Gnrt9722_Gnrt9902.wsch.doc

WELDON B. STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3283

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE INVESTIGATION TO DETERMINE AN APPROPRIATE COST MODEL USING FORWARD-LOOKING ECONOMIC COSTS FOR CALCULATING THE COSTS OF BASIC TELECOMMUICATION SERVICES IN IDAHO.
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CASE NO. GNR-T-97-22

IN THE MATTER OF THE INVESTIGATION TO ESTABLISH THE IDAHO NON-RURAL UNIVERSAL SERVICE FUND AS REQUIRED BY IDAHO CODE § 62-610A-F.
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CASE NO. GNR-T-00-2

COMMENTS OF THE
COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Weldon B. Stutzman, Deputy Attorney General, and in response to the Notice of Public Workshop issued in Order No. 28521 on September 25, 2000, submits the following comments.
On December 19, 1997, the Commission opened a docket to analyze cost models and adopt a forward-looking cost mechanism as part of establishing a new Universal Service Fund (USF) as required by Idaho Code § 62-610F (Case No. GNR-T-97-22). On January 18, 2000, the Commission opened another docket (Case No. GNR-T-00-2) to establish and implement the new USF for non-rural telephone companies (referred to as the Idaho High Cost Fund) and consolidated it with GNR-T-97-22 for the purpose of hearing and scheduling. See Order No. 28261.
Pursuant to notice and Commission Order No. 28503, a prehearing conference was held on September 18, 2000, wherein the parties met and were directed by the Commission to propose a workable solution to a case that has been in existence for three years. The Commission made clear its dissatisfaction with the continuing controversy over computer high cost models to determine the appropriate fund amount. The parties agreed that they would identify high cost areas, assemble proposed plans and convene a workshop on October 13, 2000. In response to the Commission’s directive, the Staff presents the following as a proposed frame work for a high cost fund. Staff’s proposal presumes the burden will lie on incumbent local exchange carriers (ILECs) to provide additional information to the Commission when requesting support from the fund before any disbursements can be approved by the Commission.

COST MODELS
Staff agrees with the Commission's assessment that the cost models presented are cumbersome, controversial, susceptible to manipulation, and are not entirely accurate. However, Staff believes the models need not be completely discarded. Staff has been using the synthesis model adopted by the Federal Communications Commission (FCC) and believes that it can be useful. Given existing data limitations, the model should not be used to determine the size of the high cost fund or for rural companies, as the results are not reliable. Staff also believes the model is not reliable for setting absolute values of support within a wire center, but the model can establish some relative relationships that can be beneficial. The principal, and perhaps only beneficial aspect of the model, is to identify the high cost areas within the State. Staff thus proposes a blended approach as a starting point to establish a high cost fund.
To begin a blended approach to establish the high cost fund, Staff recommends use of the FCC's model for the identification of higher cost areas within the State. This approach will satisfy the requirement in Idaho Code § 62-610 F for a forward-looking cost mechanism, create a simplified high cost mechanism that will not be administratively overwhelming to manage, and keep the costs at a minimum.
HIGH COST AREAS
Using the FCC model, Staff identified the relative high cost areas for the entire state. To minimize controversy, the inputs for the model were not changed in any way -- meaning that the model was run using the "off the shelf" inputs. The results were then sorted using various scenarios such as monthly cost per line, support per line, density and average loop length. Staff recommends using only the support per line along with the monthly cost per line results, and then only for establishing relative cost values. The results derived from the loop length and density studies were discarded because some of the wire centers showing a need for support, based solely on this criteria, include Idaho Falls, Caldwell, Blackfoot and Burley. These are high population density, low cost areas, and this exercise only affirms to Staff that model run results should be blended with other mechanisms to establish a fair and just funding mechanism that is meaningful and manageable. The results of the cost per line and monthly support schedules point to the rural exchanges as high cost areas, which is only logical. Staff’s results from the model run are attached as Schedule No. 1.

ZONE FUNDING APPROACH
Staff proposes that two zones be created. The first zone (Zone 1) or "base rate area" is the urban areas that have high population densities, resulting in lower costs. These areas should not be eligible for any support. The second zone (Zone 2) or "outside base rate area" is the rural areas where the population density is low and loop lengths tend to be much longer, resulting in higher cost areas. In its testimony, Qwest advocated a 650 line per square mile density factor when establishing a base rate area. Staff illustrated its approach using a 25 line per square mile density factor. Selecting the density factor is significant in sizing the fund. The density per square mile factor affects the number of lines which will receive support in each area. For example, the number of lines in Zone 2 were reduced significantly when a density factor of 300 rather than 650 is used. (See Staff Attachment No. 2) Staff believes that further examination is needed before determining what density factor is appropriate, however for illustrative purposes 300 has been used for these comments.

ZONE APPROACH IMPLEMENTATION
In order to establish appropriate funding based upon Staff's proposed zone approach, zone maps based on density will need to be created by the companies. Zone maps can be a valuable resource that are readily available and should be easier to implement, more reliable and less contentious than model outputs. Moreover, support from the fund is to be portable, that is, it should remain with a particular customer regardless of his chosen carrier. By using zone maps, this requirement can be readily achieved and tracked by the future Administrator, as well as any competitor that enters the ILEC's territory. Staff proposes that before any funding occurs, a Company must make formal application to the Commission. The application must contain current zone maps and specific Zone 2 customer locations. Spotting customers when an ILEC seeks funding will help with accurate disbursements from the fund as well as maintaining accurate records for the Administrator. It is important that specific customers within Zone 2 are targeted so as to eliminate the potential for over/under support going to the ILEC or ETC.
When the ILECs create the zone maps and spot customers within Zone 2, the identified areas for support should relate to some density study and correlate to the model output of high cost wire centers. Whether the data used for spotting customers is derived through census block studies, geo coding or another means approved by the Commission, it is imperative that this exercise be completed to assure that support is going to the Zone 2 customers within a high cost wire center.

SIZING THE FUND
Because there is little if any competition in the rural areas, and the statute only requires the Commission to "adopt the appropriate methodology and mechanisms to collect and distribute financial assistance", Idaho Code § 62-610F(2), an argument could be made for creating only the frame work for a fund. The frame work could address the methodology and the policies for a funding mechanism while waiting to fund it. In other words, until such time as competition enters the high cost support areas (Zone 2), the fund balance could be zero.
This approach could, however, create a "chicken before the egg argument." It might be argued that with no fund there is no incentive for competitive entry, and if there is no competition there is no need for a fund. However, this problem can be avoided by identifying areas that are eligible for support, and determining the amount of portable support that will be provided to a competitor that demonstrates it is serving specific customers in Zone 2. Under Staff’s proposal, only a few non-rural high cost wire centers are eligible for support. (Staff Attachment No. 1) It is unlikely these areas will see competition in the near future. It is important to remember that this process is new and may require review and perhaps some re-working in the future. For now however, if a non-rural LEC believes it needs support, the application process and the mechanism would be in place for a request and the ILEC would be able to seek support under Staff's proposal.
Assuming the Commission determines that a fund amount is warranted at this time, the fund size could be related to the number of lines requiring support in the Zone 2 areas where formal application is received and approved by the Commission. The funding mechanism to support the fund would be a surcharge imposed on end users of "all retail telecommunication services originating and terminating within the state of Idaho and collected by the telecommunications carrier providing telecommunication services to such end user." Idaho Code § 62-610F(2). Any disbursement from the Idaho high cost fund must be reduced by a dollar for dollar amount of any federal support the Company is currently receiving. This is necessary to avoid redundant recovery.

NUMBER OF LINES TO SUPPORT
Staff advocates USF support of only a primary residential and business line to maintain a reasonable fund size that is not too onerous to implement. The high cost fund is intended to promote universal service in rural high cost areas. The fund should not be used to support additional lines beyond the primary residential and business line.
To simplify it further, the Commission could rebalance the business/residential rate differential ratio and approve a single rate for either residential or business service, making it simpler to support one line per address. This would also help make implicit subsidies in the residential rates explicit, again complying with Legislative intent.

APPLICATION FOR SUPPORT
Before any incumbent carrier is allowed to receive support payments, it should be required to make formal application to the Commission. In an application the carrier must have current verifiable zone maps, as well as revised tariff filings that reflect a dollar for dollar reduction in rates to match the amount of support it will receive from the high cost fund. For Qwest, this reduction in rates would be for local rates only, as access rates are not part of the Company's revenue requirement, nor do they represent implicit subsidies.

SUMMARIZE
In summary, Staff's proposal is as follows:
1. Use the FCC model only to identify high cost areas.
2. Establish a two-zone approach wherein Zone 1 is identified as a "base rate area" with a high-density population and is not eligible for support. The base rate area should be established using some density criteria, determined by the Commission, that is somewhere between Staff's illustrated 25 and Qwest's 650 lines per square mile. Zone two, or "outside the base rate area," will be the only zone that will receive support. The amount of support provided will reflect a dollar for dollar reduction of the companies' implicit subsidies and will be reduced dollar for dollar by the corresponding amount of support the carrier receives from the federal USF mechanism.
3. All companies would be required to create zone maps using wire center locations as a condition of support. When creating zone maps, the companies should be required to use verifiable sources such as census block studies, geo coding or some other media approved by the Commission, that correlate to the model's output of high cost areas.
4. Companies receiving support should be required to spot specific customers located in the supported area.
5. Should the Commission determine that a fund is necessary, the fund amount should be based upon the number of lines in the support areas using density and zone maps created by the companies. If the Commission believes a fund is not needed at this juncture, it could simply adopt the methodology, policies and mechanisms and address the funding at a later date when competition begins to enter the rural areas.
6. The fund should not support more than the primary residential or business line, or only one line per address.

7. A formal Application process should precede any disbursements from the fund.

Dated at Boise, Idaho, this day of October 2000.

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Weldon B. Stutzman
Deputy Attorney General

Technical Staff: Carolee Hall

Chall:jo:i:umisc/comments/gnrt9722_gnrt002.wsch
STAFF COMMENTS 1 OCTOBER 2, 2000