DE 96-420
FREEDOM RING, L.L.C.
Petition Requesting that Incumbent LECs Provide
Customers with a Fresh Look Opportunity
Order Establishing Methodology
for Calculating Termination Charges
O R D E R N O. 22,877
March 23, 1998
I. PROCEDURAL HISTORY
On December 8, 1997, the Commission issued Order
No. 22,798 (Order) in this docket, granting customers of New
England Telegraph and Telephone Company d/b/a Bell Atlantic
(Bell Atlantic) a Fresh Look opportunity pursuant to certain
conditions. One of the conditions requires that a customer
choosing to terminate its long-term contract with Bell
Atlantic will be subject to termination charges "in an
amount equal to the price the customer would have paid for
service if the customer had taken a term offering for the
length of time the contract has actually run, minus the
amount the customer has actually paid." Order at pages
25-26. The Order provided that the Commission Staff (Staff)
and Bell Atlantic and Freedom Ring Communications, L.L.C.
(Freedom Ring) would propose, by January 15, 1998, a
methodology for calculating termination charges.
Discussions among the parties and Staff resulted
in agreement on the methodology for calculating termination
charges for long-term special contracts and for termination
of long-term contracts reached pursuant to tariff (long-term
tariffed contracts). However, the parties and Staff
disagreed on a critical input to the calculation, i.e., the
capital cost factor. Therefore, on January 15, 1998, Staff
filed a memorandum describing the agreed upon methodology
for long-term special contracts, including the positions
taken by each of the parties with regard to the capital cost
factor, as well as Staff's recommendation on the capital
cost factor. In addition, Staff requested that the
Commission grant a one week extension for parties to file
comments on Staff's memorandum. The Commission granted the
extension and, on January 22, 1998, Bell Atlantic and
Freedom Ring filed their comments.
II. TERMINATION CHARGES FOR LONG-TERM SPECIAL CONTRACTS
A. Methodology
The proposed methodology compares two separate
streams of cash flows. One stream includes the cash flow
generated according to the original terms and conditions of
a special contract between a commercial customer and Bell
Atlantic up to the time of contract termination, including
the capital cost factor in dispute. The second stream
includes the cash flow generated pursuant to a revised set
of contract terms and conditions, again, including the
capital cost factor. The revisions adjust the customer's
payment schedule and Bell Atlantic's expenses to reflect the
actual time period of the contract. The difference between
the two cash flow streams is then adjusted upward to reflect
the time value of money or the interest Bell Atlantic would
have earned on the cash flows generated under a shorter
contract period. The result of these calculations is the
proposed termination charge.
For example, a customer making payments under a
seven- year contract who elects to exercise its "Fresh Look"
opportunity pursuant to Order No. 22,798 and terminates the
existing contract at the end of three years would request
Bell Atlantic to re-calculate the payment terms as if the
contract were for a three- year period. The difference
between the two payments is then adjusted to reflect
interest foregone by Bell Atlantic.
B. Capital Cost Factor
The one disputed issue in the calculations is the
magnitude of the capital cost factor to be applied. A
capital cost factor is made up of depreciation, income taxes
and return on capital invested by Bell Atlantic in order to
deliver telecommunication services under a special contract.
The termination charge is highly sensitive to this input
factor.
Bell Atlantic proposes a capital cost factor that
incorporates one additional year beyond that actually
identified in each contract. Thus, in the hypothetical
example cited above, Bell Atlantic would use a capital cost
factor for four- and eight-year term contracts rather than
those for the actual three- and seven-year term contracts.
Bell Atlantic argues that the extra year of capital cost is
justified because it is the average length of time,
according to Bell Atlantic, to re-use salvageable equipment.
Bell Atlantic avers that at the time long-term special
contracts are negotiated, the Company routinely utilizes the
proposed higher capital cost factors. Therefore, Bell
Atlantic argues that the higher factors should be utilized
in this calculation.
Freedom Ring, on the other hand, argues against
using any time period beyond the actual terms of the
contracts. According to Freedom Ring, any capital cost
factor in excess of the actual terms of the contracts would
enable Bell Atlantic to double recover its costs. Double
recovery would occur, according to Freedom Ring, because the
cost of capital already accounts for risks of early
termination, including idle facilities. Further, Freedom
Ring argues that using more than the actual term of the
contracts is unsupported by any evidence on the record. As
a result of the added costs of providing Bell Atlantic with
enhanced cost recovery, competitive local exchange carriers
(CLECs) will be unable to offer competitively priced
services. Using the hypothetical example in Staff's January
15, 1998 memorandum, such a termination liability, according
to Freedom Ring, represents a 40% penalty. Bell Atlantic's
reported margin on Centrex service is approximately 25%.
Therefore, the Bell Atlantic proposal will eliminate any
margin for CLECs, effectively eliminating the incentive for
CLECs to compete in New Hampshire. Freedom Ring argues that
an 11% termination charge is sufficient to allow Bell
Atlantic to recover legitimate capital costs without
discouraging CLECs from competing. The 11% termination
charge can be achieved by utilizing the actual terms of
contracts. In the hypothetical example, the termination
charge as calculated by Freedom Ring, would be $18,373.
However, the cost of capital factor recommended by Bell
Atlantic results in a termination charge of $174,159.
Staff proposes a compromise position, utilizing a
capital cost factor based on the actual contract term plus
six months. For the hypothetical example, Staff's
calculation results in a termination charge of $43,931. In
support of its proposal, Staff argues that the compromise
strikes a balance between the competing interests of
compensating Bell Atlantic for its investments and that of
fostering competition in New Hampshire's local
telecommunications market.
III. TERMINATION CHARGES FOR LONG-TERM TARIFFED CONTRACTS
Consistent with the special contract methodology,
Staff and the parties agreed that termination charges for
long-term tariffed contracts should be equal to the future
monetary value of the differences in customer payments
between the original tariffed service and rates customers
would have been charged over a shorter time period.
However, because Bell Atlantic does not offer a Centrex
service for less than seven year periods in New Hampshire,
it was necessary to devise a method for creating a proxy New
Hampshire rate based upon "Centrex Plus", a Massachusetts
Centrex service with variable payment terms.
The parties and Staff agreed the proxy rate should
be established by applying the difference between various
"Centrex Plus" payment plans, expressed as a ratio, to the
New Hampshire seven-year rate. Applying the ratio to the
New Hampshire seven year rate, creates a proxy rate which
equates to the payment the customer would have paid over a
shorter period.
Bell Atlantic filed a spread sheet matrix
computing the termination liability for New Hampshire
Centrex service, using the above methodology (Attachment I,
p. 1). When considering whether to take advantage of Fresh
Look, in most instances a prospective customer can calculate
exact termination charges by using Attachment I.
Attachment I, p. 1 shows that the proxy rate for Central
Office Common Equipment, Vintage I, Schedule A charges is 4%
higher for a five-year term than for the tariffed charges
(for the seven-year term). The increase allows Bell
Atlantic to recover its capital costs over the shorter time
period. The interest foregone by Bell Atlantic is then
computed by calculating the future value of the difference
between the seven-year and five-year payments using an
interest rate of .99384 percent.
Applying the same calculation to other components
of the Centrex service, the termination charge for a 15-line
Centrex service would be $524.79 for a customer electing to
terminate a seven-year tariffed contract at the end of five
years. The termination charge assumes a 15-line Centrex
service within .5 miles from the wire center and includes an
access line component (conduit and network access) and a
feature component. See Attachment I, p. 2.
IV. COMMISSION ANALYSIS
Our decision to grant a limited Fresh Look
opportunity is "intended to provide an opportunity for
competition to flourish, not to punish Bell Atlantic for
past actions which may have anti-competitive consequences in
the present...(it is therefore) crafted to ensure that when
and if a customer decides to accept the opportunity, Bell
Atlantic is not deprived of the reasonably anticipated
benefit of its bargain". Order at page 18. The calculation
of termination charges must balance those two goals. We
ordered the Parties and Staff to propose a methodology which
would accomplish the balance, directing that customers be
"subject to termination charges equal to the price the
customer would have paid for service if the customer had
taken a term offering for the length of time the contract
has actually run, minus the amount the customer has actually
paid." Id. at p. 26.
We find that the methodology proposed by the
parties and Staff for both long-term special contracts and
long-term tariffed contracts, as described above, complies
with our Order No. 22,798. We further find that the capital
cost input factor proposed by Staff best meets our goal of
balancing the interests of competition and Bell Atlantic's
right to retain the reasonably anticipated benefit of its
contractual bargain. The amount of time necessary for Bell
Atlantic to find a new customer capable of using the
salvageable equipment formerly used by the Fresh Look
customer cannot be determined in advance. Therefore, six
months is a reasonable compromise of Bell Atlantic's claim
for one year or Freedom Ring's claim for no additional time
beyond the actual term.
Attachment I calculates the termination charge for
customers who terminate a contract after 12, 24, 36, 48, 60
or 72 months. The future value calculation should be
computed using the actual number of months the customer has
had service. We will direct Bell Atlantic to file a matrix
which includes factors for each month from on to 60.
Customers who have had service for more than 60 months are
not eligible for fresh look because they do not have two
years remaining on the contract.
Based upon the foregoing, it is hereby
ORDERED, that the methodologies proposed for
calculating the termination charges for long-term special
contracts and long-term tariffed contracts are APPROVED;
and it is
FURTHER ORDERED, that the cost of capital factor
for calculating termination charges for long-term special
contracts shall be based on the actual term plus six months;
and it is
FURTHER ORDERED, that Bell Atlantic file a matrix
which calculates termination charges for each month, from
one to 60, for each tariffed Centrex service.
By order of the Public Utilities Commission of New
Hampshire this twenty-third day of March, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S.
Geiger
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary
NOTE: Attachment 1 is available by calling the Commission
(603-271-2431). You can receive a copy by fax or mail.