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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
Cable&WireFacilities
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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
19
20
2 3 4 5 6 7 8 9 10 11 12
Capped Study Areas Loops
Cable&WireFacilities
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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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THE REGRESSION MODEL
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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THE REGRESSION MODEL
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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THE REGRESSION MODEL
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