Wireline Bureau Details New High-Cost Loop Support Methodology

Under previous rules, some carriers with high loop costs might have seen 100 percent reimbursement from the USF; this gave carriers “incentives to increase loop costs with little regard to efficiency or the burden on the Fund,” the order said, adding that carriers that tried to operate efficiently lost support. The USF/ICC order placed overall limits on costs eligible for reimbursement through HCLS, but the specific methodology was left to the bureau.

Building on the analysis proposed in the fall order, the bureau made several changes in response to comments from interested parties and two peer reviewers (CD March 13 p9). Using National Exchange Carrier Association cost data, and a quantile regression analysis to generate a capital expense and operating expense limit for each rate-of-return company cost study area, the bureau “includes some significant improvements” over the original methodology proposed in the USF/ICC order and further notice of proposed rulemaking. The “most significant change” is that the bureau will reduce the overall number of regressions from 11 to two: one for capital expense and one for operating expense.

"The choice of how many cost limits to adopt reflects a balancing of considerations,” the order said. “Using a greater number of regressions makes it possible to identify outliers at a granular level, but fails to account for the interrelationships within the cost categories that feed into the twenty-six step algorithm as identified in the record and in the peer review. In contrast, using fewer regressions limits the Commission’s ability to identify outliers, but enables carriers to account for the needs of individual networks and recognizes the fact that carriers may have higher costs in one category that may be offset by lower costs in others. … Using two regressions instead of one provides carriers flexibility to manage their operations, while still enabling the Commission to identify more instances where carriers spend markedly more in either category than their similarly-situated peers."

The bureau decided to include additional independent variables, with a heavy emphasis on cost-driving variables and proxies that are closely correlated with cost drivers. “For example, the number of loops is a direct measure of a study area’s scale, and the number of road miles is a proxy for total loop length,” the order said. “Because most cable follows roads, it is reasonable to believe that the number of road miles in a study area is a good proxy for the cabling required to serve that area.” Variables will also include age of plant, as carriers that have recently replaced aging plant with modern networks “are not similarly situated to carriers with plant that is more fully depreciated,” the order said. New variables, such as density, number of exchanges, and portion of households in urbanized areas, will help account for “customer dispersion,” the order said. The new methodology also includes several geographic independent variables, such as depth of bedrock and “soils difficulty,” and a climate variable based on the average annual minimum temperature. The bureau will also take into account the percentage of each study area on Tribal land, in a national park, or in Alaska, since those areas are more costly to serve, the order said.

"We're encouraged that the bureau and the commission took steps to acknowledge many of the concerns raised about the caps, and we think that this was a productive step forward,” said Michael Romano, senior vice president-policy for the National Telecommunications Cooperative Association. NTCA is currently running the numbers to see what effect the order will have on its members, it said. The order didn’t address every issue -- for example, the application of new rules to prior investments -- but it is a step in the right direction, Romano said.

In its further notice, the commission requested comments on whether the 90th percentile was the best cutoff; the bureau decided that will stay as is. The order acknowledged that the originally proposed methodology “was over-inclusive” because a carrier that exceeded the cap in only one category but had costs well below the caps in the other 10 would have received reduced support; the revised methodology relying on capital expense and operating expense caps alleviates that problem, the order said.

The bureau dismissed critics who claimed the proposal to adopt regression caps was an unlawful retroactive rulemaking. “It cannot fairly be said that the application of these benchmarks will take away or impair a vested right, create a new obligation, impose a new duty, or attach a new disability in respect to the carriers’ previous expenditures,” said the order, referencing a 2004 U.S. Court of Appeals for the D.C. Circuit case that provided a definition of retroactivity. “There is no statutory provision or Commission rule that provides companies with a vested right to continue to receive support at particular levels or through the use of a particular methodology.” In any case, the quantile regression variable that captures age of plant will further address retroactivity concerns, the order said, saying adding this variable raises the cost limits for carriers that have invested recently.

All rate-of-return carriers receiving HCLS must provide broadband “upon reasonable request” beginning July 1. Rate-of-return carriers must also file a new buildout plan in 2013 that accounts for the new broadband obligations.