering.  Finally, 
 we  tentatively  conclude  that  we  should  add  a  loading  for  splicing  costs  of  4.7  percent  to  the 
 material  and  labor  cost  of  the  cable  (net  of  LEC  engineering  and  splicing  costs),  based  on  the 
 estimates  in  the  NRRI  Study.  176  We  seek  comment  on  these  tentative  conclusions  and  proposed 
 adjustments. 

 92.  Underground  Fiber  Cable.  We  tentatively  conclude  that  we  should  use  the 
 regression  equation  in  the  NRRI  Study,  as  modified  by  the  Huber  methodology  described  above, 
 to  estimate  the  cost  of  underground  fiber  cable,  with  three  adjustments  similar  to  those  made  for 
 aerial  fiber  cable.  177  We  seek  comment  on  this  tentative  conclusion. 

 93.  As  noted,  we  propose  three  adjustments  to  the  NRRI  equation  for  the  cost  of 
 underground  fiber  cable.  First,  based  on  the  NRRI  Study,  we  propose  to  adjust  downward  by 
37
 Federal  Communications  Commission  FCC  99-  120 
 178  See  NRRI  Study  at  47. 
 179  See  supra  para.  80. 
 180  NRRI  Study  at  29. 
 181  See  Appendix  D,  section  II.  C. 
 182  Based  on  data  entered  into  the  record  in  the  aforementioned  proceeding  before  the  Maine  Commission, 
 Gabel  and  Kennedy  determined  that  Bell  Atlantic's  material  costs  for  underground  and  aerial  fiber  cable  are 
 approximately  33.8  and  27.8  percent  lower  than  the  RUS  values.  See  NRRI  Study  at  47.  No  data  are  available  for 
 buried  fiber.  We  tentatively  conclude  that  we  should  use  the  lower  of  these  two  numbers  --  27.8  percent  --  for 
 buried  fiber  cable. 

 183  See  supra  para.  80. 

 184  NRRI  Study  at  29. 

 38 

 27.8  percent  the  regression  coefficient  for  the  number  of  fiber  strands,  to  reflect  the  superior 
 buying  power  of  non-  rural  LECs.  178  Second,  for  the  reasons  described  earlier,  179  we  tentatively 
 conclude  that  we  should  add  a  loading  of  10  percent  to  the  material  and  labor  cost  of  the  cable 
 (net  of  LEC  engineering  and  splicing  costs)  to  approximate  the  cost  of  LEC  engineering.  Finally, 
 we  tentatively  conclude  that  we  should  add  a  loading  for  splicing  costs  of  4.7  percent  to  the 
 material  and  labor  cost  of  the  cable  (net  of  LEC  engineering  and  splicing  costs),  based  on  the 
 estimates  in  the  NRRI  Study.  180  We  seek  comment  on  these  tentative  conclusions  and  proposed 
 adjustments. 

 94.  Buried  Fiber  Cable.  We  tentatively  conclude  that  it  is  necessary  to  modify  the 
 regression  equation  in  the  NRRI  Study,  as  modified  by  the  Huber  methodology  described  above, 
 to  estimate  the  cost  of  a  buried  fiber  cable,  because  the  equation  in  the  study  includes  labor  and 
 material  costs  for  both  buried  fiber  cable  and  structure.  Appendix  D  provides  further  detail  on  the 
 proposed  modifications  to  the  equation  used  in  the  NRRI  Study.  181  We  seek  comment  on  this 
 tentative  conclusion  and  proposed  equation. 

 95.  We  also  propose  three  adjustments  to  the  proposed  equation.  First,  based  on  the 
 NRRI  Study,  we  propose  to  reduce  by  27.8  percent  the  regression  coefficient  for  the  number  of 
 fiber  strands,  to  reflect  the  superior  bargaining  power  of  non-  rural  LECs.  182  Second,  for  the 
 reasons  described  earlier,  183  we  tentatively  conclude  that  we  should  add  a  loading  of  10  percent  to 
 the  material  and  labor  cost  of  the  cable  (net  of  LEC  engineering  and  splicing  costs)  to 
 approximate  the  cost  of  LEC  engineering.  Finally,  we  tentatively  conclude  that  we  should  add  a 
 loading  for  splicing  costs  of  4.7  percent  to  the  material  and  labor  cost  of  the  cable  (net  of  LEC 
 engineering  and  splicing  costs),  based  on  the  estimates  in  the  NRRI  Study.  184  We  seek  comment 
 on  these  tentative  conclusions  and  proposed  adjustments. 
38
 Federal  Communications  Commission  FCC  99-  120 
 185  We  note  that  the  actual  fill  factor  may  be  lower  than  the  fill  factor  used  to  design  the  network  (sometimes 
 referred  to  as  administrative  fill),  because  cable  and  fiber  are  available  only  in  certain  sizes.  For  example,  assume 
 a  neighborhood  with  100  households  has  a  current  demand  of  120  telephones.  Dividing  the  120  pair  demand  by  an 
 80  percent  administrative  fill  factor  establishes  a  need  for  150  pairs.  However,  cable  is  not  sold  in  150  pair  units. 
 The  company  will  purchase  the  smallest  cable  that  is  sufficient  to  provide  150  pairs,  which  is  a  200  pair  cable. 
 The  fill  factor  that  occurs  and  is  measurable,  known  as  the  effective  fill,  will  be  the  number  of  pairs  needed  to  meet 
 demand,  120  pairs,  divided  by  the  number  of  pairs  installed,  200  pair,  or  60  percent. 

 186  As  explained  below,  default  values  in  BCPM  3.1  for  distribution  cable  do  not  vary  by  density  zone. 
 187  HAI  Dec.  11,  1997  submission,  Inputs  Portfolio  at  39,  63. 
 188  BCPM  3.1  May  26,  1998  (Preliminary  Edition)  Loop  Inputs  Documentation  at  51. 

 39 

 c.  Cable  Fill  Factors 
 96.  In  determining  appropriate  cable  sizes,  network  engineers  include  a  certain  amount 
 of  spare  capacity  to  accommodate  administrative  functions,  such  as  testing  and  repair,  and  some 
 expected  amount  of  growth.  The  percentage  of  the  total  usable  capacity  of  cable  that  is  expected 
 to  be  used  to  meet  anticipated  demand  is  referred  to  as  the  cable  fill  factor.  185  If  cable  fill  factors 
 are  set  too  high,  the  cable  will  have  insufficient  capacity  to  accommodate  small  increases  in 
 demand  or  service  outages.  In  contrast,  if  cable  fill  factors  are  set  too  low,  the  network  could 
 have  considerable  excess  capacity  for  many  years.  While  carriers  may  choose  to  build  excess 
 capacity  for  a  variety  of  reasons,  we  must  determine  the  appropriate  cable  fill  factors  to  use  in  the 
 federal  mechanism.  If  the  fill  factors  are  too  low,  the  resulting  excess  capacity  will  increase  the 
 model's  cost  estimates  to  levels  higher  than  an  efficient  firm's  costs,  potentially  resulting  in 
 excessive  universal  service  support  payments. 

 97.  Variance  Among  Density  Zones.  In  general,  both  the  HAI  and  BCPM  sponsors 
 provide  default  fill  factors  for  copper  cable  that  vary  by  density  zone,  and  they  agree  that  fill 
 factors  should  be  lower  in  the  lowest  density  zones.  186  HAI  sponsors  claim  that  an  outside  plant 
 engineer  is  more  interested  in  providing  a  sufficient  number  of  spares  than  in  the  ratio  of  working 
 pairs  to  spares,  so  the  appropriate  fill  factor  will  vary  with  cable  size.  187  For  example,  75  percent 
 fill  in  a  2400  pair  cable  provides  600  spares,  whereas  a  50  percent  fill  in  a  six  pair  cable  provides 
 only  three  spares.  Because  smaller  cables  are  used  in  lower  density  zones,  HAI  recommends  that 
 lower  fill  factors  be  used  in  the  lowest  density  zones  to  ensure  there  will  be  enough  spares 
 available.  The  BCPM  sponsors  claim  that  less  dense  areas  require  lower  fill  ratios  because  the 
 predominant  plant  type  is  buried  and  it  is  costly  to  add  additional  capacity  after  installation.  188  We 
 tentatively  agree  with  the  HAI  and  BCPM  sponsors  that  fill  factors  for  copper  cable  should  be 
 lower  in  the  lowest  density  zones,  which  is  reflected  in  the  fill  factors  that  we  propose  in  this 
 Notice.  We  seek  comment  of  this  tentative  finding. 
39
 Federal  Communications  Commission  FCC  99-  120 
 189  HAI  5.0  default  values  range  from  50  percent  in  the  lowest  density  zone  to  75  percent  in  the  highest  density 
 zone  for  distribution  cable  sizing  fill  factors,  and  range  from  65  percent  in  the  lowest  density  zone  to  75  percent  in 
 the  highest  density  zone  for  copper  feeder  cable  sizing  fill  factors.  HAI  Dec.  11,  1997  submission,  Inputs  Portfolio 
 at  39,  63. 

 190  BCPM  Dec.  11,  1997  submission.  Earlier  versions  of  BCPM,  however,  had  lower  fill  factors  for 
 distribution  than  for  feeder.  See,  e.  g.,  Further  Notice  at  para.  118.  Default  values  in  BCPM  3.1  range  from  75  to 
 85  percent  for  feeder  cable. 

 191  HAI  Dec.  11,  1997  submission,  Inputs  Portfolio  at  39,  63. 

 192  For  example,  in  an  ex  parte  meeting  on  March  24,  1999,  Ameritech  representatives  said  that  Ameritech 
 designs  distribution  plant  to  meet  "ultimate"  demand  and  designs  feeder  plant  that  is  "growable."  See  Letter  from 
 Celia  Nogales,  Ameritech,  to  Magalie  Roman  Salas,  FCC,  dated  March  25,  1999  (Ameritech  March  25  ex  parte). 

 193  Commission  staff  requested  that  the  BCPM  sponsors  make  this  change  from  earlier  versions  of  BCPM  to 
 avoid  double  counting.  That  is,  cable  sizing  in  BCPM  is  a  function  of  both  the  number  of  lines  per  customer 
 location  and  the  fill  factor.  In  HAI,  cable  sizing  is  a  function  of  the  number  of  customer  locations  and  current 
 demand  of  1.2  telephones  per  household. 

 40 

 98.  Distribution  Fill  Factors.  The  fill  factors  proposed  by  the  HAI  sponsors  for 
 distribution  cable  are  somewhat  lower  than  for  copper  feeder  cable.  189  The  BCPM  default  fill 
 factors  for  distribution  cable,  on  the  other  hand,  currently  are  set  at  100  percent  for  all  density 
 zones.  190  This  difference  is  related  to  the  differences  between  certain  assumptions  that  were  made 
 in  the  HAI  and  BCPM  models.  The  HAI  proponents  claim  that  the  level  of  spare  capacity 
 provided  by  their  default  values  is  sufficient  to  meet  current  demand  plus  some  amount  of 
 growth.  191  This  is  consistent  with  the  HAI  model's  approach  of  designing  plant  to  meet  current 
 demand,  which  on  average  is  1.2  lines  per  household.  BCPM,  on  the  other  hand,  designs  outside 
 plant  with  the  assumption  that  every  residential  location  has  two  lines,  which  is  more  than  current 
 demand.  Because  it  is  costly  to  add  distribution  plant  at  a  later  point  in  time,  incumbent  LECs 
 typically  build  enough  distribution  plant  to  meet  not  only  current  demand,  but  also  anticipated 
 future  demand.  192  BCPM  adopts  this  convention.  Setting  the  fill  factor  at  100  percent  in  BCPM 
 offsets  BCPM's  assumption  that  every  household  has  two  lines  and  the  resulting  estimation  of 
 appropriate  cable  sizes  is  sufficient  to  meet  current  demand,  rather  than  long  term  growth.  193 

 99.  In  a  meeting  with  Commission  staff,  Ameritech  raised  the  issue  of  whether 
 industry  practice  is  the  appropriate  guideline  for  determining  fill  factors  to  use  in  estimating  the 
 forward-  looking  economic  cost  of  providing  the  services  supported  by  the  federal  mechanism. 
 Ameritech  claims  that  forward-  looking  fill  factors  should  reflect  enough  capacity  to  provide 
 service  for  new  customers  for  a  few  years  until  new  facilities  are  built,  and  should  account  for  the 
40
 Federal  Communications  Commission  FCC  99-  120 
 194  Ameritech  filed  data,  subject  to  the  protective  order  in  this  proceeding,  showing  how  these  considerations 
 are  used  to  calculate  the  actual  and  forward-  looking  fill  factors  in  Ameritech's  territory.  See  Ameritech  March  25 
 ex  parte. 

 195  We  define  "current  demand"  to  include  a  reasonable  amount  of  excess  capacity  to  accommodate  short  term 
 growth. 

 196  See,  e.  g.,  Ameritech  March  25  ex  parte. 

 197  That  is,  fiber  plant  with  a  100  percent  fill  factor  has  an  actual  utilization  of  50  percent;  whereas  copper  plant 
 with  a  50  percent  fill  factor  has  an  actual  utilization  of  50  percent. 

 41 

 excess  capacity  required  for  maintenance  and  testing,  defective  copper  pairs,  and  churn.  194 
 100.  We  tentatively  conclude  that  the  fill  factors  selected  for  use  in  the  federal 
 mechanism  generally  should  reflect  current  demand,  195  and  not  reflect  the  industry  practice  of 
 building  distribution  plant  to  meet  "ultimate"  demand.  The  fact  that  industry  may  build 
 distribution  plant  sufficient  to  meet  demand  for  ten  or  twenty  years  does  not  necessarily  suggest 
 that  these  costs  should  be  supported  by  universal  service  support  mechanisms.  This  also  appears 
 to  reflect  the  assumptions  underlying  the  HAI  and  BCPM  default  fill  factors.  Because  the 
 synthesis  model  designs  outside  plant  to  meet  current  demand  in  the  same  manner  as  the  HAI 
 model,  we  believe  the  fill  factors  should  be  set  at  less  than  100  percent.  We  tentatively  select  the 
 HAI  defaults  for  distribution  fill  factors  and  tentatively  conclude  that  they  reflect  the  appropriate 
 fill  needed  to  meet  current  demand.  We  seek  comment  on  these  tentative  conclusions. 

 101.  Feeder  Fill  Factors.  In  contrast  to  distribution  plant,  feeder  plant  typically  is 
 designed  to  meet  only  current  and  short  term  capacity  needs.  196  The  BCPM  copper  feeder  default 
 fill  factors  are  slightly  higher  than  HAI's,  but  both  the  HAI  and  BCPM  default  values  appear  to 
 reflect  current  industry  practice  of  sizing  feeder  cable  to  meet  current,  rather  than  long  term, 
 demand.  Because  both  the  HAI  and  BCPM  default  values  assume  that  copper  feeder  fill  reflects 
 current  demand,  we  tentatively  select  copper  feeder  fill  factors  that  are  the  average  of  the  HAI 
 and  BCPM  default  values.  We  seek  comment  on  these  tentative  selections. 

 102.  Fiber  Fill  Factors.  Because  of  differences  in  technology,  fiber  fill  factors  typically 
 are  higher  than  copper  feeder  fill  factors.  Standard  fiber  optic  multiplexers  operate  on  four  fiber 
 strands:  primary  optical  transmit,  primary  optical  receive,  redundant  optical  transmit,  and 
 redundant  optical  receive.  In  determining  appropriate  fiber  cable  sizes,  network  engineers  take 
 into  account  this  100  percent  redundancy  in  determining  whether  excess  capacity  is  needed  that 
 would  warrant  application  of  a  fill  factor.  197  Both  the  HAI  and  BCPM  models  use  the  standard 
 practice  of  providing  100  percent  redundancy  for  fiber  and  set  the  default  fiber  fill  factors  at  100 
 percent.  We  tentatively  conclude  that  the  input  value  for  fiber  fill  in  the  federal  mechanism  should 
 be  100  percent.  We  seek  comment  on  this  tentative  conclusion. 
41
 Federal  Communications  Commission  FCC  99-  120 
 198  1997  Further  Notice,  12  FCC  Rcd  at  18541. 
 199  1997  Further  Notice,  12  FCC  Rcd  at  18541. 
 200  1997  Further  Notice,  12  FCC  Rcd  at  18541. 
 201  1997  Further  Notice,  12  FCC  Rcd  at  18541. 
 202  When  a  plow  is  used  to  place  buried  cable,  a  separate  trench  is  not  required. 

 42 

 C.  Structure  Costs 
 1.  Background 
 103.  In  the  1997  Further  Notice,  the  Commission  sought  comment  and  adopted 
 tentative  findings  and  conclusions  on  issues  relating  to  the  cost  of  outside  plant.  The  Commission 
 directed  the  HAI  and  BCPM  proponents  to  justify  fully  their  default  values  for  their  mix  of  aerial, 
 underground,  and  buried  structure  (i.  e.,  plant  mix)  and  sought  comment  on  the  input  values  that 
 will  accurately  reflect  the  impact  of  varying  terrain  conditions  on  costs.  198  The  Commission  noted 
 that  "recent  installations  of  outside  structure  may  more  closely  meet  forward-  looking  design 
 criteria  than  do  historical  installations."  199  The  Commission  found  that  an  efficient  carrier  will 
 vary  its  plant  mix  according  to  the  population  density  of  an  area  and  tentatively  concluded  that  the 
 assignment  of  plant  mix  defined  by  the  model  should  reflect  both  terrain  factors  and  line  density 
 zones.  200  Because  burying  cable  in  very  rocky  areas  is  costly,  for  example,  the  Commission 
 tentatively  concluded  that  relatively  more  feeder  and  distribution  cable  should  be  assigned  to 
 aerial  installation  for  all  density  zones  in  wire  centers  characterized  as  "hard  rock"  conditions  than 
 in  those  wire  centers  with  other  terrain  conditions.  201 

 104.  Outside  plant  structure  refers  to  the  set  of  facilities  that  support,  house,  guide,  or 
 otherwise  protect  distribution  and  feeder  cable  and  varies  by  plant  mix.  Aerial  structure  consists 
 of  telephone  poles,  and  associated  hardware,  such  as  anchors  and  guys.  Buried  structure  consists 
 of  trenches.  202  Underground  structure  consists  of  trenches  and  conduit,  and  for  feeder  plant, 
 manholes  and  pullboxes.  As  noted,  underground  cable  is  placed  underground  within  conduits  for 
 added  support  and  protection.  Structure  costs  include  the  initial  capital  outlay  for  physical 
 material  associated  with  outside  plant  structure,  including  manholes;  conduit,  trenches,  poles, 
 anchors  and  guys,  and  other  facilities;  the  capitalized  cost  for  supplies,  delivery,  provisioning, 
 right  of  way  fees,  taxes,  and  any  other  capitalized  costs  directly  attributable  to  these  assets;  and 
 the  capitalized  cost  for  the  labor,  engineering,  and  materials  required  to  install  these  assets.  For 
 example,  buried  and  underground  structure  costs  include  capitalized  labor,  engineering,  and 
 material  costs  for  such  activities  as  plowing  or  trenching,  backfilling,  boring  cable,  and  cutting  and 
 restoring  asphalt,  concrete,  or  sod,  or  any  combination  of  such  activities. 
42
 Federal  Communications  Commission  FCC  99-  120 
 203  See  Letter  from  Pete  Sywenki,  Sprint,  to  Magalie  Roman  Salas,  FCC,  dated  June  11,  1998,  attachment; 
 BellSouth  reply  comments  dated  June  12,  1998,  at  2  (arguing  only  state  specific  input  values  are  appropriate); 
 Letter  from  William  W.  Jordan,  BellSouth,  to  Magalie  Roman  Salas,  FCC,  dated  August  7,  1998,  attachment, 
 Responses  to  FCC  Staff  Questions  of  June  25,  1998,  Question  4. 

 204  See  NRRI  Study  at  52,  Table  2-  12.  This  regression  equation  is  set  forth  in  Appendix  D,  section  III.  A. 

 205  See  Appendix  D,  section  III.  A. 
 206  NRRI  Study  at  51,  Table  2-  11. 

 43 

 105.  Both  the  HAI  and  BCPM  sponsors  provide  default  input  values  for  structure  costs 
 that  are  based  upon  the  opinions  of  their  respective  experts,  without  backup  data  that  allows  us  to 
 substantiate  these  values.  Although  BCPM  provides  one  nationwide  set  of  default  values  for 
 structure  costs,  the  BCPM  sponsors  have  argued  that  we  should  use  company-  specific  inputs  and 
 have  proposed  alternative  values  for  company-  specific  structure  costs  in  some  study  areas.  203  In 
 addition,  the  Commission  received  other  structure  cost  data  from  a  number  of  LECs,  including 
 data  received  in  response  to  the  structure  and  cable  cost  survey  developed  by  staff,  which  staff  is 
 continuing  to  analyze,  as  noted  above. 

 2.  Issues  for  Comment 
 106.  The  synthesis  model  uses  structure  cost  tables  that  identify  the  per  foot  cost  of 
 structure  by  type  (aerial,  buried,  or  underground),  loop  segment  (distribution  or  feeder),  and 
 terrain  conditions  (normal,  soft  rock,  or  hard  rock),  for  each  of  the  nine  density  zones.  For  aerial 
 structure,  the  cost  per  foot  that  is  entered  in  the  model  is  calculated  by  dividing  the  total  installed 
 cost  per  telephone  pole  by  the  distance  between  poles.  As  described  below,  we  tentatively 
 conclude  that  we  should  use,  with  certain  modifications,  the  estimates  in  the  NRRI  Study  for  the 
 per  foot  cost  of  aerial,  underground,  and  buried  structure.  In  general,  these  estimates  are  derived 
 from  regression  equations  that  measure  the  effect  on  these  costs  of  density,  water,  soil,  and  rock 
 conditions. 

 a.  Cost  of  Aerial  Structure 
 107.  We  tentatively  conclude  that  we  should  use  the  regression  equation  for  aerial 
 structure  in  the  NRRI  Study  as  a  starting  point.  204  We  propose  to  use  this  equation  to  develop 
 proposed  input  values  for  the  labor  and  material  cost  for  a  40-  foot,  class  four  telephone  pole.  We 
 develop  separate  pole  cost  estimates  for  normal  bedrock,  soft  bedrock,  and  hard  bedrock.  205  The 
 regression  coefficients  estimate  the  combined  cost  of  material  and  supplies.  The  NRRI  Study 
 reports  that  the  average  material  price  for  a  40-  foot,  class  four  pole  is  $213.94.  206  We  note  that 
 this  estimate  is  very  close  to  results  obtained  from  the  data  submitted  in  response  to  the  1997 
 Data  Request.  According  to  the  Commission  staff's  analysis  of  these  data,  the  unweighted 
43
 Federal  Communications  Commission  FCC  99-  120 
 207  This  is  slightly  higher  than  the  HAI  default  value  of  $201.00  for  the  same  height  and  class  pole,  and 
 considerably  less  than  the  BCPM  default  value  of  $368.17 

 208  See  NRRI  Study  at  55,  Table  2-  14. 

 44 

 average  material  cost  of  a  40-  foot,  class  four  pole  is  $213.97,  and  the  weighted  average,  by  line 
 count,  is  $228.22.  207  We  seek  comment  on  this  tentative  conclusion  and  analysis. 

 108.  We  tentatively  conclude  that  we  should  add  to  these  estimates  the  cost  of  anchors, 
 guys,  and  other  materials  that  support  the  poles,  because  the  RUS  data  from  which  this  regression 
 equation  was  derived  do  not  include  these  costs.  In  the  NRRI  Study,  Gabel  and  Kennedy  used 
 the  RUS  data  to  develop  the  following  cost  estimates  for  anchors,  guys  and  other  pole-  related 
 items:  $32.98  in  rural  areas,  $49.96  in  suburban  areas,  and  $60.47  in  urban  areas.  208  We 
 tentatively  conclude  that  these  are  reasonable  estimates  for  the  cost  of  anchors,  guys,  and  other 
 pole-  related  items.  We  seek  comment  on  these  tentative  conclusions  and  proposed  values. 

 109.  We  also  tentatively  add  an  estimate  for  the  cost  of  LEC  engineering,  which  is  not 
 reflected  in  the  data  from  which  Gabel  and  Kennedy  derived  cost  estimates  for  poles  and  anchors, 
 guys,  and  pole-  related  materials.  For  the  reasons  described  above  for  copper  and  fiber  cable,  we 
 tentatively  conclude  that  we  should  add  a  loading  of  10  percent  to  the  material  and  labor  cost  (net 
 of  LEC  engineering)  for  poles,  anchors,  guys,  and  other  pole-  related  items.  We  seek  comment  on 
 these  tentative  conclusions  and  invite  proposals  justifying  an  alternative  loading  factor  for  LEC 
 engineering. 

 110.  In  order  to  obtain  proposed  input  values  that  can  be  used  in  the  model,  we  must 
 convert  the  estimated  pole  costs  into  per  foot  costs  for  each  of  the  nine  density  zones.  For 
 purposes  of  this  computation,  we  propose  to  use  for  density  zones  1  and  2  the  per  pole  cost  that 
 we  have  estimated  for  rural  areas,  based  on  the  NRRI  Study;  for  density  zones  3  through  7  the 
 per  pole  cost  for  suburban  areas;  and  for  density  zones  8  and  9  the  per  pole  cost  for  urban  areas. 
 We  then  divide  the  estimated  cost  of  a  pole  by  the  estimated  distance  between  poles.  We  propose 
 to  use  the  following  values  for  the  distance  between  poles:  250  feet  for  density  zones  1  and  2; 
 200  feet  for  zones  3  and  4;  175  feet  for  zones  5  and  6;  and  150  feet  for  zones  7,  8,  and  9.  For  the 
 most  part,  these  values  are  consistent  with  both  the  HAI  and  BCPM  defaults.  We  seek  comment 
 on  these  proposals. 

 b.  Cost  of  Underground  Structure 
 111.  We  tentatively  conclude  that  we  should  adopt  a  similar  methodology  to  estimate 
 the  cost  of  underground  structure,  as  we  proposed  for  the  cost  of  aerial  structure.  We  tentatively 
 conclude  that  we  should  use  the  equation  set  forth  in  the  appendix  as  a  starting  point  for  this 
44
 Federal  Communications  Commission  FCC  99-  120 
 209  See  Appendix  D,  section  III.  B.  This  regression  equation  is  based  on  the  RUS  data,  but  was  developed  after 
 the  publication  of  that  report.  The  NRRI  Study  does  not  set  forth  a  regression  equation  for  estimating  the  cost  of 
 underground  structure. 

 210  This  regression  equation  was  developed  using  underground  cost  data  for  density  zones  1  and  2.  The 
 variable  in  this  equation  that  represents  the  density  zone  of  the  geographic  area  in  which  the  underground  costs  are 
 incurred  is  not  statistically  significant  at  any  standard  level  of  significance. 

 211  We  propose  to  use  this  same  extrapolation  method  for  both  underground  and  buried  structure. 

 212  As  noted,  staff  is  continuing  to  analyze  the  data  received  in  response  to  the  survey  on  cable  costs  and 
 structure. 

 213  See  Appendix  D,  section  III.  B. 

 214  This  equation  is  set  forth  in  Appendix  D,  section  III.  C. 

 45 

 estimate.  209  We  propose  to  use  this  equation  to  develop  proposed  input  values  for  the  labor  and 
 material  cost  for  underground  cable  structure.  We  develop  separate  cost  estimates  for 
 underground  structure  in  normal  bedrock,  soft  bedrock,  and  hard  bedrock  for  density  zones  1  and 
 2.  210  As  we  did  for  aerial  structure,  we  tentatively  conclude  that  we  should  add  a  loading  factor 
 of  10  percent  for  LEC  engineering.  We  seek  comment  on  these  tentative  conclusions. 

 112.  We  are  able  to  develop  directly  from  the  regression  equation  cost  estimates  for 
 underground  structure  only  in  density  zones  1  and  2,  because  the  RUS  data  is  from  companies 
 that  operate  only  in  those  density  zones.  We  tentatively  conclude  that  we  should  derive  cost 
 estimates  for  density  zones  3  through  9  by  extrapolating  from  the  estimates  for  density  zone  2. 
 We  further  tentatively  conclude  that  we  should  perform  such  extrapolation  based  on  the  growth 
 rate  between  density  zones  in  the  BCPM  and  HAI  default  values  for  underground  and  buried 
 structure.  211  Although  we  would  prefer  to  rely  on  data  specific  to  the  density  zone,  rather  than 
 extrapolated,  we  tentatively  conclude  that,  based  on  our  current  analysis,  this  is  the  best  data 
 currently  available  for  this  purpose.  212  We  seek  comment  on  these  tentative  conclusions.  In 
 Appendix  D,  we  describe  the  proposed  method  of  extrapolation.  213  We  seek  comment  on  this 
 proposed  method  and  invite  parties  to  suggest  alternative  methods  for  estimating  costs  in  density 
 zones  3  through  9. 

 c.  Cost  of  Buried  Structure 
 113.  We  tentatively  conclude  that  we  should  use  the  modified  equation  for  estimating 
 the  cost  of  24-  gauge  buried  copper  cable  and  structure  to  estimate  the  cost  of  buried  structure.  214 
 It  is  necessary  to  modify  this  equation  because  estimates  derived  from  it  include  labor  and  material 
 costs  for  both  buried  cable  and  structure.  Appendix  D  provides  further  detail  on  the  modified 
45
 Federal  Communications  Commission  FCC  99-  120 
 215  See  Appendix  D,  section  III.  C. 
 216  This  extrapolation  method  is  described  in  Appendix  D,  section  III.  B. 
 217  BCPM,  Loop  Inputs  Documentation  at  49,  54. 
 218  HAI  Inputs  Portfolio  at  37.  The  HAI  sponsors  quote  a  1994  edition  of  Bellcore's  BOC  Notes  on  the  LEC 
 Networks:  "The  most  common  cable  structure  is  still  the  pole  line.  Buried  cable  is  now  used  whenever  feasible,  but 

 46 

 equation.  215  We  seek  comment  on  this  tentative  conclusion. 
 114.  For  the  reasons  described  above,  we  tentatively  conclude  that  we  should  add  a 
 loading  of  10  percent  for  LEC  engineering  to  the  estimates  generated  by  the  modified  equation. 
 We  seek  comment  on  this  tentative  conclusion. 

 115.  We  are  able  to  develop  directly  from  the  regression  equation  cost  estimates  for 
 buried  structure  only  in  density  zones  1  and  2,  because  the  RUS  data  is  from  companies  that 
 operate  only  in  those  density  zones.  We  tentatively  conclude  that  we  should  derive  cost  estimates 
 for  density  zones  3  through  9  by  extrapolating  from  the  estimates  for  density  zone  2.  We  further 
 tentatively  conclude  that  we  should  perform  such  extrapolation  based  on  the  same  method 
 proposed  for  estimating  the  cost  of  underground  structure.  We  seek  comment  on  these  tentative 
 conclusions.  216 

 d.  Plant  Mix 
 116.  As  discussed  above,  we  have  tentatively  selected  input  values  for  the  costs  of  cable 
 and  outside  plant  structure  that  differ  for  aerial,  buried,  and  underground  cable  and  structure. 
 Because  these  cost  differences  can  be  significant,  the  relative  amount  of  plant  type  in  any  given 
 area,  i.  e.,  the  plant  mix,  plays  a  significant  part  in  determining  total  outside  plant  investment.  The 
 synthesis  model  provides  three  separate  plant  mix  tables,  for  distribution,  copper  feeder,  and  fiber 
 feeder,  which  can  accept  different  percentages  for  each  of  the  nine  density  zones.  Although  we 
 tentatively  propose  using  nationwide  input  values  for  plant  mix,  as  we  have  for  other  input  values, 
 we  seek  comment  on  an  alternative  to  nationwide  plant  mix  input  values,  as  discussed  below. 

 117.  The  BCPM  sponsors  claim  that  in  low  densities  there  generally  is  a  greater 
 percentage  of  buried  plant  than  underground  plant,  and  conversely,  in  higher  densities  there  is 
 more  underground  than  buried  plant.  217  The  BCPM  default  plant  mix  values  reflect  these 
 assumptions.  Although  the  HAI  default  plant  mix  values  for  feeder  plant  also  reflect  these 
 assumptions,  HAI's  assumptions  with  respect  to  distribution  plant  mix  are  quite  different  than 
 BCPM's,  as  discussed  below.  The  HAI  sponsors  suggest  that  aerial  plant  is  still  the  most 
 prevalent  plant  type,  but  claim  that  their  default  plant  mix  values  reflect  an  increasing  trend 
 toward  the  use  of  buried  cable  in  new  subdivisions.  218  The  HAI  default  values  generally  assume 
46
 Federal  Communications  Commission  FCC  99-  120 
 pole  lines  remain  an  important  structure  in  today's  environment." 
 219  In  the  four  lowest  density  zones,  the  HAI  defaults  assume  slightly  less  aerial  fiber  feeder  than  the  BCPM 
 defaults,  but  in  all  other  cases,  assume  more  aerial  plant  than  BCPM.  In  addition,  the  HAI  model  provides  that  a 
 certain  percentage  of  buried  plant  can  be  shifted  to  aerial  (and  vice  versa)  based  on  certain  cost  minimization 
 routines. 

 220  HAI  Inputs  Portfolio  at  36. 

 47 

 that  there  is  more  aerial  plant  than  the  BCPM  default  values.  219  The  BCPM  defaults  have  separate 
 values  for  plant  mix  in  hard  rock  terrain,  which  generally  assume  there  is  slightly  more  aerial  and 
 less  buried  plant  than  the  normal  and  soft  rock  terrain  defaults. 

 118.  Distribution  Plant.  The  BCPM  default  values  for  distribution  plant  assume  that 
 there  is  no  underground  plant  in  the  lowest  density  zone  and  the  percentage  increases  with  each 
 density  zone  to  90  percent  underground  distribution  plant  in  the  highest  density  zone.  In  contrast, 
 the  HAI  default  values  for  distribution  plant  mix  place  no  underground  structure  in  the  six  lowest 
 density  zones  and  assume  that  only  10  percent  of  the  structure  in  the  highest  density  zone  is 
 underground.  220  The  BCPM  default  values  assume  there  is  no  aerial  plant  in  the  highest  density 
 zone  in  normal  and  soft  rock  terrain,  and  10  percent  aerial  plant  in  hard  rock  terrain.  In  contrast, 
 the  HAI  default  values  assume  that  there  is  significantly  more  aerial  cable,  85  percent,  in  the 
 highest  density  zone,  but  notes  that  this  includes  riser  cable  within  multi-  story  buildings  and 
 "block  cable"  attached  to  buildings,  rather  than  to  poles. 

 119.  We  tentatively  select  input  values  for  distribution  plant  mix  that  more  closely 
 reflect  the  assumptions  underlying  BCPM's  default  values  than  HAI's  default  values  for  several 
 reasons.  The  synthesis  model  does  not  design  outside  plant  that  contains  either  riser  cable  or 
 block  cable,  so  we  do  not  believe  it  would  be  appropriate  to  assume  that  there  is  as  high  a 
 percentage  of  aerial  plant  in  densely  populated  areas  as  the  HAI  default  values  assume.  Although 
 our  proposed  plant  mix  values  assume  somewhat  less  underground  structure  in  the  lower  density 
 zones  than  the  BCPM  default  values,  we  disagree  with  HAI's  assumption  that  there  is  very  little 
 underground  distribution  plant  and  none  in  the  six  lowest  density  zones.  We  tentatively  select  the 
 distribution  plant  mix  values  set  forth  in  Appendix  A,  and  seek  comment  on  our  tentative 
 conclusions.  We  tentatively  propose  input  values,  for  the  lowest  to  the  highest  density  zones,  that 
 range  from  zero  percent  to  90  percent  for  underground  plant;  60  to  zero  percent  for  buried  plant; 
 and  40  to  ten  percent  for  aerial  plant. 

 120.  Feeder  Plant.  The  default  plant  mix  percentages  for  feeder  plant  are  generally 
 similar  in  the  BCPM  and  the  HAI  models.  Although  the  BCPM  default  values  vary  between 
 normal  or  soft  rock  terrain  and  hard  rock  terrain,  as  noted  above,  and  the  HAI  default  values 
47
 Federal  Communications  Commission  FCC  99-  120 
 221  The  BCPM  default  values  for  copper  and  fiber  feeder  are  the  same. 
 222  HAI  default  values  assume  five  percent  underground  feeder  plant  in  the  lowest  density  zone  for  both  copper 
 feeder  and  fiber.  BCPM  default  values  assume  ten  percent  underground  copper  and  fiber  feeder  in  normal  and  soft 
 rock  terrain  and  five  percent  in  hard  rock  terrain. 

 223  For  aerial  plant,  in  the  lowest  to  the  highest  density  zones,  the  BCPM  defaults  range  from  40  to  zero  percent 
 for  normal  and  soft  rock  terrain,  and  from  50  to  five  percent  for  hard  rock  terrain;  and  the  HAI  defaults  range  from 
 50  to  five  percent  for  aerial  copper  feeder  and  35  to  five  percent  for  fiber  feeder.  For  buried  plant,  in  the  lowest  to 
 the  highest  density  zones,  the  BCPM  defaults  range  from  50  to  zero  percent  for  normal  and  soft  rock  terrain,  and 
 from  45  to  zero  percent  for  hard  rock  terrain;  and  the  HAI  defaults  range  from  45  to  five  percent  for  buried  copper 
 feeder  and  60  to  five  percent  for  fiber  feeder. 

 224  The  survey  is  described  above.  See  supra  para.  53;  see  also  App.  C. 

 48 

 differ  between  copper  and  fiber  feeder,  the  plant  mix  ratios  across  density  zones  are  similar.  221 
 For  example,  both  the  BCPM  default  values  and  the  HAI  default  values  assume  that  there  is  only 
 five  or  ten  percent  of  underground  feeder  plant  in  the  lowest  density  zone.  222  The  HAI  defaults 
 assume  there  is  somewhat  more  aerial  feeder  cable  than  the  BCPM  defaults,  except  for  fiber 
 feeder  cable  in  the  four  lowest  density  zones.  The  BCPM  defaults  assume  there  is  no  aerial  feeder 
 plant  in  the  three  highest  density  zones,  except  in  hard  rock  terrain.  Despite  these  differences,  the 
 relative  amounts  of  aerial  and  buried  plant  across  density  zones  are  generally  similar.  223 

 121.  We  tentatively  select  input  values  for  feeder  plant  mix,  set  forth  in  Appendix  A, 
 that  generally  reflect  the  assumptions  underlying  the  BCPM  and  HAI  default  plant  mix 
 percentages,  with  certain  modifications.  We  tentatively  propose  input  values,  for  the  lowest  to 
 the  highest  density  zones,  that  range  from  five  percent  to  95  percent  for  underground  plant;  50  to 
 zero  percent  for  buried  plant;  and  45  to  five  percent  for  aerial  plant.  Based  on  the  Commission 
 staff's  preliminary  review  of  the  structure  and  cable  survey  data,  224  the  proposed  values,  unlike  the 
 HAI  and  the  BCPM  (for  normal  and  soft  rock)  default  values,  assume  that  there  is  no  buried  plant 
 in  the  highest  density  zone.  In  contrast  to  the  BCPM  defaults,  the  proposed  values  assume  there 
 is  some  aerial  plant  in  the  three  highest  density  zones.  We  tentatively  find  that  it  is  reasonable  to 
 assume  that  there  is  some  aerial  feeder  plant  in  all  density  zones,  as  HAI  does,  particularly  in  light 
 of  our  assumption  that  there  is  no  buried  feeder  in  the  highest  density  zone,  where  aerial 
 placement  would  be  the  only  alternative  to  underground  plant.  Although  the  HAI  sponsors  have 
 proposed  plant  mix  values  that  vary  between  copper  feeder  and  fiber  feeder,  they  have  offered  no 
 convincing  rationale  for  doing  so.  We  tentatively  conclude  that,  like  the  BCPM  defaults,  our 
 proposed  plant  mix  ratios  should  not  vary  between  copper  feeder  and  fiber  feeder.  We  seek 
 comment  on  our  tentative  conclusions. 

 122.  Alternatives  to  Nationwide  Plant  Mix  Values.  In  the  1997  Further  Notice,  the 
 Commission  tentatively  concluded  that  plant  mix  ratios  should  vary  with  terrain  as  well  as  density 
 zones.  Because  the  synthesis  model  does  not  provide  separate  plant  mix  tables  for  different 
48
 Federal  Communications  Commission  FCC  99-  120 
 225  As  noted  above,  although  the  BCPM  sponsors  have  provided  nationwide  default  values,  they  generally 
 advocate  company  specific  input  values. 

 226  Structure  distance,  also  known  as  route  distance,  measures  the  distance  of  the  pole  line  or  the  trench. 
 Sheath  distance  measures  cable  distance.  If  there  is  only  one  cable  along  a  particular  route  then  structure  distance 
 and  sheath  distance  are  equal.  When,  however,  there  is  more  than  one  cable  along  a  route,  sheath  distance  will  be 
 a  multiple  of  the  structure  distance. 

 49 

 terrain  conditions,  the  proposed  nationwide  plant  mix  values  do  not  vary  by  terrain.  One  method 
 of  varying  plant  mix  by  terrain  would  be  to  add  separate  plant  mix  tables,  as  there  are  in  BCPM, 
 to  the  synthesis  model.  We  observe  that,  while  the  BCPM  model  provides  separate  plant  mix 
 tables,  the  BCPM  default  values  reflect  only  slightly  more  aerial  and  less  buried  plant  in  hard  rock 
 terrain  than  in  normal  and  soft  rock  terrain.  Another  method  of  varying  plant  mix  would  be  to  use 
 company  specific  or  state  specific  input  values  for  plant  mix  as  advocated  by  the  BCPM  sponsors 
 and  other  LECs.  225 

 123.  We  generally  have  chosen  not  to  use  study  area  specific  input  values  in  the  federal 
 mechanism,  and  recognize  that  historical  plant  mix  ratios  may  not  reflect  an  efficient  carrier's  plant 
 type  choice  today.  On  the  other  hand,  historical  plant  mix  also  may  reflect  terrain  conditions  that 
 will  not  change  over  time.  For  example,  because  it  is  costly  to  bury  cable  in  hard  rock,  a  carrier 
 serving  a  very  rocky  area  would  tend  to  use  more  aerial  than  buried  plant.  The  Commission  staff's 
 analysis  of  current  ARMIS  data  reveals  a  great  deal  of  variability  in  plant  mix  ratios  among  the 
 states.  In  certain  state  proceedings,  U  S  West  has  proposed  an  algorithm  for  adjusting  plant  mix 
 to  reflect  its  actual  sheath  miles  as  reported  in  ARMIS.  We  seek  comment  on  a  modified  version 
 of  this  algorithm  as  an  alternative  method  of  determining  plant  mix  percentages. 

 124.  The  proposed  algorithm  uses  ARMIS  43-  08  data  on  buried  and  aerial  sheath 
 distances  and  trench  distances  to  allocate  model  determined  structure  distance  between  aerial, 
 buried,  and  underground  structures.  226  The  first  step  is  to  set  the  underground  structure  distance 
 equal  to  the  ARMIS  trench  distance  and  to  allocate  that  distance  among  the  density  zones  on  the 
 basis  of  the  nationwide  plant  mix  defaults.  Then  an  initial  estimate  of  aerial  plant  is  calculated  as 
 the  sum  of  the  synthesis  model  structure  distances  by  density  zone  multiplied  by  the  nationwide 
 aerial  plant  mix  defaults.  A  second  estimate  of  aerial  plant  is  calculated  by  multiplying  structure 
 distance  less  trench  miles  by  the  aerial  percentage  of  total  ARMIS  sheath  miles.  Then  an 
 adjustment  ratio  is  calculated  by  dividing  the  second  estimate  by  the  initial  estimate.  This 
 adjustment  ratio  is  then  applied  to  each  density  zone  to  adjust  the  nationwide  default  so  that  the 
 final  synthesis  model  plant  mix  reflects  the  study  area  specific  plant  mix.  The  buried  plant  mix 
 percentage  is  determined  as  a  residual  equal  to  one  minus  sum  of  the  underground  and  aerial 
 percentages.  We  seek  comment  on  this  alternative  to  nationwide  plant  mix  values.  We  also  invite 
 parties  to  suggest  other  alternatives  to  determine  plant  mix  in  the  synthesis  model. 

 125.  We  also  seek  comment  on  whether  we  should  allow  the  synthesis  model  to  choose 
49
 Federal  Communications  Commission  FCC  99-  120 
 227  1997  Further  Notice,  12  FCC  Rcd  at  18547,  para.  80. 
 228  1997  Further  Notice,  12  FCC  Rcd  at  18548,  para.  81. 
 229  See  AT&  T/  MCI  Sept.  24  comments  at  12-  13;  Florida  PSC  Sept.  24  comments  at  6-  7;  GTE  Sept.  24 
 comments  at  9. 

 230  1997  Further  Notice,  12  FCC  Rcd  at  18548,  para.  82. 

 231  See,  e.  g.,  AT&  T/  MCI  Sept.  24  comments;  Bell  Atlantic  Sept.  24  comments;  GTE  Sept.  24  comments. 

 50 

 the  plant  mix  on  the  basis  of  minimum  annual  cost.  We  note  that  this  optimization  would  be 
 constrained  to  reflect  the  embedded  underground  plant  percentage,  because  underground  plant  is 
 typically  deployed  in  relatively  dense  areas  for  reasons  of  public  safety.  Embedded  percentages  of 
 aerial  and  buried  plant,  on  the  other  hand,  may  reflect  zoning  ordinances  but  we  note  that  these 
 ordinances  in  turn  may  reflect  purely  aesthetic  concerns  rather  than  public  safety.  If  we  were  to 
 determine  that  we  should  use  study  area  specific  plant  mix  input  values,  we  seek  comment  on 
 whether  the  synthesis  model  should  be  permitted  to  use  its  optimization  feature  for  percentages  of 
 aerial  and  buried  plant. 

 D.  Structure  Sharing 
 1.  Background 
 126.  Outside  plant  structures  are  generally  shared  by  LECs,  cable  operators,  electric 
 utilities,  and  others,  including  competitive  access  providers  and  interexchange  carriers.  To  the 
 extent  that  several  utilities  may  place  cables  in  common  trenches,  or  on  common  poles,  it  is 
 appropriate  to  share  the  costs  of  these  structures  among  the  various  users  and  assign  a  portion  of 
 the  cost  of  these  structures  to  the  LEC. 

 127.  In  the  1997  Further  Notice,  the  Commission  tentatively  concluded  that  100 
 percent  of  the  cost  of  cable  buried  with  a  cable  plow  should  be  assigned  to  the  telephone 
 company.  227  In  addition,  the  Commission  also  tentatively  concluded  that  Sprint's  suggested  value 
 of  66  percent  is  an  acceptable  aggregate  default  input  value  for  the  percent  of  costs  assigned  to 
 the  LEC  for  all  other  shared  facilities.  228  Several  commenters  disagreed  with  these  tentative 
 conclusions.  229  The  Commission  also  sought  comment  on  AT&  T's  contention  that  changes  to  the 
 regulatory  climate  will  increase  the  extent  to  which  carriers  are  required  or  willing  to  share 
 structures.  230 

 128.  Several  comments  relating  to  structure  sharing  values  were  filed  in  response  to  the 
 1997  Further  Notice.  231  Both  the  BCPM  and  HAI  models  vary  the  percentage  of  costs  they 
 assume  will  be  shared  depending  on  the  type  of  structure  (aerial,  buried,  or  underground)  and  line 
50
 Federal  Communications  Commission  FCC  99-  120 
 232  See  HAI  Dec.  11,  1997  submission,  App.  B  at  57;  BCPM  Jan.  31,  1997  submission,  Att.  9.  The  BCPM 
 sponsors  assume  that  an  efficient  telephone  company  will  benefit  only  marginally  from  sharing.  The  HAI  sponsors 
 assume  that  utilities  will  engage  in  substantial  sharing  with  telephone  companies,  and  generally  assigns  between 
 25%  and  50%  of  the  cost  of  shared  facilities  to  the  LEC. 

 233  See  Appendix  A  for  a  complete  list  of  the  input  values  that  we  tentatively  adopt  in  this  Further  Notice. 

 234  See,  e.  g.,  HAI  Dec.  11,  1997  submission,  App.  B  at  57;  BCPM  Jan.  31,  1997  submission,  Att.  9;  Montana 
 State  Cost  Study  at  46-  47. 

 235  See  Washington  USF  Proceeding,  Docket  No.  UT-  980311(  a),  App.  D. 

 236  Letter  from  Frank  E.  Landis,  Nebraska  Public  Service  Commission,  to  Magalie  Roman  Salas,  FCC,  dated 
 May  22,  1998  (Nebraska  State  Cost  Study)  at  5. 

 51 

 density.  The  model  proponents  differ  significantly,  however,  on  their  assumptions  as  to  the  extent 
 of  sharing  and,  therefore,  assignment  of  structure  cost  to  the  LEC.  232 

 2.  Issues  for  Comment 
 129.  We  tentatively  adopt  the  following  structure  sharing  percentages  that  represent  the 
 percentage  of  structure  costs  to  be  assigned  to  the  LEC.  For  aerial  structure,  we  tentatively 
 assign  50  percent  of  structure  cost  in  density  zones  1-  6  and  35  percent  of  the  costs  in  density 
 zones  7-  9  to  the  LEC.  For  underground  and  buried  structure,  we  tentatively  assign  90  percent  of 
 the  cost  in  density  zones  1-  2,  85  percent  of  the  cost  in  density  zone  3,  65  percent  of  the  cost  in 
 density  zones  4-  6,  and  55  percent  of  the  cost  in  density  zones  7-  9  to  the  LEC.  233 

 130.  We  believe  that  the  structure  sharing  percentages  that  we  tentatively  adopt  reflect 
 a  reasonable  percentage  of  the  structure  costs  that  should  be  assigned  to  the  LEC.  We  note  that 
 our  tentative  conclusions  reflect  the  general  consensus  among  commenters  that  structure  sharing 
 varies  by  structure  type  and  density.  While  disagreeing  on  the  extent  of  sharing,  the  majority  of 
 commenters  agree  that  sharing  occurs  most  frequently  with  aerial  structure  and  in  higher  density 
 zones.  234  For  example,  no  commenter  attributes  more  than  50  percent  of  the  cost  of  aerial 
 structure  to  the  LEC.  The  sharing  values  that  we  tentatively  adopt  reflect  these  guidelines.  In 
 addition,  we  note  that  the  Washington  Utilities  and  Transportation  Commission  has  adopted 
 structure  sharing  values  that  are  similar  to  those  that  we  tentatively  adopt.  235  We  also  note  that 
 the  sharing  values  that  we  tentatively  adopt  fall  within  the  range  of  values  proposed  by  HAI  and 
 BCPM. 

 131.  In  addition,  we  agree  with  the  Nebraska  Public  Service  Commission  that  there  are 
 some  opportunities  for  sharing  even  in  the  lowest  density  zones.  236  As  noted  by  the  Nebraska 
 Commission,  "[  e]  ven  in  these  more  remote  regions  of  the  state,  there  will  be  some  opportunities 
51
 Federal  Communications  Commission  FCC  99-  120 
 237  Nebraska  State  Cost  Study  at  5. 
 238  AT&  T  Sept.  24  comments  at  12-  13.  For  example,  AT&  T  contends  changes  in  the  regulatory  climate  have 
 increased  the  extent  to  which  carriers  are  required  or  are  willing  to  share  structures. 

 239  Generally,  when  a  neighborhood  is  located  near  a  wire  center,  copper  feeder  cable,  using  analog 
 transmission,  is  deployed  to  connect  the  wire  center  to  the  SAI.  From  the  SAI,  copper  cables  of  varying  gauge 
 extend  to  all  of  the  customer  premises  in  the  neighborhood. 

 240  Both  indoor  and  outdoor  SAI  investments  are  a  function  of  the  total  number  of  pairs,  both  feeder  and 
 distribution,  that  the  SAI  terminates. 

 241  The  current  version  of  the  model  supports  eighteen  SAI  sizes.  SAI  capacities  currently  supported  are  7200, 
 5400,  4200,  3600,  3000,  2400,  2100,  1800,  1200,  900,  600,  400,  300,  200,  100,  50,  25  and  1  line  facilities. 

 242  Indoor  SAI  Cost  Analysis,  submitted  by  Sprint  -  Local  Telecommunications  Division,  July  30,  1998. 

 52 

 for  sharing  as  new  homes  and  businesses  are  constructed."  237  We  therefore  do  not  assign  100 
 percent  of  the  cost  of  buried  or  underground  structure  to  the  LEC  in  the  lowest  density  areas,  as 
 suggested  by  the  BCPM  proponents. 

 132.  We  seek  comment  on  the  tentative  conclusions  set  forth  in  this  section.  In 
 addition,  we  seek  comment  on  AT&  T's  contention  that  the  structure  sharing  percentages  should 
 reflect  the  potential  for  sharing,  rather  than  the  LEC's  embedded  sharing  practice.  238 

 E.  Serving  Area  Interfaces 
 1.  Background 
 133.  A  serving  area  interface  (SAI)  is  a  centrally  located  piece  of  network  equipment 
 that  acts  as  a  physical  interface  between  a  copper  feeder  cable  connecting  a  wire  center  and 
 neighborhood  distribution  copper  cables.  239  The  model  includes  copper  cable  and  SAI  investment 
 only  when  there  are  no  DLC  or  T1  terminals.  240  The  model  input  table  lists  prices  for  indoor  and 
 outdoor  SAIs  of  various  sizes.  241  An  indoor  SAI  is  generally  used  in  multi-  unit  buildings  housing 
 business  establishments  or  residential  accommodations.  The  construction  of  an  outdoor  SAI 
 involves  the  additional  cost  of  metal  cabinets  for  housing  protection  and  connection  materials. 
 Thus,  the  cost  of  constructing  an  outdoor  SAI  tends  to  be  somewhat  higher  than  the  cost  of 
 constructing  an  indoor  SAI.  Consequently,  an  outdoor  SAI  is  generally  used  only  when  there  is 
 no  place  to  house  an  indoor  SAI. 

 134.  Both  the  sponsors  of  BCPM  and  HAI  have  submitted  default  input  values  for 
 indoor  and  outdoor  SAI  costs.  In  addition,  Sprint  submitted  cost  estimates  for  a  7200  pair  indoor 
 SAI.  242  Because  the  cost  of  a  SAI  depends  on  the  cost  of  its  components,  we  tentatively  conclude 
52
 Federal  Communications  Commission  FCC  99-  120 
 243  We  note  that  the  BCPM  defaults  do  not  specify  estimates  for  the  cost  of  SAI  components. 
 244  Workshop  Public  Notice  at  2.  Commission  staff  used  BCPM  default  inputs  as  the  low  end  of  the  ranges  for 
 both  indoor  and  outdoor  SAIs,  and  Sprint's  cost  estimates  as  the  high  end  of  the  range  for  indoor  SAIs.  The  high 
 end  of  the  range  for  outdoor  SAIs  represented  staff's  analysis  of  state-  approved  SAI  parameters.  Staff's  preliminary 
 ranges  for  SAI  costs  did  not  include  HAI  inputs  because  staff  concluded  that  HAI  had  not  included  all  of  the 
 materials  and  splicing  required  to  install  this  equipment. 

 245  See  Common  Carrier  Bureau  Releases  Preliminary  Common  Input  Values  to  Facilitate  Selection  of  Final 
 Input  Values  for  the  Forward-  Looking  Cost  Model  for  Universal  Service,  Public  Notice,  CC  Docket  Nos.  96-  45, 
 97-  160,  DA  99-  295  (rel.  Feb.  5,  1999)  (Preliminary  Input  Values  Public  Notice);  Workshop  Public  Notice.  See 
 also,  Preliminary  Input  Values  Handouts,  dated  December  11,  1998. 

 246  See  Appendix  D,  section  IV  for  a  breakdown  of  costs  for  each  component  calculated  to  derive  the  proposed 
 cost  of  a  7200  pair  DLC. 

 247  The  following  is  a  break-  down  of  costs  for  a  7200  SAI  size: 

 Building  Entrance  Splicing  $1,014.00 
 Protectors  $12,520.00 
 Placement  of  Feeder  Blocks  $930.00 

 53 

 that,  in  the  absence  of  contract  data  between  the  LECs  and  suppliers,  it  is  necessary  to  evaluate 
 the  cost  of  these  components.  Our  analysis  therefore  begins  with  a  review  of  the  data  and 
 justifications  submitted  by  the  HAI  sponsors  and  Sprint  regarding  the  cost  of  the  components  that 
 comprise  a  7200  pair  indoor  SAI.  243 

 135.  On  or  around  November  25,  1998,  Commission  staff  posted  preliminary  ranges  of 
 SAI  input  values  on  the  Commission's  Web  site  to  elicit  comment  and  empirical  data  from 
 interested  parties  on  the  cost  of  SAIs.  244  Commission  staff  also  conducted  a  workshop  on 
 December  11,  1998,  to  discuss  the  posted  preliminary  inputs.  245 

 2.  Issues  for  Comment 
 a.  Cost  of  a  7200  Pair  SAI 
 136.  Our  proposed  approach  takes  into  account  the  cost  of  the  following  SAI 
 components  for  a  7200  pair  indoor  SAI:  building  entrance  splicing  and  distribution  splicing; 
 protectors;  tie  cables;  placement  of  feeder  blocks;  placement  of  cross-  connect  jumpers/  punch 
 down;  and  placement  of  distribution  blocks.  Of  these,  we  tentatively  conclude  that  protector  and 
 splicing  costs  are  the  main  drivers  of  SAI  costs,  and  cross-  connect  costs  and  feeder  block  and 
 distribution  block  installation  costs  greatly  contribute  to  the  difference  in  Sprint's  and  the  HAI 
 proponents'  indoor  SAI  costs.  246  Based  upon  the  following  analysis  of  the  record  regarding  these 
 costs,  we  propose  a  total  cost  of  $21,708  for  the  7200  pair  indoor  SAI.  247  We  seek  comment  on 
53
 Federal  Communications  Commission  FCC  99-  120 
 Placement  of  Cross  Connects  $4,067.00 
 Placement  of  Distribution  Blocks  $2,363.00 
 Placement  of  41  each  100  Pair  Distribution  Tie  Cables  $187.00 
 Distribution  Splicing  $627.00 
 ______ 
 Total  $21,708.00 

 248  Preliminary  Input  Values  Handouts,  dated  December  11,  1998. 

 249  Appendix  D  shows  how  we  use  this  value  to  estimate  the  total  cost  of  protectors  in  a  7200  pair  indoor  SAI. 
 See  Appendix  D,  section  IV. 

 250  See  Letter  from  Chris  Frentrup,  MCI  WorldCom,  to  Magalie  Roman  Salas,  FCC,  dated  January  21,  1999. 
 On  January  20,  1999,  the  sponsors  of  HAI  provided  a  demonstration  of  splicing,  in  support  of  their  splicing  rate. 
 Letter  from  Kenneth  Cartmell,  U  S  West,  dated  February  8,  1999,  to  Magalie  Roman  Salas,  FCC;  Letter  from  Pete 
 Sywenki,  Sprint,  to  Magalie  Roman  Salas,  FCC,  dated  February  4,  1999. 

 251  See  attachment  to  letter  from  Chris  Frentrup,  Senior  Economist,  MCI  WorldCom,  to  Magalie  Roman  Salas, 
 FCC,  dated  January  21,  1999. 

 54 

 this  tentative  analysis. 
 137.  Protector  Costs.  The  cost  of  the  protector  is  the  single  greatest  contributor  to  the 
 difference  in  Sprint's  and  HAI's  indoor  SAI  costs.  HAI  proposes  a  cost  of  $2.00  per  pair  for 
 protector  material,  and  Sprint  initially  proposed  a  $6.62  cost  per  pair  for  protector  material.  In  its 
 review  of  Sprint's  proposed  cost,  staff  concluded  that  all  of  the  parts  identified  in  Sprint's  proposal 
 may  not  be  necessary  for  SAI  construction.  Staff  also  believed,  however,  that  HAI's  proposal  was 
 for  less  than  a  fully  functional  SAI,  and  found  HAI's  proposed  cost  to  be  too  low.  Having 
 analyzed  the  ex  parte  submissions,  staff  proposed  a  cost  of  $4.00  per  pair  for  protector 
 material.  248  In  its  February  4,  1999,  ex  parte  submission,  Sprint  agreed  that  $4.00  is  a  reasonable 
 estimate  of  the  cost.  We  tentatively  adopt  this  proposed  value  and  seek  comment.  249 

 138.  Splicing  and  Labor  Rates.  HAI  and  Sprint  propose  different  splicing  rates,  but  do 
 not  dispute  splice  set-  up  time.  The  HAI  sponsors  propose  a  splicing  rate  of  300  pairs  per  hour, 
 while  Sprint  argues  for  a  splicing  rate  of  100  pairs  per  hour.  250  We  believe  that  HAI's  proposed 
 rate  is  a  reasonable  splicing  rate  under  optimal  conditions,  and  therefore,  we  tentatively  conclude 
 that  Sprint's  proposed  rate  is  too  low.  We  note  that  the  HAI  sponsors  have  submitted  a  letter 
 from  AMP  Corporation,  a  leading  manufacturer  of  wire  connectors,  in  support  of  the  HAI  rate.  251 
 We  recognize,  however,  that  splicing  under  average  conditions  does  not  always  offer  the  same 
 achievable  level  of  productivity  as  suggested  by  the  HAI  sponsors.  For  example,  splicing  is  not 
 typically  accomplished  under  controlled  lighting  or  on  a  worktable.  Having  accounted  for  such 
 variables,  we  propose  to  adjust  the  splicing  rate  to  250  pairs  per  hour.  We  also  propose  a  $60.00 
54
 Federal  Communications  Commission  FCC  99-  120 
 252  The  $60.00  per  hour  rate  is  the  prevalent  labor  rate  for  mechanical  apprentices. 
 253  Appendix  D,  shows  how  the  proposed  splicing  and  labor  rates  are  used  in  calculating  the  cost  of  a  7200  pair 
 indoor  SAI.  See  Appendix  D,  section  IV. 

 254  Appendix  D  shows  how  this  tentative  conclusion  is  used  to  determine  proposed  costs  for  a  7200  pair  SAI. 
 See  Appendix  D,  section  IV. 

 255  Appendix  D  show  how  this  proposed  value  is  used  in  the  calculation  of  a  7200  pair  SAI. 

 55 

 per  hour  labor  rate  for  splicing,  which  is  within  the  range  of  filings  on  the  record.  252  We  seek 
 comment  on  these  proposed  values.  253 

 139.  Cross-  Connect  Costs.  The  cross-  connect  is  the  physical  wire  in  the  SAI  that 
 connects  the  feeder  and  distribution  cable.  Sprint  asserts  that  the  "jumper"  method  generally  will 
 be  employed  to  cross-  connect  in  a  SAI.  In  contrast,  HAI  suggests  that  the  "punch  down"  method 
 is  generally  used  to  cross-  connect.  We  tentatively  conclude  that  neither  the  jumper  method  nor 
 the  punch  down  method  is  used  exclusively  in  SAIs.  In  buildings  with  high  churn  rates,  such  as 
 commercial  buildings,  carriers  may  be  more  likely  to  use  the  jumper  method.  On  the  other  hand, 
 in  residential  buildings,  where  changes  in  service  are  less  likely,  carriers  may  be  more  likely  to  use 
 the  less  expensive  punch  down  method.  Based  on  the  record,  it  appears  that  both  methods  are 
 commonly  used,  and  that  neither  is  used  substantially  more  than  the  other.  Therefore,  we 
 tentatively  conclude  that  we  should  assume  that  each  method  will  be  used  half  the  time.  We  seek 
 comment  on  this  tentative  conclusion.  254  In  particular,  we  invite  parties  to  justify  a  particular 
 allocation  between  the  jumper  and  punch  down  methods. 

 140.  Feeder  Block  and  Distribution  Block  Installation  Rates.  Sprint  proposes  an 
 installation  rate  of  60  pairs  per  hour,  while  the  HAI  sponsors  propose  400  pairs  per  hour. 
 Because  neither  feeder  block  installation  nor  distribution  block  installation  is  a  complicated 
 procedure,  we  tentatively  conclude  that  Sprint's  rate  of  60  pairs  per  hour  is  too  low.  We 
 recognize,  however,  that  installation  conditions  are  not  always  ideal.  Like  splicing,  feeder  block 
 and  distribution  block  installations  are  not  typically  accomplished  under  controlled  lighting  or  on  a 
 worktable.  Having  accounted  for  such  variables,  we  propose  a  rate  of  200  pairs  per  hour.  We 
 seek  comment  on  this  proposed  value.  255 

 b.  Cost  of  Other  SAI  Sizes 
 141.  Because  we  currently  do  not  have  similar  component-  by-  component  data  for  other 
 SAI  sizes,  we  propose  to  determine  the  costs  of  the  other  SAI  sizes  by  extrapolating  from  the 
 cost  of  the  7200  pair  indoor  SAI.  We  believe  that  this  is  a  reasonable  approach  because  there  is  a 
 linear  relationship  between  splicing  and  protection  costs,  which  are  the  main  drivers  of  cost,  and 
 the  number  of  pairs  in  the  SAI.  We  look  to  the  HAI  data  to  determine  the  relationship  in  cost 
55
 Federal  Communications  Commission  FCC  99-  120 
 256  Optical  fiber  cable  carries  a  digital  signal  that  is  incompatible  with  most  customers'  telephone  equipment, 
 but  the  quality  of  the  signal  degrades  less  with  distance  compared  to  a  signal  carried  on  copper  wire.  Generally, 
 when  a  neighborhood  is  located  too  far  from  the  wire  center  to  be  served  by  copper  cables  alone,  an  optical  fiber 
 cable  will  be  deployed  to  a  point  within  the  neighborhood,  where  a  DLC  will  be  placed  to  convert  incoming  digital 
 signals  to  analog  signals  and  outgoing  analog  signals  to  digital.  From  the  DLC,  copper  cables  of  varying  gauge 
 extend  to  all  of  the  customer  premises  in  the  neighborhood. 

 257  The  current  version  of  the  model  supports  a  fifth  DLC  size  in  addition  to  those  already  supported.  DLC 
 capacities  currently  supported  are  2016,  1344,  672,  96,  and  24  line  facilities. 

 56 

 among  the  various  sizes  of  SAI.  Specifically,  we  develop  a  ratio  of  our  proposed  cost  for  a  7200 
 pair  indoor  SAI  to  the  cost  proposed  by  HAI.  We  then  propose  to  apply  this  ratio,  2.25,  to  the 
 values  submitted  by  the  HAI  sponsors  for  other  sizes  of  indoor  and  outdoor  SAIs.  Applying  this 
 factor,  we  tentatively  adopt  the  cost  estimates  for  indoor  and  outdoor  SAIs  contained  in 
 Appendix  A.  We  propose  to  use  the  HAI,  rather  than  BCPM  data,  in  this  manner  because  BCPM 
 has  not  submitted  estimates  for  all  of  the  SAI  sizes  used  in  the  model.  We  note  that  using  the 
 BCPM  data  in  this  way  would  result  in  roughly  the  same  estimates.  We  seek  comment  on  these 
 tentative  conclusions  and  proposed  values. 

 F.  Digital  Loop  Carriers 
 1.  Background 
 142.  A  digital  loop  carrier  (DLC)  is  a  piece  of  network  equipment  that  converts  a  digital 
 signal  carried  on  optical  fiber  cable  to  an  analog,  electrical  signal  that  is  carried  on  copper  cable 
 and  is  compatible  with  customers'  telephones.  256  Because  of  the  high  cost  of  DLCs,  a  single  DLC 
 is  shared  among  a  number  of  customers.  The  model  uses  fiber  cable  and  DLCs  whenever  it 
 calculates  that  this  configuration  is  cheaper  than  using  copper  cable  or  when  the  distance  exceeds 
 the  maximum  copper  loop  length.  When  using  DLCs,  the  model  determines  the  size  and  number 
 of  DLCs  that  should  be  installed  at  a  location,  based  on  cost  minimization  and  engineering 
 constraints.  In  designing  outside  plant,  the  model  uses  five  different  sizes  of  DLCs.  257  In  order  to 
 run  the  model,  a  user  must  input  the  fixed  and  per-  line  cost  for  each  of  these  DLC  sizes.  The 
 total  cost  of  a  particular  DLC  is  determined  by  multiplying  the  number  of  lines  connected  to  the 
 DLC  times  the  per-  line  cost  of  the  DLCs,  and  then  adding  the  fixed  cost  of  the  DLC. 

 2.  Issues  for  Comment 
 143.  Both  the  sponsors  of  BCPM  and  HAI  have  submitted  default  values  for  DLC 
 costs.  Because  these  values  are  based  on  the  opinions  of  experts  without  data  to  enable  us  to 
 substantiate  these  opinions,  however,  we  tentatively  conclude  that  we  should  not  rely  on  these 
 data.  We  also  tentatively  conclude  that  the  most  reliable  data  on  DLC  costs  available  to  the 
 Commission  at  this  time  are  the  contract  data  submitted  to  the  Commission  in  response  to  the 
56
 Federal  Communications  Commission  FCC  99-  120 
 258  In  response  to  the  1997  Data  Request,  Ameritech,  Bell  Atlantic  (including  NYNEX),  Bell  South,  SBC,  US 
 West,  GTE,  Sprint,  ATU,  and  PRTC  originally  submitted  data  to  the  Commission  on  DLC  costs  in  1997.  Bell 
 South  and  US  West  resubmitted  their  data  on  the  record  of  this  proceeding  subject  to  the  Protective  Order.  Letter 
 from  William  W.  Jordan,  Bell  South,  to  Magalie  Roman  Salas,  FCC,  dated  March  15,  1999;  Letter  from  Robert  B. 
 McKenna,  US  West,  to  Magalie  Roman  Salas,  FCC,  dated  March  8,  1999.  Letter  from  Alane  C.  Weixel,  counsel 
 for  ATU,  to  Magalie  Roman  Salas,  FCC,  dated  May  6,  1999  (ATU  May  6,  1999  ex  parte). 

 259  See  Material  Cost  Workshop  -  Digital  Loop  Carrier  Equipment  "Template  for  Determining  DLC  Cost" 
 handout. 

 260  Letter  from  W.  Scott  Randolph,  GTE,  to  Magalie  Roman  Salas,  FCC,  dated  February  11,  1998;  Letter  from 
 Robert  A.  Mazer  &  Albert  Shuldiner,  Counsel  for  Aliant,  to  Magalie  Roman  Salas,  FCC,  dated  February  8,  1998. 
 The  HAI  sponsors  filed  an  ex  parte  letter  with  DLC  cost  information  using  a  different  template.  Letter  from  Chris 
 Frentrup,  MCI  WorldCom,  to  Magalie  Roman  Salas,  FCC,  Docket  No.  96-  45,  97-  160,  dated  January  21,  1999 
 (following  their  January  20,  1999  presentation).  US  West  and  Sprint  filed  responses  to  the  HAI  presentation  on 
 February  8,  1999  and  February  4,  1999,  respectively. 

 261  In  addition  to  the  data  submitted  in  response  to  the  1997  Data  Request,  and  following  the  December  11, 
 1998  workshop,  the  Bureau  requested  further  data  on  DLC  costs  in  the  1997  Further  Notice  and  in  the  Inputs 
 Public  Notice.  See  also  Preliminary  Input  Values  Public  Notice. 

 262  Only  US  West,  Bell  South,  and  ATU  presented  their  contract  data  from  the  1997  Data  Request  in  a  format 
 that  staff  could  use.  Some  of  the  data  and  comments  that  were  submitted  in  response  to  the  1997  Data  Request, 
 but  not  re-  filed  on  the  record  under  the  Protective  Order,  could  not  be  used  because  the  data  were  either  inadequate 
 or  presented  in  a  format  from  which  staff  could  not  extract  relevant  information. 

 57 

 1997  Data  Request,  and  in  ex  parte  submissions  following  the  December  11,  1998  workshop. 
 We  seek  comment  on  these  tentative  conclusions. 

 144.  Following  their  submission  of  DLC  data  to  the  Commission  in  response  to  the 
 1997  Data  Request,  US  West,  Bell  South,  and  ATU  resubmitted  their  data  on  the  record  in  this 
 proceeding.  258  At  the  December  11,  1998  workshop,  staff  of  the  Common  Carrier  Bureau 
 discussed  the  DLC  costs  data  on  the  record  in  this  proceeding.  259  In  an  effort  to  elicit  further 
 discussion  of  DLC  input  values,  staff  presented  a  template  of  the  components  of  a  typical  DLC. 
 The  HAI  sponsors,  GTE,  and  Aliant  submitted  data  using  the  template  of  DLC  costs.  260  Staff 
 found  the  data  submitted  by  the  HAI  sponsors  to  be  significantly  lower  than  the  contract  data  on 
 the  record,  and  staff  concluded  that  it  would  be  inappropriate  to  use  it,  especially  as  no  support 
 was  provided  in  justification.  Because  the  data  submitted  by  the  companies  are  based  on  actual 
 costs  incurred  in  purchasing  DLCs,  we  tentatively  conclude  that  they  are  more  reliable  than  the 
 opinions  proffered,  and,  therefore,  should  be  used  to  estimate  the  cost  of  DLCs.  Although  we 
 would  prefer  to  have  a  larger  sampling  of  data,  we  note  that  the  data  represent  the  costs  incurred 
 by  several  of  the  largest  non-  rural  carriers,  as  well  as  two  of  the  smallest  non-  rural  carriers.  We 
 also  note  that,  throughout  this  proceeding,  the  Commission  has  repeatedly  requested  cost  data  on 
 DLCs.  261  We  believe  that  we  are  using  the  best  data  available  on  the  record  to  determine  the  cost 
 of  DLCs.  262 
57
 Federal  Communications  Commission  FCC  99-  120 
 263  ATU  May  6,  1999  ex  parte.  ATU  also  suggests  that  costs  for  placement,  installation,  and  testing  should 
 be  added  to  the  DLC  material  costs  it  submitted.  We  note  that  these  site  preparation  costs  are  already  separately 
 accounted  for  in  the  model. 

 264  See  infra  para.  226. 

 265  The  functions  performed  by  the  switch  for  local  service  include:  line  termination;  line  monitoring;  usage 
 call  processing,  routing,  and  completion;  interconnection  to  other  carriers;  billing  and  maintenance;  and  vertical 
 services  and  features.  We  note  that  not  all  of  these  functions  are  supported  by  universal  service. 

 58 

 145.  We  note  that  ATU  asserts  that  material  handling  and  shipping  costs  should  be 
 added  to  the  DLC  prices  reflected  in  the  contract  it  submitted.  ATU  suggests  that  these  costs 
 could  represent  up  to  10  percent  of  the  material  cost  of  a  DLC.  263  It  is  unclear  whether  the  DLC 
 data  submitted  by  other  parties  include  these  costs.  We  seek  comment  on  the  extent,  if  any,  to 
 which  we  should  increase  our  proposed  estimates  for  DLCs  to  reflect  material  handling  and 
 shipping  costs. 

 146.  We  recognize  that  the  cost  of  purchasing  and  installing  a  DLC  changes  over  time. 
 Such  changes  occur  because  of  improvements  in  the  methods  and  components  used  to  produce 
 DLCs,  changes  in  both  capital  and  labor  costs,  and  changes  in  the  functionality  requirements  of 
 DLCs.  Thus,  we  believe  it  is  appropriate  to  adjust  the  contract  data  to  reflect  1999  prices.  In 
 order  to  capture  changes  in  the  cost  of  purchasing  and  installing  DLCs  over  time,  we  propose  a 
 2.6  percent  annual  reduction  in  both  fixed  DLC  cost  and  per  line  DLC  cost.  This  proposed  rate  is 
 based  on  the  change  in  cost  calculated  for  electronic  digital  switches  over  a  four  year  period.  We 
 believe  that  the  change  in  the  cost  of  these  switches  over  time  is  a  reasonable  proxy  for  changes  in 
 DLC  cost,  because  they  are  both  types  of  digital  telecommunications  equipment.  We  also  note 
 that  the  2.6  percent  figure  is  a  conservative  estimate,  based  on  the  change  in  cost  of  remote 
 switches.  Our  analysis  suggests  that  the  change  in  cost  of  host  switches  over  the  past  four  years 
 is  much  higher.  Finally,  we  note  that  use  of  the  current  consumer  price  index  results  in  a  similar 
 figure  over  four  years.  264  The  indexed  amount  is  based  on  the  effective  date  of  the  contracts. 
 Based  upon  an  average  of  the  contract  data  submitted  on  the  record,  adjusted  for  cost  changes 
 over  time,  we  tentatively  adopt  the  cost  estimates  for  DLCs  contained  in  Appendix  A.  We  seek 
 comment  on  this  proposed  analysis  and  the  proposed  values. 

 VI.  SWITCHING  AND  INTEROFFICE  FACILITIES 
 A.  Background 

 147.  The  central  office  switch  provides  the  connection  between  a  subscriber's  local  loop 
 and  the  outside  world.  Modern  digital  switches  provide  voice,  data,  and  video  signals  connecting 
 telephones,  fax  machines,  and  computers  on  the  public  switched  network.  265  In  order  to 
 accomplish  this,  a  telephone  network  must  connect  customer  premises  to  a  switching  facility, 
58
 Federal  Communications  Commission  FCC  99-  120 
 266  The  wire  center  boundaries  define  the  area  in  which  all  customers  are  connected  to  a  given  wire  center. 
 267  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250  (criterion  two). 
 268  1997  Further  Notice,  12  FCC  Rcd  at  18560-  66,  paras.  121-  38. 
 269  Switching  and  Transport  Public  Notice  at  2-  6.  The  Bureau  guidelines  established  that:  (1)  the  models 
 permit  individual  switches  to  be  identified  as  host,  remote,  or  stand-  alone;  (2)  switching  investment  costs  should  be 
 separately  estimated  for  host,  remote,  and  stand-  alone  switches;  (3)  models  should  include  switch  capacity 
 constraints;  (4)  all  of  the  line-  side  port  costs  and  a  percentage  of  usage  costs  should  be  assigned  to  the  cost  of 
 providing  the  supported  service;  and  (5)  models  should  accommodate  an  interoffice  network  that  is  capable  of 
 connecting  switches  designated  as  hosts  and  remotes  in  a  way  that  is  compatible  with  capabilities  of  equipment  and 
 technology  that  are  available  today  and  current  engineering  practices.  Id. 

 270  Platform  Order,  13  FCC  Rcd  at  21354,  para.  75. 

 271  See  Letter  from  Richard  N.  Clarke,  AT&  T,  to  Magalie  Roman  Salas,  FCC,  dated  February  3,  1998  (HAI 
 Feb.  3  submission)  App.  B;  BCPM  April  30,  1998  submission,  Switch  Model  Inputs. 

 272  See  Workshop  Public  Notice  at  2. 

 59 

 ensure  that  adequate  capacity  exists  in  that  switching  facility  to  process  all  calls,  and  interconnect 
 the  switching  facility  with  other  switching  facilities  to  route  calls  to  their  destination.  A  wire 
 center  is  the  location  of  the  switching  facility.  266  The  infrastructure  to  interconnect  the  wire 
 centers  is  known  as  the  "interoffice"  network,  and  the  carriage  of  traffic  among  wire  centers  is 
 known  as  "transport." 

 148.  In  the  Universal  Service  Order,  the  Commission  stated  that  "[  a]  ny  network 
 function  or  element,  such  as  .  .  .  switching,  transport  or  signaling,  necessary  to  provide  supported 
 services  must  have  an  associated  cost."  267  In  the  1997  Further  Notice,  the  Commission  sought 
 comment  on  issues  that  affect  the  input  values  relating  to  the  forward-  looking  economic  cost  of 
 switching  and  interoffice  transport.  268  The  Switching  and  Transport  Public  Notice  established 
 several  guidelines  relating  to  switching,  the  design  of  the  interoffice  network,  and  interoffice  cost 
 attributable  to  providing  supported  services.  269  In  the  Platform  Order,  the  Commission  concluded 
 that  the  federal  mechanism  should  incorporate,  with  certain  modifications,  the  HAI  5.0a  switching 
 and  interoffice  facilities  module.  270 

 149.  Both  HAI  and  BCPM  have  provided  default  input  values  for  estimating  the 
 forward-  looking  economic  cost  of  switching  and  interoffice  network.  271  On  November  25,  1998, 
 the  Bureau  announced  the  release  of  preliminary  input  values  on  its  Web  site.  272  On  December  1, 
 1998,  the  Bureau  held  a  public  workshop  designed  to  elicit  comment  on  the  switching  inputs 
59
 Federal  Communications  Commission  FCC  99-  120 
 273  See  Workshop  Public  Notice.  The  December  1,  1998  workshop  addressed  issues  relating  to  switching  and 
 expenses. 

 274  Preliminary  Input  Values  Public  Notice. 

 275  These  inputs  values  are  generally  agreed  upon  by  the  parties  or  have  not  been  disputed. 
 276  David  Gabel  and  Scott  Kennedy,  Estimating  the  Cost  of  Switching  and  Cables  Based  on  Publicly  Available 
 Data,  The  National  Regulatory  Research  Institute,  NRRI  98-  09,  April  1998  (NRRI  Study). 

 60 

 values  to  be  used  in  the  federal  mechanism.  273  On  February  5,  1999,  the  Bureau  released  a  set  of 
 revised  preliminary  input  values  that  included  switching  and  interoffice  transport  values  to 
 facilitate  the  review  and  selection  of  final  input  values.  274 

 150.  In  this  section,  we  tentatively  adopt  and  seek  comment  on  the  inputs  associated 
 with  the  installation  and  purchase  of  new  switches,  the  use  of  the  LERG  to  identify  host-  remote 
 switch  relationships,  and  other  switching  and  interoffice  input  issues  that  have  been  raised  by 
 commenters.  The  remaining  switching  and  interoffice-  related  input  values  that  we  tentatively 
 adopt  in  this  Further  Notice  are  provided  in  Appendix  A.  275 

 B.  Issues  for  Comment 
 1.  Switch  Costs 
 151.  We  now  examine  the  inputs  associated  with  the  purchase  and  installation  of  new 
 switches.  Specifically,  we  must  select  values  for  the  fixed  and  per-  line  cost  of  host  and  remote 
 switches,  respectively. 

 152.  Switch  Cost  Data.  Both  the  sponsors  of  BCPM  and  HAI  have  submitted  default 
 values  for  switch  costs.  To  a  large  extent,  however,  these  values  are  based  on  non-  public 
 information  or  opinions  of  their  experts,  but  without  data  that  enable  us  adequately  to  substantiate 
 those  opinions.  Consistent  with  the  recommendation  of  the  Joint  Board  and  criterion  eight  in  the 
 Universal  Service  Order,  we  tentatively  conclude  that  we  should  not  rely  on  these  submissions 
 because  the  underlying  data  are  not  sufficiently  open  and  available  to  the  public.  We  also 
 tentatively  conclude  that  it  is  not  necessary  to  rely  on  this  information,  because  the  Commission, 
 in  conjunction  with  the  work  of  Gabel  and  Kennedy,  276  the  Bureau  of  Economic  Analysis  (BEA) 
 of  the  Department  of  Commerce,  and  the  U.  S.  Department  of  Agriculture  Rural  Utility  Service 
 (RUS),  has  compiled  publicly  available  data  on  the  cost  of  purchasing  and  installing  switches. 
 This  information  was  gathered  from  depreciation  reports  filed  by  LECs  at  the  Commission  and 
 from  reports  made  by  LECs  to  RUS. 

 153.  The  depreciation  data  contains,  for  each  switch  reported:  the  model  designation  of 
60
 Federal  Communications  Commission  FCC  99-  120 
 277  Until  1996  large  incumbent  LECs  were  required  to  file  depreciation  rate  reports  with  the  Commission 
 pursuant  to  47  C.  F.  R.    43.43.  Prior  to  filing  these  reports,  companies  generally  submit  depreciation  rate  studies 
 that  include  data  for  each  digital  switch  in  operation.  See  Appendix  E  of  this  Further  Notice  for  a  description  of 
 the  data  set  and  an  explanation  of  adjustments  made  to  the  data. 

 278  Many  small  telephone  companies  receive  financial  assistance  from  RUS,  which  requires  these  companies  to 
 report  the  payments  made  for  new  switches.  See  Appendix  E  for  a  description  of  the  RUS  data  and  an  explanation 
 of  adjustments  made  to  the  data. 

 279  BellSouth  January  29,  1999  ex  parte,  Sprint  February  5,  1999  ex  parte,  and  GTE  February  22,  1999  ex 
 parte. 

 61 

 the  switch;  the  year  the  switch  was  first  installed;  and  the  lines  of  capacity  and  book-  value  cost  of 
 purchasing  and  installing  each  switch  at  the  time  the  depreciation  report  was  filed  with  the 
 Commission.  277  The  RUS  data  contains,  for  each  switch  reported:  the  switch  type  (i.  e.,  host  or 
 remote);  the  number  of  equipped  lines;  cost  at  installation;  and  year  of  installation.  278 

 154.  The  sample  that  we  propose  to  use  to  estimate  switch  costs  includes  1,060 
 observations.  The  sample  contains  921  observations  selected  from  the  depreciation  data,  which 
 provide  information  on  the  costs  of  purchasing  and  installing  switches  gathered  from  20  states. 
 The  sample  also  contains  139  observations  selected  from  the  RUS  data,  which  provide 
 information  from  across  the  nation  on  the  costs  of  small  switches  purchased  and  installed  by  rural 
 carriers.  The  combined  sample  represents  purchases  of  both  host  and  remote  switches,  with 
 information  on  468  host  switches  and  592  remote  switches,  and  covers  switches  installed  between 
 1989  and  1996.  This  set  of  data  represents  the  most  complete  public  information  available  to  the 
 Commission  on  the  costs  of  purchasing  and  installing  new  switches. 

 155.  In  response  to  the  1997  Data  Request,  the  Commission  received  a  second  set  of 
 information  pertaining  to  1,486  switches.  Upon  analysis,  however,  Commission  staff  identified 
 one  or  more  problems  with  most  of  the  data  submitted:  missing  switch  costs;  zero  or  negative 
 installation  costs;  zero  or  blank  line  counts;  unidentifiable  switches;  or  missing  or  inconsistent 
 Common  Language  Local  Identification  (CLLI)  codes.  After  excluding  these  corrupted 
 observations,  302  observations  remained.  The  remaining  observations  represented  switches 
 purchased  by  only  four  companies.  We  tentatively  conclude  that  the  data  set  we  propose  to  use  is 
 superior  to  the  data  set  obtained  in  response  to  the  1997  Data  Request,  both  in  terms  of  the 
 number  of  usable  observations  and  the  number  of  companies  represented  in  the  data  set.  We  seek 
 comment  on  this  tentative  conclusion. 

 156.  Following  the  December  1,  1999  workshop,  three  companies  voluntarily  submitted 
 further  data  regarding  the  cost  of  purchasing  and  installing  switches.  279  Because  these 
 submissions  were  received  late  in  the  process,  Commission  staff  has  not  had  sufficient  time  to 
 analyze  the  quality  and  content  of  the  information.  We  seek  comment  on  the  use  of  this  data  set 
 as  a  substitute  or  complement  to  the  data  set  we  propose. 
61
 Federal  Communications  Commission  FCC  99-  120 
 280  Letter  from  W.  Scott  Randolph,  GTE,  to  Magalie  Roman  Salas,  FCC  dated  December  18,  1998  (GTE  Dec. 
 18  ex  parte)  at  5  and  6;  NRRI  Study  at  97  and  102;  Letter  from  Pete  Sywenki,  Sprint,  to  Magalie  Roman  Salas, 
 FCC,  dated  December  22,  1998  (Sprint  Dec.  22  ex  parte)  at  13-  21;  Letter  from  Richard  Clarke,  AT&  T,  to  Magalie 
 Roman  Salas,  FCC,  dated  January  7,  1999  (AT&  T  Jan.  7  ex  parte)  at  1. 

 281  AT&  T  Jan.  7  ex  parte  at  1. 

 282  See,  e.  g.,  Commonwealth  of  Kentucky,  An  Inquiry  Into  Universal  Service  Funding  Issues,  Administrative 
 Case  No.  360  (1998)  App.  F  at  14  (Kentucky  Cost  Study);  Compliance  Proceeding  for  Implementation  of  the 
 Texas  High  Cost  Universal  Service  Plan,  Order  No.  30,  Project  No.  18515  (August  24,  1998). 

 283  NRRI  Study  at  102-  104. 

 62 

 157.  Adjustments  to  the  Data.  The  cost  figures  reported  in  the  depreciation  information 
 reflect  the  costs  of  purchasing  and  installing  new  switches.  While  the  RUS  cost  data  also  contain 
 information  on  purchasing  and  installing  new  switches,  they  do  not  include:  (1)  the  cost 
 associated  with  purchasing  and  installing  the  main  distribution  frame  (MDF);  (2)  the  cost 
 associated  with  purchasing  and  installing  power  equipment;  (3)  the  cost  of  connecting  each 
 remote  switch  to  its  respective  host  switch;  and  (4)  LEC  engineering  costs.  280  In  order  to  make 
 the  depreciation  and  RUS  information  comparable,  we  propose  to  add  estimates  of  these  four 
 components  to  the  switch  costs  reported  in  the  RUS  information.  These  additions  are  discussed 
 below.  We  seek  comment  on  this  proposed  approach. 

 158.  In  order  to  account  for  the  cost  of  MDF  equipment  omitted  from  the  RUS 
 information,  AT&  T  recommends  using  the  HAI  5.0a  default  value  of  $12  per  line  for  MDF.  We 
 tentatively  conclude  that  $12  per  line  is  a  reasonable  cost  for  purchasing  and  installing  MDF 
 equipment.  281  No  party  contests  this  value.  We  seek  comment  on  this  tentative  conclusion  and 
 invite  commenters  to  submit  alternative  values. 

 159.  In  order  to  account  for  the  cost  of  central  office  power  equipment  omitted  from 
 the  RUS  information,  AT&  T  recommends  using  the  HAI  5.0a  default  values  for  these  inputs.  We 
 tentatively  use  the  following  input  values  for  power  equipment:  $12,000  for  switches  with  0-  999 
 lines;  $40,000  for  switches  with  1,000-  4,999  lines;  and  $74,500  for  switches  with  5,000-  25,000 
 lines.  These  values  are  derived  from  a  range  of  values  on  the  record  in  this  proceeding,  including 
 state  cost  studies.  282  We  seek  comment  on  the  values  we  tentatively  adopt  and  invite  commenters 
 to  submit  alternative  values. 

 160.  Gabel  and  Kennedy  estimate  that  the  average  cost  of  terminating  a  remote  on  a 
 host  switch  is  $27,598.  283  Relying  on  this  estimate,  we  tentatively  conclude  that  $27,598  should 
 be  added  to  the  cost  of  each  remote  switch  reported  in  the  RUS  data.  We  seek  comment  on  this 
 tentative  conclusion  and  invite  commenters  to  submit  alternative  values. 

 161.  Gabel  and  Kennedy  also  recommend,  based  on  a  data  analysis  undertaken  by  RUS, 
62
 Federal  Communications  Commission  FCC  99-  120 
 284  Id. 
 285  Sprint  Dec.  22  ex  parte  at  12.  Sprint  criticized  the  Commission's  preliminary  switch  regression  presented  in 
 the  December  1998  workshop  based  on  the  "R-  squared"  statistical  goodness  of  fit  criterion.  However,  after 
 adjusting  for  data  transformations  associated  with  moving  to  a  log-  log  specification,  the  R-  squared  of  a  log-  log 

 regression  (0.54)  suggested  by  Sprint  is  lower  than  the  R-  squared  in  the  linear  regression  (0.78).  Specifically,  we 
 note  that  the  R-  squared  measure  resulting  from  a  regression  employing  a  log-  log  functional  form  is  not  directly 
 comparable  to  the  R-  squared  measure  from  a  linear  regression.  In  order  for  the  two  measures  to  be  comparable, 
 the  R-  squared  measure  computed  from  the  log-  log  regression  must  be  computed  using  observed  and  predicted  cost 
 measures,  not  the  logs  of  these  measures.  We  also  note  that  the  log-  log  regression  we  employed  is  of  the  form: 

 Ln(  Cost)  =  a1  +  a2  *Ln(  Lines)  +  a3  *Host  +  a4  *Ln(  Time)  +  a5  *Ln(  Lines)*  Ln(  Time)  +  a6  *Host*  Ln(  Time)  +  e 
 where  Ln(  x)  denotes  the  natural  log  of  x.  Because  Sprint  did  not  make  these  necessary  adjustments,  we  believe 
 that  their  criticism  of  the  use  of  a  linear  function  is  misplaced.  For  a  discussion  of  the  "R-  squared"  statistical 
 goodness  of  fit  criterion  and  a  discussion  of  log-  log  specifications,  see  William  H.  Greene,  Econometric  Analysis, 
 192-  193  and  251  (1990). 

 63 

 that  the  cost  of  switches  reported  in  the  RUS  data  should  be  increased  by  8  percent  in  order  to 
 account  for  the  cost  of  LEC  engineering.  284  Relying  on  those  estimates,  we  tentatively  conclude 
 that  8  percent  should  be  added  to  the  total  cost,  including  MDF,  power,  and  remote  connection 
 costs,  of  each  switch  reported  in  the  RUS  data.  We  note  that  the  proposed  value  is  based  on  the 
 only  information  on  the  record  on  this  issue.  We  seek  comment  on  this  tentative  conclusion  and 
 invite  commenters  to  submit  alternative  values. 

 162.  We  tentatively  conclude  that  switch  costs  should  be  estimated  based  on  a  sample 
 of  public  data  that  includes  both  RUS  and  depreciation  data.  As  noted,  this  information 
 represents  the  broadest  range  of  data  publicly  available  for  both  small  and  large  switches.  We 
 seek  comment  on  the  appropriateness  of  merging  the  two  data  sets. 

 163.  Methodology.  In  order  to  determine  the  reasonable  forward-  looking  cost  of 
 switches,  based  on  the  selected  data  set,  we  propose  to  employ  regression  analysis.  In  the  process 
 of  estimation,  we  propose,  where  appropriate,  to  make  adjustments  to  the  information  compiled 
 by  the  above  parties.  These  proposed  modifications  to  the  data  and  estimation  techniques  used  by 
 the  Commission  are  discussed  below. 

 164.  We  tentatively  conclude  that  the  cost  of  a  switch  should  be  estimated  as  a  linear 
 function  of  the  number  of  lines  connected  to  the  switch,  the  type  of  switch  installed  (i.  e.,  host  or 
 remote),  and  the  date  of  installation.  We  adopt  a  linear  function  based  on  examination  of  the  data 
 and  statistical  evidence.  Sprint  recommends  using  a  non-  linear  function,  such  as  the  log-  log 
 function,  to  take  into  account  the  declining  marginal  cost  of  a  switch  as  the  number  of  lines 
 connected  to  it  increases.  285  We  tentatively  conclude  that  the  linear  function  we  adopt  provides  a 
 better  fit  with  the  data  than  the  log-  log  function.  A  discussion  of  the  effect  of  time  and  type  of 
63
 Federal  Communications  Commission  FCC  99-  120 
 286  See  General  Wald  Test  for  omitted  variables  in  Ramu  Ramanathan,  Introductory  Econometrics  with 
 Applications  170  (1989). 

 287  Letter  from  Richard  Clarke,  AT&  T,  to  Magalie  Roman  Salas,  FCC,  dated  January  7,  1999  (AT&  T  Jan.  7  ex 
 parte)  at  1.  "The  primary  difference  between  a  host  switch  and  remote  switch  is  in  the  extent  and  complexity  of  the 
 `getting  started  equipment,  '  associated  with  each  type  of  switch  (e.  g.,  switch  central  processor  functions,  SS7  non-scaleable 
 equipment,  maintenance  and  testing,  call  recording  for  billing  purposes,  etc.).  Because  most  of  these 
 functions  for  lines  terminating  a  remote  switch  are  performed  at  that  switch's  host,  very  little  of  this  type  of 
 `getting  started'  equipment  is  required  at  the  remote.  In  contrast,  the  scaleable  equipment  used  to  terminate  lines 
 and  trunks  and  to  perform  basic  call  processing  is  essentially  the  same  at  the  host  and  remote.  In  fact,  the  line 
 units  used  by  Lucent  5E  Remote  Switching  Modules  are  identical  to  those  used  by  5E  host  or  stand-  alone  switches. 
 Similarly,  the  line  cards  used  in  Nortel  DMS  100  host  or  stand-  alone  switches  are  the  same  as  those  used  in  DMS 
 100  remotes,  or  in  DMS  10  host  or  remote  switches."  Id. 

 288  The  gross-  domestic-  product  chain-  type  price  index,  which  tracks  economy-  wide  inflation,  is  published 
 monthly  by  the  Bureau  of  Economic  Analysis  of  the  U.  S.  Department  of  Commerce  in  the  Survey  of  Current 
 Business. 

 64 

 switch  on  switch  cost  is  presented  below.  We  seek  comment  on  these  tentative  conclusions. 
 165.  Based  upon  an  analysis  of  the  data  and  the  record,  we  tentatively  conclude  that  the 
 fixed  cost  (i.  e.,  the  base  getting  started  cost  of  a  switch,  excluding  costs  associated  with 
 connecting  lines  to  the  switch)  of  host  switches  and  remote  switches  differ,  but  the  per-  line 
 variable  cost  (i.  e.,  the  costs  associated  with  connecting  additional  lines  to  the  switch)  of  host  and 
 remote  switches  are  approximately  the  same.  This  is  consistent  with  statistical  evidence  286  and  the 
 comments  of  the  HAI  sponsors.  287  We  seek  comment  on  this  tentative  conclusion. 

 166.  Accounting  for  Changes  in  Cost  Over  Time.  We  recognize  that  the  cost  of 
 purchasing  and  installing  switching  equipment  changes  over  time.  Such  changes  result,  for 
 example,  from  improvements  in  the  methods  used  to  produce  switching  equipment,  changes  in 
 both  capital  and  labor  costs,  and  changes  in  the  functional  requirements  that  switches  must  meet 
 for  basic  dial  tone  service.  In  order  to  capture  changes  in  the  cost  of  purchasing  and  installing 
 switching  equipment  over  time,  we  propose  to  modify  the  data  to  adjust  for  the  effects  of 
 inflation,  and  explicitly  incorporate  variables  in  the  regression  analysis  that  capture  cost  changes 
 unique  to  the  purchase  and  installation  of  digital  switches.  We  describe  this  process  below. 

 167.  To  the  extent  that  the  general  level  of  prices  in  the  economy  change  over  time,  the 
 purchasing  power  of  a  dollar,  in  terms  of  the  volume  of  goods  and  services  it  can  purchase,  will 
 change.  In  order  to  account  for  such  economy-  wide  inflationary  effects,  we  propose  to  multiply 
 the  cost  of  purchasing  and  installing  each  switch  in  the  data  set  by  the  gross-  domestic-  product 
 chain-  type  price  index  288  for  1997  and  then  divide  by  the  gross-  domestic-  product  chain-  type  price 
64
 Federal  Communications  Commission  FCC  99-  120 
 289  Figures  are  adjusted  after  estimation  for  both  realized  and  expected  inflation  between  1997  and  1999.  See 
 Appendix  E  for  an  explanation  of  these  adjustments. 

 290  Time  was  added  to  the  regression  in  reciprocal  form  as  an  independent  variable  to  measure  fixed  cost 
 changes  unique  to  remote  switches.  Then,  a  time  term  was  added  in  conjunction  with  the  host  identifier  variable  to 
 measure  the  fixed  cost  changes  unique  to  host  switches.  A  time  term  was  also  added  in  conjunction  with  the  line 
 variable,  in  order  to  measure  cost  changes  unique  to  line  additions  on  switches. 

 291  GTE  Dec.  18  ex  parte  at  4. 

 292  AT&  T  Jan.  7  ex  parte  at  4. 
 293  The  index  is  published  semi-  annually  by  AUS  consultants. 
 294  See  Ameritech  Dec.  16,  1998  comments  at  5;  GTE  Dec.  18,  1998  ex  parte  at  4. 

 65 

 index  for  the  year  in  which  the  switch  was  installed,  thereby  converting  all  costs  to  1997  values.  289 
 168.  In  order  to  account  for  cost  changes  unique  to  switching  equipment,  we  propose 
 to  enter  time  terms  directly  into  the  regression  equation.  290  GTE  expresses  concern  that,  under 
 certain  specifications  of  time,  the  regression  equation  produces  investments  for  remote  switch 
 "getting  started"  costs  that  are  negative  and  that  such  specifications  overstate  the  decline  in  switch 
 costs.  291  The  HAI  sponsors  also  caution  that  the  historical  large  percentage  price  declines  seen  in 
 recent  years  may  not  continue.  292  We  tentatively  conclude  that  the  reciprocal  form  of  time  in  the 
 regression  equation  proposed  would  satisfy  these  concerns  by  yielding  projections  of  switch 
 purchase  and  installation  costs  that  are  positive  yet  declining  over  time. 

 169.  Ameritech  and  GTE  advocate  the  use  of  the  Turner  Price  Index,  293  which  is  an 
 index  designed  to  measure  the  changing  cost  of  telecommunications  plant,  to  convert  the 
 embedded  cost  information  contained  in  the  depreciation  data  to  costs  measured  in  current 
 dollars.  294  We  note,  however,  that  this  index  and  the  data  underlying  it  are  not  on  the  public 
 record.  We  prefer  to  rely  on  public  data  when  available.  Moreover,  we  tentatively  conclude  it  is 
 not  necessary  to  rely  on  this  index  to  convert  switch  costs  to  current  dollars.  As  described  in  the 
 preceding  paragraph,  the  Commission  has  proposed  to  account  for  costs  explicitly  in  the 
 estimation  process,  rather  than  adopt  a  surrogate  such  as  the  Turner  Price  Index.  We  seek 
 comment  on  this  proposed  approach.  In  addition,  we  seek  comment  on  the  potential  impact  of 
 increased  use  of  packet  switches,  including  the  possibility  that  manufacturers  will  reduce  the  price 
 of  circuit  switches  to  maintain  market  share. 

 170.  Treatment  of  Switch  Upgrades.  The  book-  value  costs  recorded  in  the  depreciation 
 data  include  both  the  cost  of  purchasing  and  installing  new  equipment  and  the  cost  associated 
 with  installing  and  purchasing  subsequent  upgrades  to  the  equipment  over  time.  Upgrades  costs 
65
 Federal  Communications  Commission  FCC  99-  120 
 295  Ameritech  Dec.  16,  1998  comments  at  4-  5;  GTE  Dec.  18,  1998  ex  parte  at  4-  5;  Sprint  Dec.  22,  1998  ex 
 parte  at  5-  7. 

 296  GTE  Dec.  18,  1998  ex  parte  at  5;  Sprint  Dec.  22,  1998  ex  parte  at  13;  Ameritech  Dec.  16,  1998  comments 
 at  6. 

 66 

 will  be  a  larger  fraction  of  reported  book-  value  costs  in  instances  where  the  book-  value  costs  of 
 purchasing  and  installing  switching  equipment  are  reported  well  after  the  initial  installation  date  of 
 the  switch.  In  order  to  estimate  the  costs  associated  with  the  purchase  and  installation  of  new 
 switches,  and  exclude  the  costs  associated  with  upgrading  switches,  we  propose  to  remove  from 
 the  data  set  those  switches  installed  more  than  three  years  prior  to  the  reporting  of  their 
 associated  book-  value  costs.  We  believe  that  this  restriction  would  eliminate  switches  whose 
 book  values  contain  a  significant  amount  of  upgrade  costs,  and  recognizes  that,  when  ordering 
 new  switches,  carriers  typically  order  equipment  designed  to  meet  short-  run  demand. 

 171.  We  tentatively  conclude  that  we  should  reject  the  suggestion  of  Ameritech,  GTE, 
 and  Sprint  that  the  costs  associated  with  purchasing  and  installing  switching  equipment  upgrades 
 should  be  included  in  our  cost  estimates.  295  The  model  platform  we  adopted  is  intended  to  use  the 
 most  cost-  effective  forward-  looking  technology  available  at  a  particular  period  of  time.  The 
 installation  costs  of  switches,  as  configured  by  us  above,  reflect  the  most  cost-  effective  forward-looking 
 technology  for  meeting  industry  performance  requirements.  Switches,  augmented  by 
 upgrades,  may  provide  carriers  the  ability  to  meet  performance  requirements,  but  do  so  at  greater 
 costs.  Therefore,  such  augmented  switches  do  not  constitute  cost-  effective  forward-  looking 
 technology.  In  addition,  as  industry  performance  requirements  change  over  time,  so  will  the  costs 
 of  purchasing  and  installing  new  switches.  The  historical  cost  data  employed  in  this  proposed 
 analysis  reflect  such  changes  over  time,  as  do  the  time-  trended  cost  estimates.  We  seek  comment 
 on  this  tentative  conclusion. 

 172.  Additional  Variables.  Several  parties  contend  that  additional  independent  variables 
 should  be  included  in  our  regression  equation.  Some  of  the  recommended  variables  include 
 minutes  of  use,  calls,  digital  line  connections,  vertical  features,  and  regional,  state,  and  vendor-specific 
 identifiers.  296  For  the  purposes  of  this  analysis,  our  proposed  model  specification  is 
 limited  to  include  information  that  is  in  both  the  RUS  and  depreciation  data  sets.  Neither  data  set 
 includes  information  on  minutes  of  use,  calls,  digital  line  connections,  vertical  features,  or 
 differences  between  host  and  stand-  alone  switches.  Nor  do  they  contain  detail  sufficient  to  allow 
 us  to  obtain  such  information  from  other  sources.  State  and  regional  identifiers  are  not  included 
 in  the  proposed  regression  because  we  only  have  depreciation  data  on  switches  from  20  states. 
 Thus,  we  could  not  accurately  estimate  region-  wide  or  state-  wide  differences  in  the  cost  of 
 switching.  Our  proposed  model  specification  also  does  not  include  vendor-  specific  variables  or 
 variables  distinguishing  host  switches  from  stand-  alone  switches  because  the  model  platform  does 
 not  distinguish  between  different  types  of  switches. 
66
 Federal  Communications  Commission  FCC  99-  120 
 297  See  Appendix  E  for  regression  results,  and  an  explanation  of  how  cost  estimates  are  derived  from  these 
 results. 

 298  The  LERG  is  a  database  of  switching  information  maintained  by  Bellcore  that  includes  the  existing  host-remote 
 relationships.  The  HAI  proponents  have  placed  on  the  record  the  portion  of  the  LERG  that  identifies  the 
 host-  remote  relationships.  Letter  from  Chris  Frentrup,  MCI,  to  Magalie  Roman  Salas,  FCC,  dated  September  14, 
 1998  (MCI  Sept.  14  ex  parte). 

 299  1997  Further  Notice,  12  FCC  Rcd  at  18560-  61,  para.  122. 

 300  Switching  and  Transport  Public  Notice  at  2.  Switches  can  be  designated  as  either  host,  remote,  or  stand-alone 
 switches.  Both  a  host  and  a  stand-  alone  switch  can  provide  a  full  complement  of  switching  services  without 
 relying  on  another  switch.  A  remote  switch  relies  on  a  host  switch  to  supply  a  complete  array  of  switching 
 functions  and  to  interconnect  with  other  switches. 

 301  Switching  and  Transport  Public  Notice  at  2-  3. 

 302  Platform  Order,  13  FCC  Rcd  at  21355,  para.  76. 
 303  Platform  Order,  13  FCC  Rcd  at  21354-  55,  para.  75. 

 67 

 173.  Switch  Cost  Estimates.  Using  the  regression  analysis  discussed  above,  we 
 tentatively  adopt  the  fixed  cost  (in  1999  dollars)  of  a  remote  switch  as  $186,400  and  the  fixed 
 cost  (in  1999  dollars)  of  both  host  and  stand-  alone  switches  as  $447,000.  We  tentatively  adopt 
 the  additional  cost  per  line  (in  1999  dollars)  for  remote,  host,  and  stand-  alone  switches  as  $83.  297 
 We  seek  comment  on  these  tentative  conclusions. 

 2.  Use  of  the  Local  Exchange  Routing  Guide  (LERG) 
 174.  We  tentatively  conclude  that  the  Local  Exchange  Routing  Guide  (LERG)  database 
 should  be  used  to  determine  host-  remote  switch  relationships  in  the  federal  universal  service 
 mechanism.  298  In  the  1997  Further  Notice,  the  Commission  requested  "engineering  and  cost  data 
 to  demonstrate  the  most  cost-  effective  deployment  of  switches  in  general  and  host-  remote 
 switching  arrangements  in  particular."  299  In  the  Switching  and  Transport  Public  Notice,  the 
 Bureau  concluded  that  the  model  should  permit  individual  switches  to  be  identified  as  host, 
 remote,  or  stand-  alone  switches.  300  The  Bureau  noted  that,  although  stand-  alone  switches  are  a 
 standard  component  of  networks  in  many  areas,  current  deployment  patterns  suggest  that  host-remote 
 arrangements  are  more  cost-  effective  than  stand-  alone  switches  in  certain  cases.  301  No 
 party  has  placed  on  the  record  in  this  proceeding  an  algorithm  that  will  determine  whether  a  wire 
 center  should  house  a  stand-  alone,  host,  or  remote  switch.  302 

 175.  In  the  Platform  Order,  we  concluded  that  the  federal  mechanism  should 
 incorporate,  with  certain  modifications,  the  HAI  5.0a  switching  and  interoffice  facilities  module.  303 
 In  its  default  mode,  HAI  assumes  a  blended  configuration  of  switch  technologies  to  develop 
67
 Federal  Communications  Commission  FCC  99-  120 
 304  HAI  Feb.  3,  1998  submission,  Model  Description  at  58. 
 305  Platform  Order,  13  FCC  Rcd  at  21355,  para.  76. 
 306  See,  e.  g.,  Aliant  Switching  and  Transport  Public  Notice  comments  at  2;  BellSouth  et  al.  Switching  and 
 Transport  Public  Notice  comments,  att.  1  at  1-  2;  GTE  Switching  and  Transport  Public  Notice  comments  at  11; 
 Bell  Atlantic  Switching  and  Transport  Public  Notice  reply  comments  at  2. 

 307  Bell  Atlantic  Switching  and  Transport  Public  Notice  reply  comments,  att.  1  at  2;  BellSouth  et  al.  Switching 
 and  Transport  Public  Notice  reply  comments,  att.  1  at  2-  3. 

 308  See,  e.  g.,  AT&  T/  MCI  Switching  and  Transport  Public  Notice  comments  at  6;  BellSouth  et  al.  Switching  and 
 Transport  Public  Notice  reply  comments,  att.  1  at  2. 

 309  Letter  from  Richard  N.  Clarke,  AT&  T,  to  Magalie  Roman  Salas,  FCC,  dated  January  6,  1998  at  11  (AT&  T 
 Jan.  6  ex  parte).  For  example,  the  HAI  sponsors  contend  that  factors  influencing  the  placement  of  switches,  such 
 as  line  demand,  switch  prices,  and  life  cycle  costs,  may  have  changed  over  time. 

 310  See  MCI  Sept.  14  ex  parte;  Letter  from  Richard  N.  Clarke,  AT&  T,  to  Magalie  Roman  Salas,  FCC,  dated 
 September  16,  1998  (AT&  T  Sept.  16  ex  parte). 

 68 

 switching  cost  curves.  304  HAI  also  allows  the  user  the  option  of  designating,  in  an  input  table, 
 specific  wire  center  locations  that  house  host,  remote,  and  stand-  alone  switches.  When  the  host-remote 
 option  is  selected,  switching  curves  that  correspond  to  host,  remote,  and  stand-  alone 
 switches  are  used  to  determine  the  appropriate  switching  investment.  The  LERG  database  could 
 be  used  as  a  source  to  identify  the  host-  remote  switch  relationships.  In  the  Platform  Order,  we 
 stated  that  "[  i]  n  the  inputs  stage  of  this  proceeding  we  will  weigh  the  benefits  and  costs  of  using 
 the  LERG  database  to  determine  switch  type  and  will  consider  alternative  approaches  by  which 
 the  selected  model  can  incorporate  the  efficiencies  gained  through  the  deployment  of  host-  remote 
 configurations."  305 

 176.  The  majority  of  commenters  support  the  use  of  the  LERG  database  as  a  means  of 
 determining  the  deployment  of  host  and  remote  switches.  306  These  commenters  contend  that  the 
 use  of  the  LERG  to  determine  host-  remote  relationships  will  incorporate  the  accumulated 
 knowledge  and  efficiencies  of  many  LECs  and  engineering  experts  in  deploying  the  existing 
 switch  configurations.  307  Commenters  also  contend  that  an  algorithm  that  realistically  predicts 
 this  deployment  pattern  is  not  feasible  using  publicly  available  data  and  would  be  "massive  and 
 complex."  308  The  HAI  proponents  argue,  however,  that  use  of  the  LERG  to  identify  host-  remote 
 relationships  may  reflect  the  use  of  embedded  technology,  pricing,  and  engineering  practices.  309 
 Although  the  HAI  proponents  oppose  the  use  of  the  LERG,  they  have  taken  steps  to  ensure  that 
 the  LERG  database  is  compatible  with  use  in  the  switching  module  in  the  synthesis  model.  310 

 177.  We  tentatively  conclude  that  the  LERG  database  is  the  best  source  currently 
 available  to  determine  host-  remote  switch  relationships  in  the  federal  universal  service  mechanism. 
68
 Federal  Communications  Commission  FCC  99-  120 
 311  See,  e.  g.,  Ameritech  Switching  and  Transport  Public  Notice  comments  at  3;  AT&  T/  MCI  Switching  and 
 Transport  Public  Notice  comments  at  6;  BellSouth  et  al.  Switching  and  Transport  Public  Notice  comments  att.  1  at 
 1-  2;  GTE  Switching  and  Transport  Public  Notice  at  11-  12. 

 312  AT&  T  Jan.  7  ex  parte;  GTE  Dec.  18  ex  parte  at  5-  7;  Sprint  Dec.  22  ex  parte  at  9. 

 313  AT&  T  Jan.  7  ex  parte;  Sprint  Dec.  22  ex  parte  at  9. 
 314  AT&  T  Jan.  7  ex  parte;  GTE  Dec.  18  ex  parte  at  5-  6;  Sprint  Dec.  22  ex  parte  at  9. 
 315  See,  e.  g.,  AT&  T  Jan.  7  ex  parte;  GTE  Dec.  18  ex  parte  at  6. 

 69 

 As  noted  above,  no  algorithm  has  been  placed  on  the  record  to  determine  whether  a  wire  center 
 should  house  a  stand-  alone,  host,  or  remote  switch.  In  addition,  a  majority  of  commenters  agree 
 that  development  of  such  an  algorithm  would  be  difficult  using  publicly  available  data.  311  We 
 tentatively  conclude  that  the  use  of  the  LERG  to  identify  the  host-  remote  switch  relationships  is 
 superior  to  HAI's  averaging  methodology  which  may  not,  for  example,  accurately  reflect  the  fact 
 that  remote  switches  are  more  likely  to  be  located  in  rural  rather  than  urban  areas.  We  therefore 
 tentatively  agree  with  the  BCPM  proponents  and  other  commenters  that  use  of  the  LERG  is  the 
 most  feasible  alternative  currently  available  to  incorporate  the  efficiencies  of  host-  remote 
 relationships  in  the  federal  universal  service  mechanism.  We  seek  comment  on  these  tentative 
 conclusions.  In  particular,  we  encourage  parties  to  comment  on  any  alternative  source  or 
 methodology  that  will  identify  host-  remote  switch  relationships  on  a  forward-  looking  basis. 

 3.  Other  Switching  and  Interoffice  Transport  Inputs 
 178.  General.  Several  commenters  assert  that  the  depreciation  studies  on  which  the 
 Commission  relied  to  develop  switch  costs  include  all  investments  necessary  to  make  a  switch 
 operational.  312  These  investments  include  telephone  company  engineering  and  installation,  the 
 main  distribution  frame  (MDF),  the  protector  frame  (often  included  in  the  MDF),  and  power 
 costs.  313  To  avoid  double  counting  these  investments,  both  as  part  of  the  switch  and  as  separate 
 input  values,  the  model  proponents  agree  that  the  MDF/  Protector  investment  per  line  and  power 
 input  values  should  be  set  at  zero.  314  In  addition,  commenters  agree  that  the  Switch  Installation 
 Multiplier  should  be  set  at  1.0.  315  We  agree  that  including  these  investments  both  as  part  of  the 
 switch  cost  and  as  separate  investments  would  lead  to  double  counting  of  these  costs.  We 
 therefore  tentatively  conclude  that  the  MDF/  Protector  investment  per  line  and  power  input  values 
 should  be  set  at  zero.  We  further  tentatively  conclude  that  the  Switch  Installation  Multiplier 
 should  be  set  at  1.0.  We  seek  comment  on  these  tentative  conclusions. 

 179.  Analog  Line  Offset.  We  tentatively  conclude  that  the  "Analog  Line  Circuit  Offset 
 for  Digital  Lines"  input  should  be  set  at  zero.  The  HAI  proponents  contend  that  the  switch 
 investment  in  the  model  should  be  adjusted  downward  to  reflect  the  cost  savings  associated  with 
69
 Federal  Communications  Commission  FCC  99-  120 
 316  AT&  T  Jan.  7  ex  parte.  The  HAI  proponents  contend  that  the  cost  of  terminating  digital  lines  is 
 significantly  less  expensive  than  terminating  analog  lines. 

 317  AT&  T  Jan.  7  ex  parte. 

 318  AT&  T  Jan.  7  ex  parte. 
 319  AT&  T  Jan.  7  ex  parte.  The  HAI  proponents  reach  this  value  by  first  concluding  that  the  total  switch  cost 
 savings  for  digital  lines  should  be  approximately  $20.00  per  line.  HAI  calculates  this  cost  savings  as  follows:  (1) 
 $12.00  for  the  MDF/  Protectors  that  are  not  needed  in  the  switch  for  incoming  lines  terminated  on  DLC;  and  (2) 
 $8.00  per-  line  "efficiencies"  (e.  g.,  greater  usage  concentration,  eliminated  line  cards,  and  lower  cost  to  terminate 
 trunks  carrying  DLC  lines).  Next,  HAI  concludes  that  the  average  fraction  of  digital  lines  included  in  the 
 "historical"  data  is  roughly  15%  (or  one  quarter  of  the  60%  digital  line  usage  engineered  in  the  model).  The  HAI 
 proponents  then  deduct  from  the  $20.00  value,  one  quarter  of  the  digital  line  usage  savings  that  is  already  taken 
 into  consideration  in  the  historical  data,  to  arrive  at  the  analog  line  offset  value  of  $15.00  per  line. 

 320  GTE  Dec.  18  ex  parte  at  6;  Sprint  Dec.  22  ex  parte  at  12;  Sprint  Jan.  8  ex  parte  at  15. 

 321  Sprint  Dec.  22  ex  parte  at  12. 
 322  Sprint  Dec.  22  ex  parte  at  12. 
 323  GTE  Dec.  18  ex  parte  at  6. 

 70 

 terminating  digital,  rather  than  analog,  lines.  316  The  HAI  proponents  assert  that  this  cost  savings 
 is  due  primarily  to:  (1)  the  elimination  of  a  MDF  and  protector  frame  termination;  and  (2)  the 
 economic  efficiencies  of  terminating  multiple  lines  on  a  DS-  1  trunk  termination  instead  of 
 individual  analog  line  terminations.  Further,  HAI  contends  that  the  depreciation  data  on  which 
 the  Commission  relied  in  developing  switch  investments  do  not  reflect  adequately  the  cost  savings 
 that  would  be  realized  if  "60+%  of  lines  are  terminated  on  DLC  -  as  occurs  in  the  TELRIC 
 models."  317  HAI  contends  that  the  depreciation  data  used  to  determine  costs  reflect  the  use  of 
 only  approximately  15  percent  digital  lines.  318 

 180.  The  HAI  proponents  suggest  that  the  analog  line  offset  input  should  be  set  to 
 $15.00  per  line  to  reflect  additional  savings  in  switch  investment  for  terminating  digital  lines  in  the 
 model.  319  The  BCPM  proponents  and  GTE  recommend  setting  the  analog  line  offset  to  zero.  320 
 Sprint  contends  that  the  analog  line  offset  is  inherent  in  the  switching  curve  in  the  model,  thus 
 making  this  input  unnecessary.  321  Sprint  argues  that  an  unknown  mixture  of  analog  and  digital 
 lines  are  taken  into  consideration  in  developing  the  switch  curve.  322  GTE  asserts  that  the  analog 
 offset  must  be  set  to  zero  to  "track  with  the  switching  inputs."  323 

 181.  We  note  that  the  record  contains  no  basis  on  which  to  quantify  savings  beyond 
 those  taken  into  consideration  in  developing  the  switch  cost.  We  also  note  that  the  depreciation 
 data  used  to  determine  the  switch  costs  reflect  the  use  of  digital  lines.  The  switch  investment 
70
 Federal  Communications  Commission  FCC  99-  120 
 324  HAI  Feb.  3,  1998  submission,  App.  B  at  38-  39. 
 325  AT&  T  Jan.  7  ex  parte.  The  HAI  proponents  included  the  updated  switch  capacity  constraints  in  a  table 
 attached  to  the  Jan.  7  ex  parte. 

 326  AT&  T  Jan.  7  ex  parte. 

 327  AT&  T  Jan.  7  ex  parte. 
 328  See,  e.  g.,  BellSouth  Inputs  Public  Notice  reply  comments  at  Exhibit  2-  13;  BCPM  Inputs  Portfolio  at  34-  36. 
 329  See  HAI  Dec.  11  submission,  Model  Inputs  at  80;  BCPM  April  30,  1998  submission,  Switching  Model 
 Inputs  at  34. 

 330  See  HAI  Dec.  11  submission,  Model  Inputs  at  80. 

 71 

 value  will  therefore  reflect  savings  associated  with  digital  lines.  We  also  note  that  HAI's  proposed 
 analog  line  offset  of  $15.00  per  line  is  based  on  assumptions  that  are  neither  supported  by  the 
 record  nor  easily  verified.  For  example,  it  is  not  possible  to  determine  from  the  depreciation  data 
 the  percentage  of  lines  that  are  served  by  digital  connections.  It  is  therefore  not  possible  to  verify 
 HAI's  estimate  of  the  digital  line  usage  in  the  "historical"  data.  In  addition,  HAI  provides  little 
 support  for  its  conclusion  that  there  is  a  $20.00  per  line  cost  savings  using  digital  lines.  HAI 
 merely  attributes  a  portion  of  this  estimate  to  certain  "efficiencies"  realized  from  terminating 
 digital  rather  than  analog  lines.  In  the  absence  of  more  explicit  support  of  HAI's  position,  we 
 tentatively  conclude  that  the  Analog  Line  Circuit  Offset  for  Digital  Lines  should  be  set  at  zero. 
 We  seek  comment  on  this  tentative  conclusion. 

 182.  Switch  Capacity  Constraints.  We  tentatively  adopt  the  HAI  default  switch 
 capacity  constraint  inputs  as  proposed  in  the  HAI  5.0a  model  documentation.  324  The  forward-looking 
 cost  mechanism  contains  switch  capacity  constraints  based  on  the  maximum  line  and 
 traffic  capabilities  of  the  switch.  The  HAI  proponents  now  recommend  increasing  the  switch  line 
 and  traffic  capacity  constraints  above  the  HAI  input  default  values  for  those  inputs.  325  HAI 
 contends  that  the  default  input  values  no  longer  reflect  the  use  of  the  most  current  technology.  326 
 For  example,  HAI  contends  that  the  maximum  equipped  line  size  per  switch  should  be  increased 
 from  80,000  to  100,000  lines.  327 

 183.  We  tentatively  conclude  that  the  original  HAI  switch  capacity  constraint  default 
 values  are  reasonable  for  use  in  the  federal  mechanism.  We  note  that  commenters  have  reviewed 
 these  values  and  are  in  general  agreement  with  the  HAI  default  values.  328  For  example,  we  note 
 that  the  HAI  and  BCPM  default  values  for  maximum  equipped  lines  per  switch  are  identical  at 
 80,000  lines  per  switch.  329  We  also  note  that  the  HAI  model  documentation  indicates  that  the 
 80,000  line  assumption  was  based  on  a  conservative  estimate  "recognizing  that  planners  will  not 
 typically  assume  the  full  capacity  of  the  switch  can  be  used."  330  The  HAI  proponents  therefore 
71
 Federal  Communications  Commission  FCC  99-  120 
 331  In  addition,  we  note  that  a  decision  to  adopt  the  revised  HAI  values  for  maximum  equipped  lines  per  switch 
 would  have  only  a  minimal  impact  on  the  overall  forward-  looking  cost  estimation  because  less  than  2  percent  of 
 wire  centers  have  more  than  80,000  lines.  A  review  of  the  data  indicates  that,  of  the  12,506  wire  centers  served  by 
 non-  rural  LECs,  only  189  (1.5  percent)  have  more  than  80,000  lines  and  57  (0.5  percent)  have  more  than  100,000 
 lines.  See  HAI  Feb.  3,  1998  model  submission. 

 332  HAI  Dec.  11,  1997  submission,  Inputs  Portfolio  at  80. 

 333  HAI  Dec.  11,  1997  submission,  Inputs  Portfolio  at  80. 
 334  BCPM  April  30,  1998  submission,  Switch  Model  Inputs  at  20-  21.  BCPM  defines  Switch  Percent  Line  Fill 
 as  the  ratio  between  the  number  of  working  lines  on  the  switch  and  the  total  number  of  lines  for  which  the  switch 
 is  engineered. 

 335  Sprint  Dec.  22  ex  parte  at  17. 

 336  Sprint  Dec.  22  ex  parte  at  18. 
 337  Sprint  Dec.  22  ex  parte  at  18. 
 338  BellSouth  Inputs  Public  Notice  reply  comments  at  Exhibit  2-  13;  Kentucky  Cost  Study  App.  F  at  13; 
 Louisiana  Public  Service  Commission,  State  Forward-  Looking  Cost  Studies  for  Federal  Universal  Service  Support 
 (May  19,  1998)  (Louisiana  Cost  Study). 

 72 

 selected  the  80,000  line  limitation  as  the  maximum  equipped  line  size  value  with  the  knowledge 
 that  the  full  capacity  of  the  switch  may  be  higher.  331  We  seek  comment  on  our  tentative 
 conclusion. 

 184.  Switch  Port  Administrative  Fill.  We  tentatively  adopt  a  switch  port  administrative 
 fill  factor  of  94  percent.  HAI  defines  the  switch  port  administrative  fill  as  "the  percent  of  lines  in 
 a  switch  that  are  assigned  to  subscribers  compared  to  the  total  equipped  lines  in  a  switch."  332  HAI 
 assigns  a  switch  port  administrative  fill  factor  of  98  percent  in  its  default  input  values.  333  The 
 BCPM  default  value  for  the  switch  percent  line  fill  is  88  percent.  334 

 185.  The  BCPM  proponents  contend  that  switches  have  significant  unassigned  capacity 
 due  to  the  fact  that  equipment  is  installed  at  intervals  to  handle  one  to  three  years'  growth.  335 
 BCPM  most  recently  contends  that  U  S  WEST  and  BellSouth  have  company-  wide  average  fills  in 
 the  range  of  76  percent.  336  Sprint,  on  behalf  of  the  BCPM  proponents,  now  recommends  an 
 average  fill  factor  of  80  percent.  337 

 186.  We  note  that  the  switch  port  administrative  fill  factor  of  94  percent  has  been 
 adopted  in  several  state  universal  service  proceedings  and  is  supported  by  the  Georgetown 
 Consulting  Group,  a  consultant  of  BellSouth.  338  We  also  note  that  this  value  falls  within  the  range 
 established  by  the  HAI  and  BCPM  default  input  values.  The  BCPM  model  documentation 
72
 Federal  Communications  Commission  FCC  99-  120 
 339  BCPM  April  30,  1998  submission,  Switch  Model  Inputs  at  20-  21. 
 340  HAI  Dec.  11,  1997  submission,  Model  Description  at  52. 
 341  HAI  Dec.  11,  1997  submission,  Model  Description  at  53. 
 342  Sprint  Dec.  22  ex  parte  at  10. 
 343  Sprint  Dec.  22  ex  parte  at  10. 
 344  GTE  Dec.  18  ex  parte  at  6. 
 345  GTE  Dec.  18  ex  parte  at  6. 

 73 

 established  a  switch  line  fill  default  value  of  88  percent  that  included  "allowances  for  growth  over 
 an  engineering  time  horizon  of  several  years."  339  BCPM  has  provided  no  additional  evidence  to 
 support  its  revised  value  of  80  percent.  We  therefore  tentatively  adopt  a  switch  port 
 administrative  fill  factor  of  94  percent.  We  seek  comment  on  this  tentative  value. 

 187.  Trunking.  We  tentatively  conclude  that  the  switch  module  should  be  modified  to 
 disable  the  computation  that  reduces  the  end  office  investment  by  the  difference  in  the  interoffice 
 trunks  and  the  6:  1  line  to  trunk  ratio.  In  addition,  we  tentatively  adopt  the  HAI  suggested  input 
 value  of  $100.00  for  the  trunk  port  investment,  per  end. 

 188.  The  HAI  switching  and  interoffice  module  developed  switching  cost  curves  using 
 the  Northern  Business  Information  (NBI)  publication,  "U.  S.  Central  Office  Equipment  Market: 
 1995  Database."  340  These  investment  figures  were  then  reduced  per  line  to  remove  trunk  port 
 investment  based  on  NBI's  implicit  line  to  trunk  ratio  of  6:  1.  341  The  actual  number  of  trunks  per 
 wire  center  is  calculated  in  the  transport  calculation,  and  port  investment  for  these  trunks  is  then 
 added  back  into  the  switching  investments. 

 189.  The  BCPM  proponents  contend  that,  under  the  HAI  trunk  investment  approach, 
 raising  the  per-  trunk  investment  leads  to  a  decrease  in  the  switch  investment  per  line  under  the 
 HAI  approach,  "despite  a  reasonable  and  expected  increase"  in  the  investment  per  line.  342  The 
 BCPM  proponents  argue  that  the  trunk  port  input  value  should  be  set  at  zero  to  avoid  producing 
 "contradictory"  results.  343  GTE  also  notes  that  the  selection  of  the  trunk  port  input  value  creates 
 a  dilemma  in  that  it  is  used  to  reduce  the  end  office  investment,  as  noted  above,  and  to  develop  a 
 tandem  switch  investment.  344  GTE  recommends  that  the  switch  module  be  modified  by  disabling 
 the  computation  that  reduces  the  end  office  investment  by  the  difference  in  the  computed 
 interoffice  trunks  and  the  6:  1  line  to  trunk  ratio.  345  The  HAI  sponsors  agree  that  the  trunk  port 
73
 Federal  Communications  Commission  FCC  99-  120 
 346  Letter  from  Chris  Frentrup,  MCI,  to  Magalie  Roman  Salas,  FCC,  dated  Feb.  9,  1999  (MCI  Feb.  9  ex  parte) 
 at  24. 

 347  GTE  Dec.  18  ex  parte  at  6. 

 348  HAI  defines  this  input  as  the  "per  trunk  equivalent  investment  in  switch  trunk  port  at  each  end  of  a  trunk." 
 HAI  Dec.  11,  1997  submission,  Appendix  B  (HM  5.0  Inputs,  Assumptions,  and  Default  Values)  at  46. 

 349  HAI  Dec.  11,  1997  submission,  Inputs  Portfolio  at  102. 

 350  GTE  Dec.  18  ex  parte  at  6;  Sprint  Dec.  22  ex  parte  at  10. 
 351  Letter  from  William  W.  Jordan,  BellSouth,  to  Magalie  Roman  Salas,  FCC,  dated  August  7,  1998  (BellSouth 
 Aug.  7  ex  parte)  Attachment  to  Question  1  at  5,  9,  13,  17  (dated  July  15,  1998).  The  four  states  are  Kentucky, 
 Louisiana,  North  Carolina,  and  South  Carolina. 

 352  Id. 

 74 

 calculation  should  be  deactivated  in  the  switching  module.  346 
 190.  We  agree  with  commenters  that  the  trunk  port  input  creates  inconsistencies  in 
 reducing  the  end  office  investment.  We  do  not,  however,  agree  with  the  suggestion  of  the  BCPM 
 sponsors  to  simply  set  this  input  value  at  zero.  As  noted  by  GTE,  this  input  value  is  also  used  to 
 calculate  the  tandem  switch  investment.  347  Consistent  with  the  suggestions  by  GTE  and  the  HAI 
 sponsors,  we  tentatively  conclude  that  the  switch  module  should  be  modified  to  disable  the 
 computation  that  reduces  the  end  office  investment  by  the  difference  in  the  computed  interoffice 
 trunks  and  the  6:  1  line  to  trunk  ratio. 

 191.  Because  the  trunk  port  input  value  is  also  used  to  determine  the  tandem  switch 
 investment,  we  must  determine  the  trunk  port,  per  end  investment.  348  The  HAI  input  value  for 
 trunk  port  investment  per  end  is  $100.00.  349  GTE  and  Sprint  contend  that  this  value  should  be 
 much  higher  --  ranging  from  $200.00  to  $500.00.  350  BellSouth  notes  that  four  states  have  issued 
 orders  addressing  the  cost  of  the  trunk  port  for  universal  service.  351  These  states  estimate  the  cost 
 of  the  trunk  port  ranging  from  $62.73  to  $110.77.  352  We  tentatively  conclude  that  the  record 
 supports  the  adoption  of  a  trunk  port  investment  per  end  of  $100.00,  as  suggested  by  the  HAI 
 sponsors.  As  noted  above,  this  value  is  consistent  with  the  findings  of  several  states  and 
 BellSouth.  In  addition,  GTE  and  Sprint  provide  no  data  to  support  their  proposed  trunk  port 
 investment  value.  We  therefore  tentatively  adopt  the  HAI  suggested  input  value  of  $100.00  for 
 the  trunk  port  investment,  per  end.  We  seek  comment  on  our  tentative  conclusions. 

 VII.  EXPENSES 
 192.  In  this  section,  we  address  the  inputs  in  the  model  related  to  expenses,  including 
74
 Federal  Communications  Commission  FCC  99-  120 
 353  Platform  Order,  13  FCC  Rcd  at  21357,  para.  81. 
 354  Plant  specific  expenses  include  the  cost  of  maintaining  telecommunications  plant  and  equipment. 
 355  Plant  non-  specific  expenses  include  the  cost  of  engineering,  network  operations,  and  power  expenses. 
 356  Corporate  operations  expenses  include  the  cost  of  administration,  human  resources,  legal,  and  accounting 
 expenses. 

 357  Customer  service  expenses  include  the  cost  of  marketing,  billing,  and  directory  listing  expenses. 

 358  1997  Further  Notice,  12  FCC  Rcd  at  18569,  para.  148. 
 359  1997  Further  Notice,  12  FCC  Rcd  at  18572-  73,  para.  157. 

 75 

 general  support  facilities  (GSF)  expenses.  In  light  of  the  criteria  identified  in  the  Universal 
 Service  Order,  the  Commission  intends  to  select  inputs  that  will  result  in  a  reasonable  allocation 
 of  joint  and  common  costs  for  non-  networked  related  costs  such  as  GSF,  plant  specific  and  non-specific 
 expenses,  and  corporate  and  customer  operations.  The  Commission  seeks  to  develop  an 
 appropriate  methodology  for  estimating  these  types  of  expenses  to  "ensure  that  the  forward-looking 
 economic  cost  [calculated  by  the  federal  mechanism]  does  not  include  an  unreasonable 
 share  of  the  joint  and  common  costs  for  non-  supported  services."  353 

 A.  Background 
 193.  GSF  costs  and  expenses  include  the  investment  and  expenses  related  to  vehicles, 
 land,  buildings,  and  general  purpose  computers.  Other  expenses  (that  are  not  associated  with 
 GSF)  include:  plant  specific  expenses,  354  plant  non-  specific  expenses,  355  corporate  operations 
 expenses,  356  and  customer  services  expenses.  357  For  purposes  of  this  Further  Notice,  costs 
 associated  with  common  support  services  (often  called  overhead  expenses)  refer  to  plant  non-specific 
 expenses,  corporate  operations  expenses,  and  customer  service  expenses. 

 194.  In  the  1997  Further  Notice,  the  Commission  sought  comment  on  how  to  remove 
 costs  for  nonregulated  activities  from  costs  for  regulated  activities  in  order  to  incorporate  the 
 appropriate  amount  of  GSF  investment  and  expenses  in  estimating  the  costs  of  providing  the 
 supported  services.  358  The  Commission  tentatively  concluded  that  GSF  expenses  should  vary  by 
 state  with  respect  to  land  values  because  a  large  share  of  GSF  expenses  is  attributable  to  the  cost 
 of  land. 

 195.  In  the  Further  Notice,  the  Commission  also  sought  comment  on  how  to  establish 
 forward-  looking  expenses  in  the  selected  federal  mechanism.  359  The  Commission  specifically 
 sought  comment  on  which  expenses  should  be  calculated  on  a  per-  line  basis  and  which  should  be 
 calculated  as  a  percentage  of  investment.  The  Commission  also  sought  comment  on  whether 
75
 Federal  Communications  Commission  FCC  99-  120 
 360  1997  Further  Notice,  12  FCC  Rcd  at  18572,  18574-  77,  paras.  157,  162,  165,  168,  171. 
 361  1997  Further  Notice,  12  FCC  Rcd  at  18574,  para.  162. 
 362  1997  Further  Notice,  12  FCC  Rcd  at  18574-  77,  paras.  162,  165,  168,  171. 
 363  Platform  Order,  13  FCC  Rcd  at  21357,  para.  81. 
 364  Platform  Order,  13  FCC  Rcd  at  21360,  para.  87. 
 365  Note  that  plant-  specific  operations  expenses  include  general  support  facilities  (GSF)  expenses. 
 366  Plant  specific  operations  expenses  correspond  to  the  following  ARMIS  43-  03  report  accounts: 

 6110  -  Network  Support  Expense 
 6120  -  General  Support  Expense 
 6210  -  COE  Switch 
 6212  -  COE  Digital  Electronic  Switch  only 
 6220  -  Operator  Systems 
 6230  -  COE  Transmission 
 6231  -  Radio  Systems 

 76 

 there  are  measures  other  than  lines  and  investment  to  which  specific  expenses  should  be  tied.  360 
 With  respect  to  plant  specific  expenses,  the  Commission  sought  comment  on  whether 
 maintenance  expense  estimates  should  depend  upon  plant  mix  and,  in  particular,  whether  an 
 increase  in  the  use  of  aerial  cable  also  increases  maintenance  expenses,  and  whether  plant  specific 
 expenses  should  vary  with  such  characteristics  as  climate  or  soil  type.  361  In  addition,  the 
 Commission  asked  commenters  to  identify  the  complete  set  of  forward-  looking  expenses  for 
 which  universal  service  support  should  be  available.  362 

 196.  In  the  Platform  Order,  we  adopted  HAI's  algorithm  for  calculating  expenses  and 
 GSF  costs,  as  modified  to  provide  some  additional  flexibility  in  calculating  expenses  offered  by 
 the  BCPM  sponsors.  363  With  this  added  flexibility,  the  model  allows  the  user  to  estimate  expenses 
 as  either  a  per-  line  amount  or  as  a  percentage  of  investment.  We  noted  that  many  of  the  questions 
 regarding  how  best  to  calculate  expenses  will  be  resolved  in  the  input  selection  phase  of  this 
 proceeding.  364 

 B.  Issues  for  Comment 
 1.  Plant  Specific  Operations  Expenses 
 197.  We  first  address  the  inputs  related  to  plant  specific  operations.  365  Plant  specific 
 operations  expenses  are  the  expense  costs  related  to  the  maintenance  of  specific  kinds  of 
 telecommunications  plant.  366 
76
 Federal  Communications  Commission  FCC  99-  120 
 6232  -  COE  Circuit  -  DDS 
 6232  -  COE  Circuit  -  Other  than  DDS 
 6310  -  Information  Origination/  Termination 
 6311  -  Station  Apparatus  (only) 
 6341  -  Large  PBX 
 6351  -  Public  Telephone 
 6362  -  Other  Terminal  Equipment 
 6411  -  Poles 
 6421.1  -  Aerial  Cable  -  Metallic  (Copper) 
 6421.2  -  Aerial  Cable  -  Fiber 
 6422.1  -  Underground  Cable  -  Metallic  (Copper) 
 6422.2  -  Underground  Cable  -  Fiber 
 6423.1  -  Buried  Cable  -  Metallic  (Copper) 
 6423.2  -  Buried  Cable  -  Fiber 
 6441  -  Conduit  Systems 

 367  See  State  High  Cost  Report  at  21;  1997  Further  Notice,  12  FCC  Rcd  at  18574,  para.  161. 

 77 

 198.  Nationwide  Estimates.  We  tentatively  conclude  that  we  should  adopt  input  values 
 that  reflect  the  average  expenses  that  will  be  incurred  by  non-  rural  carriers,  rather  than  a  set  of 
 company-  specific  maintenance  expense  estimates.  We  make  this  tentative  conclusion  for  a 
 number  of  reasons.  First,  we  note  that  this  tentative  conclusion  is  consistent  with  a 
 recommendation  of  the  state  Joint  Board  members.  367  Second,  we  have  not  been  able  to  obtain 
 current  cost-  to-  book  cost  ratios  for  each  ARMIS  reporting  firm,  which  would  be  necessary  to 
 calculate  company  or  study  area  specific  expense-  to-  investment  ratios  in  the  proposed 
 methodology  described  below.  Further,  we  tentatively  conclude  that  the  use  of  national  or 
 regional  averages  for  input  factors  is  more  consistent  with  the  forward-  looking  nature  of  the  high 
 cost  model  because  it  mitigates  the  rewards  to  less  efficient  companies.  We  seek  comment  on 
 these  tentative  conclusions.  Parties  advocating  the  use  of  company-  specific  values  or  other 
 alternatives  to  nationwide  or  regional  estimates  should  identify  the  method  and  data  readily 
 available  to  firms  that  would  be  used  to  estimate  plant-  specific  expenses.  Commenters  should 
 also  indicate  how  their  proposal  is  consistent  with  the  goal  of  estimating  forward-  looking  costs. 
 We  note  that  the  proposed  expense  estimates  in  Appendix  A  are  nationwide  averages. 

 199.  In  support  of  the  use  of  company-  specific  factors,  a  number  of  commenters  and 
 workshop  participants  argue  that  maintenance  expenses  vary  widely  by  geographic  area  and  the 
 type  of  plant  installed.  Others  contend  that  plant-  specific  expenses  are  highly  dependent  on 
 regional  wage  rate  differentials.  At  this  time,  we  have  been  unable  to  verify  significant  regional 
 differences  among  study  areas  or  between  companies  based  solely  on  labor  rate  variations  using 
 the  publicly  available  ARMIS  expense  account  data  for  plant-  specific  maintenance  costs. 
 Nonetheless,  we  believe  that  expenses  vary  by  the  type  of  plant  installed.  The  synthesis  model 
 takes  this  variance  into  account  because,  as  investment  in  a  particular  type  of  plant  varies,  the 
77
 Federal  Communications  Commission  FCC  99-  120 
 368  Report  on  Locality-  based  Comparability  Payments  for  the  General  Schedule,  Annual  Report  of  the 
 President's  Pay  Agent,  Appendix  II,  1995. 

 369  The  baseline  expense  factor  is  calculated  according  to  the  formula  Ei  =  3  3j  eij  wj  rj  where  Ei  is  the  baseline 
 expense  factor  for  category  i,  eij  is  the  expense  factor  for  category  i  and  for  study  area  j,  wj  is  a  weight  based  on  the 
 number  of  switched  lines  in  study  area  j,  and  rj  is  the  regional  deflator  from  the  Pay  Agent's  report  for  the  region 
 most  applicable  to  study  area  j. 

 370  We  note  that  the  data  used  for  this  analysis  is  available  on  the  Commission's  Web  site  at  http://  www.  fcc.  gov. 

 78 

 associated  expense  cost  also  varies.  We  seek  comment  on  the  degree  to  which  regional  wage  rate 
 differentials  exist  and  are  significant.  We  ask  parties  to  suggest  independent  data  sources  on 
 variations  of  wage  rates  between  regions.  We  seek  comment  on  a  methodology  that  permits  such 
 distinctions  without  resorting  to  self-  reported  information  from  companies. 

 200.  One  possible  approach  would  be  to  use  indexes  calculated  by  the  President's  Pay 
 Agent  for  calculating  locality  pay  differentials  for  Federal  employees.  368  Under  this  methodology, 
 we  would  first  calculate  a  baseline  expense  factor  for  the  labor-  related  portion  of  each  plant-specific 
 expense  account  according  to  a  formula  which  is  based  on  the  sum  of  an  expense  factor 
 for  that  category  by  study  area,  a  weight  representing  the  total  investment  in  a  study  area,  and  the 
 regional  wage  differential  deflator  calculated  in  the  Pay  Agent's  report  applicable  to  the  study 
 area.  369  The  baseline  expense  would  then  be  disaggregated  to  each  wire  center  or  study  area  using 
 the  deflator.  We  seek  comment  both  on  the  validity  of  this  approach  as  well  as  on  the  specific 
 implementation. 

 201.  We  also  tentatively  conclude  that  we  should  not  adopt  different  expense  estimates 
 for  small,  medium,  and  large  non-  rural  companies  on  a  per  line  basis.  In  order  to  determine  if 
 economies  of  scale  should  be  a  factor  in  plant-  specific  expenses,  Commission  staff  tested  whether 
 significant  differences  in  maintenance  expenses  per  line  could  be  discerned  from  segmenting 
 companies  into  small  carriers  with  less  than  500,000  access  lines,  medium  carriers  with  between 
 500,000  and  5,000,000  access  lines,  and  those  large  carriers  with  over  5,000,000  access  lines.  370 
 We  have  found  no  significant  differences  in  the  expense  factor  per-  line  or  per-  investment 
 estimates  based  on  these  criteria.  Therefore,  to  estimate  costs  associated  with  an  efficient 
 network  as  determined  by  the  forward-  looking  mechanism,  we  tentatively  conclude  that  plant-specific 
 maintenance  factors  should  be  estimated  on  a  national  basis.  We  seek  comment  on  these 
 tentative  conclusions. 

 202.  Methodology.  Commenters  advocate  two  methods  of  estimating  plant  specific 
 operations  expenses.  The  BCPM  sponsors  contend  that  all  expenses  should  be  calculated  on  a 
 per-  line  basis.  The  BCPM  default  estimates  for  these  accounts  are  based  on  a  survey  of 
 companies.  The  HAI  sponsors  argue  that  expenses  should  be  calculated  as  a  percentage  of 
 investment.  Specifically,  the  HAI  sponsors  assert  that  plant  specific  operations  expenses  should 
78
 Federal  Communications  Commission  FCC  99-  120 
 371  Protective  Order,  13  FCC  Rcd  at  13910. 
 372  An  example  of  a  current-  to-  book  ratio  for  a  facility  would  be  defined  as  the  ratio  of  the  current  cost  of  a 
 facility  divided  by  its  embedded  cost.  Therefore,  if  a  pole  cost  $200  to  install  in  1980,  and  $400  today,  the  current-to- 
 book  ratio  is  $400/$  200  =  2.0. 

 79 

 be  calculated  as  a  fixed  percentage  of  investment. 
 . 
 203.  Although  we  agree  with  the  HAI  sponsors  that  plant  specific  operations  expenses 
 should  be  estimated  as  a  percentage  of  investment,  we  tentatively  decline  to  adopt  the  flat 
 percentages  they  advocate.  By  using  ARMIS  investment  values  that  are  not  converted  to  current 
 levels,  the  flat-  rate  method  proposed  by  the  HAI  sponsors  does  not  attempt  to  use  forward-looking 
 estimates.  We  also  tentatively  decline  to  adopt  the  per-  line  BCPM  default  estimates. 
 Based  on  a  private  survey  of  companies,  the  BCPM  values  fail  to  comply  with  criterion  eight 
 identified  in  the  Universal  Service  Order,  because  the  underlying  data  for  these  values  are  not 
 open  to  and  verifiable  by  the  public  nor  made  available  under  the  Protective  Order.  371  In  contrast 
 to  the  BCPM  proposal,  the  methodology  that  we  tentatively  adopt  here  is  primarily  based  on 
 readily  identifiable  and  publicly  available  ARMIS  data.  Although  ARMIS  data  reflect  the 
 embedded  costs  incurred  by  incumbent  LECs,  we  take  steps  in  our  proposed  methodology  to 
 convert  these  costs  to  forward-  looking  estimates,  as  described  below.  We  note  that  this 
 methodology  was  proposed  by  Commission  staff  in  the  public  workshop  on  maintenance  expenses 
 on  December  10,  1998. 

 204.  In  order  to  estimate  forward-  looking  plant  specific  operations  expenses,  we  have 
 considered  the  requirements  set  forth  in  the  Platform  Order,  and  information  provided  in 
 workshops,  comments  and  ex-  partes.  We  tentatively  conclude  that  the  input  values  for  each  plant 
 specific  operations  expense  account  should  be  calculated  as  the  ratio  of  booked  expense  to 
 current  investment.  These  expense-  to-  investment  ratios  would  then  be  multiplied  in  the  model  by 
 the  model-  derived  investment  for  each  investment  account  or  group  of  accounts,  to  produce  an 
 estimate  of  the  plant  specific  operations  expenses. 

 205.  Our  proposed  methodology  for  estimating  expense  to  investment  ratios  consists  of 
 four  steps.  First,  staff  obtained  from  some  of  the  ARMIS-  filing  companies,  account-  specific 
 current  cost  to  book  cost  (current-  to-  book)  ratios  for  the  related  investment  accounts.  The 
 current-  to-  book  ratio  is  a  tool  that  is  used  to  restate  the  historic,  financial  account  balance  on  a 
 company's  books,  which  reflects  investment  decisions  made  over  many  years,  to  present  day 
 replacement  cost.  372  For  each  account  or  sub-  account,  a  current-  to-  book  ratio  is  developed  by 
 first  revaluing  each  type  of  equipment  at  its  current  replacement  cost.  The  sum  of  these  current 
 costs  are  then  divided  by  the  total,  embedded  cost  account  balance.  The  resulting  current-  to-book 
 ratio  will  be  greater  than  one  if  current  costs  are  rising  relative  to  the  historic  costs  and  less 
 than  one  if  current  costs  are  declining.  Current-  to-  book  ratios  for  the  years  ending  1995  and 
 1996  were  provided  by  the  following  five  holding  companies:  Ameritech,  Bell  Atlantic,  Bell 
79
 Federal  Communications  Commission  FCC  99-  120 
 373  The  current-  to-  book  ratios  submitted  by  these  companies  are  proprietary  information  subject  to  provisions  in 
 the  Protective  Order  and  therefore  are  not  re-  produced  here. 

 374  We  note  that  the  five  carriers  that  provided  current-  to-  book  ratios  account  for  66  percent  of  plant  specific 
 expenses  and  70  percent  of  the  investment  reflected  in  ARMIS. 

 375  Investment  balances  were  obtained  from  the  following  plant  accounts: 

 2112  -  2116  -  Network  Support  Investment 
 2121  -  2124  -  General  Support  Investment 
 2210  -  COE  Switch 
 2212  -  COE  Digital  Electronic  Switch  only 
 2230  -  COE  Transmission 
 2231  -  Radio  Systems 
 2232  -  COE  Circuit  -  DDS 
 2232  -  COE  Circuit  -  Other  than  DDS 
 2310  -  Information  Origination/  Termination 
 2311  -  Station  Apparatus 
 2341  -  Large  PBX 
 2351  -  Public  Telephone 
 362  -  Other  Terminal  Equipment 
 2410  -  Cable  and  Wire  Facilities 
 2411  -  Poles 
 2421.1  -  Aerial  Cable  -  Metallic  (Copper) 
 2421.2  -  Aerial  Cable  -  Fiber 
 2422.1  -  Underground  Cable  -  Metallic  (Copper) 
 2422.2  -  Underground  Cable  -  Fiber 
 2423.1  -  Buried  Cable  -  Metallic  (Copper) 
 2423.2  -  Buried  Cable  -  Fiber 
 2241  -  Conduit  Systems 

 80 

 South,  GTE,  and  Southwestern  Bell.  373  Although  we  would  prefer  to  have  data  from  more 
 companies,  the  other  ARMIS-  filing  carriers  informed  us  that,  they  either  no  longer  maintain  this 
 type  of  information,  or  never  used  current-  to-  book  ratios  for  accounting  purposes.  374 

 206.  Second,  staff  calculated  composite  current-  to-  book  ratios  for  each  account.  For 
 each  study  area  of  the  five  holding  companies  that  provided  current-  to-  book  ratios,  we  obtained 
 year-  end  1995  and  1996  investment  balances  from  ARMIS  for  the  plant  accounts  consistent  with 
 the  aforementioned  plant-  specific  expense  accounts.  375  Study  area-  specific  current-  to-  book  ratios 
 for  the  two  periods  were  multiplied  by  the  1995  and  1996  ARMIS  investments  in  each  account  to 
 derive  the  forward-  looking,  "current,"  year-  end  1995  and  1996  investment  levels  by  account  and 
 by  study  area.  The  ARMIS  and  current  investments  were  then  summed  separately,  by  year  and  by 
 account,  for  all  study  areas  of  the  five  holding  companies.  The  resulting  total  current  investment 
 (by  year  and  by  account  for  the  sum  of  all  study  areas)  was  then  divided  by  the  total  ARMIS 
 investment  (by  year  and  by  account  for  the  sum  of  all  study  areas)  producing  two  sets  of 
80
 Federal  Communications  Commission  FCC  99-  120 
 376  As  calculated  by  the  model,  TPIS  excludes  GSF  investment,  while  ARMIS  TPIS  includes  GSF  investment. 
 HAI  Dec.  11,  1997  submission. 

 81 

 composite  current-  to-  book  ratios  (year  end  1995  and  1996). 
 207.  Third,  to  calculate  the  expense-  to-  investment  ratios  for  the  plant-  specific 
 operations  expense  accounts,  staff  obtained  total,  year-  end  1995  and  1996  investment  account 
 balances  from  the  ARMIS  43-  03  reports  for  all  ARMIS-  filing  companies.  To  make  these 
 embedded  account  balances  forward-  looking,  staff  next  multiplied  each  investment  account 
 balance  for  each  year  by  the  current-  to-  book  ratios  for  the  same  year  developed  earlier.  The  1995 
 and  1996  "current"  balances  for  each  account  were  then  averaged  by  adding  the  two  years 
 together  and  dividing  by  two. 

 208.  Finally,  from  the  1996  ARMIS  43-  03  report,  staff  obtained  the  1996  balances  for 
 each  plant-  specific  operations  expense  account  for  all  ARMIS-  filing  companies.  The  expense 
 account  balances  were  divided  by  their  respective  average  "current"  investment  to  obtain  expense-to- 
 investment  ratios.  We  tentatively  conclude  that  these  expense-  to-  investment  ratios  should  be 
 applied  in  the  mechanism  to  the  model-  derived  investment  balances  to  obtain  forward-  looking 
 plant-  specific  operations  expense  estimates.  The  industry-  wide  expense-  to-  investment  ratios  are 
 listed  in  Appendix  A.  We  seek  comment  on  these  proposed  input  values,  tentative  conclusions, 
 and  the  proposed  methodology  outlined  above. 

 209.  Converting  Expense  Estimates  to  Current  Values.  We  recognize  that  plant  specific 
 expenses  will  change  over  time.  Because  we  initially  used  data  from  1996  in  the  methodology 
 described  above,  we  tentatively  conclude  that  it  is  appropriate  to  adjust  this  data  to  account  for 
 inflation  and  changes  in  productivity  by  obtaining  revised  1997  current-  to-  book  ratios  from  those 
 companies  providing  data.  In  addition,  we  tentatively  conclude  that  we  should  use  the  most 
 current  ARMIS  data  available  necessary  for  the  maintenance  factor  methodology.  Because 
 expense  and  investment  balances  for  1998  are  not  available  from  ARMIS  at  this  time,  we  have 
 also  not  been  able  to  include  them  in  calculating  the  plant-  specific  maintenance  factors.  We 
 tentatively  conclude  that  we  should  use  these  data  in  the  final  computation  of  expense  estimates. 
 We  seek  comment  on  these  tentative  conclusions. 

 210.  GSF  Investment.  GSF  investment  includes  buildings,  motor  vehicles,  and  general 
 purpose  computers.  The  synthesis  model  uses  a  three-  step  algorithm  to  estimate  GSF  for  each 
 study  area.  First,  the  model  calculates  a  GSF  investment  ratio  for  each  GSF  account  by  dividing 
 the  ARMIS  investment  for  the  account  by  the  ARMIS  total  plant  in  service  (TPIS).  Second,  the 
 model  calculates  a  preliminary  estimate  GSF  investment  for  each  account  by  multiplying  the  GSF 
 investment  ratio  for  that  account  times  the  model's  estimate  of  TPIS.  376  Finally,  the  model 
 reduces  each  of  the  preliminary  GSF  investment  estimates  by  multiplying  by  one  of  two  factors, 
81
 Federal  Communications  Commission  FCC  99-  120 
 377  These  two  factors  are  one  minus  either  the  Total  Operations  General  Support  Allocator  (Total  Operations 
 Allocator)  or  the  Office  Worker  General  Support  Allocator  (Office  Worker  Allocator).  The  Total  Operations 
 Allocator  is  applied  to  the  Motor  Vehicles,  Garage  Work  Equipment,  and  Other  Work  Equipment  accounts,  while 
 the  Office  Worker  Allocator  is  applied  to  the  Furniture,  Office  Equipment,  Buildings  and  General  Purpose 
 Computer  accounts.  See  HAI  Dec.  11,  1997  submission.  Each  of  these  allocators  is  a  fraction.  The  Total 
 Operations  Allocator  is  the  ratio  of  the  sum  of  customer  operations  expenses  and  corporate  operations  expenses  to 
 total  operating  expenses.  The  Office  Worker  Allocator  is  the  ratio  of  the  sum  of  corporate  operations  expenses  and 
 network  operations  expenses  to  the  sum  of  customer  operations  expenses,  corporate  operations  expenses  and 
 network  operations  expenses. 

 378  We  tentatively  conclude  that  the  Office  Worker  Allocator  should  equal  the  ratio  of  the  sum  of  customer 
 operations  expenses,  network  operations  expenses,  and  corporate  operations  expenses  assigned  to  supported 
 services,  to  the  sum  of  those  expenses  calculated  on  a  total  regulated  basis.  In  principle  the  Total  Operations 
 Allocator  should  equal  the  Office  Worker  Allocator.  Due  to  equations  embedded  in  the  HAI  expense  module, 
 however,  the  total  operations  general  support  allocator  is  set  equal  to  one  minus  the  office  worker  general  support 
 allocator.  We  tentatively  conclude  that  GSF  investment  should  be  calculated  as  the  product  of  the  Office  Worker 
 Allocator,  calculated  on  a  nationwide  basis,  and  the  preliminary  GSF  investment,  which  is  calculated  on  a  study 
 area  specific  basis. 

 379  Corporate  operations  and  customer  services  include  the  following  ARMIS  accounts  and  their  subaccounts: 

 6610  -  Marketing  Total 
 6611  -  Product  Management 
 6612  -  Sales 

 82 

 which  are  the  same  as  those  used  in  the  HAI  model.  377 
 211.  We  tentatively  conclude  that  the  model's  preliminary  estimate  of  GSF  investment 
 should  be  reduced,  because  only  a  portion  of  GSF  investment  is  related  to  the  cost  of  providing 
 the  services  supported  by  the  federal  mechanism.  We  also  tentatively  conclude  that  the  synthesis 
 model  should  not  use  the  same  factors  as  those  used  in  the  HAI  model.  The  HAI  sponsors,  who 
 developed  the  expense  module  in  the  synthesis  model,  have  not  shown  why  these  particular 
 factors  should  be  used  for  this  purpose.  Instead,  we  tentatively  conclude  that  total  GSF 
 investment  should  be  reduced  by  factors  that  reflect  the  percentage  of  customer  operations, 
 network  operations,  and  corporate  operations  used  to  provide  the  supported  services.  378  We  seek 
 comment  on  these  tentative  conclusions. 

 2.  Common  Support  Service  Expenses 
 212.  We  next  address  common  support  service  expenses,  which  are  comprised  of 
 corporate  operations,  customer  service  expenses,  and  plant  non-  specific  expenses.  Corporate 
 operations  expenses  are  those  costs  associated  with  general  administrative,  executive  planning, 
 human  resources,  legal,  and  accounting  expenses  for  total  company  operations.  Customer  service 
 expenses  include  marketing,  billing,  operator  services,  directory  listing,  and  directory  assistance 
 costs.  379  Plant  non-  specific  expenses  are  common  network  operations  and  maintenance  type  of 
82
 Federal  Communications  Commission  FCC  99-  120 
 6613  -  Product  Advertising 
 6620  -  Service  Expense  Total 
 6621  -  Call  Completion  (Operator  Service  Expense) 
 6622  -  Number  Services  (Directory  Publishing  Expense) 
 6623  -  Customer  Services 
 6710  -  Executive  and  Planning  Total 
 6711  -  Executive 
 6712  -  Planning 
 6720  -  General  and  Administrative 
 6721  -  Accounting  and  Finance 
 6722  -  External  Relations 
 6723  -  Human  Resources 
 6724  -  Information  Management 
 6725  -  Legal 
 6726  -  Procurement 
 6727  -  Research  and  Development 
 6728  -  Other  General  and  Administrative 

 380  Non-  specific  plant  expenses  include  the  following  ARMIS  expense  accounts: 

 6510  -  Other  Property  Plant  and  Equipment  Expense 
 6530  -  Network  Operations 
 6531  -  Power 
 6532  -  Testing 

 381  See  1997  Further  Notice,  12  FCC  Rcd  at  18578,  para  173. 

 382  BCPM  model  default  values  on  a  per-  line  per-  month  basis  are  the  following: 

 Aggregate  USOA  Account  BCPM  Default  Values 
 Other  PP  &  E  (6510)  $  0.03 
 Network  Operations  (6530)  1.33 
 Marketing  (6610)  0.35 

 83 

 expenses,  including  engineering,  network  operations,  power  and  testing  expenses,  that  are 
 considered  general  or  administrative  overhead  to  plant  operations.  380  Commission  staff  held  public 
 workshops  where  they  sought  comment  on  various  paradigms  and  econometric  estimation 
 techniques  used  to  calculate  these  factors.  Commission  staff  also  discussed  possible  methods  for 
 subtracting  non-  recurring  costs  from  expense  estimates  and  for  adjusting  estimates  for  inflation 
 and  potential  wage  differentials.  381 

 213.  Per-  Line  Basis.  Common  support  services  are  costs  that  cannot  readily  be 
 associated  with  any  particular  maintenance  expense  or  investment  account.  As  a  result,  we 
 tentatively  conclude  that  these  expenses  (unlike  plant-  specific  expenses)  should  be  estimated  on  a 
 per-  line  basis,  as  advocated  by  the  BCPM  sponsors.  382  We  tentatively  conclude  that  the  HAI 
83
 Federal  Communications  Commission  FCC  99-  120 
 Service  Exp./  Customer  Operations  (6620)  2.42 
 xec.,  Planning,  G&  A  (6700)  2.29 

 Total  Per-  Line  Per-  Month  Expenses  $  6.42 
 383  For  example,  the  HAI  sponsors  propose  that  network  operations  expense  be  estimated  at  50  percent  of 
 ARMIS-  reported  network  operations  expense.  Corporate  overhead  expense  was  estimated  to  be  10.4  percent  of  the 
 total  of  capital  costs  and  operations  expenses  as  a  default  value.  See  1997  Further  Notice,  12  FCC  Rcd  at  18572, 
 18577,  paras.  164,  170. 

 84 

 sponsors  have  failed  to  justify  their  proposal  that  expense  estimates  for  certain  accounts  be  based 
 on  a  percentage  of  ARMIS-  reported  expenses  or  a  percentage  of  total  capital  costs  and 
 operations  expenses.  383  We  seek  comment  on  these  tentative  conclusions. 

 214.  Nationwide  Estimates.  Commenters  such  as  Aliant,  Sprint,  GTE,  and  Bell  South 
 have  argued  for  the  inclusion  of  all  accounts,  and  have  argued  further  that  these  types  of 
 corporations  and  customer  service  expenses  are  inherently  company  specific  in  nature  and  should 
 be  evaluated  in  this  manner.  We  tentatively  conclude  that  inputs  for  corporate  operations, 
 customer  services,  and  plant  non-  specific  expenses  should  also  be  estimated  on  a  nationwide  basis 
 rather  than  a  more  disaggregated  basis.  We  seek  comment  on  this  tentative  conclusion. 

 215.  Costs  associated  with  plant  non-  specific  expenses  used  to  supply  and  run  network 
 operations  by  definition  cannot  be  directly  allocated  to  individual  maintenance  or  investment 
 accounts.  Commenters  have  suggested  that  these  types  of  expenses  may  vary  among  carriers  and 
 between  study  areas.  They  argue  that  these  differences  may  be  a  result  of  company  specific  plant 
 configurations,  geographic  and  labor  demographic  variables,  one-  time  exogenous  costs,  and  non-recurring 
 adjustments  such  as  re-  engineering  expenses.  They  further  argue  that  administrative 
 support  expense  differences  are  also  a  function  of  regional  wage  differentials  and  plant 
 specifications.  As  stated  earlier,  we  cannot  at  this  time  distinguish  significant  differences  in 
 regional  wage  differentials  for  administrative  services  based  solely  on  ARMIS  expense  data  for 
 these  accounts.  Further,  costs  associated  with  corporate  overhead  and  customer  services 
 accounts  are  not  directly  linked  to  specific  company  investment  levels.  We  tentatively  conclude 
 that,  for  forward-  looking  cost  estimates,  these  types  of  administrative  and  service  expenses  are 
 less  dependent  on  carrier  physical  plant  or  geographic  differentials  than  those  that  also  correlate 
 to  company  size  (number  of  lines)  and  demand  (minutes  of  use),  which  were  used  as  estimation 
 variables  to  develop  the  model  inputs.  We  seek  further  comment  on  this  analysis. 

 216.  We  also  tentatively  conclude  that  we  should  not  adopt  different  estimates  for 
 small,  medium,  and  large  high  cost  non-  rural  companies  for  common  support  service  expenses. 
 As  with  plant  specific  expenses,  Commission  staff  tested  whether  statistically  significant 
 differences  in  common  support  service  expenses  per  line  could  be  determined  from  segmenting 
 companies  into  small  carriers  with  less  than  500,000  access  lines,  medium  carriers  with  between 
84
 Federal  Communications  Commission  FCC  99-  120 
 384  Data  was  taken  from  1996  ARMIS  43-  01,  Subject  to  Separations  (Column  F)  for  Accounts  6610,  6620,  6710 
 and  6720.  Data  was  taken  from  1996  ARMIS  43-  03,  Subject  to  Separations  (Column  M)  for  Accounts  6510  and 
 6530.  Line  counts  were  taken  from  1996  ARMIS  43-  08,  Table  III,  Total  Switched  Lines  (Column  DJ)  and  Total 
 Access  Lines  (Column  DM). 

 385  Dial  Equipment  Minutes  of  Use  (DEMS)  for  1996  were  taken  from  NECA,  available  on  the  Commission's 
 Web  site  at  http://  www.  fcc.  gov/  Bureaus/  Common_  Carrier/  Reports/  FCC-  State_  Link/  neca.  html. 

 386  See  Appendix  F  for  further  explanation  of  the  data  sources  used  and  the  method  for  consolidating  study 
 areas  between  data  sets  to  reconcile  the  number  of  observations  for  the  variables  used  in  the  regression  equations. 

 387  Specification  1  used  the  following  regression  equation:  Expense/  Total  Lines  =  1  (Switched  Lines/  Total 
 Lines)+  2  (Special  Lines/  Total  Lines)+  3  (Toll  Minutes/  Total  Lines).  Specification  2  used  the  following 
 equation:  Expense/  Total  Lines  =  1  (Switched  Lines/  Total  Lines)+  2  (Special  Lines/  Total  Lines)+  3  (State  Toll 
 Minutes/  Total  Lines)+  4  (Interstate  Toll  Minutes/  Total  Lines) 

 85 

 500,000  and  5,000,000  access  lines,  and  those  large  carriers  with  over  5,000,000  access  lines. 
 We  have  further  reviewed  whether  expense  estimates  varied  due  to  the  total  number  of  Dial 
 Equipment  Minutes  (DEMs)  reported  by  companies  in  addition  to  the  number  of  lines.  As  with 
 the  plant-  specific  accounts,  we  could  find  no  significant  differences  in  the  expense  factor  per-  line 
 based  on  these  criteria.  Therefore,  consistent  with  the  forward-  looking  costs  associated  with  an 
 efficient  network  as  determined  by  the  federal  mechanism,  we  tentatively  conclude  that  we  should 
 estimate  these  non-  specific  network  operations  expenses  on  a  nationwide,  per-  line  basis.  We  seek 
 comment  on  this  tentative  conclusion. 

 217.  Data  Source.  Following  standard  economic  analysis  and  forecasting  methods,  we 
 propose  to  use  publicly  available  1996  ARMIS  expense  data  384  and  minutes  of  use  information 
 from  NECA,  385  by  study  area,  to  estimate  the  portion  of  these  company-  wide  expenses  to  be 
 covered  by  universal  service  support.  We  believe  that  consolidation  of  this  data  produces  a 
 sufficient  number  of  observations  by  study  area  for  each  of  these  accounts.  386  Public  data  for 
 1996  was  used  in  this  analysis  in  order  to  compare  the  estimates  obtained  with  proprietary 
 information  received  from  a  previous  data  request.  We  note  that  this  methodology  was  proposed 
 by  Commission  staff  in  a  public  workshop  on  December  1,  1998.  We  seek  comment  on  this 
 proposal. 

 218.  Regression  Methodology.  Using  standard  multi-  variate  regression  analysis,  we 
 developed  two  different  specifications  to  determine  the  portion  of  corporate  and  customer 
 operations  and  plant  non-  specific  expenses  subject  to  universal  service  support.  Each  equation 
 estimates  total  expenses  per  total  lines  as  a  function  of  switched  lines  per  total  lines,  special  lines 
 per  total  lines,  and  toll  minutes  per  total  lines,  either  in  combination  (Specification  1)  or  separated 
 between  intrastate  toll  and  interstate  toll  minutes  per  total  lines  (Specification  2).  387 
85
 Federal  Communications  Commission  FCC  99-  120 
 388  According  to  the  analysis,  on  average,  approximately  20  percent  of  yearly  corporate  operations  expenses 
 consisted  of  non-  recurring  charges  for  costs  relating  to  merger  and  acquisitions  and  workforce  restructuring  over 

 86 

 219.  Each  specification  has  been  chosen  to  separate  the  portion  of  expenses  that  could 
 be  estimated  as  attributable  to  special  access  lines  and  toll  usage,  which  are  not  supported  by  the 
 high  cost  mechanism,  rather  than  switched  lines  and  local  usage.  Commission  staff  found  from  an 
 earlier  formulation  that,  when  the  model  included  both  a  switched  line  component  and  a  local 
 usage  component,  the  number  of  switched  lines  and  local  DEMs  were  so  highly  correlated  that  it 
 did  not  increase  the  explanatory  power  of  the  model  to  include  both  variables.  As  a  result,  we 
 tentatively  conclude  that  we  should  not  include  local  dial  equipment  minutes  per  total  lines  as  an 
 explanatory  variable,  despite  suggestions  by  a  number  of  workshop  participants  and  commenters. 
 Because  both  regression  equations  produce  reasonable  estimates,  and  in  order  to  prevent  any 
 potential  advantage  to  firms  which  might  have  a  different  mix  of  toll  minutes,  we  propose  to  use 
 the  average  of  the  estimates  from  the  two  specifications.  We  seek  further  comment  on  this 
 proposed  regression  methodology. 

 220.  Removal  of  One-  Time  and  Non-  Supported  Expenses.  In  order  to  eliminate  the 
 impact  of  one-  time  non-  recurring  expenses  on  forward-  looking  estimates,  we  have  sought 
 verifiable  public  information  on  exogenous  costs  and  those  that  are  recovered  through  non-recurring 
 charges  and  tariffs.  These  include  specific  one  time  charges  for  the  cost  of  mergers, 
 acquisitions,  and  process  re-  engineering.  We  also  sought  to  estimate  the  cost  of  providing 
 permanent  number  portability,  network  and  interexchange  carrier  connection,  disconnection,  and 
 re-  connection  (i.  e.,  churn)  costs.  Other  recurring  functions  that  we  have  attempted  to  identify 
 include  vertical  features  expenses,  billing  and  collection  expense  not  related  to  supported  services, 
 operational  support  systems  and  other  expenses  associated  with  providing  unbundled  network 
 elements  and  wholesale  services  to  competitive  local  exchange  carriers,  collocation  expenses,  and 
 costs  associated  with  SS7  services. 

 221.  Without  obtaining  proprietary  information  from  carriers,  we  have  been  unable  to 
 find  an  objective  public  data  source  or  discern  a  systematic  method  for  excluding  many  of  these 
 costs  from  the  expense  data  used  to  calculate  the  input  factors.  AT&  T  and  MCI  WorldCom 
 presented  an  analysis  to  Commission  staff  on  January  14,  1999,  proposing  a  method  to  estimate, 
 non-  supported,  non-  recurring,  or  one-  time  expenses  for  customer,  network,  and  corporate 
 operations  expenses.  Averaging  data  for  five  years  (1993-  1997)  of  corporate  Security  and 
 Exchange  Commission  (SEC)  10-  K  and  10-  Q  filings,  a  percentage  of  corporate  and  network 
 operations  identified  as  one-  time  charges  were  estimated  for  the  BOCs  and  all  Tier  One 
 companies.  Because  the  SEC  reports  do  not  specifically  indicate  whether  the  one-  time  expenses 
 were  actually  made  during  the  year(  s)  indicated,  we  tentatively  conclude  that  we  should  not  use 
 these  figures  to  adjust  the  1996  ARMIS  data  used  in  estimating  the  expense  input  values.  The 
 analysis  does  indicate,  however,  that  one-  time  expenses  for  corporate  operations  can  be 
 significant  and  should  be  estimated,  if  possible.  388  Because  this  type  of  data  detail  is  not  publicly 
86
 Federal  Communications  Commission  FCC  99-  120 
 the  five  year  period.  Network  Operations  one-  time  charges  for  things  such  as  process  re-  engineering  were  also 
 calculated  using  the  same  methodology.  On  average,  2.6  percent  of  yearly  Network  Operations  expenses  were 
 attributed  to  non-  recurring  charges. 

 389  See  1997  Further  Notice,  12  FCC  Rcd  at  18578,  para.  173. 

 390  Both  the  HAI  sponsors  as  well  as  the  State  Joint  Board  indicated  that  all  marketing  expenses  be  excluded. 
 See  1997  Further  Notice,  12  FCC  Rcd  at  18576,  paras.  166,  167.  See  also,  Letter  from  Chris  Fentrup,  MCI-Worldcom 
 to  Magalie  Roman  Salas,  FCC,  dated  January  15,  1999. 

 391  Section  214  (e)(  1)(  B)  of  the  Communications  Act  states  that  eligible  telecommunications  carriers  shall, 
 throughout  the  service  area  for  which  the  designation  of  universal  service  support  is  received,  "advertise  the 
 availability  of  such  services  and  the  charges  therefor  using  media  of  general  distribution."  47  USC    214(  e)(  1)(  B). 

 392  See  Further  Comments  of  the  National  Cable  Television  Association  Inc.,  CC  Docket  96-  45,  Appendix  3A. 
 The  adjustment  for  supported  local  loop  Marketing  Expenses  was  made  by  deducting  95.6  percent  of  estimated 
 expenses,  maintaining  4.4  percent  of  Account  6610.  See  further  discussion  in  Appendix  F  for  calculations  of 
 expense  reductions. 

 87 

 available  from  ARMIS  or  easily  reconcilable  from  other  public  company  financial  reports  to 
 individual  account  expenses  for  a  specific  year,  we  invite  comment  on  how  to  identify  and 
 estimate  these  expenses. 

 222.  We  tentatively  conclude  that,  if  it  is  determined  that  expense  estimates  to  be  used 
 as  inputs  in  the  high-  cost  mechanism  are  to  be  revised  annually,  as  suggested  by  various  parties,  389 
 one-  time  non-  recurring  costs  should  be  systematically  excluded.  We  further  recommend  that,  to 
 the  extent  possible,  efforts  be  made  to  use  current  information  supplied  and  verified  by  the 
 companies,  if  none  can  be  found  independently,  to  more  accurately  reflect  forward-  looking 
 expenses.  We  seek  comment  on  this  tentative  conclusion  and  recommendation. 

 223.  Removal  of  Non-  Supported  Expenses.  Cost  reductions  were  made  for  continuous 
 non-  supportable  services  which  could  be  identified  and  estimated  from  publicly  available 
 (ARMIS)  expense  data.  Expense  adjustments  were  made  to  calculated  input  values  for  marketing 
 expenses.  Though  the  HAI  sponsors  and  state  Joint  Board  members  suggested  that  marketing 
 expenses  be  excluded  entirely,  390  commenters  and  workshop  participants  noted  that  Section  214 
 of  the  Communications  Act  requires  eligible  telecommunications  carriers  to  advertise  the 
 availability  of  residential  local  exchange  and  universal  service  supported  services.  391 

 224.  We  tentatively  conclude  that  an  analysis  made  by  Economics  and  Technology,  Inc., 
 regarding  the  disaggregation  of  marketing  and  advertising  expenses  made  by  companies  for  basic 
 telephone  service,  is  the  most  accurate  method  on  the  record  for  apportioning  marketing  expenses 
 between  supported  and  non-  supported  services.  This  analysis  attributes  an  average  of  95.6 
 percent  of  company  marketing  costs  to  non-  supported  customers  or  activities,  such  as  vertical  and 
 new  services.  392  We  seek  comment  on  this  proposed  analysis  for  estimating  marketing  expenses. 
87
 Federal  Communications  Commission  FCC  99-  120 
 393  A  deduction  was  made  for  average  expenses  relating  to  Coin  Collection  and  Administration,  Carrier  Access 
 Billing,  and  Other  Customer  Services  Total  at  -12.46  percent  from  the  Customer  Services  Subaccount  6623, 
 maintaining  87.54  percent  of  the  costs  associated  with  this  account.  See  discussion  in  Appendix  F  for  the 
 calculations  and  methodology  of  expense  reductions. 

 394  ARMIS  43-  04  Accounts  Subject  to  Separations,  Basic  Local  Loop  and  Other  Related  Services  for  Total 
 Customer  Operations  Expense. 

 395  Under  price  cap  regulation,  the  productivity  (X)  factor  includes  a  .50  percent  (.  005)  Consumer  Productivity 
 Dividend  (CPD),  which  is  used  as  a  supplement  to  calculated  productivity  measures  to  assure  that  consumers 
 additionally  benefit  from  price  cap  rules  through  lower  access  charge  rates.  Thus,  for  universal  service 
 calculations,  this  dividend  was  subtracted  from  expected  productivity  increases  or  cost  savings  that  can  be 
 experienced  each  year  (1997  and  1998)  by  firms  that  may  provide  universal  service. 

 396  United  States  Telephone  Association  v.  FCC,  No.  97-  1469  (D.  C.  Cir.  May  21,  1999). 

 397  These  inflation  factors  provided  by  the  Department  of  Commerce  were  used  by  price  cap  companies  in  their 
 annual  tariff  filings  to  the  Commission  to  allow  an  increase  in  revenues  for  the  years  1997  and  1998  under  the 
 price  cap  regulatory  mechanism  and  access  reform  rules. 

 88 

 225.  We  also  propose  adjustments  for  non-  supported  service  costs  related  to  coin 
 operations  and  collection,  published  directory,  access  billing,  interexchange  carrier  office 
 operation,  and  service  order  processing,  393  which  are  associated  with  specific  expense  accounts 
 used  in  the  regression  analysis.  Under  this  methodology,  percentage  reductions  would  be  made  to 
 the  estimated  coefficients  for  those  accounts  using  calculations  based  on  a  time  trend  analysis  of 
 average  ARMIS  43-  04  expense  data  394  for  five  years  (1993-  1997).  We  seek  comment  on  this 
 proposed  methodology. 

 226.  Converting  Expenses  to  1999  Values.  In  order  to  bring  forward  the  1996  data 
 relied  upon  for  estimating  common  support  service  expenses,  we  propose  to  use  a  6.0  percent 
 productivity  factor  for  each  year  (1997  and  1998)  to  reduce  the  estimated  input  values  for  each 
 account.  The  6.0  percent  productivity  factor  is  based  on  the  6.5  percent  "X-  factor"  used  in  the 
 Commission's  price  cap  methodology.  395  We  note  that  the  D.  C.  Circuit  Court  of  Appeals  recently 
 reversed  and  remanded  for  further  explanation  the  Commission's  decision  to  select  6.0  percent  as 
 the  first  component  of  the  X-  factor.  396  In  light  of  that  remand,  we  seek  comment  on  whether  we 
 should  continue  to  adjust  our  expense  input  values  to  reflect  productivity  gains.  If  we  determine 
 that  such  adjustment  is  appropriate,  we  may  want  to  use  an  alternative  method  of  estimating 
 productivity.  We  seek  comment  on  what  other  measures  we  could  use  to  adjust  our  expense  data 
 for  gains  in  productivity.  We  further  propose  to  add  an  inflation  factor  for  each  year  based  on  the 
 fixed  weighted  Gross  Domestic  Product  Price  Index  (GDP-  PI)  for  1997  (2.1120  percent)  and  for 
 1998  (2.1429  percent).  397  Thus,  we  propose  a  net  reduction  of  3.888  percent  for  1997  and 
 3.8571  percent  for  1998  when  using  the  6.0  percent  productivity  factor.  We  seek  comment  on 
 this  method  for  converting  expenses  to  1999  values. 
88
 Federal  Communications  Commission  FCC  99-  120 
 398  Input  values  for  common  support  service  expenses  are  reproduced  here: 
 Adjusted 
 Aggregate  USOA  Account  Expense  Inputs 

 Other  PP  &  E  (6510)  $  0.07 
 Network  Operations  (6530)  1.35 
 Marketing  (6610)  0.02 
 Service  Exp./  Customer  Operations  (6620)  1.07 
 Exec.,  Planning,  G&  A  (6700)  2.60 

 Totals  Per-  Line  Per-  Month  $  5.11 

 399  1997  Further  Notice,  12  FCC  Rcd  at  18570,  para.  149.  The  projected  life  of  an  asset  is  the  asset's  expected 
 service  life  at  installation,  reflecting  not  only  the  physical  life  of  the  equipment,  but  also  the  obsolescence 
 associated  with  the  replacement  of  older  equipment  with  equipment  that  uses  new  technologies  and  forecasts  of 
 future  replacements.  The  adjusted  projected  life  of  an  asset  is  its  projected  life  adjusted  by  its  future  net  salvage 
 value.  Future  net  salvage  is  the  percentage  of  the  asset's  value  that  the  owner  expects  to  obtain  when  selling  the 
 asset  at  the  end  of  its  useful  life.  Id. 

 400  Depreciation  charges  are  computed  in  this  manner  for  the  first  year.  In  subsequent  years,  depreciation 
 charges  are  computed  using  reserve. 

 89 

 227.  Estimates  of  Corporate  Operations,  Customer  Operations,  and  Plant  Non-  Specific 
 Expenses.  Appendix  A  contains  a  summary  of  the  proposed  per-  line,  per-  month  input  figures  for 
 both  plant  non-  specific  expenses,  corporate  operations,  and  customer  operations  adjusted 
 expenses  as  calculated  using  the  aforementioned  methodology.  We  seek  comment  on  these 
 proposed  values.  398 

 VIII.  CAPITAL  COSTS 
 228.  In  this  section,  we  address  the  inputs  in  the  model  related  to  capital  costs: 
 depreciation,  cost  of  capital,  and  annual  charge  factors. 

 A.  Depreciation 
 1.  Background 
 229.  We  now  consider  the  inputs  related  to  the  calculation  of  depreciation  expenses. 
 The  model  uses  "adjusted  projected  lives"  to  recover  the  current  costs  of  the  assets.  399  Under  this 
 approach,  the  annual  depreciation  charges  associated  with  an  asset  are  computed  by  dividing  the 
 asset's  current  cost  by  its  adjusted  projected  life.  400  A  shorter  life  will  increase  the  annual 
89
 Federal  Communications  Commission  FCC  99-  120 
 401  Universal  Service  Order,  12  FCC  Rcd  at  8913-  14,  para.  250  (criterion  5). 
 402  1997  Further  Notice,  12  FCC  Rcd  at  18571,  para.  152. 
 403  Id. 
 404  See  Inputs  Public  Notice. 
 405  47  C.  F.  R.    32.2000(  g).  Straight-  line  depreciation  is  an  accounting  technique  in  which  an  asset's  value  is 
 divided  into  equal  parts  over  its  useful  life.  The  equal-  life  group  procedure  subdivides  assets  according  to  age.  See 
 Amendment  of  Part  31  (Uniform  System  of  Accounts  for  Class  A  and  B  Companies)  so  as  to  Permit  Depreciable 
 Property  to  be  Placed  in  Groups  Comprised  of  Units  with  Expected  Equal  Life  for  Depreciation  Under  the 
 Straight-  Line  Method,  Report  and  Order,  83  FCC2d  267  (1980),  recon.,  87  FCC2d  916  (1981),  supplemental 
 opinion,  87  FCC2d  1112  (1981). 

 406  HAI  June  1,  1998  comments  at  14;  BCPM  June  1,  1998  comments  at  8. 

 407  Ameritech  June  12,  1998  reply  comments  at  2-  3. 

 90 

 depreciation  expense. 
 230.  In  the  Universal  Service  Order,  the  Commission  concluded  that  "economic  lives 
 and  future  net  salvage  percentages  used  in  calculating  depreciation  expense  should  be  within  the 
 FCC-  authorized  range"  and  use  currently  authorized  depreciation  lives.  401  In  the  1997  Further 
 Notice,  the  Commission  tentatively  concluded  that  it  should  adopt  depreciation  expenses  that 
 reflect  a  weighted  average  of  the  rates  authorized  for  carriers  that  are  required  to  submit  their 
 rates  to  us.  402  The  Commission  also  sought  comment  on  whether  adjusted  projected  asset  lives 
 should  reflect  the  lives  of  facilities  and  equipment  dedicated  to  providing  only  the  services 
 supported  by  universal  service  or  whether  the  asset  lives  should  reflect  a  decision  to  replace 
 existing  plant  with  plant  that  can  provide  broadband  services.  403  The  May  4  Public  Notice 
 requested  further  information  on  these  issues.  404 

 2.  Issues  for  Comment 
 a.  Method  of  Depreciation 
 231.  Before  selecting  values  for  projected  life  and  future  net  salvage  value,  we  first 
 tentatively  adopt  the  method  of  depreciation  that  should  be  used  in  the  model,  that  is,  how 
 depreciation  allowances  should  be  allocated  over  the  life  of  an  asset.  The  Commission's 
 depreciation  accounting  rules  require  carriers  to  use  straight-  line  equal-  life  group  depreciation.  405 
 Both  the  HAI  and  BCPM  proponents  advocate  the  use  of  straight-  line  depreciation  in  calculating 
 depreciation  expenses.  406  Ameritech  suggests  that  the  depreciation  method  used  for  a  specific 
 geographic  area  should  be  consistent  with  any  studies  that  underlie  the  development  of  economic 
 lives  or  net  salvage  values  for  that  same  area.  407  GTE  proposes  that  incumbent  LECs  be  allowed 
90
 Federal  Communications  Commission  FCC  99-  120 
 408  GTE  June  12,  1998  reply  comments  at  19.  GTE  urges  the  Commission  to  allow  incumbent  LECs  to  use  the 
 same  depreciation  rates  and  salvage  values  as  they  use  for  financial  reporting  or,  in  the  alternative,  to  establish  a 
 range  based  on  the  depreciation  rates  and  salvage  values  used  by  interexchange  carriers  and  competitive  LECs  for 
 their  financial  reporting. 

 409  See  47  C.  F.  R.    32.2000(  j) 

 410  See  47  C.  F.  R.    32.2000(  g)(  iii). 
 411  The  Commission  has  proposed  streamlining  the  depreciation  prescription  process  by,  inter  alia,  expanding 
 the  prescribed  range  for  the  digital  switching  plant  account  and  eliminating  salvage  from  the  depreciation  process. 
 See  1998  Biennial  Regulatory  Review  --  Review  of  Depreciation  Requirements  for  Incumbent  Local  Exchange 
 Carriers,  Notice  of  Proposed  Rulemaking,  CC  Docket  No.  98-  137,  13  FCC  Rcd  20542  (1998). 

 91 

 to  use  depreciation  lives  based  on  the  expected  economic  life  of  the  asset.  408  Because  the 
 Commission's  rules  require  the  use  of  straight-  line  depreciation,  rather  than  a  more  accelerated 
 depreciation  method,  we  tentatively  conclude  that  this  method,  which  is  used  for  all  Commission-proposed 
 depreciation,  is  also  appropriate  for  use  in  the  high  cost  support  mechanism.  We  seek 
 comment  on  this  tentative  conclusion. 

 b.  Depreciation  Lives  and  Future  Net  Salvage  Percentages 
 232.  In  estimating  depreciation  expenses,  the  model  uses  the  projected  lives  and  future 
 net  salvage  percentages  for  the  asset  accounts  in  Part  32  of  the  Commission's  rules.  409 
 Traditionally,  the  projected  lives  and  future  net  salvage  values  used  in  setting  a  carrier's  rates  have 
 been  determined  in  a  triennial  review  process  involving  the  state  commission,  the  Commission, 
 and  the  carrier.  In  order  to  simplify  this  process,  the  Commission  has  prescribed  ranges  of 
 acceptable  values  for  projected  lives  and  future  net  salvage  percentages.  410  The  Commission's 
 prescribed  ranges  reflect  the  weighted  average  asset  life  for  regulated  telecommunications 
 providers.  These  ranges  are  treated  as  safe  harbors,  such  that  carriers  that  incorporate  values 
 within  the  ranges  into  their  depreciation  filings  will  not  be  challenged  by  the  Commission. 
 Carriers  that  submit  life  and  salvage  values  outside  of  the  prescribed  range  must  justify  their 
 submissions  with  additional  documentation  and  support.  411  Commission  authorized  depreciation 
 lives  are  not  only  estimates  of  the  physical  lives  of  assets,  but  also  reflect  the  impact  of 
 technological  obsolescence  and  forecasts  of  equipment  replacement.  We  believe  that  this  process 
 of  combining  statistical  analysis  of  historical  information  with  forecasts  of  equipment  replacement 
 generates  forward-  looking  projected  lives  that  are  reasonable  estimates  of  economic  lives  and, 
 therefore,  are  appropriate  measures  of  depreciation. 

 233.  In  the  1997  Further  Notice,  the  Commission  tentatively  concluded  that  it  should 
 adopt  depreciation  expenses  that  reflect  a  weighted  average  of  the  rates  authorized  for  carriers 
91
 Federal  Communications  Commission  FCC  99-  120 
 412  1997  Further  Notice,  12  FCC  Rcd  at  18571,  para.  152. 
 413  HAI  June  1,  1998  comments  at  10. 
 414  Id. 
 415  The  proposed  values  for  these  inputs  are  listed  in  Appendix  A. 
 416  HAI's  lives  and  salvage  values  fall  within  the  Commission's  prescribed  ranges  with  the  exception  of  values 
 for  four  accounts:  Digital  Circuit  Equipment;  Garage  Work  Equipment;  Operator  Systems;  and  Poles. 

 417  Aliant  June  1,  1998  comments  at  3-  4;  Ameritech  June  1,  1998  comments  at  4;  BCPM  June  1,  1998 
 comments  at  11-  13;  GTE  June  1,  1998  comments  at  15-  16;  Southwestern  June  1,  1998  comments  at  9-  10. 

 418  BCPM  June  1,  1998  comments  at  12;  Southwestern  June  1,  1998  comments  at  17;  GTE  June  1,  1998 
 comments  at  16;  Ameritech  June  1,  1998  comments  at  4. 

 419  BCPM  June  1,  1998  comments  at  9-  10. 

 92 

 that  are  required  to  submit  their  rates  to  us.  412  The  values  submitted  by  the  HAI  sponsors 
 essentially  reflect  such  a  weighted  average.  The  HAI  values  represent  the  weighted  average 
 depreciation  lives  and  net  salvage  percentages  from  76  study  areas.  413  According  to  the  HAI 
 sponsors,  these  depreciation  lives  and  salvage  values  reflect  the  experience  of  the  incumbent  LEC 
 in  each  of  these  study  areas  in  retiring  plant,  and  its  projected  plans  for  future  retirements.  414 

 234.  We  tentatively  conclude  that  HAI's  values  represent  the  best  forward-  looking 
 estimates  of  depreciation  lives  and  net  salvage  percentages.  415  We  seek  comment  on  this  tentative 
 conclusion.  Generally,  these  values  fall  within  the  ranges  prescribed  by  the  Commission  for 
 projected  lives  and  net  salvage  percentages.  Although  the  HAI  values  for  four  account  categories 
 fall  outside  of  the  Commission's  prescribed  ranges,  416  these  values  still  reflect  the  weighted 
 average  of  projected  lives  and  net  salvage  percentages  that  were  approved  by  the  Commission  and 
 therefore  are  consistent  with  the  approach  proposed  in  the  1997  Further  Notice.  As  noted  above, 
 the  fact  that  an  approved  value  falls  outside  of  the  prescribed  range  simply  means  that  the  carrier 
 that  proposed  the  value  was  required  to  provide  additional  justification  to  the  Commission  for  this 
 value.  We  are  satisfied  that  HAI  calculated  its  proposed  rates  using  the  proper  underlying 
 depreciation  factors  and  that  HAI's  documentation  supports  the  selection  of  these  values. 

 235.  We  disagree  with  the  BCPM  sponsors  and  other  incumbent  LECs  that  the 
 Commission's  prescribed  ranges  are  not  appropriate  for  determining  depreciation  rates  in  a 
 competitive  environment.  417  These  parties  argue  that  rapid  changes  in  technology  and  the  opening 
 of  local  telecommunications  markets  to  competition  shorten  asset  lives  significantly  beyond  what 
 the  Commission  has  prescribed.  418  The  BCPM  sponsors  claim  that  these  factors  cause  existing 
 equipment  to  become  obsolete  at  a  faster  pace,  thus  reducing  the  overall  economic  value  of  the 
 assets  more  quickly.  419  We  agree  with  the  HAI  sponsors  that  there  is  no  evidence  to  support  the 
92
 Federal  Communications  Commission  FCC  99-  120 
 420  HAI  June  1,  1998  comments  at  13. 
 421  BCPM  Dec.  11  submission  at  80. 
 422  The  eight  categories  in  which  BCPM's  values  fall  outside  required  ranges  for  projected  lives  were:  Digital 
 Circuit  Equipment;  Digital  Switching;  Aerial  Cable-  Metallic;  Aerial  Cable-  Non-  Metallic;  Underground  Cable-Metallic; 
 Underground  Cable-  Non-  Metallic;  Buried  Cable-  Metallic;  and  Buried  Cable-  Non-  Metallic.  The  two 
 categories  in  which  BCPM's  values  fall  outside  required  ranges  for  net  salvage  percentage  were  Digital  Circuit 
 Equipment  and  Poles. 

 423  BCPM  Dec.  11  submission  at  80. 

 93 

 claim  that  increased  competition  or  advances  in  technology  require  the  use  of  shorter  depreciation 
 lives  in  the  model  than  are  currently  prescribed  by  the  Commission.  420  The  Commission's 
 prescribed  lives  are  not  based  solely  on  the  engineered  life  of  an  asset,  but  also  consider  the 
 impacts  of  technological  change  and  obsolescence.  We  note  that  the  depreciation  values  we 
 tentatively  adopt  are  generally  at  the  lower  end  of  the  prescribed  range.  We  further  note  that 
 although  the  average  depreciation  rate  for  an  incumbent  LEC's  Total  Plant  in  Service  is 
 approximately  seven  percent,  incumbent  LECs  are  retiring  plant  at  a  four  percent  rate.  This 
 difference  has  allowed  depreciation  reserves  to  increase  so  that  the  depreciation  reserve-  ratio  is 
 greater  than  50  percent.  We  tentatively  conclude  that  the  existence  of  this  difference  implies  that 
 the  prescribed  lives  are  shorter  than  the  engineered  lives  of  these  assets.  In  addition,  this 
 difference  provides  a  buffer  against  technological  change  and  competitive  risk  for  the  immediate 
 future.  We  therefore  tentatively  conclude  that  the  Commission's  prescribed  ranges  are 
 appropriate  to  determine  depreciation  rates  for  the  model.  We  seek  comment  on  these  tentative 
 conclusions. 

 236.  We  tentatively  decline  to  adopt  the  values  for  projected  lives  and  net  salvage 
 percentages  submitted  by  the  BCPM  proponents.  The  BCPM  proponents  based  their  default 
 values  for  projected  lives  and  salvage  on  a  LEC  industry  data  survey  requesting  forward-  looking 
 values.  421  With  regard  to  projected  lives,  the  BCPM  values  generally  fall  outside  of  the 
 Commission's  prescribed  ranges.  422  Because  the  BCPM  sponsors  fail  to  introduce  sufficient 
 evidence  supporting  their  values,  we  tentatively  decline  to  accept  their  approach.  The  BCPM 
 proponents  submitted  values  for  projected  life  that  are  significantly  shorter  than  the  already 
 shortened  Commission's  prescribed  life  ranges.  423  This  is  significant  because  BCPM's  values  that 
 fall  outside  of  the  prescribed  ranges  represent  accounts  that  reflect  the  overwhelming  majority  of 
 plant  investment,  thus  potentially  triggering  a  dramatic  increase  in  support.  We  seek  comment  on 
 this  assessment. 

 B.  Cost  of  Capital 
93
 Federal  Communications  Commission  FCC  99-  120 
 424  Rate  of  return  is  the  percentage  which  a  telephone  carrier  is  authorized  to  earn  on  its  rate  base.  For 
 example,  if  the  rate  of  return  is  11.25%  and  the  rate  base  is  $1  million,  the  carrier  is  authorized  to  earn  $112,500. 

 425  See  Local  Exchange  Carriers'  Rates,  Terms,  and  Conditions  for  Expanded  Interconnection  Through 
 Physical  Collocation  for  Special  Access  and  Switched  Transport,  Second  Report  and  Order,  CC  Docket  No.  93- 
 316212  FCC  Rcd  18370,  18765  (1997). 

 426  Universal  Service  Order,  12  FCC  Rcd  at  8913,  para.  250. 

 427  HAI  June  1,  1998  comments  at  13. 
 428  Id.  at  13. 
 429  BCPM  Dec.  11  submission. 

 94 

 237.  The  cost  of  capital  represents  the  annual  percentage  rate  of  return  424  that  a 
 company's  debtholders  and  equity  holders  require  as  compensation  for  providing  the  debt  and 
 equity  capital  that  a  company  uses  to  finance  its  assets.  425  In  the  Universal  Service  Order,  the 
 Commission  concluded  that  the  current  federal  rate  of  return  of  11.25  percent  is  a  reasonable  rate 
 of  return  by  which  to  determine  forward-  looking  costs.  426 

 238.  The  HAI  proponents  have  submitted  data  indicating  that  the  incumbent  LEC's  cost 
 of  capital  is  10.01  percent,  not  the  current  11.25  percent  federal  rate  of  return.  427  The  HAI 
 proponents  also  contend  that  certain  state  commissions  have  determined  that  even  lower  costs  of 
 capital  are  appropriate.  428  The  BCPM  proponents  advocate  a  cost  of  capital  rate  of  11.36 
 percent.  429 

 239.  We  find  that  both  BCPM  and  HAI  proponents  have  failed  to  make  an  adequate 
 showing  to  justify  rates  that  differ  from  the  current  11.25  percent  federal  rate  of  return.  We 
 tentatively  conclude,  therefore,  that  the  current  rate  is  reasonable  for  determining  the  cost  of 
 universal  service.  If  the  Commission,  in  a  rate  represcription  order,  adopts  a  different  rate  of 
 return,  we  tentatively  conclude  the  model  should  use  the  more  recently  determined  rate  of  return. 
 We  seek  comment  on  these  tentative  conclusions. 

 C.  Annual  Charge  Factors 
 240.  Incumbent  LECs  develop  cost  factors,  called  "annual  charge  factors,"  to  determine 
 the  dollar  amount  of  recurring  costs  associated  with  acquiring  and  using  particular  pieces  of 
 investment  for  a  period  of  one  year.  Incumbent  LECs  develop  these  annual  charge  factors  for 
 each  category  of  investment  required.  The  annual  charge  factor  is  the  sum  of  depreciation,  cost 
 of  capital,  adjustments  to  include  taxes  on  equity,  and  maintenance  costs. 

 241.  To  develop  annual  charge  factors,  the  BCPM  proponents  propose  a  model  with 
94
 Federal  Communications  Commission  FCC  99-  120 
 430  BCPM  Dec.  11  submission  at  80. 
 431  Id.  BCPM's  model  includes  all  of  the  methodologies  that  are  in  practice  today,  including:  Deferred  taxes; 
 Mid-  year,  Beginning  Year,  and  End  Year  placing  conventions;  Gompertz-  Makeham  Survival  Curves;  Future  Net 
 Salvage  Values;  Equal  Life  Group  Methods;  and  others.  The  model  also  incorporates  separate  Cost  of  Debt  and 
 Equity  rates,  along  with  the  Debt  to  Equity  ratio.  Id. 

 432  HAI  Dec.  11  submission  at  41. 

 433  The  expense  module  contains  the  expense  values  including,  plant  specific  maintenance  ratios,  and  the 
 algorithms  that  determine  monthly  cost  per-  line  given  the  results  of  all  other  modules. 

 95 

 user-  adjustable  inputs  to  calculate  the  depreciation  and  cost  of  capital  rates  for  each  account.  430 
 The  BCPM  proponents  state  that  this  account-  by-  account  process  was  designed  to  recognize  that 
 all  of  the  major  accounts  have,  inter  alia,  differing  economic  lives  and  salvage  values  that  lead  to 
 distinct  capital  costs.  431  HAI's  model  is  also  user  adjustable  and  reflects  the  sum  for  the  three 
 inputs:  depreciation,  cost  of  capital,  and  maintenance  costs.  432 

 242.  Because  the  synthesis  model  uses  HAI's  expense  module,  with  modifications,  we 
 tentatively  conclude  that  HAI's  annual  charge  factor  should  be  used.  433  We  believe  that  HAI's 
 annual  charge  factor  is  consistent  with  other  inputs  used  in  the  model  adopted  by  the  Commission, 
 and  therefore  easier  to  implement.  We  seek  comment  on  this  analysis  and  our  tentative  decision 
 to  use  HAI's  annual  charge  factor. 

 IX.  OTHER  ISSUES  RELATED  TO  THE  HIGH  COST  MECHANISM 
 A.  Alternatives  to  the  Forward-  Looking  Cost  Model 
 243.  It  is  our  expectation  that  the  model  outputs  will  be  fully  verified  in  time  for 
 implementation  on  January  1,  2000,  and  we  remain  firmly  committed  to  the  idea  that  support 
 based  on  forward-  looking  costs  will  provide  the  best  assurance  of  predictable,  specific,  and 
 sufficient  support  as  competition  develops.  In  the  unlikely  event  that  the  model  is  not  ready  for 
 timely  implementation,  however,  we  seek  comment  on  how  the  Commission  might  determine 
 support  levels  without  resort  to  a  forward-  looking  cost  model.  Commenters  addressing  this  issue 
 should  specifically  describe  how  their  proposal  will  generate  sufficient  support  to  meet  the  goals 
 of  section  254,  even  as  competition  develops  in  the  local  exchange. 

 B.  Proposed  Modification  to  Procedures  for  Distinguishing  Rural  and  Non-  Rural 
 Companies 

 1.  Background 
 244.  In  the  Universal  Service  Order,  the  Commission  determined  that  rural  and  non- 
95
 Federal  Communications  Commission  FCC  99-  120 
 434  Universal  Service  Order,  12  FCC  Rcd  at  8927,  para.  273. 
 435  See  47  U.  S.  C.    153(  37);  Universal  Service  Order,  12  FCC  Rcd  at  8944,  para.  310. 
 436  Universal  Service  Order,  12  FCC  Rcd  at  8943-  44,  para.  310. 
 437  Self-  Certification  as  a  Rural  Telephone  Company,  Public  Notice,  DA  97-  1748  (rel.  Sept.  23,  1997)  (Self-Certification 
 Public  Notice). 

 438  See  47  U.  S.  C.    153(  37). 

 96 

 rural  carriers  will  receive  federal  universal  service  support  determined  by  separate  mechanisms,  at 
 least  until  January  1,  2001.  434  The  Commission  stated  that  it  would  define  rural  carriers  as  those 
 carriers  that  meet  the  statutory  definition  of  a  rural  telephone  company  in  section  153(  37)  of  the 
 Communications  Act.  435  Under  this  definition,  a  "local  exchange  carrier  operating  entity"  is 
 deemed  a  "rural  telephone  company"  to  the  extent  that  such  entity-  - 

 (A)  provides  common  carrier  service  to  any  local  exchange  carrier  study 
 area  that  does  not  include  either-- 
 (i)  any  incorporated  place  of  10,000  inhabitants  or  more,  or  any 
 part  thereof,  based  on  the  most  recently  available  population  statistics  of 
 the  Bureau  of  the  Census;  or 
 (ii)  any  territory,  incorporated  or  unincorporated,  included  in  an 
 urbanized  area,  as  defined  by  the  Bureau  of  the  Census  as  of  August  10, 
 1993; 
 (B)  provides  telephone  exchange  service,  including  exchange  access,  to 
 fewer  than  50,000  access  lines; 
 (C)  provides  telephone  exchange  service  to  any  local  exchange  carrier 
 study  area  with  fewer  than  100,000  access  lines;  or 
 (D)  has  less  than  15  percent  of  its  access  lines  in  communities  of  more  than 
 50,000  on  the  date  of  enactment  of  the  Telecommunications  Act  of  1996. 

 245.  In  addition,  the  Commission  determined  that  LECs  should  self-  certify  their  status 
 as  a  rural  company  each  year  to  the  Commission  and  their  state  commission.  436  On  September  23, 
 1997,  the  Common  Carrier  Bureau  (Bureau)  released  a  Public  Notice  requiring  carriers  seeking  to 
 be  classified  as  rural  telephone  companies  to  file  a  letter  with  the  Commission  by  April  30  of  each 
 year  certifying  that  they  meet  the  statutory  definition.  437  The  Self-  Certification  Public  Notice 
 requires  a  LEC  certifying  as  a  rural  carrier  to  explain  how  it  meets  at  least  one  of  the  four  criteria 
 set  forth  in  the  statutory  definition.  438  On  March  16,  1999,  the  Bureau  released  a  Public  Notice 
 revising  the  annual  deadline  for  LECs  seeking  to  be  classified  as  rural  carriers  to  July  1  of  each 
 year. 
96
 Federal  Communications  Commission  FCC  99-  120 
 439  Commission  Acknowledges  Receipt  of  Letters  Self-  Certifying  LECs  as  Rural  Telephone  Companies,  Public 
 Notice,  DA  98-  1205  (rel.  June  22,  1998).  Under  current  procedures,  each  of  these  carriers  would  have  to  submit 
 another  rural  certification  by  July  1,  1999. 

 440  The  National  Exchange  Carrier  Association,  Inc.  (NECA)  has  requested  that  the  Commission  eliminate  the 
 annual  rural  certification  process.  NECA  states  that  the  majority  of  carriers  that  meet  the  rural  definition  are  small 
 LECs  with  limited  resources,  and  whose  status  is  not  likely  to  change.  Letter  from  Richard  A.  Askoff,  NECA  to 
 Irene  Flannery,  Chief,  Accounting  Policy  Division,  FCC,  dated  April  9,  1999. 

 441  47  U.  S.  C.    153(  37)(  B),  (C). 

 442  47  U.  S.  C.    153(  37)(  A). 
 443  47  U.  S.  C.    153(  37)(  D). 

 97 

 2.  Issues  for  Comment 
 246.  On  June  22,  1998,  the  Accounting  Policy  Division  released  a  Public  Notice  with  a 
 list  of  the  approximately  1,400  carriers  that  had  certified  as  rural  carriers  as  of  April  30,  1998.  439 
 Because  a  vast  majority  of  the  carriers  certifying  as  rural  serve  under  100,000  access  lines,  we 
 tentatively  conclude  that  we  should  adopt  new  filing  requirements  for  carriers  filing  rural  self-certification 
 letters.  We  propose  that  carriers  who  serve  under  100,000  access  lines  should  not 
 have  to  file  the  annual  rural  certification  letter  unless  their  status  has  changed  since  their  last 
 filing.  440  We  believe  that  this  is  a  better  approach  because  the  overwhelming  majority  of  the 
 companies  that  filed  rural  certification  letters  qualified  as  rural  telephone  companies  because  they 
 provide  service  to  fewer  access  lines  than  either  the  50,000  or  100,000  line  thresholds  identified  in 
 the  statute.  Access  line  counts  can  be  verified  easily  with  publicly-  available  data.  Further,  this 
 relaxation  in  filing  requirements  would  lessen  the  burden  on  many  rural  carriers  and  Commission 
 staff.  We  estimate  that  this  change  will  eliminate  the  filing  requirement  for  approximately  1,380 
 of  the  carriers  that  filed  this  year.  We  seek  comment  on  this  proposal. 

 247.  As  noted  above,  the  Commission  can  easily  determine  whether  a  carrier  satisfies 
 criteria  (B)  or  (C)  of  the  rural  telephone  company  definition,  441  because  these  criteria  are  based  on 
 information  that  can  be  verified  easily  with  publicly  available  data  --  the  number  of  access  lines 
 served  by  a  carrier.  In  contrast,  criteria  (A)  and  (D)  require  additional  information  and  analysis  to 
 verify  a  carrier's  self-  certification  as  a  rural  company.  Specifically,  under  criterion  (A)  a  carrier  is 
 rural  if  its  study  area  does  not  include  "any  incorporated  place  of  10,000  inhabitants  or  more"  or 
 "any  territory  ...  in  an  urbanized  area,"  based  upon  Census  Bureau  statistics  and  definitions.  442 
 Under  criterion  (D)  a  carrier  is  rural  if  it  had  "less  than  15  percent  of  its  access  lines  in 
 communities  of  more  than  50,000  on  the  date  of  enactment  of  the  [1996  Act]."  443 

 248.  We  tentatively  conclude  that,  once  we  have  clarified  the  meaning  of  "local 
 exchange  operating  entity"  and  "communities  of  more  than  50,000"  in  section  153(  37),  we  should 
97
 Federal  Communications  Commission  FCC  99-  120 
 444  Many  carriers  claim  they  meet  three  or  four  of  the  criteria.  We  also  note  that  many  carriers  that  only  cite 
 one  criterion  may  qualify  under  several  criteria. 

 445  See  47  U.  S.  C.    251(  f)(  1);  Order  Denying  Motion,  Docket  No.  M-  263,  Iowa,  Department  of  Commerce 
 Utilities  Board  (Dec.  11,  1996). 

 98 

 require  carriers  with  more  than  100,000  access  lines  that  seek  rural  status  to  file  certifications  for 
 the  period  beginning  January  1,  2000,  consistent  with  the  Commission's  interpretation  of  the  rural 
 telephone  company  definition.  We  seek  comment  on  this  tentative  conclusion.  We  also  seek 
 comment  on  whether  we  should  require  these  carriers  to  re-  certify  each  year  (after  the  filing  for 
 January  1,  2000)  or,  in  the  alternative,  whether  they  should  be  required  to  re-  certify  only  if  their 
 status  has  changed. 

 249.  Most  of  the  carriers  asserting  rural  status  under  criterion  (A)  or  (D)  also  claim 
 rural  status  under  the  access  line  thresholds  in  criterion  (B)  or  (C).  444  In  these  cases,  the 
 Commission  does  not  need  additional  information  to  verify  the  carrier's  rural  status.  If  a  carrier 
 serves  a  local  exchange  study  area  with  more  than  100,000  access  lines,  however,  the 
 Commission  needs  additional  information  about  the  study  area  to  determine  whether  criterion  (A) 
 or  (D)  is  met.  Based  on  the  certifications  we  have  received,  we  believe  that  carriers  have  adopted 
 differing  interpretations  of  criterion  D.  We  tentatively  conclude  that  criterion  A,  on  the  other 
 hand,  by  referencing  Census  Bureau  sources,  can  be  applied  consistently  without  further 
 interpretation  by  the  Commission.  We  seek  comment  on  this  tentative  conclusion. 

 250.  We  have  identified  at  least  two  issues  in  the  rural  telephone  company  definition  for 
 which  carriers  have  adopted  different  interpretations  that  affect  the  determination  of  whether  a 
 carrier  satisfies  the  requirements  of  criterion  D.  Specifically,  carriers  differ  on  whether  criterion 
 (D)  should  be  applied  on  a  holding  company  or  study  area-  by-  study  area  basis.  For  example, 
 while  most  carriers  have  asserted  that  they  meet  the  15  percent/  50,000  test  in  criterion  (D)  for  a 
 particular  study  area  because  less  than  15  percent  of  its  access  lines  within  that  study  area  are  in 
 communities  of  more  than  50,000,  at  least  one  carrier  claims  it  meets  this  criterion  for  all  of  its 
 study  areas,  because  less  than  15  percent  of  its  access  lines  nationwide  are  in  such  communities. 
 In  order  to  resolve  these  differences,  we  must  interpret  the  phrase  "local  exchange  operating 
 entity"  in  the  introductory  text  of  section  153(  37). 

 251.  We  therefore  seek  comment  on  how  we  should  interpret  the  phrase  "local 
 exchange  operating  entity"  in  section  153(  37)  of  the  Communications  Act.  Specifically,  we  seek 
 comment  on  whether  that  term  refers  to  an  entity  operating  at  the  study  area  level  or  at  the 
 holding  company  level.  Although  most  of  the  carriers  certifying  under  subparagraph  (D)  have 
 construed  the  term  to  refer  to  an  entity  at  the  study  area  level,  we  note  that  at  least  one  state 
 commission,  in  denying  a  carrier's  request  for  an  exemption  under  section  251(  f)(  1)  of  the 
 Communications  Act,  viewed  the  exemption  claim  from  the  perspective  of  the  national  operating 
 entity.  445  We  also  request  information  on  how  states  have  construed  the  rural  telephone  company 
98
 Federal  Communications  Commission  FCC  99-  120 
 446  47  U.  S.  C.    214(  e)(  2),  251(  f)(  1). 
 447  47  U.  S.  C.    153(  37)(  D). 
 448  Section  54.5  provides  the  following  definition  of  rural  area: 

 A  "rural  area"  is  a  non-  metropolitan  county  or  county  equivalent,  as  defined  in  the  Office  of 
 Management  and  Budget's  (OMB)  Revised  Standards  for  Defining  Metropolitan  Areas  in  the 
 1990s  and  identifiable  from  the  most  recent  Metropolitan  Statistical  Area  (MSA)  list  released  by 
 OMB,  or  any  contiguous  non-  urban  Census  Tract  or  Block  Numbered  Area  within  an  MSA-  listed 
 metropolitan  county  identified  in  the  most  recent  Goldsmith  Modification  published  by  the  Office 
 of  Rural  Health  Policy  of  the  U.  S.  Department  of  Health  and  Human  Services." 

 47  C.  F.  R.    54.5. 
 449  See  47  C.  F.  R.    54.5. 

 99 

 definition  in  exercising  their  authority  under  section  251(  f)(  1)  and  section  214(  e)(  2)  of  the  Act.  446 
 252.  Carriers  also  have  used  different  interpretations  of  the  phrase  "communities  of 
 more  than  50,000"  in  criteria  (D)  of  the  rural  telephone  company  definition.  447  Some  carriers  have 
 used  Census  Bureau  statistics  for  legally  incorporated  localities,  consolidated  cities,  and  census-designated 
 places,  to  identify  communities  of  more  than  50,000.  Other  carriers  have  provided 
 lists  of  communities  without  identifying  the  source  of  the  designation  or  the  population 
 information.  Some  carriers  have  attempted  to  distinguish  between  rural  communities  and 
 communities  that  may  be  characterized  as  urban  or  suburban.  One  carrier,  for  example,  based  its 
 analysis  of  its  service  territories  on  the  Commission's  definition  of  "rural  area"  in  section  54.5  of 
 the  Commission's  rules.  448  The  carrier  calculated  its  percentage  of  rural/  non-  rural  lines  by 
 determining  whether  each  of  its  wire  centers  is  associated  with  a  metropolitan  statistical  area 
 (MSA).  If  so,  these  lines  were  considered  to  be  urban,  unless  the  wire  center  has  rural  pockets,  as 
 defined  by  the  most  recent  Goldsmith  Modification.  449 

 253.  We  seek  comment  on  how  we  should  interpret  the  phrase  "communities  of  more 
 than  50,000"  in  section  153(  37)  of  the  Act.  We  seek  comment  on  whether  we  should  define 
 communities  of  more  than  50,000  by  using  Census  Bureau  statistics  for  legally  incorporated 
 localities,  consolidated  cities,  and  census-  designated  places.  In  the  alternative,  we  seek  comment 
 on  whether  we  should  distinguish  between  rural  and  non-  rural  communities  in  applying  criterion 
 D  of  section  153(  37).  Specifically,  we  seek  comment  on  whether  we  should  use  the  methodology 
 in  section  54.5  of  the  Commission's  rules  to  determine  whether  a  community  is  in  a  rural  area. 
 We  also  seek  comment  on  other  methods  of  defining  communities  with  populations  greater  than 
 50,000  for  purposes  of  applying  criterion  D. 

 254.  As  noted  above,  states  apply  the  definition  of  rural  telephone  company  in 
99
 Federal  Communications  Commission  FCC  99-  120 
 450  47  U.  S.  C.    214(  e)(  2),  251(  f)(  1). 
 451  Universal  Service  Order,  12  FCC  Rcd  at  8936,  para.  294. 
 452  Universal  Service  Order,  12  FCC  Rcd  at  8936,  para.  294. 
 453  See  generally  47  C.  F.  R.    1.1202,  1.1203,  1.1206. 

 100 

 determining  whether  a  rural  telephone  company  is  entitled  to  an  exemption  under  section 
 251(  f)(  1)  of  the  Act  and  in  determining,  under  section  214(  e)(  2)  of  the  Act,  whether  to  designate 
 more  than  one  carrier  as  an  eligible  telecommunications  carrier  in  an  area  served  by  a  rural 
 telephone  company.  450  Although  the  Commission  used  the  rural  telephone  company  definition  to 
 distinguish  between  rural  and  non-  rural  carriers  for  purposes  of  calculating  universal  service 
 support,  there  is  no  statutory  requirement  that  it  do  so.  The  Commission  adopted  the  Joint 
 Board's  recommendation  to  allow  rural  carriers  to  receive  support  based  on  embedded  cost  for  at 
 least  three  years,  because,  as  compared  to  large  LECs,  rural  carriers  generally  serve  fewer 
 subscribers,  serve  more  sparsely  populated  areas,  and  do  not  generally  benefit  as  much  from 
 economies  of  scale  and  scope.  451  The  Commission  also  noted  that  for  many  rural  carriers, 
 universal  service  support  provides  a  large  share  of  the  carriers'  revenues,  and  thus,  any  sudden 
 change  in  the  support  mechanisms  may  disproportionately  affect  rural  carriers'  operations.  452  We 
 seek  comment  on  whether  the  Commission  should  reconsider  its  decision  to  use  the  rural 
 telephone  company  definition  to  distinguish  between  rural  and  non-  rural  carriers  for  purposes  of 
 calculating  universal  service  support.  That  is,  we  seek  comment  on  whether  there  are  differences 
 between  our  universal  service  policies  and  the  competitive  policies  underlying  sections  251(  f)(  1) 
 and  214(  e)(  2)  that  would  justify  definitions  of  "rural  telephone  company"  and  "rural  carrier"  that 
 differ. 

 255.  Finally,  we  address  a  necessary  procedural  matter.  Currently,  carriers  are  required 
 to  file  rural  certifications  by  July  1,  1999  to  be  classified  as  rural  for  January  1,  2000.  Given  our 
 tentative  conclusions  above  that  we  should  modify  the  current  filing  requirements  for  rural 
 certification,  including  eliminating  the  filing  requirement  for  most  carriers  that  have  filed 
 previously,  we  move  the  July  1,  1999  filing  deadline  to  October  15,  1999. 

 X.  PROCEDURAL  MATTERS  AND  ORDERING  CLAUSE 
 A.  Ex  Parte  Presentations 
 256.  This  is  a  permit-  but-  disclose  notice-  and-  comment  rulemaking  proceeding.  Ex 
 parte  presentations  are  permitted,  except  during  the  Sunshine  Agenda  period,  provided  that  they 
 are  disclosed  as  provided  in  Commission's  rules.  453 

 B.  Initial  Regulatory  Flexibility  Act 
100
 Federal  Communications  Commission  FCC  99-  120 
 454  See  5  U.  S.  C.    603.  The  RFA,  see  5  U.  S.  C.    601  et  seq.,  has  been  amended  by  the  Contract  with  America 
 Advancement  Act  of  1996,  Pub.  L.  No.  104-  121,  110  Stat.  847  (1996)  (CWAAA).  Title  II  of  the  CWAAA  is  the 
 Small  Business  Regulatory  Enforcement  Fairness  Act  of  1996  (SBREFA). 

 455  See  5  U.  S.  C.    603(  a). 

 101 

 257.  As  required  by  the  Regulatory  Flexibility  Act  (RFA),  454  the  Commission  has 
 prepared  this  Initial  Regulatory  Flexibility  Analysis  (IRFA)  of  the  possible  significant  economic 
 impact  on  small  entities  by  the  proposals  in  this  Further  Notice.  Written  public  comments  are 
 requested  on  the  IRFA.  These  comments  must  be  filed  in  accordance  with  the  same  filing 
 deadlines  as  comments  on  the  rest  of  this  Further  Notice,  and  should  have  a  separate  and  distinct 
 heading  designating  them  as  responses  to  the  IRFA.  The  Commission  will  send  a  copy  of  this 
 Further  Notice,  including  the  IRFA,  to  the  Chief  Counsel  for  Advocacy  of  the  Small  Business 
 Administration  (SBA)  in  accordance  with  the  RFA.  455  In  addition,  the  Further  Notice  and  IRFA 
 (or  summaries  thereof)  will  be  published  in  the  Federal  Register. 

 258.  Need  for  and  Objectives  of  Proposed  Rules.  In  the  Universal  Service  Order,  the 
 Commission  adopted  a  plan  for  universal  service  support  for  rural,  insular,  and  high  cost  areas  to 
 replace  longstanding  federal  subsidies  to  incumbent  local  telephone  companies  with  explicit, 
 competitively  neutral  federal  universal  service  mechanisms.  In  doing  so,  the  Commission  adopted 
 the  recommendation  of  the  Joint  Board  that  an  eligible  carrier's  support  should  be  based  upon  the 
 forward-  looking  economic  cost  of  constructing  and  operating  the  networks  facilities  and  functions 
 used  to  provide  the  services  supported  by  the  federal  universal  service  mechanism. 

 259.  Our  plan  to  adopt  a  mechanism  to  estimate  forward-  looking  cost  has  proceeded  in 
 two  stages.  On  October  28,  1998,  the  Commission  completed  the  first  stage  of  this  proceeding: 
 the  selection  of  the  model  platform.  The  platform  encompasses  the  aspects  of  the  model  that  are 
 essentially  fixed,  primarily  assumptions  about  the  design  of  the  network  and  network  engineering. 
 In  this  Further  Notice  we  move  toward  completion  of  the  second  stage  of  this  proceeding,  by 
 proposing  input  values  for  the  cost  model,  such  as  the  cost  of  cables,  switches  and  other  network 
 components,  in  addition  to  various  capital  cost  parameters.  In  addition,  we  propose  adoption  of  a 
 road  surrogate  algorithm  to  determine  the  location  of  customers  and  a  data  set  of  customer 
 locations.  This  Further  Notice  also  seeks  comment  on  other  issues  related  to  the  federal  high  cost 
 mechanism,  including  alternatives  to  the  forward-  looking  cost  model  and  modifications  to  the 
 procedures  for  distinguishing  rural  and  non-  rural  companies. 

 260.  Legal  Basis:  The  proposed  action  is  supported  by  sections  4(  i),  4(  j),  201-  205, 
 254,  and  403  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.    154(  i),  154(  j),  201- 
 205,  254,  and  403. 

 261.  Description  and  Estimate  of  the  Number  of  Small  Entities  to  which  the  Further 
 Notice  will  Apply. 
101
 Federal  Communications  Commission  FCC  99-  120 
 456  5  U.  S.  C.    601(  6). 
 457  5  U.  S.  C.    601(  3)  (incorporating  by  reference  the  definition  of  "small  business  concern"  in  5  U.  S.  C.    632). 
 Pursuant  to  5  U.  S.  C.    601(  3),  the  statutory  definition  of  a  small  business  applies  "unless  an  agency  after 
 consultation  with  the  Office  of  Advocacy  of  the  Small  Business  Administration  and  after  opportunity  for  public 
 comment,  establishes  one  or  more  definitions  of  such  term  which  are  appropriate  to  the  activities  of  the  agency  and 
 publishes  such  definition  in  the  Federal  Register." 

 458  15  U.  S.  C.    632.  See,  e.  g.,  Brown  Transport  Truckload,  Inc.  v.  Southern  Wipers,  Inc.,  176  B.  R.  82  (N.  D. 
 Ga.  1994). 

 459  13  C.  F.  R.    121.201. 

 460  Carrier  Locator:  Interstate  Service  Providers,  Figure  1  (Jan.  1999)  (Carrier  Locator).  See  also  47  C.  F.  R. 
   64.601  et  seq. 

 461  See  13  C.  F.  R.    121.201,  Standard  Industrial  Classification  (SIC)  4813.  Since  the  time  of  the  Commission's 
 1996  decision,  Implementation  of  the  Local  Competition  Provisions  in  the  Telecommunications  Act  of  1996,  First 
 Report  and  Order,  11  FCC  Rcd  15499,  16144-  45  (1996),  the  Commission  has  consistently  addressed  in  its 

 102 

 262.  The  RFA  generally  defines  "small  entity"  as  having  the  same  meaning  as  the  term 
 "small  business,"  "small  organization,"  and  "small  government  jurisdiction."  456  In  addition,  the 
 term  "small  business"  has  the  same  meaning  as  the  term  "small  business  concern"  under  the  Small 
 Business  Act,  unless  the  Commission  has  developed  one  or  more  definitions  that  are  appropriate 
 to  its  activities.  457  Under  the  Small  Business  Act,  a  "small  business  concern"  is  one  that:  (1)  is 
 independently  owned  and  operated;  (2)  is  not  dominant  in  its  field  of  operation;  and  (3)  meets  any 
 additional  criteria  established  by  the  SBA.  458  The  SBA  has  defined  a  small  business  for  Standard 
 Industrial  Classification  (SIC)  category  4813  (Telephone  Communications  Except 
 Radiotelephone)  to  be  small  entities  when  they  have  no  more  than  1,500  employees.  459 

 263.  The  most  reliable  source  of  information  regarding  the  total  number  of  certain 
 common  carriers  appears  to  be  data  the  Commission  publishes  annually  in  its  Carrier  Locator 
 report,  derived  from  filings  made  in  connection  with  the  Telecommunications  Relay  Service 
 (TRS).  460 

 264.  Although  some  affected  incumbent  LECs  may  have  1,500  or  fewer  employees,  we 
 do  not  believe  that  such  entities  should  be  considered  small  entities  within  the  meaning  of  the  RFA 
 because  they  are  either  dominant  in  their  field  of  operations  or  are  not  independently  owned  and 
 operated,  and  therefore  by  definition  not  "small  entities"  or  "small  business  concerns"  under  the 
 RFA.  Accordingly,  our  use  of  the  terms,  "small  entities"  and  "small  businesses"  does  not 
 encompass  incumbent  LECs.  Out  of  an  abundance  of  caution,  however,  for  regulatory  flexibility 
 analysis  purposes,  we  will  separately  consider  small  incumbent  LECs  within  this  analysis  and  use 
 the  term  "small  incumbent  LECs"  to  refer  to  any  incumbent  LEC  that  arguably  might  be  defined 
 by  the  SBA  as  "small  business  concerns."  461 
102
 Federal  Communications  Commission  FCC  99-  120 
 regulatory  flexibility  analyses  the  impact  of  its  rules  on  such  incumbent  LECs. 
 462  13  C.  F.  R.    121.210,  SIC  Code  4813. 

 463  Carrier  Locator  at  Fig.  1. 
 464  Carrier  Locator  at  Fig.  1. 
 465  See  supra  para.  3. 
 466  Commission  Acknowledges  Receipt  of  Letters  Self-  Certifying  LECs  as  Rural  Telephone  Companies,  Public 
 Notice,  DA  98-  1205  (rel.  June  22,  1998).  Under  current  procedures,  each  of  these  carriers  would  have  to  submit 
 another  rural  certification  by  July  1,  1999. 

 467  The  National  Exchange  Carrier  Association,  Inc.  (NECA)  has  requested  that  the  Commission  eliminate 
 the  annual  rural  certification  process.  NECA  states  that  the  majority  of  carriers  that  meet  the  rural  definition  are 
 small  LECs  with  limited  resources,  and  whose  status  is  not  likely  to  change.  Letter  from  Richard  A.  Askoff, 
 NECA  to  Irene  Flannery,  Chief,  Accounting  Policy  Division,  FCC,  dated  April  9,  1999. 

 103 

 265.  Local  Exchange  Carriers.  Neither  the  Commission  nor  SBA  has  developed  a 
 definition  of  small  local  exchange  carriers.  The  closest  applicable  definition  for  these  carrier-  types 
 under  SBA  rules  is  for  telephone  communications  companies  other  than  radiotelephone  (wireless) 
 companies.  462  The  most  reliable  source  of  information  regarding  the  number  of  these  carriers 
 nationwide  of  which  we  are  aware  appears  to  be  data  that  we  collect  annually  in  connection  with 
 the  TRS.  463  According  to  our  most  recent  data,  there  are  1,410  LECs.  464  Although  it  seems 
 certain  that  some  of  these  carriers  are  not  independently  owned  and  operated,  or  have  more  than 
 1,500  employees,  we  are  unable  at  this  time  to  estimate  with  greater  precision  the  number  of  these 
 carriers  that  would  qualify  as  small  business  concerns  under  SBA's  definition.  Consequently,  we 
 estimate  that  there  are  fewer  than  1,410  small  entity  LECs  that  may  be  affected  by  the  proposals 
 adopted  in  this  Further  Notice.  We  also  note  that,  with  the  exception  of  a  modification  in 
 reporting  requirements,  the  proposals  in  this  Further  Notice  apply  only  to  larger  "non-  rural" 
 LECs.  465 

 266.  Description  of  Projected  Reporting,  Recordkeeping,  and  Other  Compliance 
 Requirements. 

 267.  On  June  22,  1998,  the  Accounting  Policy  Division  released  a  Public  Notice  with  a 
 list  of  the  approximately  1,400  carriers  that  had  certified  as  rural  carriers  as  of  April  30,  1998.  466 
 Because  a  vast  majority  of  the  carriers  certifying  as  rural  serve  under  100,000  access  lines,  we 
 tentatively  conclude  that  we  should  adopt  new  filing  requirements  for  carriers  filing  rural  self-certification 
 letters.  We  propose  that  carriers  who  serve  under  100,000  access  lines  should  not 
 have  to  file  the  annual  rural  certification  letter  unless  their  status  has  changed  since  their  last 
 filing.  467  We  believe  that  this  is  a  better  approach  because  the  overwhelming  majority  of  the 
 companies  that  filed  rural  certification  letters  qualified  as  rural  telephone  companies  because  they 
103
 Federal  Communications  Commission  FCC  99-  120 
 468  A  supporting  statement,  prepared  in  accordance  with  the  Paperwork  Reduction  Act,  that  details  the 
 Commission's  estimates  with  respect  to  the  burdens  imposed  by  the  proposals  in  this  Further  Notice  is  available 

 104 

 provide  service  to  fewer  access  lines  than  either  the  50,000  or  100,000  line  thresholds  identified  in 
 the  statute.  Access  line  counts  can  be  verified  easily  with  publicly-  available  data.  Further,  this 
 relaxation  in  filing  requirements  would  lessen  the  burden  on  many  rural  carriers  and  Commission 
 staff.  We  estimate  that  this  change  will  eliminate  the  filing  requirement  for  approximately  1,380 
 of  the  carriers  that  filed  this  year. 

 268.  We  tentatively  conclude  that,  once  we  have  clarified  the  meaning  of  "local 
 exchange  operating  entity"  and  "communities  of  more  than  50,000"  in  section  153(  37),  we  should 
 require  carriers  with  more  than  100,000  access  lines  that  seek  rural  status  to  file  certifications  for 
 the  period  beginning  January  1,  2000,  consistent  with  the  Commission's  interpretation  of  the  rural 
 telephone  company  definition.  We  also  seek  comment  on  whether  we  should  require  these 
 carriers  to  re-  certify  each  year  (after  the  filing  for  January  1,  2000)  or,  in  the  alternative,  whether 
 they  should  be  required  to  re-  certify  only  if  their  status  has  changed. 

 269.  In  addition,  we  address  a  necessary  procedural  matter.  Currently,  carriers  are 
 required  to  file  rural  certifications  by  July  1,  1999  to  be  classified  as  rural  for  January  1,  2000. 
 Given  our  tentative  conclusions  above  that  we  should  modify  the  current  filing  requirements  for 
 rural  certification,  including  eliminating  the  filing  requirement  for  most  carriers  that  have  filed 
 previously,  we  propose  moving  the  July  1,  1999  filing  deadline  to  October  15,  1999. 

 270.  Steps  Taken  to  Minimize  Significant  Economic  Impact  on  Small  Entities  and 
 Significant  Alternatives  Considered.  Throughout  the  Further  Notice,  we  seek  comment  on  the 
 tentative  conclusions  that  we  propose.  In  addition,  we  believe  that  the  reporting  modifications 
 that  are  proposed  above  will  reduce  the  burden  on  rural  LECs.  As  noted,  we  propose  that 
 carriers  serving  fewer  access  lines  than  either  the  50,000  or  100,000  line  thresholds  should  not  be 
 required  to  file  annual  rural  certification  letters  unless  their  status  has  changed  since  their  last 
 filing. 

 271.  Federal  Rules  That  May  Overlap,  Duplicate  or  Conflict  with  the  Proposed  Rule. 
 None. 

 C.  Initial  Paperwork  Reduction  Act  Analysis 
 272.  This  Further  Notice  contains  a  proposed  information  collection.  As  part  of  its 
 continuing  effort  to  reduce  paperwork  burdens,  we  invite  the  general  public  and  the  Office  of 
 Management  and  Budget  (OMB)  to  take  this  opportunity  to  comment  on  the  information 
 collections  contained  in  this  Further  Notice,  as  required  by  the  Paperwork  Reduction  Act  of  1995, 
 Pub.  L.  No.  104-  13.  468  Public  and  agency  comments  are  due  at  the  same  time  as  other  comments 
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 from  the  Commission  or  from  the  Office  of  Management  and  Budget. 
 105 

 on  this  Further  Notice;  OMB  comments  are  due  60  days  from  date  of  publication  of  this  Further 
 Notice  in  the  Federal  Register.  Comments  should  address:  (a)  whether  the  proposed  collection 
 of  information  is  necessary  for  the  proper  performance  of  the  functions  of  the  Commission, 
 including  whether  the  information  shall  have  practical  utility;  (b)  the  accuracy  of  the  Commission's 
 burden  estimates;  (c)  ways  to  enhance  the  quality,  utility,  and  clarity  of  the  information  collected; 
 and  (d)  ways  to  minimize  the  burden  of  the  collection  of  information  on  the  respondents, 
 including  the  use  of  automated  collection  techniques  or  other  form  of  information  technology. 

 D.  Deadlines  and  Instructions  for  Filing  Comments 
 273.  Pursuant  to  Sections  1.415  and  1.419  of  the  Commission's  rules,  47  C.  F.  R.   
 1.415,  1.419,  interested  parties  may  file  comments  on  or  before  July  2,  1999  and  reply  comments 
 on  or  before  July  16,  1999.  Comments  may  be  filed  using  the  Commission's  Electronic  Comment 
 Filing  System  (ECFS)  or  by  filing  paper  copies.  See  Electronic  Filing  of  Documents  in 
 Rulemaking  Proceedings,  63  Fed.  Reg.  24,121  (1998). 

 274.  Comments  filed  through  the  ECFS  can  be  sent  as  an  electronic  file  via  the  Internet 
 to  <http://  www.  fcc.  gov/  e-  file/  ecfs.  html>.  Generally,  only  one  copy  of  an  electronic  submission 
 must  be  filed.  If  multiple  docket  or  rulemaking  numbers  appear  in  the  caption  of  this  proceeding, 
 however,  commenters  must  transmit  one  electronic  copy  of  the  comments  to  each  docket  or 
 rulemaking  number  referenced  in  the  caption.  In  completing  the  transmittal  screen,  commenters 
 should  include  their  full  name,  Postal  Service  mailing  address,  and  the  applicable  docket  or 
 rulemaking  number.  Parties  may  also  submit  an  electronic  comment  by  Internet  e-  mail.  To  get 
 filing  instructions  for  e-  mail  comments,  commenters  should  send  an  e-  mail  to  ecfs@  fcc.  gov,  and 
 should  include  the  following  words  in  the  body  of  the  message,  "get  form  <your  e-  mail  address." 
 A  sample  form  and  directions  will  be  sent  in  reply.  Parties  who  choose  to  file  by  paper  must  file 
 an  original  and  four  copies  of  each  filing.  If  more  than  one  docket  or  rulemaking  number  appear 
 in  the  caption  of  this  proceeding,  commenters  must  submit  two  additional  copies  for  each 
 additional  docket  or  rulemaking  number.  All  filings  must  be  sent  to  the  Commission's  Secretary, 
 Magalie  Roman  Salas,  Office  of  the  Secretary,  Federal  Communications  Commission,  445 
 Twelfth  Street,  S.  W.,  TW-  A325,  Washington,  D.  C.  20554. 

 275.  Parties  must  also  send  three  paper  copies  of  their  filing  to  Sheryl  Todd, 
 Accounting  Policy  Division,  445  Twelfth  Street  S.  W.,  5-  A523,  Washington,  D.  C.  20554.  In 
 addition,  commenters  must  send  diskette  copies  to  the  Commission's  copy  contractor, 
 International  Transcription  Service,  Inc.,  1231  20th  Street,  N.  W.,  Washington,  D.  C.  20037. 

 E.  Ordering  Clauses 
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 276.  IT  IS  ORDERED,  pursuant  to  Sections  1,  4(  i)  and  (j),  201-  209,  218-  222,  254,  and 
 403  of  the  Communications  Act,  as  amended,  47  U.  S.  C.    151,  154(  i),  154(  j),  201-  209,  218- 
 222,  254,  and  403  that  this  Further  Notice  of  Proposed  Rulemaking  IS  HEREBY  ADOPTED  and 
 comments  ARE  REQUESTED  as  described  above. 

 277.  IT  IS  FURTHER  ORDERED  that  the  Commission's  Office  of  Public  Affairs, 
 Reference  Operations  Division,  SHALL  SEND  a  copy  of  this  Further  Notice  of  Proposed 
 Rulemaking,  including  the  Regulatory  Flexibility  Analysis,  to  the  Chief  Counsel  for  Advocacy  of 
 the  Small  Business  Administration. 

 FEDERAL  COMMUNICATIONS  COMMISSION 

 Magalie  Roman  Salas 
 Secretary 
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 Appendix  A  (Proposed  Input  Values) 
 Appendix  B  (Description  of  PNR's  Methodology  to  Estimate  the  Number  of  Customer 
 Locations) 

 Appendix  C  (Outside  Plant  Structure  and  Cable  Costs  Survey) 
 Appendix  D  (Description  of  Proposed  Methodology  for  Estimating  Outside  Plant  Costs) 
 Appendix  E  (Description  of  Switching  Costs) 
 Appendix  F  (Description  of  Proposed  Methodology  for  Estimating  Expenses) 
107