[Federal Register Volume 63, Number 222 (Wednesday, November 18, 1998)]
[Rules and Regulations]
[Pages 63993-64005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30687]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36, 54 and 69

[CC Docket Nos. 96-45 and 97-160; FCC 98-279]


Federal-State Joint Board on Universal Service, Forward-Looking 
Mechanism for High Cost Support for Non-Rural Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this Order, we select a platform for the federal mechanism 
to estimate non-rural carriers' forward-looking cost to provide the 
supported services. The model platform we adopt combines the best 
elements from each of the three models currently in the record. The 
model platform we adopt will allow the Commission to estimate the cost 
of building a telephone network to serve subscribers in their actual 
geographic locations, to the extent known. To the extent that telephone 
companies cannot supply the actual geographic location of the customer, 
the model platform assumes that those customers are located near roads. 
The model also allows the Commission to adjust engineering assumptions 
to reflect any evolution in the definition of supported services, and 
to assure that the model assumes a network architecture that will not 
impede rural Americans' ability to use the internet and other advanced 
telecommunications and information services. As such, we believe the 
federal model platform we adopt will serve as a solid foundation for 
further decisions that will determine the amount of universal service 
support to be provided to non-rural eligible telecommunications 
carriers.

EFFECTIVE DATE: November 18, 1998.

FOR FURTHER INFORMATION CONTACT: Chuck Keller, Common Carrier Bureau, 
(202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fifth 
Report and Order in CC Docket Nos. 96-45 and 97-160, adopted October 
22, 1998 and released October 28, 1998. The full text is available for 
inspection and copying during normal business hours in the FCC 
Reference Center (Room 239), 1919 M St., N.W., Washington, DC.

[[Page 63994]]

Summary of Fifth Report and Order in CC Docket Nos. 96-45 and 97-
160

I. Overview

    1. Since well before passage of the 1996 Act, the Commission has 
had in place policies to ensure the availability of telephone service 
in rural and high cost areas, as well as support mechanisms for low 
income consumers. Traditionally, consumers in high cost and rural areas 
of the nation have received universal service support through implicit 
subsidies in interstate and intrastate rates. Universal service has 
helped ensure that consumers in all parts of the country, even the most 
remote and sparsely populated areas, are not forced to bear 
prohibitively high rates in order to obtain phone service. Universal 
service also has been designed to ensure that low-income consumers have 
access to local phone service at reasonable rates. Long distance rates 
and rates for certain intrastate services have been priced above cost 
in many instances, in order to keep local telephone rates at affordable 
levels throughout the country. The universal service program has 
benefited all telephone subscribers throughout the country by helping 
to ensure that all Americans are connected to the network, and 
therefore telephonically accessible to one another. Universal service 
support has increased subscribership levels by ensuring that residents 
in rural and high cost areas are not prevented from receiving phone 
service because of prohibitively high local telephone rates. As of 
today, approximately 94 percent of the households in the United States 
subscribe to telephone service, a subscribership rate that is among the 
best in the world.
    2. In the 1996 Act, Congress established a ``pro-competitive, de-
regulatory national policy framework designed to accelerate rapidly 
private sector deployment of advanced telecommunications and 
information technologies and services to all Americans by opening up 
all telecommunications markets to competition.'' One of the principal 
goals of the telephony provisions of the 1996 Act is reforming 
universal service support so that the universal service objectives set 
forth in the 1996 Act continue to be met as local exchange and exchange 
access markets move from monopoly to competition. 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.'' 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. In requiring incumbents to open their local 
markets to competitive entry, Congress rendered unsustainable the 
existing universal service support system, which is based on a complex 
system of implicit and explicit subsidies. Rate structures that contain 
implicit support flows, such as artificially inflated interstate access 
charges and business rates, are sustainable in a monopoly environment 
but not in a competitive environment. Absent restructuring of the 
universal service system, competitors would enter markets where rates 
are artificially high relative to costs, and would not enter markets 
where rates are kept artificially low. Moreover, absent rate 
restructuring, such systematic market entry strategies would threaten 
to erode altogether the system of universal service. Incumbents would 
continue to have to serve the high cost customers without the 
offsetting benefit of the high-profit revenue streams that previously 
subsidized serving these high cost areas.
    3. In order to sustain universal service in a competitive 
environment, Congress found: (1) that universal service support should 
be explicit; (2) that all carriers (rather than only interexchange 
carriers) that provide telecommunications service should contribute to 
universal service on a competitively neutral, equitable, and non-
discriminatory basis; and (3) that, as a general matter, any carrier 
(rather than only the incumbent local exchange carrier) should be 
eligible to receive, on a competitively neutral, equitable, and non-
discriminatory basis, the appropriate level of support for serving a 
customer in a high cost area.
    4. In the Universal Service Order, 62 FR 32862 (June 17, 1997), the 
Commission adopted its plan to implement a system of universal service 
support for rural, insular, and high cost areas to replace the existing 
high cost programs and the implicit federal subsidies with explicit, 
competitively neutral federal universal service support mechanisms. The 
first steps were implemented on January 1, 1998. For instance, as of 
that date the new universal service rules require equitable and non-
discriminatory contributions from all providers of interstate 
telecommunications service rather than exclusively from interstate long 
distance providers. Also, as of January 1, 1998, competitive eligible 
telecommunications carriers are also eligible to receive federal 
universal service support for serving customers in high cost, rural, 
and insular areas. This order, which adopts the platform of a federal 
mechanism that would allow support amounts to be determined based on 
forward-looking cost, is the first step towards further revisions of 
federal support mechanisms. This estimate will be used to determine the 
level of support provided to eligible non-rural telecommunications 
carriers, beginning July 1, 1999.
    5. In the Universal Service Order, the Commission also agreed with 
the Joint Board that the appropriate level of federal universal service 
high cost support should be based on forward-looking economic cost 
rather than embedded cost. The Joint Board found that, for purposes of 
administering a federal high cost support system based on forward-
looking cost, a forward-looking cost model would be an essential part 
of determining support levels in an efficient way. The Joint Board also 
found that determining costs with a cost model would provide other 
benefits, such as the ability to determine costs at smaller geographic 
levels than would be practical using the existing cost accounting 
system. By using a cost model, universal service support can be 
targeted to support the high cost customers within a carrier's service 
area. Moreover, a forward-looking economic cost mechanism eliminates 
incentives to invest inefficiently. Also, because all eligible carriers 
will receive the same level of support when they win a customer and 
because the level of support is not based on the specific technology 
that the carrier used to deliver the supported service, the new 
universal service mechanism will be competitively and technologically 
neutral. Finally, the use of a forward-looking cost model allows the 
Commission to ensure that universal service support amounts are based 
on a network that will provide the supported services and not impede 
the provision of advanced services. In contrast, a support system based 
on the existing network, which is in some cases of lower quality, would 
not provide sufficient support for necessary upgrades. Basing support 
on the forward-looking cost of a network that is capable of providing 
the supported services will ensure that universal service support is 
based on a network with the capacity to ensure service

[[Page 63995]]

quality and access to advanced services in rural areas.
    6. In determining the appropriate level of high cost support, the 
Commission is committed to ensuring that ``[q]uality services [are] 
available at just, reasonable, and affordable rates,'' and 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 rates 
charges for similar services in urban areas,'' as required by the 
statute. In agreeing with the Joint Board that forward-looking economic 
cost will provide sufficient support for an efficient carrier to 
provide the supported services for a particular geographic area, the 
Commission specifically rejected arguments that support should be based 
on a carrier's embedded cost. As the Joint Board recognized, providing 
support based on embedded cost provides the wrong signals to potential 
market entrants. If embedded costs exceed forward-looking costs, such 
support would encourage inefficient entry. In contrast, providing 
support based on embedded costs that are below forward-looking economic 
costs would dissuade market entry even where such competition would be 
economically efficient. The Commission concurred with the Joint Board's 
finding that the use of forward-looking economic costs as the basis for 
determining support will send the correct signals for entry, 
investment, and innovation. The Commission found that a forward-looking 
economic cost methodology creates the incentive for carriers to operate 
efficiently and tends not to give carriers an incentive to inflate 
their costs or to refrain from efficient cost-cutting.
    7. As noted above, our process of estimating forward-looking costs 
is proceeding in two stages. Consistent with the Joint Board's 
recommendation, the Commission in the Universal Service Order concluded 
that it would need to estimate costs based on a careful analysis of 
efficient network design, engineering practices, available 
technologies, and current technology costs. That is, to estimate 
forward-looking costs accurately, the Commission decided to look at all 
of the costs and cost-causative factors that go into building a 
network. The Commission decided to do this in two stages: first, it 
would look at the network design, engineering, and technology issues 
relevant to constructing a network to provide the supported services. 
Second, the Commission said that it would look at the costs of the 
components of the network, such as cabling and switch costs, and 
various capital cost parameters, such as debt-equity ratios and 
depreciation rates (``input values'').
    8. This Order includes our conclusions as to the platform 
selection, the first of the two stages. In the Universal Service Order, 
the Commission concluded that two industry-proposed cost models should 
continue to be considered and developed further and stated that it 
might also consider models or model components submitted by other 
parties or developed by Commission staff. Both of the industry-proposed 
models have improved in significant ways since the Universal Service 
Order was adopted, and Commission staff has developed a separate model. 
Below we adopt a synthesis of the best aspects of each of the three 
models before us in this proceeding. We recognize that, of necessity, 
models estimate the forward-looking cost of providing the supported 
services. Such analysis is, however, the only practicable method that 
presently exists for determining forward-looking costs on a widescale 
basis, and we expect that the synthesis model will generate accurate 
estimates of the forward-looking of providing the supported services. 
The federal mechanism that we select in this Order to estimate forward-
looking cost will serve as the foundation for determining the final 
universal service support requirements. The Commission intends to issue 
Orders on the input values to be used in the selected mechanism and the 
further recommendations of the Joint Board in time to implement the 
federal mechanism for non-rural carriers by July 1, 1999. Because 
inputs are critical to determining the cost of providing the supported 
services, the Order we adopt today does not identify the amount of high 
cost support that will be provided to non-rural carriers beginning July 
1, 1999. The selected platform alone is not dispositive of the cost 
calculations generated by the mechanism. That determination also 
depends upon the selection of input values and the resolution of the 
issues recently referred back to the Joint Board, such as benchmark 
levels. Moreover, we note that the selection of the synthesis platform 
is based solely on our evaluation of its performance for determining 
non-rural carriers' forward-looking costs for universal service 
purposes. We have not evaluated it for any other purpose.
    9. We recognize that the task of establishing a model to estimate 
forward-looking costs is a dynamic process that will need to be 
reviewed and adjusted periodically. We must balance the needs to 
provide predictability and certainty with the need to account for 
changes that inevitably will occur over time, such as technological 
advances. For example, a party recently submitted data in support of 
basing support on the use of wireless technologies in some instances. 
The Commission therefore intends, before the end of this year, to begin 
more detailed consideration of possible future modification of the 
model to reflect new technologies. Among other things, the Commission 
may consider how the model should be updated in the future to account 
for changes in material prices, technology, and other circumstances. We 
also will address issues related to the administration of high cost 
support, including the transition by which routine use of the model and 
updating of model data will be provided by the administrator of 
universal service support mechanisms, subject to Commission oversight. 
In addition, we expect that, both before we implement the model for 
non-rural carriers on July 1, 1999, and on an ongoing basis, we will 
find opportunities to make technical improvements. In such cases, we 
delegate to the Common Carrier Bureau the authority to make changes or 
direct that changes be made as necessary and appropriate to ensure that 
the platform of the federal mechanism operates as described in this 
Order.

II. Procedural History

A. Universal Service Order

    10. 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, dial equipment minutes (DEM) weighting, 
and the Long-Term Support program. Other mechanisms also have 
historically contributed to maintaining affordable rates in rural 
areas, including subsidies implicit in intrastate rates and interstate 
access charges. Section 254 required the Commission to institute a 
Federal-State Joint Board on universal service and implement the 
recommendations from the Joint Board by May 8, 1997. After receiving 
the recommendations of the Joint Board, the Commission adopted the 
Universal Service Order.
    11. In the Universal Service Order, the Commission adopted a 
forward-looking economic cost methodology for non-rural carriers that 
will calculate support in four steps. First, a forward-looking

[[Page 63996]]

economic cost mechanism selected by the Commission, in consultation 
with the Joint Board (federal mechanism), would be used to calculate 
non-rural carriers' forward-looking economic cost of providing the 
supported services in high cost areas. Second, the Commission would 
establish a nationwide benchmark that represents the revenue that 
carriers receive as a result of providing service. Third, the 
Commission would calculate the difference between the forward-looking 
economic cost and the benchmark. Fourth, federal support would be 25 
percent of that difference, corresponding to the percentage of loop 
costs that historically has been allocated to the interstate 
jurisdiction. In the Universal Service Order, the Commission stated 
that, once states have taken steps to identify the subsidies implicit 
in intrastate rates, the Commission may reassess the amount of federal 
support that is necessary to achieve the Act's goals. In response to 
issues raised by commenters and the state Joint Board members, the 
Commission referred back to the Joint Board questions related to how 
federal support should be determined. For example, the Joint Board is 
reviewing how best to determine the support amount, given the forward-
looking cost of providing the supported services in an area, and the 
appropriate share to be provided by the federal mechanism. Although 
many of the proposals under consideration by the Joint Board and 
pending before the Commission on reconsideration might alter some of 
those four steps, the proposals would generally still require the 
Commission to adopt a mechanism for determining the forward-looking 
cost of providing the supported services.
    12. In the Universal Service Order, the Commission concluded that 
two industry-proposed models, the HAI Model and the Benchmark Cost 
Proxy Model, that had been submitted for consideration in the 
proceeding that led up to the Order were not sufficiently accurate for 
adoption as the federal cost mechanism, but that the two models should 
continue to be considered and developed further.
    13. The Commission stated that it might consider, for the federal 
mechanism, alternative algorithms and approaches submitted by parties 
other than the model sponsors or that could be generated internally by 
Commission staff. The Commission noted that one possible outcome of 
this approach would be development of a hybrid or synthesis model that 
combines selected components of different models with additional 
components and algorithms drawn from other sources. The Commission 
presently has three models before it: (1) the Benchmark Cost Proxy 
Model, Version 3.0 (BCPM); (2) the HAI Model, Version 5.0a (HAI); and 
(3) the Hybrid Cost Proxy Model, Version 2.5 (HCPM).

B. Further Notice and the Model Development Process

    14. In a July 18, 1997 Further Notice of Proposed Rulemaking 
(Further Notice), 62 FR 42457 (August 7, 1997), the Commission 
established a multi-phase plan to develop a federal mechanism that 
would send the correct signals for entry, investment, and innovation. 
The Further Notice divided questions related to the cost models into 
``platform design'' issues and ``input value'' issues. The Further 
Notice subdivided the platform 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 platform issues; (2) outside plant design platform issues; (3) 
switching and interoffice platform issues; and (4) general support 
facilities, expenses, and all inputs issues.
    15. In the Further Notice, we also requested that parties provide 
information about the platform design and input values that would allow 
the mechanism developed in this proceeding to estimate the forward-
looking cost of non-rural carriers in Alaska and insular areas. In 
addition, the Commission indicated in the Further Notice that, in 
selecting a federal mechanism, we might consider alternative approaches 
to BCPM and HAI, such as the development of a hybrid model that 
combines components of BCPM or HAI with each other or with algorithms 
drawn from other sources. After reviewing the comments received in 
response to the Further Notice, the Common Carrier Bureau released two 
public notices as guidance to parties wishing to submit cost models for 
consideration as the federal mechanism. The Bureau's guidance provided 
recommendations on the platform design of the customer location, 
outside plant, switching, and transport components of a cost model.
    16. During the course of the model development process, proponents 
of BCPM and HAI submitted a series of revisions to model components and 
intermediate output data. In a Public Notice released on November 13, 
1997, the Bureau requested that model proponents by December 11, 1997 
submit versions of their model platforms that incorporated the Bureau's 
guidance. The Bureau stated its expectation that the Commission would 
evaluate the models submitted at that time to select the platform for 
the federal mechanism. Updated versions of BCPM, HAI, and HCPM were 
filed with the Commission on December 11, 1997. On August 7, 1998, HCPM 
released a clustering algorithm to group customers into serving areas. 
The Bureau has continued to receive minor refinements to all three 
models.

C. Design of a Forward-Looking Wireline Local Telephone Network

    17. To understand the assumptions made in the models, it is 
necessary to understand the layout of the current wireline local 
telephone network. 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 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 which routes the call to its destination. A 
``wire center'' is the location of a switching facility, and there are 
geographic boundaries that define the area in which all customers are 
connected to a given wire center. By requiring the models to use 
existing incumbent LEC wire center locations, the Universal Service 
Order imposed some uniformity in the models' network design.
    18. 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 optical fiber 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 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 the signal degrades 
significantly 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 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 signal carried on 
optical fiber cable to an analog, electrical signal that is compatible 
with

[[Page 63997]]

customers' telephones. This equipment is known as a digital loop 
carrier remote terminal, or DLC. Because of the cost of DLCs, the 
models are designed so that a single DLC is shared among a number of 
customers. 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.
    19. A model's estimate of the cost of serving the customers located 
within a given wire center's boundaries includes the model's 
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 models 
divide the area served by the wire center into smaller areas that will 
be served from a single DLC, known as ``serving areas.'' All cable 
within a serving area, with the exception of that which connects a DLC 
to a central office, is considered distribution plant.
    20. The model proponents agree that forward-looking design requires 
that wire centers be interconnected with one another using optical 
fiber networks known as Synchronous Optical Network (SONET) rings. 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 
switching capacity of a single switch to process 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.
    21. The models under consideration in this proceeding differ in 
several important ways in estimating the forward-looking cost of 
designing a telephone network. For example, the three models in this 
proceeding rely on different sets of data and assumptions to ascertain 
the number of customers in each wire center and the geographic location 
of those customers. The models also use different methods to calculate 
switch size, the size, type, and number of fiber and copper cables, and 
the routing of those cables.

III. Customer Location and Outside Plant Design

    22. We first consider the customer location and outside plant 
algorithms of BCPM, HAI, and HCPM in light of the criteria identified 
in the Universal Service Order. As the Bureau pointed out in the 
Outside Plant Public Notice, the criteria suggest that the models 
``should be considered both from an engineering perspective, to ensure 
that the network provides the type and quality of service specified in 
the [Universal Service] Order, and from an economic perspective, to 
ensure that the network design minimizes costs and maximizes 
efficiency.'' We conclude that the customer location and outside plant 
platform of the federal mechanism should consist of a synthesis of the 
best ideas presented by the model proponents, including HAI's use of 
geocoded customer location data, BCPM's use of the road network to 
estimate the locations of customers for whom no geocode data are 
available, HCPM's approach to identifying customer serving areas based 
on natural clusters of customers, and HCPM's ability to design plant to 
the precise customers locations within each serving area.

A. Discussion

    23. In this section, we identify the combination of data and 
algorithms that locate customers and design outside plant to serve 
those customers in a way that best meets the criteria identified in the 
Universal Service Order. As an initial matter, we observe that all 
three models design a network that is capable of providing the 
supported services. We also conclude, as explained below, that each of 
the models meets a reasonable standard for ensuring that the network 
designed does not impede the provision of advanced services.
    24. We identify five distinct aspects of the customer location and 
loop design portions of a cost model that can have a significant 
bearing on the model's ability to estimate the least-cost, most-
efficient technology for serving a particular area. These include: (i) 
the extent to which the model uses actual customer location data to 
locate customers, (ii) the method of determining customer locations in 
the absence of actual data, (iii) the algorithms employed to group 
customers into serving areas, (iv) the model's ability to design plant 
directly to the customer locations within the serving area, and (v) 
adherence to sound engineering and cost minimization principles in both 
the design of distribution plant within each serving area and the 
design of feeder plant to connect each serving area to the associated 
central office.
1. Determining Customer Location
    25. Each model has a method for determining where customers are 
located. The issues raised are whether to use actual geocode data, to 
the extent they are available, and what method to use for determining 
surrogate customer locations where geocode data are not available. We 
conclude that HAI's proposal to use actual geocode data, to the extent 
that they are available, is the preferred approach, and BCPM's proposal 
that we use road network information to determine customer location 
where actual data are not available, provides the most reasonable 
method for determining customer locations.
    26. The starting point that all three models use in determining 
customer location is publicly available information from the Census 
Bureau, which provides the number of customers within each Census Block 
(CB). Thus, at a minimum, each model has information about the number 
of customers within a specified geographic area. In urban areas, CBs 
tend to be relatively small, and often contain only one city block. In 
rural areas, however, CBs typically are much larger. It is therefore 
important to have a reasonable method for determining customer 
locations more precisely within the CB.
    27. Use of Geocode Data. Only HAI includes a specific proposal for 
using actual latitude and longitude data to identify customer 
locations. Many commenters from across the spectrum of the industry 
agree that geocode data that identify the actual geographic locations 
of customers are preferable to algorithms intended to estimate

[[Page 63998]]

customer locations based solely on such information as Census data. We 
agree with Ameritech that proxy techniques for estimating customer 
locations are unnecessary and inappropriate for companies that can 
identify the actual customer dispersion of their customers with geocode 
data. We conclude 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.
    28. Recent public comment demonstrates support for the use of 
accurate geocode data in the federal mechanism when available. At 
present, the only geocode data in the record of this proceeding are 
those prepared for the HAI model by the HAI sponsors' consultants, PNR 
Associates (PNR). Many commenters recognize that, in addition to the 
current sources of geocode data, more comprehensive geocode data are 
likely to be available in the future. Nevertheless, some commenters 
still question whether PNR's geocode data set should be used in the 
federal mechanism. We note 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 particular source 
of that data. We anticipate, however, that a reasonable source of 
verifiable geocode data can be determined at the inputs stage of this 
proceeding. At a minimum, PNR's data is now available for review, and 
interested parties may comment upon and suggest improvements to the 
accuracy of that database. Thus, while we conclude that the federal 
mechanism should use geocode data to the extent available, we do not in 
this Order adopt a particular source of geocode data. The final choice 
of what source or sources of geocode data to use in determining 
customer location will be decided at the inputs phase of this 
proceeding.
    29. We also conclude that the federal mechanism should not discard 
geocode data in favor of surrogating below some ``break point'' 
percentage in each CB. The BCPM sponsors contend that actual geocode 
data should be used in conjunction with surrogate data only when the 
percentage of customer locations in a given area for whom precise 
geocode data are known is above 80 percent. The BCPM sponsors suggest 
that the combined use of actual and surrogate customer locations below 
this threshold will lead to clusters with ``unnatural distributions.'' 
The BCPM sponsors have provided no concrete evidence or statistical 
support for their position that significant anomalies will result from 
mixing actual and surrogate geocode points, nor provided adequate 
justification for the proposed level of the break point. We find that 
actual geocode data, to the extent available, provide the most reliable 
customer location information. BCPM has not persuaded us that geocode 
data should be discarded simply because the available geocode data for 
a given area may be limited. We therefore decline to adopt BCPM's 
suggestion that the model use surrogate geocode data in instances where 
only low percentages of actual geocode data are available.
    30. Surrogate Location Methodology. Where actual customer location 
information is unavailable, the models must use other means to identify 
customer locations. Each model has developed a method for determining 
the location of customers in the absence of geocoded customer location 
data.
    31. In the absence of geocoded customer data, HAI distributes all 
``surrogate'' customers uniformly around the boundaries of a CB. The 
HAI proponents contend that this distribution results in a conservative 
placement of customers because it assumes they are maximally separated 
from one another.
    32. BCPM uses CB data and a grid approach that allocates customers 
to microgrids using road network data, based on the assumption that 
customers are located along roads. The BCPM proponents argue that many 
roads lie in the interior of CBs, not just along CB boundaries, and 
that customer location correlates with roads. Information about the 
correlation between ``road mileage'' and ``housing units'' presented by 
the BCPM proponents for the state of Kentucky suggests that customers 
tend to live near roads. BCPM also notes that most rights of way follow 
roads.
    33. In the absence of geocode data, HCPM locates customers based on 
CB-level data by assuming that customers are distributed evenly across 
a square grid cell with the same area as the average size of a CB in 
the wire center.
    34. Recent comments in this docket support the use of road network 
to place surrogate customer locations. We conclude that, in the absence 
of precise customer location data, BCPM's rationale of associating road 
networks and customer locations provides the most reasonable approach 
in determining customer locations. We find that BCPM's assumption that 
customers generally live along roads is reasonable. Moreover, we find 
that BCPM's method of associating customers with the distribution of 
roads is more likely to correlate to actual customer locations than 
uniformly distributing customers throughout the CB, as HCPM proposes, 
or uniformly distributing customers along the CB boundary, as HAI 
proposes. HCPM's surrogating method, for example, would be more likely 
than the other two models to locate customers in uninhabitable areas 
such as bodies of water or national parks. As BCPM notes, HAI's 
surrogating method might well associate customer locations in ditches, 
bodies of water, or other uninhabitable areas that may constitute CB 
boundaries. Moreover, HAI's method of placing surrogate locations along 
CB boundaries may result in the identification of false customer 
clusters, as surrogates from adjoining CBs are placed near one another 
along the common CB boundary. In addition, we note that BCPM has taken 
steps to identify and exclude certain types of roads or road segments 
that are unlikely to be associated with customer locations. We also 
note that the proponents of HAI have recently proposed a road surrogate 
methodology premised on the rationale that customers locations 
correspond to roads. Therefore, we adopt BCPM's proposal to use road 
network information as the basis for locating within a CB boundary 
customers whose precise locations are unknown.
    35. We adopt BCPM's set of guidelines for excluding from the 
surrogating process the types of roads and road segments (such as 
interstate highways, bridges, and on- and off-ramps) that are unlikely 
to be associated with customer locations. Beyond these conclusions, we 
do not select a particular algorithm in this Order for placing 
surrogate points along roads. We conclude 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.
2. Algorithms Employed to Group Customers Into Serving Areas
    36. Once customer locations have been identified, each model must 
determine how to group and serve those customers in an efficient and 
technologically reasonable manner. A model will most fully comply with 
the criteria in the Universal Service Order if it uses customer 
location information to the full extent possible in determining how to 
serve multiple customers using a single set of electronics. Moreover, 
the model should strive to group customers

[[Page 63999]]

in a manner that will allow efficient service. As discussed below, we 
conclude that a clustering approach, as first proposed by HAI in this 
proceeding, is superior to a grid-based methodology in modeling 
customer serving areas accurately and efficiently. In addition, we 
conclude that the federal high cost mechanism should use the HCPM 
clustering module.
    37. The model proponents have identified two methods--clustering 
and gridding--for grouping customers into serving areas. HAI identifies 
groups of customers based on their proximity to one another to create 
``clusters'' of customers. HAI defines a ``serving area'' as a main 
cluster and those outlier clusters in close proximity. BCPM determines 
serving areas by means of a multi-step process that begins by placing 
grids over a map of CBs that make up a wire center. Once the grids are 
populated with customer location data, serving areas are determined 
based on technological limitations such as the number of lines that can 
be served from a single DLC. Although it originally proposed a gridding 
approach, HCPM subsequently developed a clustering algorithm.
    38. To meet the Universal Service Order's criteria, a clustering 
algorithm should group customer locations into serving areas in an 
efficient manner to minimize costs while maintaining a specified level 
of network performance quality. This is consistent with actual, 
efficient network design. In other words, an efficient service provider 
would design its network using the most efficient method of grouping 
customers, in order to minimize costs.
    39. The advantage of the clustering approach to creating serving 
areas is that it can identify natural groupings of customers. That is, 
because clustering does not impose arbitrary serving area boundaries, 
customers that are located near each other, or that it makes sense from 
a technological perspective to serve together, may be served by the 
same facilities. There are two main engineering constraints that must 
be accounted for in any clustering approach to grouping customers in 
service areas. Clustering algorithms attempt to group customers on the 
basis of both a distance constraint, so that no customer is farther 
from a DLC than is permitted by the maximum distance over which the 
supported services can be provided on copper wire, and on the basis of 
the maximum number of customers in a serving area, which depends on the 
maximum number of lines that can be connected to a DLC remote terminal.
    40. In contrast, the chief advantage of the gridding approach is 
its simplicity. Placing a uniform grid over a populated area, and 
concluding that any customers that fall within a given grid cell will 
be served together, is simpler to program than an algorithm that 
identifies natural groupings of customers. The simplicity of the grid-
based approach, however, can generate significant artificial costs. 
Because a simple grid cannot account for actual groupings of customers, 
grid boundaries may cut across natural population clusters. Serving 
areas based on grids may therefore require separate facilities to serve 
customers that are in close proximity, but that happen to fall in 
different grids. The worst-case scenario would involve a natural 
cluster of customers that, given distance and engineering constraints, 
could be served as a single serving area but that happened to be 
centered over the intersection of a set of grid lines. This would 
result in the division of the natural population cluster into four 
serving areas instead of one. As a result, a gridding approach cannot 
reflect the most cost-effective method of distributing customers into 
serving areas. In order best to meet the Universal Service Order's 
criteria, we conclude that the federal mechanism should use a 
clustering methodology, rather than a grid-based methodology, to 
determine serving areas.
    41. Having determined that a clustering approach should be used, we 
must determine which clustering approach to adopt for use in the 
federal mechanism. Two types of clustering algorithms have been 
proposed in this proceeding, agglomerative and divisive. The HAI 
clustering algorithm is a ``nearest neighbor'' algorithm, a type of 
agglomerative approach, which forms clusters by joining customer 
locations to the nearest adjacent location in a sequential fashion. The 
HCPM sponsors have developed a divisive algorithm that they describe as 
tending ``to create the smallest number of clusters and is also by far 
the most efficient algorithm in terms of computer run-time.''
    42. The agglomerative approaches to clustering, including the HAI 
nearest neighbor algorithm, work as follows. Initially, each location 
constitutes its own individual cluster. This initial state is modified 
by merging the two closest clusters together, reducing the total number 
of clusters by one. This modification is repeated until merging is no 
longer feasible from an engineering standpoint. In the HAI nearest-
neighbor algorithm, distance is measured from the two customer 
locations that are closest together. The HAI nearest-neighbor method 
contains an additional constraint that no customer locations are joined 
if the distance between them is more than two miles.
    43. In the divisive approach advocated by HCPM, all customer 
locations initially are grouped in a single cluster. If one or more 
engineering constraints are violated, the original cluster is divided 
into a new ``parent'' cluster and a ``child'' cluster. Customer 
locations are added to the child cluster until it is full, i.e., until 
no more locations can be added without violating the line count and 
maximum distance constraints. This process continues until the original 
cluster has been subdivided into a set of clusters that conform to the 
line count and maximum distance constraints.
    44. The clustering module developed by the HCPM sponsors includes 
several optimization routines that seek to lower the cost of 
constructing distribution areas by reassigning certain customer 
locations to different clusters. One routine, called ``simple 
reassignment,'' reassigns a customer location to a different cluster if 
the location is closer to that cluster's center. The routine operates 
sequentially, taking account of both the maximum distance and line 
count constraints. After the reassignment, cluster centers are re-
computed and the routine is repeated. The process continues until no 
more reassignments can be made. The second routine, called ``full 
optimization,'' considers customer locations one by one. It measures 
the effect each customer location has on the location of cluster 
centers, and moves a location from one cluster to another if the total 
distance from all customer locations to their cluster centers is 
reduced. The routine moves the customer location that gives the most 
distance reduction at each step. It continues until no more distance 
reduction is possible.
    45. While some commenters express concern that the HCPM clustering 
algorithm has not undergone extensive review, most agree that the HCPM 
clustering algorithm introduces innovations and improvements over 
previous models. For example, Bell Atlantic notes that HCPM's ability 
to limit redistribution of customers from their geocoded locations by 
assigning them to small microgrids is a substantial improvement over 
the approaches of HAI and BCPM. GTE contends that the HCPM clustering 
algorithm is a significant improvement over the HAI clustering 
approach.
    46. While we are cognizant of the concern expressed by commenters 
that the HCPM clustering algorithm has been available for review for a 
more limited time than the HAI clustering algorithm,

[[Page 64000]]

we note that the HCPM clustering algorithm and test data have been made 
available for public comment. Commission staff have met with and 
discussed issues relating to HCPM with the model sponsors and 
interested parties. The BCPM sponsors have performed an initial 
analysis of the HCPM clustering algorithm and while they suggest 
certain improvements to the HCPM clustering algorithm, no major flaw 
has been identified. Moreover, we observe that clustering algorithms, 
including in particular the divisive algorithm that HCPM employs, are a 
generally accepted and thoroughly tested part of statistical theory.
    47. We find that the HCPM clustering algorithm provides the least-
cost, most-efficient method of grouping customers into serving areas. 
The HCPM clustering algorithm tends to create the smallest number of 
clusters and is more efficient in terms of computer run-time. The 
divisive algorithm has greater ability to minimize costs while 
conforming to technological constraints and network quality standards. 
By considering at all times the most efficient assignment of a customer 
to a particular cluster, HCPM's divisive clustering algorithm ensures 
that customers will be served at the least cost possible. In 
establishing the least-cost, most-efficient method of grouping 
customers into serving areas, we note that fixed costs (i.e., those 
that do not vary with the number of lines) associated with DLC terminal 
devices in serving areas militate in favor of selecting an algorithm 
that generates a small number of large clusters rather than a larger 
number of small clusters. On the other hand, with a small number of 
clusters, the average distance of a customer from a central point of a 
cluster, and consequently the variable costs associated with cable and 
structures, tends to be greater than it would be if there were more 
clusters. In low-density rural areas, it is likely that fixed costs 
will be the most significant cost driver. Consequently, a clustering 
algorithm such as HCPM's that generates the smallest number of clusters 
should provide the least-cost, most-efficient method of determining 
customer serving areas in rural areas. In addition, a practical 
advantage of the divisive algorithm is that it runs in a small fraction 
of the time required for the agglomerative approaches. Hence it is more 
compatible with the criterion that the model platform be available for 
review. Therefore, we conclude that HCPM's clustering algorithm is 
superior to alternative algorithms designed to group customers into 
serving areas and adopt it for use in the federal mechanism.
3. Outside Plant Design
    In designing outside plant, a model will most fully comply with the 
Universal Service Order's criteria if it designs a network that 
reflects as accurately as possible the available data on customer 
locations, adheres to sound engineering and forward-looking, cost-
minimizing principles, and does not impede the provision of advanced 
services. We conclude that HCPM's outside plant design algorithms best 
meet the criteria developed in the Universal Service Order, including 
the requirement that the technology assumed in the model is the 
``least-cost, most-efficient, and reasonable technology for providing 
the supported services.'' We therefore conclude that the federal 
mechanism should incorporate HCPM's outside plant design algorithm.
a. Designing Plant to Customer Locations
    49. We first consider the manner in which each of the models 
designs outside plant once customer location and serving areas have 
been identified. After selecting a model that determines customer 
locations as accurately as possible and identifies efficient serving 
areas, it is important that the model design a network that takes the 
greatest advantage of that information. Thus, the model's method of 
designing outside plant should provide the best estimation of the 
design of outside plant to customer locations.
    50. The HCPM loop design modules build loop plant directly to 
individual microgrids in which customers are located. The microgrids 
that HCPM is able to design closely reflect the underlying customer 
locations. If an accurate source of geocoded customer locations is 
used, the model is capable of building plant directly to every customer 
location with an error of no more than a few hundred feet for any 
individual customer.
    51. By contrast, HAI and BCPM design outside plant by modifying the 
distribution areas so that they have square or rectangular dimensions 
and relocating customers so that they are distributed uniformly within 
the distribution area. In doing so, HAI and BCPM discard or distort 
customer location data. For example, although BCPM initially locates 
customers based on road network information, these customers are 
subsequently relocated into a square distribution area that is smaller 
than the quadrant in which the road network containing these customers 
is located. HAI's approach of designing plant to simplified customer 
locations within rectangularized serving areas, instead of to actual 
customer locations, could result in a systematic underestimation of 
outside plant costs. Sprint has observed that HAI's simplification of 
actual clusters to rectangles can result in an underestimation of plant 
costs. Sprint has shown that, under certain circumstances, HAI's 
conversion of actual clusters into rectangular distribution areas 
results in a shorter maximum cable length--and thus a lower cost of 
service--within the rectangularized cluster than in the actual, 
underlying cluster. Commission staff analysis has also revealed that 
HAI's approach to distributing customers evenly within its 
rectangularized serving areas can also result in a systematic 
underestimation in less dense areas when compared to the cost of 
constructing plant to serve the underlying customer locations within 
the clusters. BCPM's approach of designing plant to square customer 
serving areas that are significantly smaller than the areas over which 
the customers are actually distributed is likely to have similar 
infirmities.
    52. The HAI model also sacrifices accuracy by assuming that 
customers are dispersed uniformly within its distribution areas. As a 
result, the boundaries of HAI's distribution areas are unlikely to 
correlate exactly with the boundaries of the clusters, so some 
customers located inside a cluster may be shifted beyond the boundaries 
of that cluster. Commenters have criticized this ``squaring up'' of 
cluster areas to create distribution areas, as well as the assumption 
that customers are uniformly distributed throughout the distribution 
area. We agree that inaccuracies may be introduced by modifying the 
geographical boundaries of distribution areas and the location of 
customers within those areas for purposes of constructing outside 
plant.
    53. The models also have other elements that help ensure that an 
adequate amount of plant is constructed. For example, all three models 
categorize the terrain where plant is being built based on factors that 
affect the difficulty of building plant, such as soil type, depth to 
bedrock, and slope. HAI uses multipliers to reflect increased costs in 
areas with difficult terrain. BCPM uses separate structure cost tables 
for each of three terrain categories to reflect higher cost in more 
difficult areas. HCPM incorporates BCPM's approach. We find that the 
federal model should account for terrain factors in determining 
structure costs.

[[Page 64001]]

For the reasons stated elsewhere in this Order, we conclude that the 
federal platform should employ HCPM's outside plant algorithms, which 
take terrain factors into account in determining the cost of outside 
plant.
    54. Thus, both BCPM and HAI, by relocating customers so as to 
distribute them uniformly in square or rectangular distribution areas, 
create an apparent systematic downward bias in the required amount of 
distribution plant that is constructed in less dense areas. In 
contrast, HCPM's outside plant design algorithm is capable of designing 
plant directly to, or very nearly to, precise customer locations and 
thus should generate estimates of distribution plant that are 
sufficient to reach actual customer locations. HCPM therefore has a 
significant advantage in estimating sufficient outside plant over HAI 
and BCPM in its ability to avoid the distortions associated with 
adjusting customer locations to establish square or rectangular 
distribution areas. This is particularly important for ensuring that 
the federal mechanism estimates the cost of a sufficient amount of 
plant. By designing plant to serve actual customer locations instead of 
simplified representations of customer locations, HCPM is substantially 
more likely to estimate the correct amount of plant necessary for 
providing the supported services. As a result, HCPM's outside plant 
cost estimates are likely to reflect more accurately the forward-
looking cost of providing the supported services and thus comport more 
fully with the Universal Service Order's criteria.
b. Cost Minimization Principles
    55. We conclude that the outside plant module should be able to 
perform optimization routines through the use of sound network 
engineering design to use the most cost-effective forward-looking 
technology under a variety of circumstances, such as varying terrain 
and density. Each of the three model proponents has made some effort to 
consider alternative plant designs and select the most economical 
approach, or to place limits on investment in certain circumstances in 
order to control costs. The ability of a model to perform optimization 
routines is a significant factor in its ability to estimate the least-
cost, most-efficient technology under a variety of conditions, as the 
first criterion in the Universal Service Order requires. For example, 
assuming that the price of fiber cable or DLC electronics continues to 
drop, an optimizing model might shift the mix of fiber and analog 
copper towards fiber and away from copper.
    56. HAI and BCPM have made efforts to incorporate cost minimization 
principles into their respective approaches. Both models permit main 
feeder routes to be angled towards areas of population concentration in 
order to reduce feeder costs. BCPM also economizes the cost of DLC 
equipment in the central office by connecting multiple DLC remote 
terminals with a single central office terminal where possible, and 
limits distribution investment by limiting total distribution plant 
within a distribution area to the total road distance in the area. In 
HAI, for feeder plant that is less than 9,000 feet in length, the model 
chooses between fiber or copper cable technologies based on life-cycle 
cost minimization. In determining plant mix, HAI also can choose 
between aerial and buried plant based in part on the alternative with 
the lower life-cycle cost. We have concerns, however, that the 
effectiveness of these cost minimization principles are tempered by 
their practicality in actual use. For example, the angling of feeder 
routes toward population centers without regard to considerations such 
as rights of way may lead to significantly lower cost estimates than 
are practicable in reality. More importantly, however, neither HAI nor 
BCPM would recompute the type of technology deployed in response to a 
change in relative input prices, a key feature of ensuring that costs 
are minimized, subject to technological and service quality 
constraints.
    57. In contrast, HCPM selects the optimal type, number, and 
placement of DLCs, which are sized based on the number of lines served. 
For example, in a distribution area with 400 lines, HCPM would 
determine, based on input values for equipment prices, whether it is 
more economical to place one DLC with a maximum capacity of 500 lines 
or two DLCs each with a maximum capacity of 250 lines. HCPM also 
considers the relative costs of placing various feeder technologies 
(fiber or
T-1 on copper) and selects the most economical technology. HCPM further 
selects the lowest relative cost of different feeder routings.
    58. HCPM uses an algorithm developed for network planning purposes 
in both its feeder and distribution segments. This algorithm selects a 
feeder or distribution routing network by weighing the relative 
benefits of minimizing total route distance (and therefore structure 
costs) and minimizing total cable distance (and therefore cable 
investment and maintenance costs.) HCPM also selects technologies 
(e.g., fiber vs. copper, aerial vs. buried) on the basis of annual cost 
factors that account for both operating expenses and capital expenses 
over the expected life of the technology.
    59. In reviewing the current models, we conclude that HCPM's 
explicit optimization routines are superior to those in BCPM and HAI. 
In addition, because the platform that we adopt for the federal 
mechanism may be in place for a significant time period during which 
relative costs may change, the impact of optimization may increase in 
importance over time.
    60. We do not agree, as some parties have argued, that the models' 
outside plant design parameters should be verified by comparing the 
design of the model networks in specific locations to the design of 
incumbent LECs' existing plant in those locations in all cases. While 
we recognize that certain factors such as terrain, road networks, and 
customer locations are fixed, the design of the existing networks under 
these conditions may not represent the least-cost, most-efficient 
design in some cases. The Commission, in the Universal Service Order, 
adopted the Joint Board's recommendation that universal service support 
should be based on forward-looking economic costs. Existing incumbent 
LEC plant is not likely to reflect forward-looking technology or design 
choices. 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. Incumbent LECs' existing plant also was designed and 
built in a monopoly environment, and therefore may not reflect the 
economic choices faced by an efficient provider in a competitive 
market. Although we do not believe that a forward-looking platform can 
meaningfully be verified by comparing its network to an embedded 
network, we note that the platform is only one of many considerations 
used to set actual levels of support.
c. Service Quality
    61. The Universal Service Order's first criterion specifies that a 
model should not ``impede the provision of advanced services.'' In the 
Universal Service Order, the Commission disallowed a model's use of 
loading coils because their use may impede high-speed data 
transmission. During the model development process, the Bureau 
recommended that model proponents ``demonstrate how their models permit 
standard customer premises equipment (CPE) available to consumers 
today, such as 28.8 Kbps or 56 Kbps modems, to perform at speeds at 
least as fast as

[[Page 64002]]

the same CPE can perform on the typical existing network of a non-rural 
carrier.'' The BCPM proponents propose that testing a model network's 
capability to support data transmission over a 28.8 Kbps modem is a 
``conservative approach'' to identifying whether a model may impede 
advanced services because network access at 28.8 Kbps is ``widely 
available today in urban areas'' and ``modem speeds of 33.6 Kbps and 
even 56 Kbps are becoming more and more common.'' We agree that a 
reasonable standard for ensuring that a model's network does not impede 
the provision of advanced services would ensure the reasonable 
performance of 28.8 Kbps modems. We find that proponents of the BCPM, 
HAI, and HCPM have demonstrated that their models allow 28.8 modems to 
work at reasonable rates, which will permit all customers to have 
access to high-speed data transmission.
4. Maximum Copper Loop Length
    62. We now turn to the issue of the maximum loop length that the 
federal mechanism should permit. We note that, in making this 
determination, we must examine whether the models use the least-cost, 
most efficient, and reasonable technology while not impeding the 
provision of advanced services. HAI and BCPM proponents disagree on the 
maximum loop length over which a copper loop will carry a signal of 
appropriate quality, without the use of expensive electronics. The HCPM 
sponsors state that an 18,000 foot copper loop is capable of meeting 
current Bellcore standards, but they otherwise take no position on the 
appropriate length of copper loops. The maximum copper loop length will 
affect the model's cost estimates because a longer loop length will 
permit more customers to be served from a single DLC. As noted above, 
reducing the number of DLCs tends to reduce the overall cost. In the 
models, the ``fiber-copper cross-over point'' determines when carriers 
will use fiber cable instead of copper cable. BCPM asserts that Bell 
Labs standards call for loops not to exceed 12,000 feet. The proponents 
of BCPM further assert that copper loops longer than 13,600 feet will 
require the use of an expensive extended-range line card in the DLC to 
provide advanced services, the additional cost of which will outweigh 
the cost savings from using longer loops. Taking into consideration 
loading and resistance, the BCPM default provides that loop lengths 
that exceed 12,000 feet will be fiber cables. HAI contends that copper 
lengths may extend to 18,000 feet using only a slightly more expensive 
line card in the DLC.
    63. The Commission sought comment on this issue in the Further 
Notice and a Public Notice Requesting Further Comment. A few commenters 
contend that use of the HAI standard would impede access to advanced 
services and violate Carrier Serving Area (CSA) design standards. The 
HAI proponents disagree, and contend that there is no support for the 
claim that a 18,000 foot copper loop is too long to support advanced 
services such as ISDN and Asymmetric Digital Subscriber Line (ADSL). 
The HAI proponents note that there are two ADSL standards, ADSL1 and 
ADSL2. The HAI proponents contend that no commenter alleges that the 
facilities modeled by HAI are unable to support ADSL1. Although the HAI 
proponents admit that their plant design cannot support ADSL2 using a 
loop length of 18,000 feet, they argue that the higher speed of ADSL2 
is not a component of basic service supported by universal service.
    64. We conclude that the federal mechanism should assume a maximum 
copper loop length of 18,000 feet. The record supports the finding that 
a platform that uses 18,000 foot loop-lengths will support at 
appropriate quality levels the services eligible for universal service 
support. Although BCPM has presented evidence that the provision of 
some, high-bandwidth advanced services may be impaired over 18,000-foot 
loops, we conclude that the BCPM sponsors have not presented credible 
evidence that the 18,000-foot limit will not provide service at an 
appropriate level, absent the use of expensive DLC line cards. We also 
disagree with BCPM's interpretation of the Bell Labs standards manual. 
The publication states, in pertinent part, that ``[d]emands for 
sophisticated services are requiring the outside plant network to 
support services ranging from low-bit rate transmission to high-bit 
rates. To meet this demand, a digital subscriber carrier is being 
placed into the network starting at 12,000 feet from the serving [wire 
center].'' The document is referring to the design of digital loop 
carrier systems and related outside plant that will ``accommodate a 
wide range of transmission applications including voice, data, video, 
sensor control, and many others.'' This design standard seems to exceed 
the service quality standards for universal service. We find that the 
public interest would not be served by burdening the federal universal 
service support mechanism with the additional cost necessary to support 
a network that is capable of delivering very advanced services, to 
which only a small portion of customers currently subscribe. 
Accordingly, we conclude that the federal mechanism should assume a 
maximum copper loop length of 18,000 feet.

IV. Switching and Interoffice Facilities

A. Discussion

    65. We conclude that the federal universal service mechanism should 
incorporate, with certain modifications, the HAI 5.0 switching and 
interoffice facilities module. We find that HAI's module satisfies the 
relevant criteria set forth in the Universal Service Order and would be 
simpler to implement than BCPM's module. In our evaluation of the 
switching modules in this proceeding, we note that, for universal 
service purposes, where cost differences caused by differing loop 
lengths are the most significant cost factor, switching costs are less 
significant than they would be in, for example, a cost model to 
determine unbundled network element switching and transport costs.
    66. We find that both models meet the Universal Service Order's 
requirement that a model assume the least-cost, most-efficient and 
reasonable technology to provide the supported services. Both models 
assume the use of modern, high-capacity digital switches, and 
interconnect switching facilities with state-of-the-art SONET rings. 
The Further Notice recommended that the federal mechanism should be 
capable of separately identifying host, remote, and stand-alone 
switches and of distributing the savings associated with lower-cost 
remote switches among all lines in a given host-remote relationship. In 
the Further Notice, we requested ``engineering and cost data to 
demonstrate the most cost-effective deployment of switches in general 
and host-remote switching arrangements in particular,'' and sought 
comment on ``how to design an algorithm to predict this deployment 
pattern.'' No party has developed an algorithm that will determine 
whether a wire center should house a stand-alone, host, or remote 
switch. As noted above, however, both models can incorporate either a 
single blended cost curve that assumes a mix of host, remote, and 
stand-along switches, or use the Bellcore Local Exchange Routing Guide 
(LERG) to assume the existing deployment of switches and host-remote 
relationships. In 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

[[Page 64003]]

deployment of host-remote configurations.
    67. Both models also permit a significant amount of flexibility to 
ensure the allocation of a reasonable portion of the joint and common 
costs of the switching and interoffice functions to the cost of 
providing the supported services. As discussed below, however, BCPM's 
allocation methodology would introduce an additional degree of 
complexity to the inputs stage of this proceeding that we conclude is 
not administratively justified in light of the potential marginal gains 
in accuracy. We find that HAI's switching and interoffice modules 
satisfy the Universal Service Order's requirements to associate and 
allocate the costs of the network elements and functionalities 
necessary to provide the supported services, and do so in a less 
complex manner than BCPM's module, while still providing a degree of 
detail that is sufficient for the accurate computation of costs for 
federal universal service purposes.
    68. We also find that HAI's switching module more fully satisfies 
the requirement that data, computations, and assumptions be available 
for review and comment. HAI's modules use a spreadsheet program that 
reveals all computations and formulas, allows the user to vary input 
costs, and provides a simple, user-adjustable allocation factor. BCPM 
also uses a spreadsheet program that reveals its computations and 
formulas, but its default costs and allocation factors are based on 
results from the proprietary Switching Cost Information System (SCIS) 
and Switching Cost Model (SCM) models, and the defaults used to 
generate the results that BCPM uses in its modules have not been placed 
on the record in this proceeding. To minimize concerns regarding BCPM's 
use of proprietary data, the Commission could, in the inputs stage of 
the proceeding, substitute other inputs in place of the SCIS and SCM 
results for the cost amounts and allocation factors. Because the SCIS 
and SCM generate such detailed results, however, the process of trying 
to determine input values to replace the SCIS and SCM results would 
inject a significant degree of complexity into the inputs phase of this 
proceeding. We conclude that this additional complexity in the inputs 
phase is not justified by potential gains in accuracy. As noted above, 
we find that HAI's modules compute and allocate switching and 
interoffice costs with a degree of accuracy that is sufficient for the 
computation of federal universal service costs and in a manner that 
more readily provides for public review.
    69. We find that both models generally satisfy the requirement that 
each network function and element necessary to provide switching and 
interoffice transport is associated with a particular cost, though HAI 
satisfies the criterion more thoroughly than BCPM. AT&T contends that 
the BCPM 3.0 signaling network calculations indicate no explicit 
modeling of signaling costs. In BCPM, signaling costs used to develop 
per-line investments are provided through a user input table that its 
proponents assert reflects the cost of building a modern SS7 network. 
The signaling cost for a wire center is based on a weighted average of 
residence and business lines associated with that wire center. Users 
have the option of using the provided default values or entering their 
own values. In contrast to HAI, which explicitly models the cost of 
signaling, BCPM 3.0 simply adds on a signaling cost to the cost of 
switching based upon an input table of costs. Although this technically 
satisfies the criterion that any network function or element necessary 
to produce supported services must have an associated cost, we find 
that it is not likely to produce results that are as accurate as an 
estimate obtained through the explicit cost estimation used in HAI. The 
HAI 5.0 Switching and Interoffice Module computes signaling link 
investment to end office or tandem links between segments connecting 
different networks. HAI always equips at least two signaling links per 
switch and computes the required SS7 message traffic according to call 
type and traffic assumptions. We therefore conclude that HAI employs a 
more reliable method of assigning an associated cost to the network 
functions or elements, such as switching and signaling, that are 
necessary to produce supported services.
    70. Thus, although we conclude that either model's switching and 
interoffice modules could be used to adequately model universal service 
costs for these functionalities, we conclude that the federal mechanism 
should incorporate the HAI modules. Moreover, parties recently have 
identified certain aspects of HAI's interoffice module with respect to 
which the progress of state proceedings has shown a need for minor 
changes in the model's coding. These changes were identified too late 
in the proceeding to be included in this Order. Because general 
agreement exists among the parties as to the need to make them, 
however, we delegate to the Common Carrier Bureau the authority to make 
these changes.

V. Expenses and General Support Facilities

    71. We now consider the algorithms of HAI and BCPM for calculating 
expenses and general support facilities (GSF) costs in light of the 
criteria identified in the Universal Service Order. The most relevant 
of the criteria to expense and GSF issues is the ninth, which requires 
that the models make a reasonable allocation of joint and common costs. 
With this criterion, the Commission intended 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.'' Therefore, the platform of the federal 
mechanism must permit the reasonable allocation of joint and common 
costs for such non-network related costs as GSF, corporate overhead, 
and customer operations. In addition, the criterion requires that 
``[t]he cost study or model must include the capability to examine and 
modify the critical assumptions and engineering principles.'' 
Therefore, it is important that the platform's method of calculating 
expenses and GSF costs must be sufficiently flexible. It is also 
important that we select model components that are compatible with one 
another to compute cost estimates in a reasonable time. In light of 
these considerations, we conclude that the platform for the federal 
mechanism should consist of HAI's algorithm for calculating expenses 
and GSF costs, as modified to provide some additional flexibility in 
calculating expenses offered by BCPM.

Discussion

    72. Although we sought comment on alternative measures for 
estimating forward-looking GSF investment and other expenses, most 
commenters only address which expenses should be calculated on a per-
line basis and which expenses should be calculated as a percentage of 
investment. We agree that the majority of expenses can be estimated 
accurately on the basis of either lines or investment. Other commenters 
argue, however, that GSF investment and other expenses should be based 
on ARMIS data for individual companies to ensure accuracy. GTE argues 
that, without empirical evidence, neither calculating expenses on a 
per-line nor a per-investment basis is entirely satisfactory. GTE 
proposes a time-series forecasting model, which it attaches to its 
comments. While we find that most expenses can be estimated accurately 
based on either number of lines or investment, we agree that

[[Page 64004]]

neither investment ratios nor per-line calculations may be entirely 
satisfactory for estimating the forward-looking costs of certain 
expenses. Further, we observe that many of the input questions 
regarding how best to calculate expenses will be resolved in the input 
selection stage of this proceeding, and find that the platform of the 
federal mechanism must be sufficiently flexible to allow for the 
correct resolution of these issues. In this way, we can best ensure 
that the model will correctly allocate joint and common costs and 
includes sufficient flexibility to allow the modification and 
examination of critical assumptions.
    73. The Florida Public Service Commission agrees with our tentative 
conclusion that the cost of land, which comprises a large portion of 
GSF, should vary by state in order to reflect differing land values. In 
addition, the Florida Commission argues that, because of varying labor 
costs, state-specific expense-to-investment percentages should be used 
to estimate plant-specific operating expenses and state-specific per-
line values should be used to estimate plant non-specific expenses. We 
note that there may be other variables, in addition to land values and 
labor costs, that may vary by state, and find that the model should 
allow GSF and expense calculations to vary by state. Both models allow 
the user to make different assumptions by state, thus both models 
provide the same degree of flexibility in this regard.
    74. Because BCPM permits users to estimate all operating expenses 
(including GSF expenses) either as a per-line amount or as a percentage 
of investment and to adjust these amounts easily, it is somewhat more 
flexible than HAI in this regard. Because the federal mechanism must be 
sufficiently flexible to accommodate the decisions we will be making in 
the input selection phase of this proceeding, the HAI developers have 
made minor changes in their model so that expenses can be calculated on 
a per-line or percentage-of-investment basis. As noted above, many of 
the issues regarding the appropriate method of calculating forward-
looking expenses will be resolved when we determine the input values 
that should be used in the federal mechanism.
    75. We adopt our tentative conclusions in the Further Notice with 
respect to GSF investment and other expenses and conclude that the 
federal mechanism should: (1) be capable of calculating GSF investment 
and expenses by state; (2) provide the user with the capability to 
calculate each category of expense based either on line count or 
investment ratios; and (3) permit users to use different ratios or per-
line amounts to calculate expenses for different size companies. We 
also conclude that the combination of model components that the 
Commission selects in this Order should be capable of generating cost 
estimates for the supported services within a reasonable time. The 
model will not be used to make final support calculations until next 
year, but it is important that the Commission and the Universal Service 
Joint Board can use the selected platform in the near term in 
connection with the issues that the Joint Board is considering in light 
of the Referral Order.
    76. We find that the HAI and BCPM modules for computing expenses 
and GSF are roughly comparable, and conclude that the federal mechanism 
should incorporate the HAI module. Although, as noted above, the BCPM 
module may be somewhat more flexible, and therefore create the 
possibility for somewhat more fine-tuning at the inputs stage, we have 
thoroughly tested HAI's module and conclude that it generates accurate 
results. We also observe that expenses and GSF represent a small 
percentage of the total cost of providing the supported services. We 
therefore conclude that the practical benefits of using the HAI module 
outweigh those of using the BCPM module and that, in the interest of 
administrative efficiency, the federal mechanism should incorporate 
HAI's expense and GSF module.

VI. Conclusion

    77. In this Order, we select a platform for the federal mechanism 
to estimate non-rural carriers' forward-looking cost to provide the 
supported services. To generate the most accurate estimates possible, 
we have selected the best components from the three models on the 
record. The model components selected are all generally available to 
the parties, and a software interface to merge the selected components 
is also available on the Commission's World Wide Web site. Thus, the 
federal platform is available for use by states, other interested 
policymakers, and the public. Pursuant to the plan established in the 
Further Notice of Proposed Rulemaking, we will continue to evaluate 
model input values with the intention of selecting inputs for the 
federal platform at a later date. Once input values have been selected, 
the federal platform will be used to generate cost estimates.

VII. Procedural Matters and Ordering Clauses

A. Final Regulatory Flexibility Act Certification

    78. The Regulatory Flexibility Act (RFA) requires a Final 
Regulatory Flexibility Analysis (FRFA) in rulemaking proceedings, 
unless we certify that ``the rule will not, if promulgated, have a 
significant economic impact on a substantial number of small 
entities.'' It further requires that the FRFA describe the impact of 
the rule on small entities. The RFA generally defines ``small entity'' 
as having the same meaning as the term ``small business concern'' under 
the Small Business Act, 15 USC 632. The Small Business Administration 
(SBA) defines a ``small business concern'' as 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. Section 121.201 of the SBA regulations defines a small 
telecommunications entity in SIC code 4813 (Telephone Companies Except 
Radio Telephone) as any entity with 1,500 or fewer employees at the 
holding company level. In the Further Notice of Proposed Rulemaking 
(Further Notice) released July 18, 1997, the Commission considered 
regulatory flexibility issues relating to the selection of a mechanism 
to determine the forward-looking economic costs of non-rural LECs for 
providing supported services, but certified that there was no 
significant economic impact on a substantial number of small entities. 
The Commission found that non-rural LECs do not meet the criteria 
established by the SBA to be designated as a ``small business 
concern.'' Non-rural LECs are not small business concerns pursuant to 
the SBA guidelines because they are generally large corporations, 
affiliates of such corporations, or dominate in their field of 
operation. No comments were filed in response to the certification.
    79. We therefore certify, pursuant to section 605(b) of the RFA, 
that this Report and Order will not have a significant economic impact 
on a substantial number of small entities. The Office of Public 
Affairs, Reference Operations Division, will send a copy of this 
Certification, along with this Report and Order, in a report to 
Congress pursuant to the Small Business Regulatory Enforcement Fairness 
Act of 1996, 5 USC 801(a)(1)(A), and to the Chief Counsel for Advocacy 
of the Small Business Administration, 5 USC 605(b). A copy of this 
final certification will also be published in the Federal Register.

[[Page 64005]]

B. Ordering Clauses

    80. Accordingly, it is ordered, pursuant to sections 1, 4(i) and 
(j), and 254 of the Communications Act as amended, 47 USC 151, 154(i), 
154(j), and 254, that the Fifth Report & Order in CC Docket Nos. 96-45 
and 97-160, FCC 98-279, is adopted, effective 30 days after publication 
of a summary in the Federal Register.
    81. It is further ordered that the Commission's Office of Public 
Affairs, Reference Operations Division, shall send a copy of this 
Report and Order, including the Final Regulatory Flexibility 
Certifications, to the Chief Counsel for Advocacy of the Small Business 
Administration.

List of Subjects

47 CFR Part 36

    Reporting and recordkeeping requirements and Telephone.

47 CFR Part 54

    Universal service.

47 CFR Part 69

    Communications common carriers.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 98-30687 Filed 11-17-98; 8:45 am]
BILLING CODE 6712-01-P