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by: Wireline Competition Bureau

May 17, 2013

Please provide comments to the issue below as part of the 2012 WCB cost model virtual workshop for inclusion in the record. Comments are moderated for conformity to the workshop’s guidelines.

Background

In the USF/ICC Transformation Order, the Commission adopted a methodology “that will target support to areas that exceed a specified cost benchmark, but not provide support for areas that exceed an 'extremely high cost' threshold.” With regard to the support benchmark, the Commission stated that it would use the model “to identify those census blocks where the cost of service is likely to be higher than can be supported through reasonable end-user rates alone.” With regard to the “extremely high cost” threshold, the Commission also concluded that "a small number of extremely high-cost census blocks that should receive funding specifically set aside for remote and extremely high-cost areas . . . rather than receiving CAF Phase II support." The Commission anticipated that no more than 1 percent of all American household would be in such remote and extremely high-cost areas. Finally, the Commission directed that "[t]he threshold should be set to maintain total support in price cap areas within our up to $1.8 billion annual budget.”

In the Model Design PN, the Bureau sought comment on how to set the funding and extremely high-cost thresholds. It specifically sought comment on whether the Bureau should first determine the funding threshold and then use the budget to determine the extremely high-cost threshold, or if it should first determine the extremely high-cost threshold and then use the budget to determine the funding threshold. Both ACA and NASUCA urged the Bureau to use the former approach, and set the funding threshold first.

Questions for Comment

  1. One possible method for establishing the support threshold would be to estimate the average revenue per user (ARPU) that could be reasonably expected from voice and broadband services and make adjustments to take into account that not all locations passed will necessarily subscribe to one or both services over the full term of Phase II support.  Is this an appropriate way to set the support threshold? 
  2. The Bureau recognizes that there may be different take rates for standalone voice service, standalone broadband service, and a package that includes both voice and broadband, and that the number of locations connected (and therefore able to subscribe) will increase over time as deployment progresses. The Bureau previously sought comment (Calculating Average Per-Unit Costs) on the assumption that, on average, 80% of locations would subscribe over the Phase II time horizon, noting that take rate has a small impact on the cost per location passed. (To illustrate the point, if 60% of locations subscribe at the beginning of Phase II and 100% subscribe at the end of Phase II, that would represent an average subscription rate of 80% over the five-year period.) What assumptions for ARPU and take rate are appropriate for purposes of setting the funding threshold?
  3. The table below shows the support threshold for various take rate-ARPU combinations. Would adopting a funding benchmark in the $40 to $50 range be a reasonable approach? To the extent commenters believe the funding threshold should set higher or lower, they should identify with specificity their underlying assumptions about ARPU and take rate.

     

    Average Take Rate over Phase II

    ARPU

    50%

    60%

    70%

    80%

    $50

    $25

    $30

    $35

    $40

    $60

    $30

    $36

    $42

    $48

    $70

    $35

    $42

    $49

    $56

    $80

    $40

    $48

    $56

    $64

  4. Given the Phase II budget of up to $1.8 billion, adopting a support benchmark in the $40 to $50 range could result in an extremely high-cost threshold between $145 and $155 per location passed, under version 3.1.2 of the Connect America Cost Model with default input values.  Is this a reasonable range for the extremely high-cost benchmark?
  5. Are there other methods of calculating the support threshold for Connect America Phase II support? For instance, would basing the funding benchmark on a specified cost percentile, such as the 95th percentile, be appropriate?  Are there other methods that the Bureau should consider?

Sources

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