Q24. WHAT ARE FILL FACTORS?

A24. The FCC defines a "fill factor" as the proportion of a network facility that will be filled with network usage.12 In the context of a TELRIC cost model, a higher fill factor translates into lower average estimated costs. However, that is not necessarily true in the real world, because higher fill factors themselves impose costs on a system and these costs should also be accounted for.

A25. In the real world a firm typically carries spare capacity, which means that its plant is not running flat out at all periods of time. There are a number of reasons that spare capacity is efficient and necessary in a telecommunications network. First, it is entirely unrealistic to suppose that a real-world firm will know with 100 percent certainty what or where its actual future demand will be. In economics, there is a principle attributed to Nobel Laureate George Stigler that a real-world efficient firm will incur costs that are higher than what it might otherwise incur if it were to build a rigid, inflexible plant that is incapable of responding efficiently to changes, variability, and uncertainty in the market.14 A real-world firm will incur higher costs to build an adaptable plant that can accommodate changes in the economic or market situation. This principle applies not only to spare capacity needed for flexibility in accommodating uncertain growth in demand, but spare capacity is necessary to accommodate variability in demand, with or without net growth. Airlines, for example, historically have run on average at 50-70 percent fill factors (or what is called in that industry "load factors"). Airlines maintain spare capacity not necessarily because they expect demand to grow next year, but because demand is higher on Friday evenings than Wednesday mornings, and because some Fridays are simply and unpredictably busier than others. Similarly, networks must maintain spare capacity because it is impossible to predict which households will demand new or additional lines.

A26. The following represent some examples that are based on issues of (1) an economic tradeoff between inputs; (2) technological considerations; (3) service quality; and (4) prudent response to risk.

12 Local Competition Order, ¶ 682.
13 Id.
14 George J. Stigler, The Theory of Price. (New York: Macmillan Publishing, 1966), pp. 130-131.

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