Summary of USF ICC Reform - Part 4 Regression Analyses

8/3/2019 Summary of USF ICC Reform - Part 4 Regression Analyses

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Summary of USF & ICCReform Order & FNPRM

Part IV Regression Analysis


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The material appearing in this presentation is for informational purposes

only and is not legal or accounting advice. Communication of this

information is not intended to create, and receipt does not constitute, a

legal relationship, including, but not limited to, an accountant-client

relationship. Although these materials may have been prepared by

professionals, they should not be used as a substitute for professional

services. If legal, accounting, or other professional advice is required, the

services of a professional should be sought.


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BACKGROUND & INTRODUCTIONS

Chad Duval, Partner

Moss Adams LLP


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CAF & ICC REFORM ORDER & FNPRM

Connect America Fund (CAF) andIntercarrier Compensation (ICC) ReformOrder and FNPRMo Approved October 27, 2011

o Released November 18, 2011

o Order primarily addresses long term ICC and interim

USF reform Proposed effective dates beginning in 2012

o FNPRM primarily addresses long term USF reform


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USF REFORM

Limitations on capital and operating expenses

o Paragraphs 210 226 & Appendix H

o Implemented no later than 7/1/2012

o Additional comment as part of FNPRM Regression analysis using publicly available cost, geographic and

demographic data

Comparison of costs to similarly situated companies

o Annual publication of capped costs that will be usedin place of actual costs that exceed the cap

o Focused initially on HCLS, but FNPRM directs similarbenchmarks for ICLS


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WHY A WEBCAST ON REGRESSION?

Analysis shows that these limitations couldhave significant impact on rural carriers

o Over 40% of rural carriers would be impacted

Regression is a complex tool and very fewpeople understand how it works

The FCCs model is flawed and we want to make

sure that everyone is aware and takes action People asked!


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INTRODUCTIONS

Patrick Sherrill, CEO

Zona Communications, Inc.

o Bachelors Degree in Mathematics

o Masters Degree in Industrial Engineering

o Focus on regression basics and FCCs application

Clay Sturgis, Partner

Moss Adams, LLPo Bachelors Degree in Accounting

o CPA & CMA

o Focus on issues with FCC model & recommendations


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FUNDAMENTALS OF REGRESSION ANALYSIS

Patrick Sherrill, CEO

Zona Communications


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Formula which defines the limit of

appropriate levels of capital expenses

and operating expenses.

Cost study data from 720 rate-of-return

companies.

Regression Analysis


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OVERVIEW OF REGRESSION ANALYSIS

1. Define the dependent variable to bepredicted.

2. Select the independent variables that helppredict the level of the dependent variable.

3. Use regression to develop a formula.

4. Multiply independent variables by their

coefficients. Add the results together thenadd the constantvalue.

5. The result provides the models prediction ofthe dependent variable.


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0.377

Coefficients Independent Variables

0.885 multiplied by loops

plus

-0.320 multiplied by non-urban housing units

plus

0.166 multiplied by urban cluster housing units

plus

-0.0356 multiplied by urban area housing units

plus

0.163 multiplied by non-urban land area

plus

0.00647 multiplied by urban cluster land area

plus

-0.101 multiplied by urban area land area

plus

0.866 multiplied by percent water area

plus

0.134 multiplied by non-urban census blocks

plus

-0.252 multiplied by urban cluster census blocks

plus

0.160 multiplied by urban area census blocks

plus

constant value of 10.38


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0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

0 10000 20000 30000 40000 50000 60000 70000 80000

Loops

Cable&WireFacilities


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10

11

12

13

14

15

16

17

18

19

20

2 3 4 5 6 7 8 9 10 11 12

Loops



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y = 0.875x + 9.1971

R = 0.7864

10

11

12

13

14

15

16

17

18

19

20

2 3 4 5 6 7 8 9 10 11 12

Linear (C&WF) Loops

Cable&W

ireFacilities


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10

11

12

13

14

15

16

17

18

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2 3 4 5 6 7 8 9 10 11 12

Capped Study Areas Loops



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14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

7 7.5 8 8.5 9 9.5 10

Capped Study Areas Loops

Cable&W

ireFacilities


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0

5000000

10000000

15000000

20000000

25000000

- 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

Non-capped Companies

Capped Companies

Loops

StudyAreaCosts


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0

1000000

2000000

3000000

4000000

5000000

6000000

- 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Non-capped Companies

Capped Companies

Loops

Study

AreaCosts


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Independent Variables used

by the FCC

loops

non-urban housing units

urban cluster housing units

urban area housing units

non-urban land areaurban cluster land area

urban area land area

percent water area

non-urban census blocks

urban cluster census blocks

urban area census blocks

Independent Variables not

included by the FCC

linear density

area density

soil type

road mileage in study area

frost indexwetlands percentage

age of investment

regulatory environment

existing broadband capabilities

labor costs


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CONCERNS WITH REGRESSION CAPSClay Sturgis, PartnerMoss Adams LLP


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CONCERNS WITH REGRESSION CAPS

Impacts are significant

o 32 companies, 15 impacted - $6.9M est. for 2013

o Average of $215k per carrier

o Some have very odd results:

Co. A $2.5M Loops/mile less than 2.0

Co. B - $730k Loops/mile less than 1.3

Co. C - $530k Loops/mile less than .50

Implementation date is not clear

o Impact of 2012, all of 2012 or 2013?


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THE REGRESSION MODEL

Overly Complex, not easy to replicate

o Carriers cannot plan accordingly

o Discourage investment

Data utilized is incorrect in some cases

o Wrong study area info

Flawed independent variables

o # of loops is THE significant drivero Population density

o Loop length and terrain not adequately factored in.


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Loops Land AreaAL1 - FCC Cap

(MA Calc)Cap/Land

AreaLoops/Land

Area

Company A 6,599 3,468.01 42,023,584.82 12,118 1.90282206

Company B 6,228 2,023.83 36,431,371.48 18,001 3.07733605

Both companies have comparable terrain - Company A revised cap using B =62,428,340.70

Similarly situated companies are not seeing similar resultso Carriers penalized for serving large areas?


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Loops Land AreaAL1 - FCC Cap

(MA Calc)Cap/Land

AreaLoops/Land

Area

Company A 6,599 3,468.01 42,023,584.82 12,118 1.90282206

Company B 6,260 2,358.91 46,719,212.90 19,805 2.65376309

Company A revised cap using B =68,685,219

Similarly situated companies are not seeing similar resultso Another example with the same Company A

Oh by the way Company A had over $25M in facilities capped

(they spent approximately $69m)


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Example Certain coefficients seem odd and model too reliant on loops Caps as a way to control the size of the fund?

Coefficients

0.8846 (0.3238) 0.1664 (0.0356) 0.1629 0.0065 (0.1007) 0.8661 0.1342 (0.2520) 0.1596 10.3778

Loops HU nu HU uc HU ua Land nu Land uc Land ua %water Blocks nu Blocks uc Blocks ua Constant Sum

8.6696 (3.1324) 1.2060 - 1.5319 0.0068 - 0.0059 1.2100 (1.2900) - 10.3778 18.5855

AL1 Impacts

(388,419,410.2797)

Capped FCC Amount Actual Amount Impact of Cap

117,918,895.06 88,095,319.84 -


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CONCERNS WITH REGRESSION CAPS

Caps are applied incorrectly to HCLS modelo Capping algorithm lines, not data lines

o Ignores other impacted accounts

COE and CWF Accumulated depreciation TPIS, Total CWF, Total COE, Avg. CWF, & Avg. CWF Cat 1.0.

o Uses regression on items it shouldnt Depreciation expense could be calculated

Some carriers have depreciation capped when

investment is not Excessive amounts can be removed.

One carrier equated to a 12 year life on CWF(theirs is 20)


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OUR PRELIMINARY FCC COMMENTS

Incorrect application of the caps needs to beresolved

Implementation dates of the caps are needed

now Model adjustments required to accurately

reflect density and cost of constructiondifferences or not used

Alternatives to regression can come from otherreadily available information loops per milecalculations, annual certifications, etc.


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NEXT STEPS FOR CARRIERS OUR

RECOMMENDATIONS Verify your data included in the regression

o Study area information (land, housing units, etc.)

Understand the impacts on your companyo Especially going forward (this is an annual event)

Communicate concerns & potential solutionso File individual comments with the FCC

o Encourage your various associations to filecomments and support them

o Visit the FCC if at all possibleremember, commentsare due 1/18/12 but the caps are effective 7/1/12

Summary of USF ICC Reform - Part 4 Regression Analyses

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