NECA Conference Update
NECA Industry Issues Meeting | Denver, Colorado | February, 2008
A Brief Overview
NECA held its annual Industry Issues Meeting in Denver on February 26 and 27, 2008. Following is our summary as an attendee of some of the significant issues that were discussed.
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Bob Gnapp, Director of Demand Assurance and Network Analysis, presented an overview and discussion of the phantom traffic and access avoidance problems. The impact on the NECA traffic sensitive pool earnings, as well as intrastate and local compensation was highlighted. Bob explained the causes (substitution services, avoidance schemes and human error) and implications of unbillable traffic. Issues with service mobility, including traffic originated from wireless and nomadic VoIP, were discussed, along with the suggested “solution” of the Jurisdiction Information Parameter (JIP). There was some discussion of the “free interstate access” letters being received by NECA members from VoIP providers and NECA’s efforts to address the issue.
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Larry Sampson from the Eastern Region provided a quick reminder and explanation regarding the new FUSC/USC pool reporting policy. Under the new policy, members report the Federal Universal Service Contributions (FUSC) collected from customers to the pool, rather than actual Universal Service Contributions paid to USAC as in the past. A letter forthcoming from NECA will also remind members that the FUSC revenue, rather than the USC, needs to be included in the cost study in account 6540. Editorial note - under the new policy, the common line pool earnings should end up at exactly 11.25%, although individual companies earnings could be slightly more or less, depending upon the relationship of their FUSC revenues to their USC contributions.
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Jennifer Leonard gave a pooling update which covered topics ranging from an earnings overview to the write-off of access uncollectibles. She reviewed some of the true-up timelines, including fact that LSS true-ups will occur in April and will affect May cash flow, via an impact on Traffic Sensitive pool earnings. One helpful note was that, effective with the January 2008 input, certification of settlement data can now be done electronically.
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Sue Barrett from the Western Region brought the group up to speed on the latest guidelines regarding 2007 cost study submissions. The 2008 “Cost Study Letter” will be sent in March, covering these topics. Highlights include the availability of electronic submission and the appropriate treatment (including proper averaging) of cost study method changes, such as lead lag study changes.
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A description of NECA’s review process and financial benchmarking was provided by Vinod Singh of the Southern Region. He summarized NECA’s move from its traditional reviews (such as the FSCRs – focused cost study reviews) to the targeting of at-risk areas. He provided some interesting insight into the benchmarking that is used by NECA to select members/cost areas for review. Examples of criteria used in these comparisons include: growth of investment by category, growth of expenses by category, investment cost per loop by category, expense cost per loop by category, revenue per line and revenue billed to revenue requirement. He also described the system that is used to weight the various criteria and compute a composite score which is the basis for selection of companies for review. Subjects and subcategories which contribute to the composite score are reviewed on a selected basis. He noted that the USF/Cost study validation process will not change as a result of these changes to the review process.
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A discussion of OIG audits was led by Colleen Freeland, Director of Separations and Access Costs. The Office of the Inspector General (OIG) as you are probably aware, has contracted with KPMG, Deloitte and Clifton Gunderson to audit recipients of USF funds as part of its oversight of USAC. She gave examples of data to be reviewed (i.e. audited financial statements, continuing property records) as well as examples of potential audit findings (i.e. lack of documentation, lack of internal controls, continuing property records not current). A spirited and sometimes entertaining group discussion of experiences in dealing with the OIG auditors revealed some common themes.
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Colleen also gave a presentation on forecasting, emphasizing the importance of quality company forecasts to the NECA tariffing process. Important items related to 2008 assumptions included line ports, TIC revenues, WBI offered on a non-tariffed basis, RTB final liquation payment and changes in cash working capital methodology. Changes in cash working capital methodology (i.e. standard allowance to lead-lag study) must be reported to NECA no later than May 9th for inclusion in the annual tariff filing.
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Carol Brennan, Director of Industry Relations – West, discussed the issues associated with categorization of wideband and special access services. Most notably, the use of the “voice grade equivalent” method for circuit counting is no longer acceptable for NECA pooling, effective with 2008 cost studies. She described some allowable methods such as the circuit method, system method, weighting based on actual study and actual costs. In general, the elimination of the voice grade equivalent method is expected to shift costs from special to switched access. Editorial note – the method is still allowable for 2007 studies, and this provides an opportunity to evaluate and select another method a year before it’s required, if it should prove to be beneficial.
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NECA’s tariff filing plans for the coming year were presented by Jeff Dupree, Director – Access Tariffs and Federal Support Programs. He discussed significant tariff changes, such as modifications to the Ethernet Transport Service Term Discount Plan and the DSL Wholesale Pricing Plan. The first quarter tariff filing will be effective April 1, 2008.
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Victor Glass delivered a presentation on demand trends and pricing strategies. He reviewed NECA’s “score card” comparing actual demand and growth rates to forecasts, and some of the reasons for forecast misses. He also summarized NECA’s pricing strategy which attempts to insure that tariffed rates are sufficient to generate incremental revenue, are aligned with other NECA service rates and are comparable to rates of other carriers.
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Colleen Freeland reviewed the NECA guidelines for providing local exchange telephone services using VoIP technology through Tariff 5. The three scenarios covered include: 1) ILEC provisions basic local exchange service using VoIP; 2) ILEC provides a combination of basic local exchange service and DSL service, over which a VoIP services is provided by another entity; and 3) the ILEC provides a data-only DSL service over which a VoIP service is provided by another entity. The presentation provided some practical guidance for pool reporting of costs, universal service support filings and billing of SLCs for this service.
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The conference concluded with Sal Talluto’s presentation on technology trends and his more detailed explanation of specific technologies that are impacting the telecommunications industry. IPTV and VoIP were two of the more significant technologies that companies need to understand in order to be prepared for competitive threats and business opportunities.
We would be happy to provide you with more detailed information, analysis, and opinions on the topics covered. Please contact Bill Brown at 207-541-2208 or bbrown@bdmp.com.
