Choice of CAF Cost Models Could Make Billion-Dollar Difference, ACA Says
Before the FCC can implement its Connect America Cost Model, it must settle a more fundamental question than what capabilities should be added to the model, said commenters on a December rulemaking notice on the features. The real question, they said in filings and interviews, is whether to use a greenfield or a brownfield approach to estimating costs. “Of any changes that could be made to the model, this is by far the biggest,” said Ross Lieberman, American Cable Association vice president-government affairs. The ACA has been a primary proponent of the brownfield model, one option offered in the latest version of the CACM.
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Generally, a greenfield approach estimates the full cost of constructing and operating a network from scratch, whereas a brownfield approach takes into account the existing infrastructure already in the ground. The brownfield approach doesn’t include the cost of replacing the entire copper pole and conduit network, but rather assumes that most of the existing plant can deliver the 4 Mbps download/1 Mbps upload speeds the FCC seeks as part of its Connect America Fund goals. The difference in cost, Lieberman told us, is somewhere around a billion dollars. Instead of giving that money to the price-cap carriers to build up a new network, the commission could use that money to build out in more unserved areas, he said, or lighten the USF contribution fee.
But a brownfield approach has “critical flaws,” the ABC Coalition said (http://xrl.us/boaxwn). It would cause years of delay as the FCC attempts to collect currently unavailable data and make significant modifications to the model, the coalition said. The brownfield approach advocates using existing infrastructure while giving short shrift to actually maintaining that plant, and replacing it when it outlives its useful life, the coalition said. The brownfield approach, the price-cap carriers say, underestimates the cost of constructing and operating a broadband wireline network. The ABC Coalition consists of USTelecom, AT&T, CenturyLink, Frontier, Verizon and Windstream.
Simplicity and administrative feasibility are crucial to the success of Phase II, the coalition said. That’s why the commission adopted a greenfield approach before, such as in the TELRIC cost methodology, it said. The brownfield approach is “logically flawed” because it fails to consider some costs associated with existing infrastructure, including ongoing operating expenses, replacement capital and maintenance expense, and the capital costs associated with the undepreciated plant, the coalition said.
The CACM is “similar” to the CostQuest broadband analysis tool (CQBAT) model submitted by the ABC Coalition, with some “key differences” including an updated calculation of brownfield costs to include replacement capital expenditures, the FCC said in a public notice that started the comment cycle that had a Friday deadline (http://xrl.us/bn5v86). The CACM contemplates two scenarios: The greenfield model, which accounts for costs to construct a network building out fiber to the node; and the brownfield model, similar to the one in CQBAT except incorporating some tweaks suggested by ACA.
ACA is not really arguing for a brownfield model, said Jonathan Banks, USTelecom senior vice president-law and policy. He characterized the ACA model as saying anything that already exists is paid for and free, and needs no money for replacement costs when it wears out. “'It’s paid for, it has no cost, and it has no value -- we'll just take it out of the equation,'” Banks said, summarizing ACA’s approach. “That’s not really a brownfield model. That’s a model that ignores capital costs."
Lieberman disagreed. The ACA’s brownfield model does not ignore capital costs, but only excludes required upfront investments for copper, pole, and conduit plant and where the relevant fiber plant already exists, he said. “In fact, a large portion of the modeled costs in the ACA’s approach are capital costs that would be required for a brownfield build-out.” Even with those capital costs, using the existing infrastructure would lead to major cost savings, Lieberman said.
Yet in an “economic” way, those supposed cost savings by reusing existing plant don’t actually materialize, Banks said. “That infrastructure is somewhere on its lifecycle of producing enough money to replace its infrastructure,” he said. “This is this whole ‘replacement cost notion’ that economists talk about,” Banks said: “For better or worse, there are depreciation lives that the FCC has established for all of those things” in the model -- wire, fiber, cable, electronics. “Every asset in the network model has this depreciation life that’s supposed to be pretty accurate as to how long these things really last,” Banks said.
Yes, Lieberman said, the model should take useful life into account. The problem, he said, is that “they have the information.” Price-cap carriers say, “'Oh, we don’t know what the useful life is of any of this stuff. So the easiest thing to do is just to give [it to] us as if we're going to replace it all,'” Lieberman said. “That is exactly what they have said, and exactly what they have done. And we've said: ‘Come on, you've got to be kidding me.’ We cannot make these kinds of rough estimates when we're talking about $1.8 billion over the course of five years."
An FCC official told us it’s an oversimplification to say that there is a billion-dollar difference between the two models. Even within those two models, there are many additional variables that will affect the ultimate cost, he said, such as how long to depreciate the investments and whether they are fully paid for within the five-year period of support.