NEWSReport No. DC 95-121 ACTION IN DOCKET CASE September 27, 1995 COMMISSION INVITES COMMENT ON LONG-TERM PRICE CAP PLAN, SEEKS TO ESTABLISH SYSTEM THAT ENCOURAGES GREATER PRODUCTIVITY AND BENEFITS CONSUMERS (CC DOCKET 94-1) The Commission today sought further comment on establishing a long-term mechanism for calculating rates under its price cap rules that have applied to certain local exchange carriers (LECs) since 1991. The LEC price cap rules determine the access charges for originating and terminating interstate long distance calls that interexchange carriers (IXCs) pay LECs subject to this regulatory scheme. These access charges assessed by the nation's largest LECs are a significant component of the cost of interstate long distance services. The LEC price cap plan is designed to foster the deployment of a modern, efficient nationwide telecommunications network and to ensure that the rates charged by LECs for interstate services are just, reasonable, and non-discriminatory. Price cap regulation achieves these goals by replicating, to the extent possible, the effects and incentives of competitive markets. These incentives encourage LECs to move prices to economically efficient levels, to reduce costs, to invest efficiently in new plant and facilities, and to develop and deploy innovative services. Price caps is a less burdensome form of regulation than traditional rate of return regulation. In March of 1995, the Commission concluded its review of the first four years of LEC price cap regulation. In the First Report and Order, the Commission adopted an interim plan that revised important elements of the original price cap plan, providing greater incentives for carriers to operate efficiently and greater benefits for consumers in the form of lower prices. The Commission stated at the time, however, that it would initiate a further phase of this proceeding to develop a long-term price cap plan. It stated that it intended to explore in further detail several issues related to the price cap formula. (over) - 2 - The Commission today adopted a Further Notice of Proposed Rulemaking, seeking comment on these and other issues that are involved in establishing a long-term price cap plan. In the First Report and Order, the Commission tentatively concluded that the X- Factor should be based on a Total Factor Productivity (TFP) model, which is designed to measure the actual rate of LEC productivity growth. The Commission requests comment on several issues related to the use of the TFP model to compute an X-Factor for the long-term LEC price cap plan. Because the Commission also found in the First Report and Order that use of the TFP potentially may present implementation problems, the Commission also seeks comment on alternative methods of determining the X-Factor. In addition, the Commission seeks comment on whether the sharing mechanism can be eliminated. The sharing mechanism requires LECs whose interstate earnings in a calendar year exceed specific thresholds to share, or give back, part of those earnings by reducing their access prices in the next year. Under the interim plan adopted in March, LECs have a choice of three X-Factors. LECs electing the highest X-Factor, 5.3%, have no sharing requirements. Thus, LECs that select the most challenging productivity factor are able to keep whatever earnings they generate through increased efficiency. In contrast, LECs electing one of the other X-Factors are required to share earnings that exceed specified levels. In the First Report and Order, the Commission noted that the sharing requirement blunts the efficiency incentives created by the price cap plan because the incentive to operate efficiently is not as strong when the rewards must be shared. Therefore, the Commission tentatively held that sharing eventually should be eliminated. In addition, the Commission tentatively concluded that, if it adopts a long-term price cap plan with multiple optional X- Factors, the plan should eliminate sharing for at least one X-Factor. Under the Commission's original price cap plan, sharing served important functions, such as providing a mechanism for ensuring that if the X-Factor was calculated incorrectly, consumers would share in the LECs' greater productivity gains, and that, in a system in which LECs can select an X-Factor, there is an incentive for LECs to choose the X-Factor that most closely matches their actual rate of productivity. This Fourth Further Notice adopted today thus seeks comment on the extent to which the Commission can establish other mechanisms to replace the functions served by sharing. Finally, the Commission seeks comment on other aspects of the long-term price cap plan, including the common line formula and exogenous cost rules. The Commission's actions today reflect a commitment to adopt a price cap plan that will create greater incentives for LECs to improve their productivity and efficiency and to pass on the benefits of those improvements to consumers. Action by the Commission September 27, 1995, by Fourth Further Notice of Proposed Rule Making (FCC 95-406). Chairman Hundt, Commissioners Quello, Barrett, Ness and Chong. - FCC - News Media contact: Susan Lewis Sallet at (202) 418-1500. Common Carrier Bureau contacts: Steven Spaeth at (202) 418-1530, and C. Anthony Bush at (202) 418-1540.