i
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
In the Matter of
Connect America Fund
A National Broadband Plan for Our Future
Establishing Just and Reasonable Rates for Local
Exchange Carriers
High-Cost Universal Service Support
Developing an Unified Intercarrier
Compensation Regime
Federal-State Joint Board on Universal Service
Lifeline and Link-Up
Universal Service Reform – Mobility Fund
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WC Docket No. 10-90
GN Docket No. 09-51
WC Docket No. 07-135
WC Docket No. 05-337
CC Docket No. 01-92
CC Docket No. 96-45
WC Docket No. 03-109
WT Docket No. 10-208
COMMENTS
of
THE CHILLICOTHE TELEPHONE COMPANY
ii
TABLE OF CONTENTS
INTRODUCTION AND SUMMARY ..................................................................................... iii
I. ANALYSIS PERFORMED BY CHILLICOTHE .......................................................1
II. THE MODEL DOES NOT YIELD CONSISTENT RESULTS FOR
SIMILARLY SITUATED COMPANIES.....................................................................2
III. THE FCC’S REGRESSION ANALYSIS DOES NOT CONSIDER THE
IMPACTS OF DEPRECIATION RESERVE .............................................................6
IV. THE LIMITATIONS ARE APPLIED INCORRECTLY TO THE HIGH
COST LOOP SUPPORT ALGORITHM .....................................................................7
V. THE LIMITATIONS ARE MISSING CRITICAL COMPONENTS .......................8
VI. THE FCC’S REGRESSION ANALYSIS DOES NOT APPROPRIATELY
CALCULATE LIMITATIONS ON DEPRECIATION EXPENSE ..........................9
VII. THERE IS A COMPOUNDING EFFECT BETWEEN THE DATA LINES
IN THE HCLS ALGORITHM ....................................................................................10
VIII. CONCLUSIONS ...........................................................................................................10
iii
Introduction and Summary
The Federal Communications Commission’s (Commission or FCC) Report and Order and
FNPRM1 in the above captioned proceeding requests comment on proposed changes to the
existing Universal Service Fund (USF) and Intercarrier Compensation (ICC) mechanisms for
rural rate-of-return carriers, among other issues. Specifically, the FCC requests comments on
Sections XVII.A-K of the FNPRM, which address a wide variety of USF related issues. THE
CHILLICOTHE TELEPHONE COMPANY2 (hereinafter referred to as Chillicothe). Chillicothe
submits these comments for the FCC’s consideration. Chillicothe is a rural telecommunications
provider serving 22,465 voice access lines and 9,856 broadband customers in the State of Ohio.
The following characteristics are true of Chillicothe:
Chillicothe is the Carrier of Last Resort designated by the Public Utilities Commission of
Ohio, which legally obligates the company to provide telecommunications service to all
requesting customers within its service territory.
1 In the Matter of Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN
Docket No. 09-51, Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135,
High-Cost Universal Service Support, WC Docket No. 05-337, Developing an Unified Intercarrier Compensation
Regime, CC Docket No. 01-92, Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Lifeline and
Link-Up, WC Docket No. 03-109, Universal Service Reform – Mobility Fund, WT Docket No. 10-208, Report and
Order and Further Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking, FCC 11-161 (rel.
November 18, 2011) (Report and Order and FNPRM).
2 Chillicothe serves customers in ten central offices located in Ross, Pike, Pickaway, Jackson, Hocking, and Vinton
counties in south central Ohio. The ten central exchanges are known as, and are located at, Bainbridge, Bourneville,
Chillicothe, Clarksburg, Frankfort, Hallsville, Kingston, Londonderry, Massieville and Richmondale. The ten
central offices serve 744 square miles in the 614 LATA.
The largest of the ten central exchanges is Chillicothe, the headquarters location. Chillicothe is the county seat of
Ross County, Ohio's third largest county in land area. The surrounding area is primarily Appalachian foothills, with
the city center hosting a few large businesses including Adena Regional Medical Center, PH Glatfelter Co,
Kenworth Trucking, V.A. Medical Center and Ross Correctional Institute and Chillicothe Correctional Institute.
With an area of 744 square miles, Chillicothe’s high-density pocket is a 3.5-mile radius around Chillicothe’s central
exchange and houses 290 or greater customers per square mile. The remaining serving area of approximately 795
square miles is expansive and sparsely populated.
iv
Chillicothe is the Eligible Telecommunications Carrier (ETC) determined by the Public
Utilities Commission of Ohio to provide universal service within the company’s
designated service territory.
Chillicothe receives High Cost Support from the Federal Universal Service Fund. This
support totaled 11,488,198 in 20103 and comprised over 32.67% of Chillicothe’s
regulated operating revenues in 2010. Support came from the following sources:
o High Cost Loop Support (HCLS) $6,220,756
o Safety Net Additive (SNA) $663,792
o Interstate Common Line Support (ICLS) $4,183,602
o Local Switching Support (LSS) $420,048
Chillicothe provides voice and broadband services to schools, libraries, rural health care
facilities, governmental agencies, and/or other anchor institutions within its service
territory. Chillicothe has partnered with Adena Regional Medical Center to ensure the
highest quality and availability of broadband services for healthcare services.
Chillicothe is one of the ten largest employers in the company’s rural service territory,
providing jobs and financial stability in rural areas of south central Ohio. In 2010,
Chillicothe employed 177 people and provided combined payroll and benefits of
$16,140,961.
3 2010 revenues are used throughout these comments because final 2011 numbers are not yet known. We believe
that 2010 revenues are reasonably representative of 2011.
v
Chillicothe has deployed substantial financial and human resources to provide voice and
broadband services under the existing rate of return rules prescribed by the FCC and by
the Public Utilities Commission of Ohio. In 2010, Chillicothe had gross regulated
investment of $169,267,627.
Chillicothe would not have had the financial resources to deploy and maintain either
voice or broadband services without rate of return regulation and the support of the
Universal Service Fund under the existing rules.
Chillicothe is very concerned with the potential financial implications of the Report and
Order and FNPRM and the impact they will have on Chillicothe’s ability to continue to
provide high quality voice and broadband services at the public interest standards
established by the Commission.
In these comments, Chillicothe outlines the impacts that adoption of the limitations on
capital and operating expenses, as proposed in the Report and Order and FNPRM, would have
on its financial results.
1
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
In the Matter of
Connect America Fund
A National Broadband Plan for Our
Future
Establishing Just and Reasonable Rates
for Local Exchange Carriers
High-Cost Universal Service Support
Developing an Unified Intercarrier
Compensation Regime
Federal-State Joint Board on Universal
Service
Lifeline and Link-Up
Universal Service Reform – Mobility
Fund
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
WC Docket No. 10-90
GN Docket No. 09-51
WC Docket No. 07-
135
WC Docket No. 05-
337
CC Docket No. 01-92
CC Docket No. 96-45
WC Docket No. 03-
109
WT Docket No. 10-
208
COMMENTS
of
THE CHILLICOTHE TELEPHONE COMPANY
I. Analysis Performed by Chillicothe
In order to provide relevant financial context to the FCC in these comments, Chillicothe
engaged Moss Adams LLP4 to perform a detailed financial analysis of the potential impacts of
the limitations on capital and operating expenses proposed in the Report and Order and FNPRM.
This analysis primarily focused on the impacts of the proposed regression analysis identified in
4 Moss Adams LLP (Moss Adams) is the 11th largest accounting and consulting firm in the United States, with more
than 225 partners and 1,800 staff. Moss Adams’ Telecom Group has served the telecommunications industry since
1957. Today, they provide audit, tax, and consulting services to more than 80 small and mid-sized
telecommunications carriers throughout the United States and its territories.
2
Appendix H to the Report and Order and FNPRM. This analysis was performed using
Chillicothe data used by, and provided by, the FCC in the development of its regression analysis.
In doing so, Moss Adams recreated the regression analysis performed by the FCC and
reproduced the same results. In addition, Moss Adams also utilized other information generally
available from Chillicothe in the analysis. The following comments include our overall
assessment of the FCC’s regression analysis and provide a summary of the financial impacts on
Chillicothe.
II. The Model Does Not Yield Consistent Results for Similarly Situated
Companies
Chillicothe notes that the FCC’s model used to perform the regression analysis does not
take into account the length of loops – a major factor leading to high loop costs and high loop
related central office costs. In Chillicothe’s case, its average loop length is 5.40 miles, meaning
that it has to build 5.40 miles of cable plant to serve an individual customer. The longer the loop
length, the greater the Cable and Wire Facility investment and the more central office
transmission equipment must be installed to adequately provide broadband services. The model
also does not take into account unusual terrain conditions such as rock that must be cut or bored
to bury loops. Chillicothe is located in the Appalachian foothills and has rocky and rugged
terrain. Chillicothe points out that when comparing Chillicothe to similarly situated companies
like those listed in the tables below, companies with higher concentrations of loops had
significantly higher cable and wire facility (CWF) caps than Chillicothe and companies with
more Central Office Equipment (COE) per mile had significantly higher COE caps. Noted
elsewhere in these comments, the limitation on Chillicothe’s COE and CWF plant yields
devastating impacts to the company.
3
AL1 Discussion: Chillicothe’s service area has 30.70 loops per square mile. Chillicothe
has a ceiling or cap on its cable and wire loop facilities of $100,774 per mile. The table provided
compares loops, land area served and the resulting caps under the proposed regression model.
The table supports Chillicothe’s position that areas with few subscribers, or loops, per mile
necessitate higher values under the regression caps and that caps should be comparable for
similarly situated companies. However, the table shows contrary results. The table demonstrates
that of the six companies listed, four have more loops per mile, (i.e., have a higher population
density than Chillicothe), however all four have significantly higher caps per mile. Specifically,
Example A Telephone with 32.22 loops per mile, which is very similar to the total loops of
Chillicothe (16,599 for Example A versus 22,465 for Chillicothe), yields a significantly higher
cap. The regression model yields a cap of $205,194 per mile for Example A Telephone,
$104,240 more per mile than Chillicothe even though Example A has a more densely populated
area. Chillicothe points out that utilizing the same $205,194 per mile cap for its area would yield
a loop cable and wire facility investment cap of $150,164,995, $31,948,720, or 43.32%, higher
than its current cap and much higher than Chillicothe’s actual investment in cable and wire
facilities. Chillicothe also points out that Example A which has a density very consistent with
Chillicothe’s density (32.22 loops per mile for Example A), has a cap that is also lower than
three of the companies depicted in the table provided with more loops per mile. This is yet
another example of the regression analysis not producing consistent results for similarly situated
companies.
There are several ways to improve the FCC’s regression model. Chillicothe and other
carriers can provide the FCC with average loop lengths and other relevant data similar to what
they do for the United States Department of Agriculture Rural Development Utilities Program
4
Form 479. Because loop lengths are a major component of loop cost, it is a critical component
that must be included in order for the model to work accurately. Terrain data is also not included
in the model, other than percentage of water in the study area, which is not a significant driver of
loop costs.
Loops
Land
Area
AL‐1‐FCC Cap
(Est.)
Cap/Mile Loops/Mile
CHILLICOTHE 22,465 731.82 73,748,660 100,774 30.70
Example A 16,599 515.11 105,697,380 205,194 32.22
Example B 21,193 904.51 86,431,723 95,556 23.43
Example C 20,916 477.16 104,717,772 219,461 43.83
Example D 21,111 252.78 65,490,001 259,082 83.52
Example E 21,584 86.09 68,167,056 791,830 250.72
Example A Cap/Mile for Chillicothe = 150,164,995
AL2 Discussion: Chillicothe’s service area has 30.70 loops per square mile. Chillicothe
has a ceiling or cap on its loop related central office equipment of $22,458 per mile. Loops per
square mile remain a relevant comparison for loop related central office equipment, as this
equipment is utilized to aggregate subscriber traffic in the field, shorten loop lengths and provide
greater broadband speeds to customers. The table provided compares loops, land area served and
the resulting caps under the proposed regression model. The table supports Chillicothe’s
position that areas with few subscribers, or loops, per mile necessitate higher values under the
regression caps and that caps should be comparable for similarly situated companies. However,
the table shows contrary results. The table demonstrates that of the six companies listed, four
have more loops per mile, (i.e., have a higher population density than Chillicothe), however all
four have significantly higher central office equipment caps per mile. Specifically, Example C
Telephone with 43.83 loops per mile, which is similar to the total loops of Chillicothe (20,916
5
for Example C versus 22,465 for Chillicothe), yields a significantly higher cap. The regression
model yields a cap of $53,368 per mile for Example C Telephone, $30,910 more per mile than
Chillicothe even though Example C has a much more densely populated area. Chillicothe points
out that utilizing the same $53,368 per mile cap for its area would yield a central office
equipment investment cap of $39,055,779, $9,029,677, or 54.94%, higher than its current cap
and much closer to Chillicothe’s actual investment in central office equipment. Chillicothe also
points out that Example C which has a density very consistent with Chillicothe’s density (43.83
loops per mile for Example C), has a cap that is also lower than two of the companies depicted in
the table provided with more loops per mile. This is yet another example of the regression
analysis not producing consistent results for similarly situated companies.
There are several ways to improve the FCC’s regression model. Chillicothe and other
carriers can provide the FCC with average loop lengths and other relevant data similar to what
they do for the United States Department of Agriculture Rural Development Utilities Program
Form 479. Because loop lengths are a major component of central office equipment
transmission cost, it is a critical component that must be included in order for the model to work
accurately.
6
Loops
Land
Area COE
AL‐2‐FCC Cap
(Est.)
Cap/
Mile
COE/
Mile
Loops/
Mile
CHILLICOTHE 22,465 731.82 42,857,304 16,435,366 22,458 58,563 30.70
Example A 16,599 515.11 22,836,180 22,020,627 42,749 44,333 32.22
Example B 21,193 904.51 39,528,044 20,029,503 22,144 43,701 23.43
Example C 20,916 477.16 29,840,857 25,465,043 53,368 62,539 43.83
Example D 21,111 252.78 28,500,907 13,682,533 54,129 112,751 83.52
Example E 21,584 86.09 19,962,851 20,299,031 235,794 231,889 250.72
Example C Cap/Mile for
Chillicothe =
39,055,779
III. The FCC’s Regression Analysis Does Not Consider the Impacts of
Depreciation Reserve
Chillicothe notes that the FCC’s model used to perform the regression analysis does not
take the depreciation reserve of the plant being limited into account; it is purely analyzed on a
gross plant value. Companies like Chillicothe deployed the network years ago and, like many,
face the need to upgrade facilities as the plant is reaching the end of its useful life. In addition,
they will continue to make the necessary network changes, which require tremendous
investment, to meet the Commission’s 4 Mbps downstream/1 Mbps upstream broadband
requirements. Chillicothe already made significant investment to be able to currently provide 4
Mbps downstream/1 Mbps upstream broadband services to two-thirds of the homes passed. A
significant portion of that investment was made seven years ago and thus is already partly
depreciated. The regression model as proposed does not allow for this, and its failure to
recognize the impacts of depreciation reserve is a significant flaw in the model.
7
IV. The Limitations Are Applied Incorrectly to the High Cost Loop Support
Algorithm
Chillicothe believes there are three accounting issues that must be addressed in the
calculation and application of the proposed regression-based limitations. First, the High Cost
Loop Support (“HCLS”) data inputs (“data lines” or “DL”) should be limited, not the outputs
(“algorithm lines” or “AL”). Second, the limitations must take into account the impact of
accumulated depreciation and other Part 32 accounts on the calculation of support. Third, the
methodology used to calculate the limitations on depreciation expense must be modified.
Chillicothe believes that the limitations should be applied to the HCLS data lines instead
of the algorithm lines, which would allow the 26 step algorithm to work as designed. The
current limitation of the algorithm lines does not account for the interrelationship between many
of the data lines used in the calculation of support. It should be noted that all of the algorithm
lines are calculations based on various data lines, so any proposed limitations can also be
accomplished by adjusting the data lines. As currently proposed, the FCC’s regression model
limits outputs, rather than limiting inputs and allowing the inputs to be run through the model.
An excellent example of this is AL 3, also referred to as the “A” Factor, which is calculated as
Cable and Wire Facilities (CWF) divided by Total CWF. The “A” Factor is used in the
allocation of expenses associated with CWF. AL 3 is one of several algorithm steps that uses
both AL and DL inputs to produce the result; in this case AL1, DL 255 (Account 2400 - Total
CWF) and DL 815 (Account 2680 – Amortizable Tangible Assets – CWF). The FCC’s proposed
treatment only limits the AL1 amount, however, neither DL 255 (which includes AL1) nor DL
815 are adjusted. As a result, the algorithm is not allowed to calculate support as it was intended
and produces an incorrect result.
8
V. The Limitations Are Missing Critical Components
As mentioned above, accumulated depreciation and other Part 32 accounts must be taken
into consideration if the FCC is going to limit the 11 proposed algorithm lines, or follow the
approach to limiting the data lines described above. The FCC’s proposed regression analysis
does not limit the accumulated depreciation related to Chillicothe CWF assets removed via AL1
or Chillicothe COE assets removed via AL2, nor does it remove amounts from other associated
accounts. If the FCC is going to limit AL1, the following data lines should also be limited:
DL 160 – Account 2001 – Total Plant in Service
DL 190 – Account 3100 – Accumulated Depreciation
DL 255 – Account 2410 – Total CWF
DL 280 – Account 3124 – CWF Accumulated Depreciation
DL 700 – Cost Study Average CWF – Total Account 2410
DL 710 – Cost Study Average CWF Cat 1 – Total Subscriber Line Plant
If the FCC is going to limit AL2, similar data lines as detailed for AL1 should also be
limited.
By not limiting these data lines the FCC’s regression analysis yields flawed and punitive
results on Chillicothe. In addition, as discussed above, limiting the algorithm lines and not the
data lines does not allow the HCLS algorithm to work as designed. There could be some
question as to how to appropriately limit the accumulated depreciation reported on DL 190 and
DL 280, but this could be handled one of two ways. First, a ratio of the limited investment in the
associated plant account to the total plant account could be developed and applied to the
accumulated depreciation. Alternatively, the limited plant could be handled as a retirement, in
which case Part 32 for retirement accounting would treat the investment as fully depreciated.
9
Whichever method is selected would be more appropriate than the current approach of ignoring
depreciation reserve and other associated accounts in the algorithm. The limitation of algorithm
lines rather than data lines yields inappropriate results and ignores the net book value of the
assets being removed.
VI. The FCC’s Regression Analysis Does Not Appropriately Calculate
Limitations on Depreciation Expense
Depreciation expenses have not been properly accounted for in the FCC’s regression
model. Specifically, depreciation expenses should not be analyzed independently via regression,
as they are a byproduct of the associated plant investment. Instead, depreciation expenses should
be reflected as a function of the asset values removed. The FCC’s current, regression-based
approach results in limitations on depreciation expenses on AL 18 that are excessive and
inconsistent with Part 32 accounting principles. Chillicothe’s depreciation rates were approved
by the Public Utilities Commission of Ohio and are therefore not subject to unilateral adjustment
by the company. Further, the COE depreciable life averages 14.33 years, well within the FCC
previously approved depreciation ranges5 of 12-18 years for COE switching and 11-13 years for
COE transmission. Finally, we are audited annually by an independent CPA firm that verifies
the proper use of the approved depreciation rates, thus there is minimal risk of improper
application. Therefore, we recommend that regression not be used to limit depreciation expense.
Instead, we believe that depreciation expense limitations should be computed as the percentage
of limitation of the associated plant investment multiplied by depreciation expense.
5 REPORT AND ORDER IN CC DOCKET NO. 98-137; MEMORANDUM OPINION AND ORDER IN ASD 98-91;
Adopted: December 17, 1999 Released: December 30, 1999 (FCC 99-397)
10
VII. There is a Compounding Effect Between the Data Lines in the HCLS
Algorithm
Unfortunately in the case of Chillicothe, the current regression caps limit AL1 - CWF
assigned to category 1.0, AL2 - COE assigned to Cat. 4.13, AL14 – COE maintenance assigned
to Cat 4.13, AL15 - Network support expense assigned to CWF Cat 1.0, AL18 – Depreciation
and Amortization Expense assigned to COE, and AL21 – Benefits assigned to CWF Cat 1.0 and
COE Cat 4.13, and as evidenced by these comments, there is a high degree of interrelationship in
the calculations. Because these effects are compounded Chillicothe has suffered substantial
harm.
VIII. Conclusions
Chillicothe has provided service to its primarily rural customers for over 115 years. For
many of those years, the Universal Service Fund (USF) supported Chillicothe’s services to high
cost areas, keeping the cost of service to its customers comparable to those living in densely
populated metropolitan areas. In fact, because Chillicothe invested wisely in its network,
Chillicothe's customers not only receive high quality and cost-comparable voice services, they
also already enjoy access to broadband services at service levels and prices comparable to
metropolitan areas.
Many carriers serving rural areas did not invest as wisely in their networks, creating a
digital divide between those rural areas and the metropolitan areas. The National Broadband
plan urged the FCC to find a solution to bring broadband services to “unserved” rural areas.
Unfortunately, the FCC’s quest to find this solution—as evidenced by the establishment of
regression caps—falsely assumes that “served” rural areas are served because of past USF
investments rather than appropriately anticipated future USF support.
11
In reality, private investors and lenders—with the codified expectation of universal
service support—enabled Chillicothe to make the investment necessary to bring comparable
service to Chillicothe’s customers at comparable prices. This codified expectation—supported
by decades of predictability—was a program that assured a company that invested in its network
following well-established guidelines that the USF would provide support during the life of that
investment.
Regression caps make it impossible to recover costs that Chillicothe, its investors and its
lenders appropriately anticipated being able to recover through the USF. Not only do these caps
effectively undercut Chillicothe by changing the rules after the investment was made, the
regression caps—as demonstrated above—are flawed and inconsistently applied to similar
companies.
Because of the dramatic impact regression analysis has had on HCLS and the anticipation
of future reduction to ICLS using similar regression analysis, Chillicothe will likely:
• Be forced to effectively put the current broadband network on “life support”—
investing minimally with no ability to upgrade current services.
• Be required to dramatically reduce personnel in an area already experiencing
double-digit unemployment. A reduction this significant will ultimately diminish
the quality of service provided to customers.
• Find it difficult to raise future debt or justify future private investment due to the
arbitrary, unpredictable and significant impact of regression analysis.
• Face serious pressure to meet current loan covenants that were based on what
were believed to be predictable USF revenue streams.