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Bureau Seeks Comment on Rate of Return Represcription Staff Report

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Released: May 16, 2013


News Media Information 202 / 418-0500

Federal Communications Commission

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445 12th St., S.W.
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Washington, D.C. 20554


DA 13-1110

Released: May 16, 2013




WC Docket Nos. 10-90, 07-135, 05-337, and 03-109, GN Docket No. 09-51,

CC Docket Nos. 96-45 and 01-92, and WT Docket No. 10-208

Comment Date: July 25, 2013
Reply Comment Date: August 26, 2013

In the USF/ICC Transformation Order and Further Notice, the Commission initiated a
proceeding to represcribe the authorized rate of return,1 which is used to determine interstate common line
rates and special access rates for rate-of-return incumbent LECs2 and is also used in calculating some
forms of support provided by the Universal Service Fund (USF), including High Cost Loop Support
(HCLS)3 and Interstate Common Line Support (ICLS).4 The currently authorized rate of return is 11.25
percent, and was last set in 1990.5 Noting the major changes that have occurred in the market,
technology, and regulation in the last 23 years,6 the Commission found compelling evidence that the
authorized rate of return “is no longer reflective of the cost of capital”7 and sought comment on the data

1 Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order and Further Notice of Proposed
Rulemaking, 26 FCC Rcd 17663, 17870, para. 640 (2011) (USF/ICC Transformation Order and Further Notice),
pets. for review pending sub nom. In re: FCC 11-161, No. 11-9900 (10th Cir. filed Dec. 8, 2011).
2 In the USF/ICC Transformation Order and Further Notice, the Commission took rate-of-return incumbent LECs
off of rate-of-return based recovery for interstate switched access revenues. See Connect America Fund et al., WC
Docket No. 10-90 et al., Report and Order and Further Notice of Proposed Rulemaking, 26 FCC Rcd 17663, 17983-
84, para. 900 (2011) (USF/ICC Transformation Order), pets. for review pending sub nom. In re: FCC 11-161, No.
11-9900 (10th Cir. filed Dec. 8, 2011).
3 See 47 C.F.R. § 36.621(a)(1).
4 See 47 C.F.R. § 54.901.
5 Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No.
89-624, Order, 5 FCC Rcd 7507 (1990).
6 USF/ICC Transformation Order and Further Notice, 26 FCC Rcd at 17870, 18052-55, paras. 639-40, 1048-57.
The Commission noted that the monthly average yields for the past six months on ten-year United States Treasury
securities had been “over 450 basis points below the monthly average yields in the six months immediately prior to
the last prescription.” Id. at 17870, para. 640.

and procedures to be used to represcribe the authorized rate of return.8 The Commission’s preliminary
analysis in the USF/ICC Transformation Order and Further Notice conservatively suggested that the rate
of return “should be no more than 9 percent.”9 If the rate of return is higher than necessary for carriers to
maintain their credit-worthiness and attract capital, it results in unreasonably high prices for consumers
and businesses and creates excessive demands on USF.
To further assist the Commission in its efforts to represcribe the authorized rate of return, the
Wireline Competition Bureau (Bureau) prepared the attached staff report setting forth data and procedures
it recommends the Commission use to represcribe the authorized rate of return.10 Based upon the staff
analysis of 16 publicly-traded incumbent LECs, using various analytical methods and sources of publicly-
available data, the staff report identifies a zone of reasonable estimates of the weighted average cost of
capital (WACC) ranging from 7.39 percent to 8.72 percent.11 This zone of reasonable estimates reflects,
among other things, different estimates of the cost of equity produced using the Capital Asset Pricing
Model and the Discounted Cash Flow Model. Analyzing the effects of a new authorized rate of return
with a times-interest-earned analysis, the staff report recommends that the Commission consider
establishing the authorized rate of return in the upper half of this range, between 8.06 percent and 8.72
percent. We seek comment on the data, analysis and recommendations contained in the staff report. If
applicable, we ask that parties document the methodology, assumptions, data, and calculations of
any alternative analyses, and submit their calculations in Microsoft Excel® format, including all
relevant formulas and data relied upon.

In addition, the Bureau is initiating an external peer review process for the staff report. Office of
Management and Budget Guidelines require a peer review for any “highly influential scientific, financial,
or statistical information.”12 Because the staff report may be considered highly influential, the Bureau is
seeking timely peer review and will incorporate the results of that process into these dockets to provide
notice to interested parties and an opportunity for comment on the peer review results.
Pursuant to sections 1.415 and 1.419 of the Commission’s rules, 47 CFR §§ 1.415, 1.419,
interested parties may file comments on or before July 25, 2013, and reply comments on or before August
26, 2013. Going forward, this proceeding will be conducted exclusively in WC Docket No. 10-90. All
filings are to reference WC Docket No. 10-90.

Electronic Filers: Comments may be filed electronically using the Internet by accessing the

Paper Filers: Parties who choose to file by paper must file an original and one copy of each
filing. If more than one docket or rulemaking number appears in the caption of this proceeding,
filers must submit two additional copies for each additional docket or rulemaking number.

7 Id. at 18052, para 1047.
8 Id. at 18052-55, paras 1048-57.
9 Id. at 18055, para 1057.
10 Prescribing the Authorized Rate of Return: Analysis of Methods for Establishing Just and Reasonable Rates for
Local Exchange Carriers
, WC Docket No. 10-90, Staff Report, DA 13-1111 (Wireline Comp. Bur. rel. May. 16,
2013) (Staff Report).
11 Staff Report at 50, para. 143.
12 See 67 Fed. Reg. 8452 (2002).

Filings can be sent by hand or messenger delivery, by commercial overnight courier, or by first-
class or overnight U.S. Postal Service mail. All filings must be addressed to the Commission’s
Secretary, Office of the Secretary, Federal Communications Commission.

All hand-delivered or messenger-delivered paper filings for the Commission’s Secretary
must be delivered to FCC Headquarters at 445 12th St., SW, Room TW-A325,
Washington, DC 20554. The filing hours are 8:00 a.m. to 7:00 p.m. All hand deliveries
must be held together with rubber bands or fasteners. Any envelopes and boxes must be
disposed of before entering the building.

Commercial overnight mail (other than U.S. Postal Service Express Mail and Priority
Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD 20743.

U.S. Postal Service first-class, Express, and Priority mail must be addressed to 445 12th
Street, SW, Washington DC 20554.
People with Disabilities: To request materials in accessible formats for people with disabilities
(braille, large print, electronic files, audio format), send an e-mail to or call the
Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-418-0432 (tty).
The proceeding this Notice initiates shall be treated as a “permit-but-disclose” proceeding in
accordance with the Commission’s ex parte rules.13 Persons making ex parte presentations must file a
copy of any written presentation or a memorandum summarizing any oral presentation within two
business days after the presentation (unless a different deadline applicable to the Sunshine period applies).
Persons making oral ex parte presentations are reminded that memoranda summarizing the presentation
must (1) list all persons attending or otherwise participating in the meeting at which the ex parte
presentation was made, and (2) summarize all data presented and arguments made during the
presentation. If the presentation consisted in whole or in part of the presentation of data or arguments
already reflected in the presenter’s written comments, memoranda or other filings in the proceeding, the
presenter may provide citations to such data or arguments in his or her prior comments, memoranda, or
other filings (specifying the relevant page and/or paragraph numbers where such data or arguments can be
found) in lieu of summarizing them in the memorandum. Documents shown or given to Commission
staff during ex parte meetings are deemed to be written ex parte presentations and must be filed
consistent with rule 1.1206(a). In proceedings governed by rule 1.49(f) or for which the Commission has
made available a method of electronic filing, written ex parte presentations and memoranda summarizing
oral ex parte presentations, and all attachments thereto, must be filed through the electronic comment
filing system available for that proceeding, and must be filed in their native format (e.g., .doc, .xml, .ppt,
searchable .pdf). Participants in this proceeding should familiarize themselves with the Commission’s ex
For further information regarding this proceeding, contact Craig Glenn, Pricing Policy Division,
Wireline Competition Bureau, 202-418-1520 or
- FCC -

13 47 C.F.R. §§ 1.1200 et seq.

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