BEFORE THE
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES

__________________________________________

DIRECT TESTIMONY OF
ANDREA C. CRANE
Filed on Behalf of
THE NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE
Before the
State of New Jersey
Board of Public Utilities
BPU Docket No. TX95120631
AUGUST 19, 1997

TABLE OF CONTENTS

DOCKET NO. TX95120631

I. Statement of Qualifications

II. Purpose of Testimony

III. Summary of Conclusions

IV. Introduction

V. Discussion of the Issues

Q. Please state your name and business address.

A. My name is Andrea C. Crane and my business address is 38C Grove Street, Ridgefield, Connecticut 06877.

Q. By whom are you employed and in what capacity?

A. I am Vice President of The Columbia Group, Inc., a financial consulting firm that specializes in utility regulation. In this capacity, I analyze rate filings, prepare expert testimony, and participate in various financial studies.

Q. Please summarize your professional experience in the utility industry.

A. Prior to my association with The Columbia Group, Inc., I held the position of Economic Policy and Analysis Staff Manager for GTE Service Corporation, from December 1987 to January 1989. From June 1982 to September 1987, I was employed by various Bell Atlantic subsidiaries. While at Bell Atlantic, I held assignments in the Product Management, Treasury, and Regulatory Departments.

Q. Have you previously testified in regulatory proceedings?

A. Yes, since joining The Columbia Group, Inc. in January 1989, I have testified in over fifty dockets in the states of New Jersey, Arizona, Connecticut, Delaware, Hawaii, Kansas, New York, Pennsylvania, Rhode Island, and the District of Columbia. These proceedings involved telephone, electric, gas, water, wastewater, solid waste, cable television and navigation utilities. A list of dockets in which I have filed testimony is included as Appendix A. In addition to the dockets listed in Appendix A, I have participated in numerous regulatory proceedings that were resolved prior to the submission of testimony.

Q. What is your educational background?

A. I received a Masters degree in Business Administration, with a concentration in Finance, from Temple University in Philadelphia, Pennsylvania. My undergraduate degree is a B.A. in Chemistry from Temple University.

Q. What is the purpose of your testimony?

A. I was engaged by the State of New Jersey, Division of the Ratepayer Advocate ("Ratepayer Advocate") to provide testimony on certain "Fact Issues" and "Policy Issues" identified in the Prehearing Order issued on August 7, 1996 by the New Jersey Board of Public Utilities ("BPU" or "Board") in this proceeding. Pursuant to the August 11, 1997 correspondence from the Board, the designated fact and policy issues impacting on Universal Service covered within the attached testimony are:

1) the establishment of mandated discounts to schools, libraries and hospitals;

2) the definition of advanced telecommunications capability and the establishment of levels of discounts for schools, libraries, and health care providers.

Specifically, my testimony develops the necessary funding level required for the proposed state Schools and Libraries Fund and it recommends an appropriate funding mechanism. In developing my testimony, I relied upon the policy guidelines recommended by the Ratepayer Advocate in its Brief and Reply Brief on Universal Service Fund Policy Issues (g) and (j) filed in December 1996, pursuant to the Board's October 10, 1996 Order. Those policy recommendations are further supported in the prefiled testimony of Dr. Mark Cooper which is also being filed in this docket on behalf of the Ratepayer Advocate. Additionally, my recommendations for the funding requirement are based on the annual cost of a five year technology program for all public and private elementary and secondary schools in New Jersey that was recently prepared by the Ratepayer Advocate¹, which is attached to the testimony of Dr. Lee McKnight, filed on behalf of the Ratepayer Advocate in this proceeding.

Q. Please summarize the findings and recommendations contained in your testimony.

A. Based on the guidelines developed in the Universal Service Brief and Reply Brief and on the policy testimony of Dr. Cooper, my findings and recommendations are as follows:

1. I estimate that the state Schools and Libraries Fund will require annual funding of $40,140,703. Any necessary funding that is not provided through the federal Schools and Libraries Fund should be provided through a separate New Jersey Schools and Libraries Fund.

2. The necessary funding should be raised by contributions from all providers of telecommunication services, including facilities-based carriers, wireless carriers, cable television companies, and all other companies (including all utilities) that provide telecommunications services.

3. The proposals outlined in this testimony will require an annual contribution of approximately 0.89% of revenue for intrastate telecommunications services and interstate telecommunications services either originating or terminating in New Jersey.

4. Each telecommunications provider should determine the best method for recovering, or absorbing these costs.

 

Q. Please provide a brief background of this proceeding.

A. This Docket was initiated by the Board in December, 1995 to examine the issue of local exchange competition. Shortly thereafter, on February 8, 1996, The Telecommunications Act of 1996 (Act) was signed into law and encompassed sweeping changes in the telecommunications industry. Of particular significance are provisions in the Act mandating competition in the local exchange market. This provision of the Act is based on the premise that such competition is in the public interest.

As a result of the Act, the Federal Communications Commission (FCC) instituted a number of Notices of Proposed Rulemaking (NOPR) to determine the most effective way to implement provisions of the Act. On November 7, 1996, the Federal-State Joint Board issued a Recommended Decision regarding Universal Service Issues ². In defining Universal Service, the Joint Board was required by the Act to consider four criteria, including the extent to which specific services:

1) are essential to education, public health, or public safety;

2) have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers;

3) are being deployed in public telecommunications networks by telecommunications carriers; and

4) are consistent with the public interest, convenience and necessity.

On May 8, 1997, the FCC released its Report and Order in CC Docket No. 96-45, which adopted most of the recommendations proposed by the Joint Board. In early July, the FCC reconsidered a few areas of its earlier decision and made minor modifications to its rules.

In its Order of August 7, 1996, the Board identified a series of Policy Issues ((a) through (l)), to be decided through Briefs, and Fact Issues ((a) through (e)), to be decided based upon an evidentiary proceeding. Policy Issues identified in that prehearing order relating to Universal Service, which was designated Issue (g), included:

1) the definition of Universal Service;

2) the need for a Universal Service Fund;

3) who should contribute to and receive payments from the Fund;

4) the impact of federal subsidy programs on the Fund;

5) the effect of the Federal/State Joint Board on Universal Service rules promulgated by the Board;

6) questions regarding the creation of an "affordability benchmark" as the basis for making determinations regarding support from the Fund;

7) the definition of "basic" services supported by the Fund and how the definition can be updated as needs and technology change.

The BPU's Order also designated a related Policy Issue, Issue (j), which addressed the establishment of mandated discounts to schools, libraries, and hospitals.

Pursuant to the Board's October 10, 1996 Memorandum, the Ratepayer Advocate filed Briefs on Policy Issues (g) and (j) on December 9, 1996 and filed Reply Briefs on December 23,

1996. In those filings, the Ratepayer Advocate recommended the establishment of three funds to promote Universal Service: a Low Income Fund, a High Cost Fund, and a Schools and Libraries Fund.

This testimony is now submitted pursuant to the Board's August 11, 1997 Memorandum, to address Policy Issues (j) and Fact issue (e) regarding the definition of advanced telecommunications capability and the establishment of levels of discounts for schools, libraries and health care providers.

While the FCC's Report and Order provides guidance in these areas, the Ratepayer Advocate believes that the Board must take a proactive stance in promoting Universal Service in the State of New Jersey. Otherwise, the promises of the Act will not be fully realized in the State.

As stated in its Initial Brief on Universal Service, the Ratepayer Advocate believes that the Board should establish policies to assist schools and libraries in obtaining necessary telecommunications services, including "state of the art access to high-speed capabilities and internal wiring of all school facilities, as well as discounts for traditional telephone services" in order to promote Universal Service to the maximum extent possible.

Q. From your reading of the Act, in developing its recommendations, is the Board confined by the guidelines contained in either the Act or in the FCC's Report and Order?

A. No, it is not. Section 254(f) of the Act specifically states that "[a] State may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service." A careful reading of the Act leads me to conclude that there is nothing in either the Act or the FCC Report and Order that would preclude the Board from establishing the best policy for the State of New Jersey, as long as the Board's policy is not "inconsistent" with the requirements of the Act.

Q. Please discuss the eligibility requirements for the Schools and Libraries Fund.

A. We are proposing that the State of New Jersey adopt a Schools and Libraries Funding Program similar to the program recently enacted by the FCC. Specifically, the Ratepayer Advocate is proposing that schools and libraries be eligible for discounts for services as outlined by the FCC in its recently adopted Report and Order, CC Docket No. 96-45. The federal funding available to schools and libraries under the FCC's rules is limited to $2.25 billion annually. To address the need for additional funding to eliminate specific barriers faced by New Jersey schools, such as the aging infrastructure, the Ratepayer Advocate recommends the formation of a New Jersey Schools and Libraries Fund to ensure that there are sufficient resources to allow the schools and libraries to take maximum advantage of the telecommunications technology available.

Q. Why is it so important to establish a New Jersey Schools and Libraries Fund?

A. Availability of computers to students, and the gateway to knowledge offered by such computers, is critical if New Jersey's schoolchildren are truly to receive the exceptional educational opportunities envisioned by our elected officials and anticipated by parents of New Jersey students.

While the funding mechanism outlined in the FCC's rules is a good first step, New Jersey must evaluate its own needs, based on the particular aspects of its schools and libraries. New Jersey's schoolchildren and residents depending on libraries for access to the information superhighway should not be constrained by funding limits established on a nationwide basis by the policies of the FCC. Therefore, New Jersey should develop its funding requirements independent from considerations of Federal funding. The State funding requirement for future years should then be adjusted to reflect the actual level of funding received by New Jersey institutions under the programs ultimately adopted by the FCC.

Adequate funding for schools and libraries is made even more critical given declining subscribership for basic local exchange telephone service in New Jersey. Since New Jersey schoolchildren may not have computer access at home, the school provides an important alternative source for Internet access and all the services provided thereto. In the same way, our state's libraries serve as a similar resource for adults who may not be able to afford telephone service or Internet access. Thus, a Schools and Libraries Fund can work in concert with other assistance, such as a Low Income Fund, to ensure that access is provided to the broadest possible base of New Jersey residents.

Q. Which services for Schools and Libraries should be eligible for support?

A. The definition of Universal Service as applied to schools and libraries should be expanded to encompass not only a telecommunications access line, but also those services that are necessary to make that access line a valuable educational tool. Accordingly, the FCC found that services eligible for funding should include "all commercially available telecommunications services" as well as "Internet access and installation and maintenance of internal connections."³

Q. How did you develop the funding requirement for the Schools and Libraries Fund?

A. The development of my recommended funding requirement for schools is shown on Schedule 2. This funding requirement is based on the Ratepayer Advocate's report of the annual cost of a five year technology program for all public and private elementary and secondary schools in New Jersey, Before 2000: Funding Technology in New Jersey's Schools and Public Libraries by the End of the Century, attached to Dr. McKnight's testimony.

The Ratepayer Advocate's technology plan is comprehensive. In addition to telecommunication services, the plan quantifies and describes the hardware, distance learning equipment, training and support, and other items that are required for schools and libraries. However, in order to quantify the Federal and State Schools and Libraries funding, I have included only those costs as defined in the FCC rules.

According to the Ratepayer Advocate's Report, five year costs related to development of an in-school network are estimated at $39,220 per school. These costs include LAN wiring and installation, a LAN hub, and coaxial cabling.

Non-recurring costs for a District network to tie schools and libraries together is estimated at $5,732 per school, while recurring District related costs are estimated to be $5,280 per year or $26,400 over a five year period.

Internet connection charges based on T-1 service is estimated to include a fixed charge per school of $1,560 and recurring charges of $5,250 per year or $26,250 per school over a five year period.

In developing the recommended funding, I have also included telephone service (POTS) for the schools, based on an assumption of 5 lines per school at a monthly average cost of $50.00.⁴ However, my calculations do not include any costs for the provision of local exchange service and all other tariffed services at rates equivalent to residential rates for schools and libraries, as recommended by the Ratepayer Advocate in other testimony filed in this proceeding. The Ratepayer Advocate recommends that schools and libraries have the option of either taking service under tariffs comparable to residential rates, or applying for a discount from the commercial tariff rate, pursuant to the FCC guidelines offering discounts of 20% to 90%. If the former option is selected, the Ratepayer Advocate recommends against allowing the company to seek recovery for the difference between the residential and non-residential rate from the Schools and Libraries Fund. If the latter option is selected, then the applicable discount (20% to 90%) should be funded from the Schools and Libraries Fund.

As shown on Schedule 2, these cost assumptions result in total estimated costs per school over a five year period of $114,162, or $22,832 per school per year. Assuming that on average one- half of these costs would be eligible for fund support results in a funding requirement of $11,416 per school, or $38,324,183 on an annual basis.

Q. How did you determine that one-half of these costs would be eligible for support?

A. I relied upon the Federal-State Joint Board Recommendation which was adopted by the FCC. The Joint Board recommended that "all eligible schools and libraries may receive discounts of between 20 and 90 percent on all telecommunications services, Internet access, and internal connections, subject to a $2.25 billion annual cap."⁵ Specifically, the Joint Board recommended "that the Commission adopt a rule which provides support to schools and libraries through a percentage discount mechanism." The mechanism recommended by the Joint Board included consideration of both the cost to serve the schools and libraries and a consideration of the extent to which a school is disadvantaged, the latter being determined by the percentage of students in the school lunch program. This mechanism was adopted in the FCC's final rules, Section 54.505(c).

New Jersey had 287,539 public school children participating in the school lunch program in the state during the 1995-1996 school year.⁶ This constitutes 24% of the public school population. Per the guidelines recommended in the Joint Board Recommendation, schools with between 20 and 34% of school lunch participants are eligible for discounts of 50% to 60%, depending on whether they are classified as urban or rural. I utilized the bottom of this range, or 50%, as the discount generally applicable to New Jersey's schools.

Q. Have you undertaken a similar analysis for the libraries in New Jersey?

A. Yes, I did. This analysis is shown at Schedule 3. The funding requirement for libraries assumes in-library network costs of $3,360 per library. Non-recurring District network costs are estimated at $5,732, while recurring district costs are estimated at $26,400 for a five year period. Estimated Internet connection costs using a T-1 line are estimated at $921 per library, which includes $52 of fixed costs and $869 of recurring costs over a five year period. Telephone service is based on the assumption of three lines for every library, which equates to approximately one line for every four employees. The result is an estimated five year cost of $45,413 per library, or $9,083 per year. Based on 400 libraries, this would result in a total annual funding requirement of $3,633,040. Once again I recommend that 50% of these costs be recoverable from the Schools and Library Fund. Therefore, the total annual Fund requirement for library support would be $1,816,520.

Q. What is the total funding requirement that would be needed for the Schools and Libraries Fund?

A. As shown on Schedule 1, my recommendations will result in a total annual Schools and Libraries funding requirement of $40,140,703. It must be recognized that this amount is based primarily on the specific program identified in the Ratepayer Advocate's technology plan, and on the technologies contained therein. However, schools and libraries should not be restricted to specific technologies and in fact they should have the opportunity to take advantage of new technologies as they are deployed. The BPU recently approved a stipulation in Bell Atlantic-New Jersey's Opportunity New Jersey (ONJ) review proceeding which provided for discounts to schools and libraries for certain packet switching and data transport services. To the extent that these technologies are employed by schools and libraries, such services should be eligible for funding from the Schools and Libraries fund.

Q. How much of this funding will be provided from the Federal Schools and Libraries Fund?

A. Under the FCC's rules, federal funds will be dispersed on a first come-first served basis. Therefore, we do not know at this time how much of the federal fund will be available for New Jersey. Furthermore, although New Jersey constitutes approximately 2-3% of the United States population, there are no assurances that a proportionate share of these federal funds will be directed to New Jersey. Accordingly, we have no assurance that New Jersey's schools and libraries will obtain any benefits from the federal Universal Service fund.

Q. Under the Ratepayer Advocate's proposal, who would be eligible for payments from the Schools and Libraries Fund?

A. Payments from the New Jersey fund would be available for any provider of eligible services included in the FCC's rules, including telecommunications services and internal connections.

Q. How should the funding for the State Schools and Libraries Fund be obtained?

A. Funding for the Schools and Libraries Fund should be obtained as a percentage of revenue assessment from all telecommunication providers providing service within the State of New Jersey. Furthermore, these providers should be assessed based on both intrastate gross revenues and and interstate gross revenues for telecommunications services originating or terminating in New Jersey, net of payments to other carriers.

Q. Have you estimated the percentage of revenues that would be required in order to capture the costs of the fund?

A. Yes, I have. At Schedule 4, I have estimated the total revenues that would be available to be assessed at $4.5 billion. This estimate was determined by reviewing the estimated nationwide telecommunication industry revenue estimates and allocating a portion of this revenue to New Jersey. I also examined historic revenue levels for Bell Atlantic, AT&T, Sprint, and MCI. Based on this review, I believe that the $4.5 billion is a reasonable revenue estimate to use for establishing the initial Universal Service rate. This rate should be adjusted annually depending on the magnitude of the estimated support payments required, the estimate of the revenue available for assessment, the level of support actually obtained from the federal Universal Service Fund, and the possible carryover of unspent funds from prior periods. The base of $4.5 billion estimated in this testimony upon which the assessments would be applied should be updated prior to establishment of the initial assessment. In order to determine an accurate base upon which to apply the assessment, companies subject to the assessment should be required to report the last three year's of annual revenues to the BPU. The BPU should evaluate this data and quantify a reasonable base upon which to determine the assessment.

Q. What is the initial assessment that you are recommending in this case?

A. Based on my analysis, I am recommending an initial assessment of 0.89% for the Schools and Libraries Fund. This revenue assessment should be applied to all revenue from the broadest possible base. Specifically, in addition to local exchange carriers, the assessment should apply to interexchange carriers, cellular and other wireless carriers, payphone providers, operator services providers, and cable companies offering two-way access.

Q. How should telecommunication companies recover the costs of the new Schools and Libraries Fund funding requirement from ratepayers in the State?

A. As discussed in its Reply Brief, the Ratepayer Advocate does not believe that the Board should mandate any particular method of recovery. Specifically, the Board should not require that Universal Service Fund funding requirements be directly imposed on customers as a surcharge. Rather, each company should be free to recover or absorb these costs in whatever way it sees fit. Ultimately, each company's treatment of these funding requirements will be a marketing decision best left to the individual companies to decide. For example, a company that passes these funding requirements along to end users as a surcharge may find itself in a competitive disadvantage, as customers seek to find alternative suppliers who do not include this funding requirement as part of their rate structure. The manner in which these amounts are recovered by carriers, and the extent to which they are recovered from ratepayers, should be a business decision left to the discretion of the individual providers.

Q. Do you have any additional comments?

A. Yes, I recognize that there are many other parties to this proceeding who have valuable input with regard to the issue of technology in schools and libraries. Therefore, my recommendations may be modified once I have had the opportunity to review the testimonies filed by other parties to this proceeding. For example, while my recommendations pertain to K through 12 schools, it may be desirable to expand support to include other educational forums. I will review the initial testimonies filed in this case and incorporate the recommendations of other parties, if appropriate.

Q. Does this conclude your testimony?

A. Yes, it does.

TOP

FOOTNOTES

¹ Before 2000: Funding Technology in New Jersey's School and Public Libraries by the end of the Century. _back

² CC Docket No. 96-45. _back

³ 54.503 and 54.504 of FCC rules. _back

⁴ The $50.00 per month estimated cost was based on a review of current tariff rates and usage assumptions.The 5 lines per school was based on an estimate of one line for approximately every two non-teaching employees. The total monthly cost per school will be updated if more definitive information is provided by other parties in this proceeding. _back

⁵ Joint Board Recommended Decision, paragraph 440. _back

⁶ New Jersey Department of Education. _back

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