June 17, 2016 – The FCC’s Wireline Competition Bureau has approved the National Exchange Carrier Association’s (NECA) modifications to the formula that will be used to calculate universal service high-cost loop support (HCLS) for average schedule rate-of-return carriers.[1] The new HCLS average schedule formula will be in effect for the second half of 2016 – July 1, 2016 through December 31, 2016. The formula produces a 3.4 percent decrease in HCLS for average schedule study areas which is due to the decrease from 11.25 percent to 11 percent in the prescribed interstate rate of return.

What The Heck Is An Average Schedule Company?

There are two types of incumbent local exchange carriers that fall under rate-of-return regulation: cost companies and average schedule companies. One category contains the companies that are considered big (cost companies), while the other is made up of the smallest companies (average schedule). Cost companies file cost studies which detail their spending or plant investment, explain their actual regulated and unregulated costs, demonstrate compliance with various FCC regulations, and justify the amount of universal service fund support they receive. For the smallest rate-of-return companies, filing a company-specific cost study can be extremely burdensome and very expensive. The FCC’s rules allow these smaller rate-of-return carriers to estimate some or all of their costs through the use of an “average schedule.” NECA does this for them every year. The FCC’s rules require NECA either to file revised average schedule formulas annually by December 31 or certify that no revisions are necessary.

What Is Universal Service Fund High-Cost Loop Support?

Pursuant to the FCC’s USF rules, HCLS, also known as the loop expense adjustment, provides support to carriers with high loop costs based on the extent that an individual company’s cost per loop (CPL) exceeds the national average cost per loop (NACPL). Average schedule companies’ HCLS is calculated pursuant to formulas developed annually by NECA and approved or modified by the Commission, after a notice and comment period. The HCLS formula is developed using data from a sample group of average schedule carriers and similarly-situated cost companies in addition to data (access line and exchange information) obtained from the entire population of average schedule rate-of-return carriers. Once approved, the formula is used to determine support amounts for all average schedule carriers.

NECA’s Revised HCLS Average Schedule Formula For The Second Half Of 2016

The current HCLS formula for average schedule carriers was approved in October 2015. However, NECA proposed modifications to the formula in May 2016 to reflect the decreased interstate rate of return that becomes effective July 1, 2016. What exactly is the new interstate rate of return? In the Rate-of-Return Reform Order, the FCC revised/represcribed the authorized interstate rate of return from 11.25 percent to 9.75 percent in all situations where an FCC-prescribed rate of return is used for ILECs (i.e., calculating interstate common line rates, calculating consumer broadband-only loop rates, calculating special access rates, and determining some forms of universal service support).[2] To minimize any immediate negative financial impacts that the new 9.75 percent rate may have on rate-of-return carriers, the new rate will be phased in over a period of six years. Here is how: beginning July 1, 2016, the 11.25 percent rate of return will be reduced by 25 basis points per year until the 9.75 percent rate of return is reached.

To revise the HCLS formula, NECA started with the same data used to calculate the original formula. NECA then applied the FCC’s prescribed 11% rate of return (starting July 2016) and recalculated algorithm lines 23 and 24 for each sample average schedule company study area. For other algorithm lines, NECA applied the same methods used in the original formula, and calculated a new loop cost for each sample study area. Finally, NECA used the same statistical regression model methods used in the original formula to derive an updated cost per loop formula. Using this formula, NECA calculated cost per loop values for July – December, 2016 for all average schedule study areas.

To put it simply, the only revision to the original formula is that the rate of return used is 11 percent instead of 11.25 percent. The original HCLS formula was expected to provide $10.81 million in payments to carriers serving 194 average schedule study areas. NECA’s revised formula projects $10.44 million in payments to carriers serving 191 average schedule study areas, a decrease of 3.4 percent which is due to the decrease in the prescribed rate of return. On average, the CPL decreased by 3.4 percent.[3]

The Wireline Competition Bureau has adopted the proposed modified formula, concluding that “NECA’s results and CPL calculations appear to be accurate and complete.” The Bureau further concluded that “the proposed HCLS formula should reasonably approximate the CPL of the sample average schedule companies, and thereby allocate funds appropriately to average schedule companies.”

**********

[1] High-Cost Universal Service Support: National Exchange Carrier Association, Inc., 2016 Further Modification of Average Schedule Universal Service Support Formula, WC Docket No. 10-90, Order, DA 16-687 (June 17, 2016) (Order).

[2] See Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Report and Order, Order and Order On Reconsideration, and Further Notice Of Proposed Rulemaking, FCC 16-33, ¶226 (rel. Mar. 30, 2016).

[3] For 2014, 2015, and 2016, approved HCLS average schedule formulas were estimated to result in total payments of $11.2 million, $10.3 million and 11.3 million, respectively. Order at footnote 10.