WCB Cost Model Virtual Workshop 2012 - Rate of Return for Connect America Cost Model

Please provide comments to the issue below as part of the 2012 WCB cost model virtual workshop for inclusion in the record. Comments are moderated for conformity to the workshop’s guidelines.

Background

The Commission previously adopted a unitary rate of return for all incumbent LECs – regardless of size – when such carriers were operating as regulated monopolies. Since that time, Congress enacted the 1996 Act, technology changes have introduced alternatives to the incumbent’s service, and most of the larger incumbent LECs have moved to price cap regulation.

Hybrid Cost Proxy Model: The authorized federal rate of return has been 11.25 percent since January 1, 1991. HCPM utilizes the authorized rate of return. When establishing criteria to ensure consistency in the calculations of federal universal service support, the Commission concluded that the authorized federal rate of return on interstate services would be a “reasonable rate of return by which to determine forward looking costs.”

Connect America Cost Model: The Connect America Cost Model (CACM) utilizes Annual Charge Factors (ACFs) to capture the annual cost of capital investments that are used over time, including the cost of initial deployment, replacement capital expense, and the cost of money necessary to have access to that amount of capital. The ABC Coalition previously submitted into the record a model that assumed a nine percent rate of return when calculating ACFs. In response to the June 2012 Model Design Public Notice, the American Cable Association submitted data about a number of price cap carriers, arguing that an appropriate rate of return for the price cap companies receiving model-based support should be lower than nine percent. The current version of the model assumes a nine percent rate of return in setting the ACFs. The model also assumes a debt-to-equity ratio of 25:75 to calculate taxes only on equity.

Questions for Comment

1. In order to adopt final values for ACFs, the Bureau will need to make an assumption about the cost of money for price cap carriers receiving model-based support. What rate of return should the Bureau use in setting the ACFs when it adopts the final version of the model? Would it be appropriate for the final version of CACM to have different cost of money assumptions for different price cap carriers? Or, would the administrative benefits of using a single rate of return for all price cap carriers outweigh the complexity of establishing carrier-specific assumptions regarding appropriate rates of return?
2. Given the different regulatory treatment of price cap carriers, particularly for purposes of calculating universal service support, should the Commission use a different rate of return for purposes of calculating universal service support in the CACM for price cap carriers than the generally-authorized rate of return for incumbent rate-of-return carriers?