In a Notice of Proposed Rulemaking (NPRM) released last Friday, the Federal Communications Commission (FCC) announced that it is seeking comments on proposed changes to it rules governing the Dial Equipment Minutes (DEM) factor.  The DEM, a measure of switch usage, is used to allocate local switching equipment costs between the state and interstate jurisdictions using relative values or percentages.  Comments on the proposed changes are due fourteen days after publication in the Federal Register, with reply comments due seven days later. 

In today's e-lert, JSI explains how the FCC's current DEM weighting rule negatively affects cost-company clients that fall below a DEM weighting factor threshold due to loss of access lines and how the proposed rule change could potentially benefit your company.  JSI plans to file comments in the proceeding and encourages companies that have already been or project that they will be affected in the near future to file comments as well.

The Current Rule Penalizes Cost Companies That Fall Below a DEM Threshold

The DEM and its associated weighting factors are subject to the FCC's separations factor freeze.  Under the current separations rules, the costs associated with local switching equipment are allocated between the state and interstate jurisdictions through the DEM.  Local exchange carriers (LECs) with less than 50,000 access lines adjust their DEM with a "weighting factor," thereby providing these LECs with a higher allocated cost basis for local switching support (LSS), a component of federal universal service support.  LSS is vital for small LECs to be able to make necessary equipment upgrades and to provide and maintain quality service at just, reasonable, and affordable rates.

There are several thresholds in the weighting depending on number of access lines served:  LECs with less than 10,000 access lines have the highest weighting factor, 3.0; carriers with between 10,000 and 20,000 access lines use a smaller factor, 2.5; LECs with between 20,000 and 50,000 access lines use a factor of 2.0; and, LECs with more than 50,000 access lines apply a factor of 1.0.  The current FCC DEM rule requires that for cost companies, a study area in which access lines increase over a weighting threshold move to a lower DEM weighting factor.  However, the current rule is silent for a LEC study area that realizes a decrease in access lines to a level below a DEM weighting factor threshold, thus prohibiting a LEC from moving up to a higher weighting factor.  As a result of this imbalance, JSI cost-company clients that have dropped below a DEM weighting factor threshold due to a decline in access line counts have been penalized in the calculation and receipt of LSS. 

How the FCC's Proposed Rule Change Addresses this Problem

In 2006, JSI was the first to call the FCC's attention to the flaw in the DEM rule in a series of ex parte meetings related to the FCC's consideration of extending the separations factor freeze.  At that time, JSI urged the FCC to rule that DEM weighting changes should apply to both increases and decreases as the number of access lines crossed a DEM weighting factor threshold.  Although the FCC declined to make the rule change at that time, the agency sought comment on JSI's request. 

In the three years since first citing the rule imbalance, JSI has continued to file comments and to join with clients in frequent meetings with FCC staff.  In these meetings, JSI and client representatives demonstrated that these and many other companies have experienced declines in access lines due to increased use of broadband and intermodal competition and that these companies have been significantly penalized by the rule application.  In addition, JSI repeatedly urged the FCC to act expeditiously on the matter. 

In a related development, JSI has supported a coalition of companies known as the "Coalition for Equity in Switching Support" that petitioned the FCC to clarify that its DEM rule did apply to decreases in access lines or, alternatively, to make a rule change.  It was in response to the Coalition's petition that the FCC has finally set forth the proposed rule changes.

In last week's NPRM, the FCC "tentatively concluded" that the current DEM rule should be amended to allow a LEC's DEM weighting factor and LSS "to increase if the carrier's access lines decrease below the thresholds set out in the rules."  The FCC then asked for comments on this conclusion and asked commenting parties to provide specific data on the potential effect of such a change in the DEM rule, including an analysis as to why any increase in the size of the universal service fund that may be caused by the DEM rule change is justifiable.  JSI will address these aspects in its comments.

The Need for Affected Companies to File Comments

The NPRM makes it quite clear that this battle is far from over.  Although the FCC recognized there is evidence that the effect of the current DEM rule has been to cause or threaten to cause LECs "some hardship," it does not seem willing to acknowledge the severity of that hardship on small and rural telecom providers.  Instead, the FCC appears more concerned on the potential impact on the universal service fund, which the Coalition already demonstrated to be minimal in light of the overall size of the fund. 

Accordingly, JSI believes it is important for companies that have fallen below a DEM weighting factor threshold and, thus, have already been negatively affected by the flawed DEM rule to file comments demonstrating the impact the loss in LSS has had on current operations and proposed expansions.  Similarly, companies that anticipate falling below a threshold in the near future due to loss of access lines should file comments to demonstrate how the loss in LSS could potentially affect operations and expansion plans. 

If you have any questions about the FCC's DEM NPRM, would like to discuss filing comments along these lines, or would like our assistance in preparing or filing comments on behalf of your company, you can contact John Kuykendall (jkuykendall@jsitel.com) or Brian Sullivan (bsullivan@jsitel.comland office, at 301-459-7590.