PUBLIC NOTICE Federal Communications Commission 1919 M St., N.W. Washington, D.C. 20554 DA 97-56 Released January 9, 1997 COMMISSION STAFF RELEASES ANALYSIS OF FORWARD-LOOKING ECONOMIC COST PROXY MODELS Comment Date: February 3, 1997 Reply Comment Date: February 14, 1997 This past year, the Commission has undertaken proceedings on universal service, interstate access charge reform, and local exchange competition to overhaul our current regulations in light of the Telecommunications Act of 1996. In each proceeding the Commission has examined the use of cost proxy models as a regulatory tool to estimate forward-looking economic costs of providing telephone service. Today the Commission Staff released a staff analysis intended to stimulate discussion of criteria for the evaluation, and use, of forward-looking cost proxy models in determining universal service support payments, cost-based access charges, and interconnection and unbundled network element pricing. The Common Carrier Bureau ("Bureau") here is seeking comment on the issues raised in the paper. The record gathered in response to this paper may at a future date be associated with the official record of certain pending rulemakings to which it may be relevant and may be used to support Commission determinations in those rulemakings. These rulemakings are Federal- State Joint Board on Universal Service, CC Docket No. 96-45, Access Charge Reform, CC Docket No. 96-262, and Implementation of the Local Competition Provisions of the Telecommunications Act of 1996,CC Docket No. 96-98. The staff's analysis begins with a methodological discussion of the criteria for evaluating an economic cost model. These criteria include: (1) adherence to a forward-looking costing methodology; (2) the ability to measure the cost of a narrowband network; (3) consistency with independent cost evidence; (4) potential for independent evaluation of model algorithms and input assumptions; and (5) flexibility to vary user input choices. The Bureau seeks comment on these design criteria, and other issues, including whether a proxy model should estimate the cost of a network capable of delivering broadband services as well as traditional narrowband services. In commenting on the above issues and any others that commenters regard as useful in evaluating the models, commenters should identify the criteria they believe are the most important and the basis for their position. Further, commenters should discuss whether and to what extent the models in the record, or any models submitted subsequently, satisfy these criteria. The paper also contains a detailed analysis of the structure and input requirements of existing proxy models. With regard to model structure, the paper examines various issues including: (1) the use of existing local exchange carrier wire centers; (2) the geographic unit of analysis used by model proponents in designing their networks; (3) the specification of demand for business and special access lines; and (4) the specification of network elements included in a model and the services those elements are capable of providing. The paper also analyzes the engineering assumptions made by existing models submitted in one or more of the rulemakings listed above in determining levels of forward-looking investment, with particular attention directed to feeder and distribution routes, fill factors, investment in structures, and switching investment. Finally, the paper considers the those models' treatment of capital expenses, operating expenses, and joint and common costs. Commenters should use this analysis as a basis for their comments on existing proxy models. For instance, do the models include loop plant investment sufficient to meet demand? In addition, based on its analysis thus far, the Commission staff believes that varying any one of a number of input factors of the models, such as the cost of capital or the depreciation rate, may greatly affect the resulting prices or support payment amounts. The Bureau seeks comment on this view, and on which inputs are most critical to the soundness of the prices generated by the models. Should the Commission take steps to set specific inputs such as depreciation rates, capital costs, treatment of taxes, joint and common costs, and expenses, and, if so, how? The staff's analysis attempts to identify the modeling assumptions and inputs that are most likely to have a significant impact on estimated costs. Where appropriate, commenters should indicate whether they agree or disagree with this analysis. In the case of model input choices, commenters can, if desired, recommend either specific input values or specific methodologies that could be used to select an appropriate input. In some cases, the staff analysis indicates areas in which alternative modeling approaches would be desirable, and commenters are asked to describe in detail such alternatives whenever possible. While commenters are invited to address any aspect of existing or future proxy models, particular attention should be paid to the following areas identified in the staff analysis: (1) the appropriate choice of fill factors and the treatment of structure costs; (2) methodologies for determining the appropriate forward-looking cost of capital and rate of depreciation; (3) alternative methodologies that models could use to estimate forward-looking operating expenses; and (4) sources of independent evidence that could be used to choose model inputs and verify model outputs. The staff's analysis also considers several questions about the potential uses of models in pending proceedings on universal service, access reform and element pricing. For instance, could a single model, or combination of models, be used for multiple regulatory objectives, i.e., in determining cost-based access charges as part of a prescriptive approach to access reform and in setting both interconnection and unbundled element prices and universal service support levels? The Federal-State Universal Service Joint Board has already recommended that the models before it undergo refinement before they may be used to set universal service support levels. Similarly, the staff's analysis suggests that each of the models would need to be modified before it alone could be used to set cost-based access charges or to estimate network facilities' costs, and the Bureau seeks comment on this view. As an alternative to choosing a single model or set of models, could a hybrid model be developed that would employ the most successful features and assumptions contained in individual models? The Bureau also seeks comment on the different design assumptions that commenters believe can or should be used in models used for different purposes. For instance, commenters that believe the modeling of the economic cost of providing network facilities or access costs can or should differ from the modeling of the economic costs of providing the services receiving universal service support should describe their reasons, including in part the differences in network investments required. Specifically, they should identify any costs included in unbundled elements that are directly attributable to unsupported services. More broadly, the Bureau seeks comment on whether the various inputs to the models, such as rate of return and depreciation, can or should differ for these different purposes. The Bureau looks forward to receiving comments and working with all interested parties in developing reasonable approaches to using economic cost models as tools in resolving the various critical telecommunications policy issues described above. The comments should be filed on or before February 3, 1997, with reply comments due February 14, 1997. Commenters must file an original and four copies of their comments with the Office of the Secretary, Federal Communications Commission, Room 222, 1919 M Street, N.W., Washington, D.C. 20554. Comments should reference CPD Docket No. 97-2. Commenters should send one copy of their comments to the Commission's copy contractor, International Transcription Service, Room 140, 2100 M Street, N.W., Washington, D.C. 20037. Comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. 20554. Parties are also asked to submit comments on diskette. Such diskette submissions would be in addition to and not a substitute for the formal filing requirements addressed above. Parties submitting diskettes should submit them to Wanda M. Harris, Competitive Pricing Division, Common Carrier Bureau, 1919 M Street, N.W., Room 518, Washington, D.C. 20554. Such a submission should be on a 3.5 inch diskette in an IBM compatible format using WordPerfect 5.1 for Windows software in a "read only" mode. The diskette should be clearly labelled with the party's name, proceeding, and date of submission. The diskette should be accompanied by a cover letter. For further information contact David Konuch, 202-418-0199, or Brad Wimmer, 202-418-1847.