USF Disaggregation The Big Debate

1. USF Disaggregation The Big Debate WRTA Spring Convention February 22, 2002 Moderator: Richard Gesinger Debaters: Evelyn Jerden Glenn Brown Note: Copies of color maps can be obtained at www.mcleanbrown.com

2. The Basic Problem • RTF recommended and FCC approved a system to allow ILECs to disaggregate support. • Costs vary widely between customers within a wire center. • Distance • Density • Current rules provide uniform USF support based on study area average costs. • Support is portable to CETCs.

3. The Rules of the Road • ILECs can disaggregate USF. • Carriers elect one of three paths. • Support for zones must equal total USF support. • Disaggregation must be “reasonably cost based”. • Per-line support set for 4 years absent PUC order. • Other interested parties can intervene. • Does cost vary within the wire center? • Wireless CETCs use billing address for USF zone.

4. Disaggregation Paths • Path 1 - No Disaggregation • Choice is fixed until State PUC approves change. • Interested parties can petition to force disaggregation. • Path 2 - State PUC Approval • No restrictions. • Path 3 - Self Certification • Plan is fixed until State PUC approves any change. • Maximum of 2 support zones per wire center. • Support must sum to study area total. • Disaggregation must be reasonably cost-based. • Filing to USAC must provide data and algorithms. • Interested parties may challenge plan before State PUC. • Not available if a CETC was certified before 5/23/01.

5. To Decide on Disaggregation You Need to Know • Amount of Support • Type of Support • Competitive Vulnerabilities • Concentration of Customers

6. Amount of Support Who Should Disaggregate?

7. Type of Support

8. Type of Support • Local Switching Support • Study Area Average LSS • Could leave LSS averaged at Study Area. • This could be done even if you disaggregate 3 loop support mechanisms below study area level. • Wire Center Average LSS • Could disaggregate LSS to wire center level. • Below Wire Center Level LSS • Could disaggregate LSS below study area level if ETC has COE Category 3 equipment outside of the central office.

9. Competitive Vulnerabilities • Identify the Competitors • Type • Wireline • Wireless • Could they cover the entire study area. • Quality of the competitor’s service. • Are they willing to serve everyone? • Do they target just key customers or key business parks?

10. Competitive Vulnerabilities • Current Competitors • Future Competitors • Incenting Competition into areas. • What level of support might incent a competitor to apply for CETC status?

11. Competitive Vulnerabilities “Downtown” Arbitrage • How does it happen? • Densely populated area • Average support • Costs are lower • Both for incumbent and competitor • Wireline and Wireless • How to prevent it? • Reduce support in dense core • Increase support in outlying areas

12. Competitive Vulnerabilities “Wireless” Arbitrage • How does it happen? • Support based on wireline ILEC cost • Wireless cost structure is different • Windfall opportunities • How to prevent it? • Enforce the “Public Interest” standard • Can the fund be that large? • Is this a scenario for a train wreck?

13. The Wireless Dilemma Wireless carriers have a different network architecture and cost structure

14. Customer Concentration • Does the study area have cities/towns? • High line density • Lower per-line cost • For both ILEC and CLEC/Wireless • What is ratio of high-density to low-density? • The Law of Deaveraging • When some areas go down, others go up. • The higher the concentration in the dense areas, the higher the relative support in the sparse areas.

15. To Disaggregate You Need • Support amount (by HCL, LTS, LSS, ICLS) • Cost by small areas of geography • Wire Center • Sub Wire-Center • Customer locations • Zone boundary design • Line count by zone • Support by zone

16. Costs by Geography “In-House” Resources: • Continuing Property Records • Loop Length Studies • Maps • DLC Inventories • Serving Area Data • Cost Study Categorization • Traffic Studies • Special Studies

17. Costs by Geography Proxy Cost Models • Several are available • HCPM • BCPM • HAI • But they come with a risk… Fundamental Cost Relationships • Distance • Density • Don’t overcomplicate the problem!

18. Density as a Cost Driver National Average Cost = $27.02 115% of Nat’l Average = $31.07 Source BCPM30 with FCC Common Inputs

19. Distance as a Cost Driver Source: BCPM30 with FCC Common Inputs All rural and non-rural study areas

20. Density HH per Sq Mi Monthly Cost 0 – 5 $133.00 5 – 100 $48.44 100 – 200 $30.72 200 – 850 $26.43 850 – 2500 $23.11 2500+ $20.29 USIA Example - 1

21. Density HH per Sq Mi Monthly Cost 0 – 5 $133.00 5 – 100 $48.44 100 – 200 $30.72 200 – 850 $26.43 850 – 2500 $23.11 2500+ $20.29 USIA Example - 2

22. Density HH per Sq Mi Monthly Cost 0 – 5 $133.00 5 – 100 $48.44 100 – 200 $30.72 200 – 850 $26.43 850 – 2500 $23.11 2500+ $20.29 USIA Example - 3

23. Density HH per Sq Mi Monthly Cost 0 – 5 $133.00 5 – 100 $48.44 100 – 200 $30.72 200 – 850 $26.43 850 – 2500 $23.11 2500+ $20.29 USIA Example - 4

24. Disaggregation Case Study

25. Disaggregation Case Study

26. Disaggregation Case Study

27. Wire Center A

28. Wire Center B No Zone Disaggregation 23 Housing Units 32 Housing Units

29. Wire Center C

30. Wire Center C (Towers)

31. Disaggregation Case Study

32. Disaggregation Case Study Alternatives 1. Do Not Disaggregate • Each line receives $28.05 per line per month of support 2. Disaggregate to the Wire Center Level • Support ranges from $11.20 to $119.19 3. Disaggregate to the Wire Center and Zones • Zone 1 $5.12, Zone 2 from $20.85 to $119.19 4. Disaggregate Study Area to 2 Zones • Zone 1 $5.12, Zone 2 $56.90

33. Conclusion • There is no one right answer. • You need to understand your study areas and disaggregation options. • The key vulnerability is in the densely populated areas. • Wireless portability does not become a factor until the state PUC makes a Public Interest finding. • Get active, get involved! • The clock is ticking (82 days until May 15)