If a POLR service provider believes that the revenues generated by the sale of POLR service in a particular geographic area within its service territory (e.g., an exchange or census block) are insufficient to cover the costs of offering and
providing the service throughout that area (plus a reasonable return on investment) it may request additional revenues. To evaluate whether such additional revenues are, in fact, required, the Commission will conduct an adjudicatory proceeding to establish the forward-looking revenue requirement for that specific geographic area. This analysis will employ a forward-looking cost model to determine the costs of providing all of the services that the POLR service provider offers in the specified area.
The forward-looking cost model (“cost model”) will be developed in the context of the first adjudicatory proceeding in which a POLR service provider seeks additional revenues. The Commission anticipates that the cost model will be designed to determine the total costs of constructing and maintaining a hypothetical network that capable of providing not only POLR service but also all of the other services offered by the POLR service provider in the relevant geographical area. The hypothetical network that would form the basis of the model would presume that it is built today using modern technologies (likely IP technology as opposed to traditional, and increasingly outmoded, circuit-switched technology) and present-day costs.
The Commission expects that its development of this model will coincide with, and benefit from, the FCC’s recently announced plan to develop just such a model over the course of 2012, in an open proceeding. It is the FCC’s stated intention to begin using this new model in 2013 for the purpose of calculating federal USF
distributions to support broadband build-out, and to calculate high-cost support for voice service during the period in which that support is being phased out. The Commission believes that significant regulatory efficiencies may be realized by tailoring Maine’s model to that being developed by the FCC. Once completed, the Commission’s cost model will be applied to the geographic area in which the POLR service provider seeks additional revenues.
To determine the POLR service provider’s revenue requirement for a given geographic area, the Commission will obtain from the POLR service provider an accounting of its total current revenues derived from of all services that it offers in that area. Thus, the total revenue calculation will include not just the revenue derived from the sale of regulated POLR service, but also from the sale of all telecommunications and information services not regulated by the Commission (regardless of whether the service is regulated by the FCC). All current state and federal USF support received by the POLR service provider will be included in the total revenue calculation.
If total costs exceed total company revenues for the specific geographic area under consideration, the POLR service provider will be entitled to additional revenues. Under the Plan, these revenues must first take the form of an increase in the POLR service rate in that area, up to a level which under the FCC’s existing rules is two standard deviations above the national average local exchange rate charged in urban areas. Presently, that two standard deviation benchmark is $32.28 per month.
If the Commission’s revenue analysis determines that there would still be a revenue shortfall in the relevant area after POLR service rates are increased to the maximum federal benchmark level, then some amount of support will be provided from the Maine USF. Such Maine USF support will enable POLR service providers to maintain POLR service rates at the benchmark. Under the existing Maine USF rule implemented by the Commission, Chapter 288, only rural ILECs are eligible for Maine USF support, and 15 of the 22 such carriers receive subsidization from the fund. Under the Plan, however, FairPoint-NNE (a non-rural ILEC) will become eligible to receive Maine USF support because it will be designated as a POLR service provider. Chapter 288 will need to be revised accordingly.
The approach to revenue requirement analysis outlines above is a substantial departure from the Commission’s traditional rate-making techniques for telephone utilities. First, consideration of a POLR service provider’s costs would be limited to specific geographic areas which could be subsets of the company’s entire service territory. Second, the Commission would not seek to allocate costs according to the various types of services offered by the company (or the traditional “jurisdictional” characterization of service supported by those costs). Regardless of whether a portion of the cost of a particular piece of network equipment was formerly treated as an
intrastate cost, an interstate cost, or an “unregulated” cost, the cost will be included in the model, on a forward-looking basis. Third, all revenues, regardless of whether they are revenues derived from services formerly characterized as “intrastate” revenues will be considered in setting the revenue requirement for the POLR service provider for the particular geographic area at hand. Finally, the need for a revenue increase in a particular geographic area will be met, in the first instance, through a rate increase for POLR service only, as under the Plan the Commission will not regulate the rates of any other voice service in the State and will therefore be unable to spread the need for additional revenues across a variety of different services offered by the POLR service provider.
Moreover, implementation of the Plan’s approach to evaluating the revenue requirements of a POLR service provider will likely, over time, result in the rate for POLR service paid by customers residing in certain higher cost areas of a POLR service provider’s territory to become comparatively higher than the rate paid by
customers residing in other lower cost areas of the same carrier’s territory. The degree to which there will be different “rate zones” for the same POLR service will depend upon if, when, and for which particular service areas a POLR service provider seeks and obtains approval for additional revenues. Likewise, the existing regime of nearly
identical rates among various rural carriers (a result of reforms to intrastate access rates, the contours of local service calling areas, and implementation of the Maine USF) is not guaranteed under the Plan. Stated another way, a significant consequence of implementing the Commission’s Plan may be erosion of the viability of the rate-
averaging policy that has, to date, been a significant component of price regulation of telephone service in Maine.
One reason why disparate rates may occur under the Plan is that the costs of providing service are undoubtedly higher in rural areas of the state. Another reason is that less robust competition in certain rural areas of the state may enable a POLR service provider to increase its POLR service rate without losing POLR service customers. Indeed, the view that competition as it presently exists constrains the market price for basic local service is true only to the extent that in a particular area there are several competitive providers for that service. For instance, in the case of FairPoint-NNE, the existing price caps set by the AFOR do not constrain FairPoint- NNE’s ability to lower prices for basic local service to meet competition where it exists. However, under the AFOR, FairPoint-NNE may not increase its rates above the cap where it faces little or no competition for basic local service. In contrast, the Plan would permit FairPoint-NNE to seek a rate increase for POLR service selectively in a discrete geographic area, provided that application of the Commission’s cost-model
demonstrates that its costs in that area exceed its revenues.
The Commission’s Plan may also cause changes in the size of the Maine USF. Even though POLR service rate increases up to the FCC benchmark will serve to temper undue reliance on Maine USF support, it is possible that the total size of the Maine USF will increase once the Plan is implemented. This is especially so because FairPoint-NNE will become eligible, for the first time, to obtain Maine USF subsidies. The economic effect of any increase in the size of the Maine USF fund is increased socialization of revenue shortfalls experienced by POLR service providers. The total cost of these subsidies will be borne by all providers of voice service in Maine through their contributions to the fund and, to the extent those costs are passed on to customers, by every user of voice service in the state.
In developing the revenue requirement provisions of its Plan, the Commission considered the possibility of establishing a mechanism to examine the economic cost to a company of providing only POLR service. However, this would be exceedingly difficult because POLR service is not a discrete service provided over dedicated facilities by the carrier. Instead, POLR service is one of many services, both regulated and unregulated, that are provided over the plant and equipment
encompassing the carrier’s entire network. Indeed, much of the carrier’s investment is made to provide multiple services, and a significant portion of its expenses are incurred on a company-wide basis. The complexities of attempting to correctly separate and allocate the investments in plant and the joint and common costs of providing only POLR service would not only be extremely time-consuming but also would be sure to generate considerable controversy. Conducting POLR service-specific rate cases is simply not, in the Commission’s view, a viable option.