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CONSUMER GROUP PROPOSAL
TO RESTRUCTURE FEDERAL COST
RECOVERY
AND SETTLE OUTSTANDING ACCESS
CHARGE
ISSUES
Supported By
TEXAS OFFICE OF PUBLIC UTILITY COUNSEL, CONSUMER FEDERATION OF
AMERICA, CONSUMERS UNION, NATIONAL ASSOCIATION OF STATE UTILITY
CONSUMER ADVOCATES (NASUCA), AARP, INTERNATIONAL COMMUNICATIONS
ASSOCIATION, NATIONAL RETAIL FEDERATION
January 25, 2000
INTRODUCTION: COMPROMISE CONSUMER RESPONSE TO THE CALLS
PLAN
The following plan has been endorsed by a number of consumer
groups and should be incorporated into the Coalition for Affordable
Local and Long Distance Services (CALLS) petition before the Federal
Communications Commission (FCC) so that consumer benefit, currently
absent from the proposal, may be realized.
The undersigned groups have been concerned from the outset that
CALLS provides no tangible benefits for consumers. We are confident
that this compromise proposal will bring immediate benefits to
consumers via reductions in the cost of telephone service. These
reductions in the cost of service will appear on a consumer's bill
from the outset regardless of long distance usage. The plan we
outline would allow consumers to reap billions in benefits.
Recognizing that the manner in which revenues are collected in the
federal jurisdiction is of utmost importance to the proponents of the
CALLS proposal, we have tried to devise a methodology that will
enable costs to be recovered without unduly discriminating against
any class of customers (residential or business) or segment of the
industry (local exchange companies or the long distance carriers). In
doing so, the undersigned groups have offered relief to the carriers
in many of the areas that precipitated the initiation of the CALLS
petition.
On the other hand, the consumer proposal requires the two segments
of the industry to each shoulder part of this financial
responsibility. Business and residential customers get the same
reductions in their fixed charges, under the consumer proposal. Fixed
charges and usage charges are reduced equally.
CONSUMER COMPROMISE PLAN ELEMENTS
Business as usual assumptions produce reductions in cost recovery
in the Federal jurisdiction of over $5 billion over five years.
Therefore, we are addressing only changes in timing and "new" moneys
needed to affect a compromise that restructures federal cost
recovery.
CONSUMERS GET UP FRONT BENEFIT
1. SUBSCRIBER LINE CHARGE (SLC) $2.0 billion
Reduce all SLCs by $1.00/mo.
2. PRIMARY INTEREXCHANGE CARRIER CHARGE (PICC)
1.8
Remove all PICCs entirely from consumers’ bills.
(IXCs responsible for $.50 payment).
3. SPECIAL ACCESS .2
Total Reductions in ILEC Revenue before 7/1/00
4.0
IXC’S GET
4. SWITCHED ACCESS
Lower Switched Access to $.0055 over 4 years.
(This is funded by the continued use of the X-Factor).
-
- PICC
Reduced to $.50.
- NO BIG INCREASE IN UNIVERAL SERVICE FUND COLLECTIONS
- No new universal service charge of $650 million.
ILECS GET
7. PRODUCTIVITY FACTOR
Keep the X-factor at 6.5% and use reductions to move switching
rates to $.0055. When switching rates equal $.0055, the productivity
factor is eliminated. At the end of the transition period, switching
rates, SLC and PICC charges are capped at then current levels and
presumed to be just and reasonable by the operation of market forces.
Parties may seek to change the cap but bear the burden of making two
showings: (1) demonstration of market failure and (2) economic cost
model adopted by FCC supports the requested change. Movant has the
burden of proof.
8. AUDIT:
The audit is settled with no further actions required other than
the implementation of the reductions and productivity factor
discussed above.
BACK UP CALCULATION AND COMPARISONS OF THE ENDPOINT OF
RESTRUCTURING OF COST RECOVERY IN THE FEDERAL
JURISDICTION.
The up front reduction in the consumer plan comes before, but
within the business as usual assumptions. Thus, two factors will be
at work in restructuring the cost recovery in the federal
jurisdiction. It is important to keep the two separate and to
understand how they interact to produce the end point that is desired
(see Exhibit 1). It is also important to keep the short term, up
front reductions and long-term final rate structure in view. The
interactions between these effects are important to recognize.
EXHIBIT 1
COMPARISON OF CURRENT RULES, CALLS AND CONSUMER
ALTERNATIVE
Contact Karen Walls, NASUCA Deputy Director at (301)589-6313 for a
copy of this exhibit.
For example, the base case has a total reduction of $5.37 billion.
Although the consumer proposal makes a $4 billion reduction up front,
the total reduction is not $9.37 billion because the
productivity factor in the out years is applied to a smaller base.
The total reduction necessary to restructure cost recovery in the
federal jurisdiction is equal to a total of $7.78 billion. Therefore,
the consumer plan requires just under $2.5 billion in new reductions
in cost recovery above the base case.
Exhibit 1shows the recovery of costs in the four categories the
consumer proposal affects. The numbers for current rules and CALLS
were presented by MCI to the Commission. They are a true
representation of the CALLS assumptions. CALLS appears to be backing
off of their own assumptions since this analysis shows that the CALLS
proposal is not revenue neutral; it is obvious that all else equal,
CALLS cannot be revenue neutral since it lowers the productivity
factor and therefore foregoes rate reductions.
In addition to the up front reductions, there is one other
substantial difference between the consumer approach and the CALLS
approach. This analysis focuses only on the interstate revenues and
does not include any changes in universal service fund payments. In
particular, the consumer proposal moves switched access to $.0055 per
minute without creating a new universal fund (arbitrarily set at $650
million by CALLS). To the extent that such an accounting item (i.e.
implicit subsidy) is necessary, it should be accounted for in
settling the audit. We recognize that universal service funds for
high cost support will be necessary, but CALLS did not address this
issue.
OVER RECOVERY OF COSTS IN THE FEDERAL
JURISDICTION
IDENTIFIED IN ONGOING PROCEEDINGS
The reform of rates is to be driven by correcting the blatant over
recovery of costs in the Federal jurisdiction. Year after year, when
the local exchange companies report their earnings in the Federal
jurisdiction, they are far above the targeted level. The proceedings
at the FCC demonstrate the cause of these over earnings (see Exhibit
2).
The audit has found phantom assets and the FCC has noted that the
RBOCs report far more assets to regulators than they carry on their
financial books. This raises cost recovery far in excess of where it
should be. For example, the audit yielded a discrepancy of $5
billion, which would generate cost recovery reductions of about $.25
billion in the federal jurisdiction. Reconciling the depreciation
discrepancy between financial and regulatory books would increase the
total reductions dramatically. Reconciling the books would lower cost
recovery by $1.5 billion. Reinitializing rates would result in
another $2.5 billion.
The FCC uses a company-wide productivity factor, rather than an
interstate specific productivity factor. As a result, productivity
growth is vastly understated. Each year, when rates are adjusted,
they are under corrected and the over earnings reappear. Using an
interstate productivity factor, based on the FCC methodology, would
raise the productivity factor to 10.2%, resulting in reductions of
$.9 billion in cost recovery. Reinitializing the rates for
underestimated productivity in the past 3 years would reduce costs
recovery by another $2.9 billion.
EXHIBIT 2
OVER RECOVERY OF COSTS IN THE FEDERAL JURISDICTION
Contact Karen Walls, NASUCA Deputy Director at (301)589-6313 for a
copy of this exhibit.
The FCC uses a return on investment of 11.25 percent. Just getting
the local exchange companies back to that level would lower cost
recovery by $2.6 billion. Lowering the return to more reasonable
levels would yield even larger reductions of cost recovery.
We have not calculated one number for total reductions in all
these area because some of the reductions interact, so that the grand
total would not be the sum of the three columns. However, the
proposed reduction needed to "pay for" the restructuring is $4
billion in the first year, which could be easily accounted for by
aggressive reductions in one category or moderate use of all
three.
Although the FCC has routinely used any scheduled reductions in
cost recovery to lower the switching rates, all of these sources of
over recovery of costs apply to both loop costs and switching costs.
A major source of the discrepancy between the regulated books and the
financial books stems from the write off of loop costs. Loop costs
have been falling because of the adoption of digital line carrier
technology. Average loop costs have also been falling because of the
growth of second lines, which are far lower in cost than first lines.
The FCC’s forward-looking cost methodology concludes that
efficient loop costs would be far lower than claimed embedded loop
costs.
The consumer proposal splits the reductions equally between fixed
charges (PICC +SLC = $3.80 billion) and access (switched + special =
$3.94).
ANALYSIS OF FORWARD LOOKING COSTS AND RATES FOR UNBUNDLED
NETWORK ELEMENTS DEMONSTRATES THAT THE CONSUMER PROPOSAL
IS JUST AND REASONABLE
Not only does the consumer proposal fit squarely within the
regulatory cost recovery proceedings at the FCC, it is also
consistent with the economic policy that the commission has set, as
CFA, CU and TXOPC stated in their comments in response to the CALLS
proposal. Forward-looking economic costs require a reduction of
recovery of loop costs in the federal jurisdiction.
The FCC has recently used its Synthesis Proxy Cost Model (SPCM) to
calculate the high cost payments for large LECs. States have begun
using forward-looking economic costs to set Unbundled Network Element
rates. CALLS defines the reductions in switching costs as movement to
forward looking economic levels. A few examples of how these numbers
compare are provided below.
As noted in the TXOPC, CFA, CU comments, we must also look forward
a bit. That is, the growth of second lines is dramatically lowering
costs. In part, this is why there is this constant over recovery of
costs in the Federal jurisdiction. Since CALLS points to 2004 as the
end point, the result must be reasonable at that point in time.
National average forward looking costs are just over $20.00 based
on 1996 numbers (see Exhibit 3). TXOPC, CFA, CU have demonstrated
that the growth of second lines has likely already driven costs down
by $1.00 to $1.50 due to the growth of second lines. They will
certainly fall another $1.50 by 2004. Thus, by 2004, national average
loop costs should be in the neighborhood of $17 per month.
Although UNE rates are not available on a national average basis,
examination of these rates on a state-by-state basis indicate that
they have been set in the same range as the cost estimates generated
by the SPCM. A few examples demonstrate the point.
UNE rates in Texas are $18.36 for Southwestern Bell Telephone
Company (SWBT). Forward-looking costs in Texas are $19.07 for SWBT.
The statewide average for all loops in Texas (for all companies
covered in the FCC support analysis) is $21.38. With second line
growth this number would fall into the range of $15 to $18.
We obtain similar results for Virginia and Delaware for UNEs. In
comments in this proceeding TXOPC, CFA, CU demonstrated similar
outcomes for other states with the SPCM results.
EXHIBIT 3
USE OF FORWARD LOOKING ECONOMIC COST, AS RECENTLY APPLIED FOR HIGH
COST SUPPORT AND STATE UNBUNDLED NETWORK ELEMENT RATES REQUIRES
REDUCTION OF LOOP COST RECOVERY IN THE FEDERAL
JURISDICTION
Contact Karen Walls, NASUCA Deputy Director at (301)589-6313 for a
copy of this exhibit.
The consumer proposal would envision cost recovery for loop in the
year 2004 that is generally described in Exhibit 4. Our proposal
supports national average loop costs without implicit subsidies, in
the range of $20, assuming that the federal share of costs is 25
percent of the loop. This is consistent with the forward-looking
costs used by the FCC and the UNE rates adopted by the states.
Our proposal, which supports loop costs up to $20 actually leaves
a little money on the table, since we believe that national average
loop costs will be down to $17 by then. CALLS, on the on the other
hand, drives up the costs supported by federal charges to almost $25.
CALLS claims a national average SLC of $6.15, which supports total
costs of $24.60. It adds in a universal service fund of $650 million
(equal to about $.32). Thus, by the time CALLS is through, the
institutionalized over recovery of cost will be 50 percent (~
$25/$17= 1.47).
EXHIBIT 4
LOOP COST RECOVERY IN THE FEDERAL JURISDICTION
AT THE END OF THE TRANSITION IN 2004
UNDER THE CONSUMER PROPOSAL
Contact Karen Walls, NASUCA Deputy Director at (301)589-6313 for a
copy of this exhibit.
CONCLUSION
Implementation of the consumer proposal will go a long way towards
resolving many of the cost issues facing the Commission.
Additionally, adoption of the consumer group proposal will assist
both long-distance and local service carriers by correcting some of
the existing imbalances in federal cost recovery and access charge
collection. Most importantly, however, is the fact that this proposal
will provide consumers with real, clearly identifiable benefits in
the form of lower costs.
National Association of State Utility Consumer Advocates
8380 Colesville Road, Suite 101, Silver Spring, MD 20910
Phone: (301) 589-6313 Fax: 589-6380
e-mail: nasuca@nasuca.org |