20170811Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER RAPER
COMMTSSIONER ANDERSON
COMMISSION SECRBTARY
LEGAL
WORKING FILE
FROM:CAROLEE HALL
AUGUST 7,2017
2OI7 IDAHO T.INIVERSAL SERVICE TUND ANNUAL REPORT AND
RECOMMENDATIONS; CASE NO. CNR-T-L7 -04
DATB:
RE:
BACKGROUND
The ldaho Universal Service Fund (IUSF) rules were adopted under the general legal
authority of the Telecommunications Act of 1988, Chapter 6, Title 62,ldaho Code, and the
specific authority of 62-610, Idaho Code. The Commission established a universal service fund
for the purpose of maintaining the universal availability of local exchange service at reasonable
rates and to promote the availability of message telecommunications service (MTS) at
reasonably comparable rates throughout the state of ldaho. ldaho code 52-610(t). The IUSF is
fuaded tluough a statewide end-user surcharge on local exchange services and intrastate MTS
and Wide Area Telephone Service (WATS) type services. The USF Administrator submits an
Annual Report to the Commission detailing the program activities of the previous year and
recommending surcharge rates to meet the next year's funding requirements. The Commission
issues an Order in response to the Administrator's report, establishing statewide end-user
surcharges to be in effect for the next twelve months.
20 I 7 ADMINISTRATOR'S REPORT
On July 14,2017, the Administrator of the Idaho USF, Alyson Anderson, filed the
Annual Report for the IUSF fiscal year from July I ,2A16 through June 30, 2017. Included with
the report is the Administrator's proposed budget for the next fiscal year - July l, 2017 through
June 30,2018.
DECISION MEMORANDUM AUGUST 7,2017I
The cunent IUSF monthly surcharge rates are $.12 per residential line, $.20 per business
line, and $.005 per intrastate MTS/WTS billed minutes. ,See Order No. 33582. Surcharge
revenue for the year totaled $ I,291,532. Local exchange services contributed $647 ,66? (50%),
and $643,865 (50%) was contributed by MTS/WATS services. Surcharge revenue from local
exchange services decreased by approximately $352,866 and MTS/WATS surcharge revenue
decreased by approximately $157,235. The Administrative expenses for the year were $12,906.
Administrative expenses include the Administrator's salary, expenses, and bank charges.
Cunently, eight qualifying incumbent rural local exchange carriers (RLECs) receive
annual payments from the fund, and those payments remain unchanged at $1,698,610. If no
changes occur, the annual disbursements to the RLECs are expected to remain the same for the
next fiscal year (July 1,2017 through June 30, 2018). The end-of-year cash balance for fiscal
year 2A17, after applying bank charges and administrative expenses, was $80,784.
2017 - 2018 Administrative Budget
Ms. Anderson proposes an annual administrative budget of $24,100. This amount
includes the Administrator's salary and other expenses along with an audit that is anticipated to
cost $8,000 and is scheduled for October 201'1.
Local Residential and Business Senice Inventorics
The IUSF surcharge is assessed on residential and business lines, and long-distance billed
minutes, of wireline companies. The Administrator annually obtains reports from Companies
providing those specific services. As of May 1,2017, companies reported an average monthly
inventory of 152,290 residential lines and 122,009 business lines, for a total of 274,299. Tltis
represents a fiYo decrease in residential lines and a37Yo decrease in business lines from the prior
year. Total MTS/WATS billed minutes of use for the year ended December 3 l, 2016 were
125,154,20A, an I 1.5% decrease from the prior year.
The adjusted statewide weighted average rates for one-party single line residential and
business service and the corresponding threshold average rates are:
DECISION MEMORANDUM AUCUST 7,20172
Residential Semiccs
Business Services
2016 Statewide
Weighted
Avcrage Rate
2017 Statewide
Weighted
Avcrnge Rnte
1257o Statewide
rJ[cighted Average
Rate - 2016
125% Statewide
Weighted Average
Rste - 2017
$2t.77
$36.94
s2 r.83
$37.77
s?7.2t
s47,42
$27,28
s47.22
Switched Access Service
Long distance service providers reported intrastate MTSAI/ATS billed minutes of
125,154,200 compared to the 2016 reported minutes of 197,135,147,an11.5% decrease.
Currently, the statewide weighted average toll switched access rate is $.031 per minute, a change
from last year's rate of $.035.
Funding Adjustments Review - Rule 106
The Administrator also reviews the residential, business, and switched access rates of the
recipient RLEC companies to determine eligibility to receive IUSF funding. A company's
average one-party, single-line rate must equal or exceed the 125% statewide weighted average
line rate and the average rates per minute for MTSWWATS access rate must exceed 100% a{
the statewide weighted average access rate. IDAPA 31.46.01.106. If the difference in the
company's current average rate and the statewide average threshold rate is greater than three
percent (3%), and the difference in the annual revenue associated with the company's current
ratc and the revenue associated with the statewide average threshold mtes is over $5,000, the
company may need to revise rates to meet or exceed the statewide threshold rates. The
Commission may also calculate the weighted statewide average rates by using the residence and
business basic local exchange rates in effect on July l, 2005, to determine the eligibility of ETCs
for distributions from the IUSF. See Rule 106.04, and, Idaho Code 62-605(e\.
ADMINISTRATOR'S OPTIONS
The Administrator reports that over the last several years, bo& the number of local access
lines and intrastate MTS/WATS billed minutes have, on the average, steadily declined. As a
result, it is difficult to accurately calculate &e funding requirements necessary to maintain
adequate fund balances throughout the fiscal year. With this in mind, the Administrator presents
the following funding options for the Commission's consideration.
3DECISION MEMORANDUM AUGUST 7,2017
Option.l: Stattrs Ogg - Ms, Anderson reports that if current surcharge levels are
maintained and no additional IUSF funding is authorized, the funding will decrease by
approximately $584,820. The 2017-2018IUSF authorized disbursements willbe $1,698,510.
MTS/WATS services would contribute approximately 55% of the surcharge revenue and local
exchange services would contribute 45% of the surcharge revenue. The fund would not meet
obligations, and have a negative balance of approximately $504,036 at June 30, 2018,
Option 2: Adjust Fundinq per Rule lQ$ a{Ld Maintain Surchslge Rates - Idaho USF Rule
106.2 outlines the requirement to continue receiving IUSF funding after the first year of
eligibility. The following applies Rule 106 to each company currently receiving IUSF funding:
r ATC Communications (ATC) * decrease toll switched access rates; increase local
residentia! and business rates. ATC Communications annual IUSF draw would be
reduced by $67,569.
. Cambridge Telephone Company should increase toll switched access, local residential
and business rates. Cambridge Telephone Company annual IUSF draw would be reduced
by $39,533.
. Columbine Telephone/Silver Star Telecom, does not need to adjust toll switched access.
ColumbineiSilver Star should increase local residential and business rates. Silver Star
Telecom annual IUSF draw would be reduced by $l10,499.
o Direct Communications Rockland should increase local residential and business rates,
Direct Comrnunications Rockland annual IUSF draw would be reduced by $23,394.
r Fremont Telecom should increase toll switched access rates, and increase local residential
and business rates. Fremont Telecom annual IUSF draw would be decreased by $70,148.
o Inland Telephone Company should decrease toll switched access rates. Inland Telephone
Company annual IUSF draw would be increasedby $29,442.
. Midvale Telephone Company should decrease toll switched access rates, and increase
local residential and business rates. Midvale Telephone Company annual IUSF draw
would be reduced by $l7,l6l
. Rural Telephone Company should increase local residential and business rates. Rural
Telephone Company annual IUSF draw would be reduced by $ 16,104.
Under this proposal, Ms, Anderson projects the annual IUSF disbursements would be
$1,453,792. If current surcharge levels are maintained, the fund will continue to decrease by
4DECISION MEMORANDUM AUGUST 7,2017
approximately $340,002 with MTSAVATS services contributing 55% of the total surcharge
and local exchange services would contribute 45%. The fund would not meet obligations,
and have a negative balance of approximately $259,218 at June 30,2018.
Option 3: Adiust [nventorie.g. MaintgiE fundins Levels and Adiust Surcharge Rates -
Ms. Anderson, to more aceurately calculate future fund balances, adjusts inventories to the most
recent five-year trend. Thus, the residential lines have been reduced 107o, the business lines
reduced l0% and the MTS/WATS billed minutes are reduced l2%. lf the surcharge rates are
increased to $.25 per residential line, $.44 per business line, and $.009 per intrastate MTS/WATS
billed minute and IUSF disbursements are maintained at current levels, the fund will increase by
approximately $307,797. MTSAVATS services would contribute approximately 48% of the
surcharge revenue and local exchange services would contribute 52%. The fund would have a
balance of approximately $388,581 at June 30,2018.
Qqtion 4: Ad.Uqt.In-Lentories. Adjust Fundine to Meet State Averaees an.d.Decrease
Surcharge Rates - As with Option 3, Ms. Anderson adjusts the inventories based on the previous
five'year averages. Thus, the residential lines have been reduces l0%, the business lines reduced
l0% and the MTSIWATS billed minutes have been reduces 12%, The projected fund balance
indicates that the IUSF surcharge rates need to be increased. If the local surcharge rates are
increased to $.21 per residential line, S.37 per business line and the MTSAVATS rates are
increased to $,008 per intrastate billed minute, as well as IUSF disbursements adjusted per rule
106, the fund will increase by approximately $190,683, MTS/WATS senrices would contribute
approximately 52% of the surcharge revenue and local exchange services would contribute 48%.
The fund would have a balance of approximately $248,382 at June 30,2018.
ADMINISTRATOR'S RECOMMENDATION
Ms. Anderson reasoned that during the past year, there has been a37Ya decline in both
local business lines and MTS/WATS bill minutes, along with a l0% decline in local residential
line. She pointed out that the continued popularity of wireless, cellular and VoIP services have
contributed to this decline and that the trends do not appear to be changing. Therefore, surcharge
rates need to be increased significantly.
5DECISION MEMORANDUM AUGUST 7,7017
Ms. Anderson recommends that the Commission adopt Option 3, adjust inventories and
surcharge rates, while maintaining company disbursements at current levels. Option 3 should
approximate a three-month reserve balance adequate to cover approximately three months of
disbursements. MTSAIIiATS services would contribute approximately 48% of the surcharge
revenue and local exchange services would contribute 52% of the surcharge revenue. Ms.
Anderson projected that the fi:nd would have approximately $388,581 at June 30,2018.
Finally, Ms. Anderson recomrnends that the inuease be effective September l,2Al7 .
STAFF ANAYLSIS AND RECOMMENDATION
Staffhas reviewed the calculations, supporting documentation, and recommendations
contained in the Administrator's Annual Report. Staffalso notes the impact to Idaho Rule 106
by the Federal Communication Commission's (FCC) USF/ICC Tronsformation Order,FCC
I l-161, released on November 18, 201l, and the subsequent FCC 14-54, Seventh Order on
Reconsiderorior, released on June 10,2014. The first FCC Order established a schedule to
reduce intrastate terminating access rates, including transport and reciprocal compensation, to
bill-and-keep by July 1,2019. The second FCC Order established a four-year transition of voice
services to a rat€ floor of $20.45 for carriers that receive federal high cost support. In April,
2017, the FCC froze the rates at $18.00 and issued a Notice of Proposed Rulemaking and Order
seeking comments on the rate for basic voice services. Stakeholder's argued that higher prices
for basic voice service in nrral high cost areas created a significant and legitimate rate shock for
rural customers. Therefore, the FCC has provided a freeze on the rate floor at $ l8 pending
fuither review and comments.
Given these Orders and the uncertainty at the FCC, it makes it impractical for the
Commission to apply Rule 106 to determine eligibility for the eight companies that receive state
IUSF disbursements. All eight tUSF-funded companies have residential rates of $25 ,76,t lf
Rule 106 is strictly applied, all eight companies would be required to increase the residential
focal exchange rate from the cunent 525.76 to $27.21 and the business local exchange rate to
547.42. Staffacknowledges that the funding elements are impermanent and difficult to predict.
Stafl therefore, agrees with Ms. Anderson's recommendation to the Commission to adopt
I On Scptember 2, 2009, Commission Order No. 30894 was issued notiffing the USF recipient companies that
residential rates must be increased to the statewide threshold rate of $25.76 to continue to receive funding. Alleight
companies complied by increasing the residsntial rates,
6DECISION MEMORANDUM AUGUST 7,2017
Option 3 and increase surcharge rates to $.25 per residential line, $.44 per business line and
$.009 per intrastate MTS/WATS billed minute and maintain IUSF disbursements at current
levels. With these increases it is estimated that the fund will inuease by approximately
$307,797 leaving a balance of approximately $388,581 at June 30, 2018.
A very important concern of Staff and the Administrator has been trying to fund the IUSF
in a declining industry where land lines are being replaced with new technologies such as VoIP
and cell phones. Staffbelieves that it is time for the Commission to take a serious look at thc
sustainability of the fund given the significant decline of line counts and minutes. The revenue
impact of increasing the surcharges to fund the current IUSF exacerbates the erosion of the
customer base thereby increasing the impact even further on land line customers, Staffbelieves
that opening a docket to notice workshops and allow for comments where all stakeholders can
participate regarding the future of the IUSF needs to occur as quickly as possible.
Finally, Staff recommends that the Administrator provide quarterly cash flow analysis to
the Staff. The quarterly cash flow review will allow Staff to monitor any anomalies that may
arise and to proactively respond to any unforescen cash flow impacts due to further declines in
line counts or minutes.
COMMISSION DECISION
Does the Commission wish to approve the Administrator's IUSF 2017-2018 budget?
Does the Commission wish to adopt the Administrator and Staffs recommended funding
Option 3?
Does the Commission wish to adopt a different funding option?
Does the Commission wish to open a docket to investigate the future of the IUSF through
comments and workshops?
Does the Commission wish to accept Stafls final recommendation for quarterly cash
flow reports to monitor revenue impacts from unforeseen changes in line counts or access
minutes?
i udmcmoVlUSF/J017 ldaho USF Annuol Rcport
1DECISION MEMORANDUM
Carolee
AUGUST 7,2017