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Regulation of Interstate Exchange Access Service``"(#L21"Q%0*&&aa $"Ԍ X-x` ` 2. The 1996 Telecommunications Act``"(#L32  X-x` ` 3. Need for Access Reform ``"(#L41  X-II.xAccess Reform for Incumbent Local Exchange Carriers``"(#L50  X-xA.` ` Application of Reforms to Price Cap Carriers x` ` and NonPrice Cap Carriers ``"(#L50  Xv-xB.` ` Applicability of Part 69 to Unbundled Elements``"(#L54  XH-III.xRate Structure Modifications``"(#L55  X1-xA.` ` Overview``"(#L55  X -xB.` ` Common Line ``"(#L57  X -x` ` 1. Background``"(#L57  X -x` ` 2. Alternative Methods of Recovery of CCL Portion of Subscriber Loop(# `(#(#X x` `  Costs``"(#L59  X -x` ` 3. Alternative Methods of Recovery of SLC Portion of Subscriber Loop(# `(#(#X x` `  Costs``"(#L64  X-x` ` 4. Assessment of SLCs on Derived Channels``"(#L68  Xy-xC.` ` Local Switching``"(#L71  Xb-x` ` 1. NonTrafficSensitive Charges ``"(#L72  XK-x` ` 2. TrafficSensitive Charges``"(#L74  X4-xD.` ` Transport``"(#L80  X-x` ` 1. Background``"(#L80  X-x` ` 2.  Entrance Facilities and DirectTrunked Transport Services ``"(#L86  X-x` ` 3. TandemSwitched Transport Services``"(#L87  X-xE.` ` Transport Interconnection Charge(#` ``"(#L96  X-x` ` 1. Background``"(#L96  X-x` ` 2. Possible Sources of Costs in the TIC`!(#F101  X-x` ` 3. Possible Revisions to the TIC(# `!(#F112  X|-xF.` ` SS7 Signalling (#` `!(#F123  Xe-x` ` 1. Background`!(#F123  XN-x` ` 2. Ameritech's SS7 Rate Structure`!(#F127  X7-x` ` 3. Other SS7 Issues `!(#F135  X -xG.` ` New Technologies `!(#F139  X-IV.xApproaches to Access Reform and Deregulation`!(#F140  X-xA.` ` Different Approaches to Access Reform(#` `!(#F140  X -xB.` ` The Goal Deregulation in the Presence of Substantial Competition `!(#F149  X!-x` ` 1. Objectives hh`!(#F149  X"-x` ` 2. Competitive Factors(# `!(#F156  Xh$-V.xMarketBased Approach to Access Reform `!(#F161  XQ%-xA.` ` Introduction `!(#F161"Q%0*&&aa $"Ԍ X-xB.` ` Phase 1 Potential Competition(#` `!(#F168  X-x` ` 1.X Trigger and Geographic Scope(# `!(#F169  X-x` ` 2. Reforms(# `!(#F180  X-xC.` ` Phase 2 Actual Competition`!(#F201  X-x` ` 1.X Trigger and Relevant Markets(# `!(#F202  X-x` ` 2.X Reforms(# `!(#F211  X_-VI.xPrescriptive Approach to Access Reform`!(#F218  XH-xA. ` ` Introduction(#` `!(#F218  X1-xB.` ` Goal of Prescriptive Access Reform`!(#F220  X -xC. ` ` Specific Regulatory Requirements`!(#F223  X -x` ` 1.  Readjustment of Rates to Economic Cost Levels`!(#F223  X -x` ` 2. Reinitialization of Rates on Some Other Basis`!(#F228  X -x` ` 3. Revision of LEC Price Cap Plan`!(#F231  X -x` ` 4. Rate Prescription `!(#F236  X -xD.` ` Phases for Prescriptive Approach `!(#F239  Xy-VII.xTransition Issues`!(#F241  Xb-xA. ` ` Universal Service Joint Board Recommended Decision`!(#F242  XK-xB. ` ` Treatment of Any Remaining Embedded Costs Allocated to the Interstate XxX` ` Jurisdiction(#` `!(#F247  X-x` ` 1. Nature and Magnitude of Any Remaining InterstateAllocated Costs `!(#F249  X-x` ` 2. Recovery of Remaining InterstateAllocated Embedded Costs`!(#F256  X-x` ` 3. Recovery Mechanisms `!(#F260  X-VIII.xOther Issues`!(#F271  X-xA.` ` Regulation of Terminating Access`!(#F271  X-x` ` 1. Price Cap Incumbent LECs`!(#F273  X|-x` ` 2. NonIncumbent LECs`!(#F277  Xe-x` ` 3. "Open End" Services`!(#F281  XN-xB. ` ` Treatment of Interstate Information Services`!(#F282  X7-xC.` ` Other Part 69 Revisions(#` `!(#F291  X -x` ` 1. Equal Access Network Reconfiguration Costs`!(#F291  X -x` ` 2. Part 69 Allocation Rules`!(#F294  X-x` ` 3. Other Proposed Part 69 Changes`!(#F295  X -IX.xThird Report and Order`!(#F300  X!-xA.` ` Lower Service Band Indices(#` `!(#F301  X"-x` ` 1. Background`!(#F301  X#-x` ` 2. Comments`!(#F303  Xh$-x` ` 3. Discussion`!(#F305  XQ%-xB.` ` Waiver Requirement for Introduction of New Services  (# `!(#F307"Q%0*&&aa $"Ԍ X-x` ` 1. Background`!(#F307  X-x` ` 2. Comments`!(#F308  X-x` ` 3. Discussion`!(#F309  X-X.XxNotice of Inquiry on Implications of Information Service and Internet Usage(#`!(#F311  Xv-XI.XxProcedural Issues(#`!(#F319  XH-XII.xOrdering Clauses`!(#F349  X -APPENDIX A Parties Filing Pleadings  X -APPENDIX B Amendments to the Code of Federal Regulations +!R+ J:\ACCESS.REF\IA.RL +  X -M b I. INTRODUCTIONTP  Xy- A.xOverview  XK-x1. In passing the Telecommunications Act of 1996 (1996 Act),4\K0 {O-ԍ Telecommunications Act of 1996, Pub. L. No. 104104, 110 Stat. 56, to be codified at 47 U.S.C.  151  {O-et. seq (1996 Act). Hereinafter, all citations to the 1996 Act will be to the 1996 Act as codified in the United States Code.4 Congress sought to establish "a procompetitive, deregulatory national policy framework" for the United Statesb  X-telecommunications industry.0 {O-ԍ S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 1 (1996) (Joint Explanatory Statement). With this Notice, we commence the third in a trilogy of actions that collectively are intended to foster and accelerate the introduction of efficient competition in all telecommunications markets, pursuant to the mandate of the 1996 Act. In August 1996, as required by the 1996 Act, we adopted rules to implement Sections 251 and 252 of the Act, which establish the basic obligations of carriers, especially in the local  X-exchange and exchange access markets.~0 yO-ԍ Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket  {O-No. 9698, First Report and Order, 11 FCC Rcd 15499 (1996) (Local Competition Order), Order on  {Ok -Reconsideration, CC Docket No. 9698, 11 FCC Rcd 13042 (1996) (Local Competition Reconsideration Order),  {O5!-petition for review pending and partial stay granted, sub nom. Iowa Utilities Board et. al v. FCC, No. 963321  {O!-and consolidated cases (8th Cir., Oct. 15, 1996), partial stay lifted in part, Iowa Utilities Board et. al v. FCC, No. 963321 and consolidated cases (8th Cir. Nov. 1, 1996). In November 1996, pursuant to Section 254 of the Act, the FederalState Universal Service Joint Board issued its recommendations to the Commission for reforming our system of universal service so that universal service is preserved and advanced, but in a manner that permits the local exchange and exchange access"e 0*&&aa"  X-markets to move from monopoly to competition.0 yOy-ԍ FederalState Joint Board on Universal Service, CC Docket No. 9645, Recommended Decision, FCC 96J {OA-3 (rel. Nov. 8, 1996) (Joint Board Recommended Decision). In this proceeding, we seek to reform our system of interstate access charges to make it compatible with the competitive paradigm  X-established by the 1996 Act and with state actions to open local networks to competition. "0 yO-ԍ In providing interstate longdistance service, interexchange carriers use local telephone companies' facilities to originate and terminate calls. The use of local telephone company facilities to originate and terminate longdistance calls is referred to as access service. Local exchange carriers receive access charges for providing interexchange carriers with access to the local exchange carrier's customers.  x2. The 1996 Act seeks to develop efficient competition by opening all telecommunications markets through a procompetitive, deregulatory national policy framework. To that end, the 1996 Act eliminates state and local legal and regulatory barriers to entry, and bans state and local governmental actions that have the effect of prohibiting any  XH-entity from offering any telecommunications service.=H 0 yO-ԍ 47 U.S.C.  253.= The Act also requires all telecommunications carriers to interconnect directly or indirectly with other  X -telecommunications carriers in order to facilitate the creation of a "network of networks."J 0 {Oe-ԍ See 47 U.S.C.  251(a).J In addition, the 1996 Act requires all local exchange carriers (LECs) to establish reciprocal  X -compensation arrangements for the transport and termination of calls,[ , 0 yO-ԍ 47 U.S.C.  251(b)(5), (c)(2), and (c)(3).[ and prohibits incumbent LECs from charging more than the additional cost incurred to transport and  X -terminate a call.C 0 yO+-ԍ 47 U.S.C.  252(d)(2).C The Act further directs all LECs to provide number portability and dialing  X -parity.R L 0 yO-ԍ 47 U.S.C.  251(b)(2) and (b)(3).R The 1996 Act confers three fundamental rights on potential competitors to incumbent LECs: the right to interconnect at rates based on cost, including a reasonable profit; the right to obtain unbundled network elements at costbased rates; and the right to obtain an  Xb-incumbent LEC's retail services at wholesale discounts in order to resell those services.C b0 yO -ԍ 47 U.S.C.  251(c)(4).C x3. The Act also directs the Commission, after receiving the recommendations of a FederalState Joint Board, to define the services to be supported by federal universal service mechanisms, to support such services in a manner that is "explicit and sufficient," and to ensure that "every telecommunications carrier that provides interstate telecommunications"l 0*&&aa'" services shall contribute, on an equitable and nondiscriminatory basis, to the specific,  X-predictable and sufficient mechanisms . . . to preserve and advance universal service."> 0 yOb-ԍ 47 U.S.C.  254. > The Act further provides that multiple carriers may seek and obtain designation as carriers eligible  X-to receive universal service funds for service within a particular geographic area. X0 yO-ԍ 47 U.S.C.  214(e). We note that, while section 214(e) requires a state commission to designate additional eligible telecommunications carriers upon request and consistent with the public interest, in the case of an area served by a rural telephone company, section 214(e) permits a state commission to designate additional eligible telecommunications carriers only if the state commission finds that the designation is in the public interest. 47 U.S.C.  214(e)(2). As a whole, these provisions of the 1996 Act, when fully implemented, should greatly reduce the legal, regulatory, economic, and operational barriers to entry in the local exchange and exchange access market.  XH-x4. The 1996 Act also ends the prohibition against provision of interLATA servicesH0 yO-ԍ Section 3(21) of the 1996 Act defines interLATA services as "telecommunications between a point located in a local access and transport area and a point located outside such area." 47 U.S.C.  153(21). by Bell Operating Companies (BOCs) that was imposed by the Modification of Final  X -Judgment.k ` 0 {O+-ԍ United States v. AT&T, 552 F.Supp. 131 (D.D.C. 1982) (MFJ).k BOCs were permitted immediately upon enactment of the 1996 Act to begin to provide certain interLATA services, including outofregion and incidental interLATA services. In order to provide interLATA services originating inregion, however, a BOC is first required to obtain Commission approval. In order to approve such an application, the Commission must find that the BOC has met the requirements of the "competitive checklist," that the BOC will comply with the Act's separate affiliate requirements, and that grant of the  X-application is consistent with the public interest, convenience and necessity.= 0 yO3-ԍ 47 U.S.C.  271.= x5. These fundamental changes in the structure and dynamics of the telecommunications industry wrought by the 1996 Act now necessitate that the Commission review its existing access charge regulations to ensure that they are compatible with the 1996 Act's farreaching changes. We also seek to eliminate, either now or as soon as changes in the marketplace permit, any unnecessary regulatory requirements on incumbent LEC exchange access services. While a broad range of telecommunications industry participants, including both interexchange carriers (IXCs) and incumbent LECs, have long advocated for the Commission to commence a comprehensive review of access charges, the Act accelerates and intensifies the need for such a review. We commence this review of the Commission's Part 69 interstate access charge rules, together with its Part 61 price cap rules, to determine the" 0*&&aaQ" extent to which we must revise these rules to take account of the local competition and Bell entry provisions of the 1996 Act and state actions to open local networks to competition; to reflect the effects of potential and actual competition on incumbent LECs' pricing for interstate access; to implement the Act's direction to end implicit universal service subsidies in favor of a system of explicit subsidies; and to establish fair rules of competition for both the local exchange and interexchange markets, especially as carriers begin to offer service packages that bundle local and interexchange offerings. x6. We adopted our Part 69 rules at approximately the same time that AT&T divested its local exchange operations and established the seven regional Bell companies pursuant to  X -the MFJ. The rules were designed to promote competition in the interstate, interexchange market by ensuring that all IXCs would be able to originate and terminate their traffic over incumbent LEC networks at just, reasonable, and nondiscriminatory rates. While our Part 69 rules expressly contemplated competition in the interexchange market, they were not designed to address the potential effects of competition in the local exchange and exchange access market. Indeed, these rules reflected the reality of the telecommunications marketplace in 1983 and what was mandated in some states prior to the 1996 Act that the incumbent LEC was the monopoly provider of local exchange and exchange access services. In adopting the Part 69 rules, the Commission did not seek to eliminate implicit support flows, but in fact incorporated such flows into the Part 69 rate structure. Our Part 69 rules are designed to be consistent with our jurisdictional separations rules that govern the allocation of incumbent  X-LECs' expenses and investment between the interstate and state jurisdictions.r0 {O-ԍ Part 36 of the Commission's Rules; 47 C.F.R.  36.1 et seq.r Consequently, the Part 69 access charge system likely reflects any jurisdictional cost misallocations mandated by our current separations rules. As such, the Part 69 rules are fundamentally inconsistent with the competitive market conditions that the 1996 Act attempts to create. We will soon begin a related proceeding to examine our jurisdictional separations rules in light of the 1996 Act. x7. Competition isolates and highlights the inefficiencies and distortions present in the current Part 69 access charge rules. Our present interstate access charge regime, for example, requires incumbent LECs to maintain rate structures that have been widely criticized as economically inefficient. In particular, even though the costs of the local loop do not vary with the amount of traffic carried by the loop, our current rules require incumbent LECs to recover a portion of those costs through trafficsensitive carrier common line (CCL) charges imposed on IXCs. While Part 69 mandates perminute charges for local switching, the portion of local switching costs that is associated with ports appears to be driven by the number of lines connected to the switch, not by the number of minutes of traffic routed by the switch. The transport interconnection charge (TIC) is a nonfacilitiesbased, perminute charge imposed on all switched access customers regardless of whether they use the incumbent LEC's transport facilities. Rather than fostering efficient pricing and competition,"#Z0*&&aae"" these mandatory rate structures inflate usage charges and reduce charges for connection to the network, in essence overcharging highvolume end users in order to reduce rates for lowvolume end users. x8. Although these inefficient rate structures might have been sustainable in a local monopoly environment, the introduction of competition from providers operating their own network facilities or leasing network facilities as unbundled network elements may undermine these access rate structures. A competing provider of exchange access services entering a market can use its own facilities or lease unbundled network elements to target selectively the incumbent LEC's highvolume end users with efficiently priced access service offerings. This places the incumbent LEC at a regulatorilyimposed disadvantage in competing for highvolume end users, and jeopardizes the source of revenue that permits the incumbent LEC to cover its costs of providing service to lowvolume end users. At the same time, these inefficient rate structures and implicit support flows also create artificial impediments to any new entrants that might seek to serve the subsidized end users, because they must attempt to do so without the benefit of a subsidy. As a result, these access rate structures may inhibit the development of competition for service to lowvolume end users. x9. Competition also allows entrants to arbitrage between different pricing systems. For example, if transport and termination rates are lower than access charge rates, a competitor would have an incentive to funnel interexchange terminating access traffic through transport and termination arrangements where possible. Whether traffic originates locally or from a distant exchange, transport and termination of traffic by a particular LEC involves the same network functions. Ultimately, the rates that local carriers impose for the transport and termination of local traffic and for the transport and termination of long distance should converge. As a legal matter, however, transport and termination of local traffic by an incumbent LEC are different services from access service provided by that incumbent LEC for longdistance telecommunications. Transport and termination of local traffic are governed by 251(b)(5) and 252(d)(2), while access charges for interstate longdistance traffic are governed by sections 201 and 202 of the Act. x 10. This Commission has previously examined the impact of stateled reforms in New York and Illinois on the existing access charge rate structures, and has concluded that some interim modifications to the incumbent LECs' rate structures were warranted where states had implemented marketopening measures similar to those mandated by the 1996 Act. The Commission concluded that competitive developments in the New York City, Chicago, and Grand Rapids LATAs justified granting NYNEX and Ameritech limited waivers of our access  X!-charge rules to allow them to recover the TIC on a geographically deaveraged basis and to"!0*&&aa " bulk bill some of their common line costs rather than recovering them through the perminute  X-CCL charge. 0 yOb-ԍ The NYNEX Telephone Companies Petition for Waiver, Transition Plan to Preserve Universal Service in a Competitive Environment, Memorandum Opinion and Order, 10 FCC Rcd 7445 (1995); Ameritech Operating Companies, Petition for a Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region, Order, FCC 9658 (rel. Feb. 15, 1996). x x 11. In addition to their criticisms of the access charge rate structures, IXCs, in particular, have insisted that the rate levels of access charges are excessive and must be reduced. AT&T asserts, for instance, that the current average perminute access rates of the BOCs are nearly seven times the forwardlooking economic cost of providing that service, and that total interstate access charges collected today from interexchange carriers exceed forward XH-looking economic cost by $11 billion, or 70 percent of the total.$H0 yO -ԍ Letter from Bruce K. Cox, Government Affairs Director, AT&T, to William F. Caton, Acting Secretary, FCC, October 9, 1996, filed in CC Docket No. 9645; Letter from R. Gerard Salemme, Vice President,  {O9-Government Affairs, AT&T, to Regina Keeney, Chief, Common Carrier Bureau, Nov. 22, 1996 (AT&T  {O-November 22 Letter).  IXCs argue that, if access prices are allowed to remain at current levels, they will face an anticompetitive disadvantage  X -both in the local exchange market and in the interexchange market whenever an incumbent  X -LEC also provides interexchange services.S 0 {OP-ԍ See, e.g., AT&T November 22 Letter.S x 12. In this item, we first adopt two initial steps toward reforming our system of access charges. In the sections that comprise the Third Report and Order in the Price Cap Performance Review for Local Exchange Carriers, we eliminate the lower service band indices, which unnecessarily restrict the ability of price cap LECs to lower their access prices. Under our existing rules a price cap LEC must specifically justify a proposal to lower its access charges below the pricing floors established by the indices. Thus, our rules currently discourage price cap LECs from lowering prices even when it would be economically efficient to do so. These rules also hamper a price cap LEC in responding to lowerpriced access service offerings by competing access service providers. To encourage the development and prompt deployment of new switched access services, we also streamline the process for price cap LECs to offer such services. x 13. In the Notice of Proposed Rulemaking portion of this item, we initiate a comprehensive review of our interstate access charge regime. We propose a series of reforms to the existing access charge rate structure rules that are designed to eliminate the inefficiencies summarized above. Our goal is to end up with access charge rate structures that a competitive market for access services would produce. "N . 0*&&aa"Ԍx 14. We also outline in this item two possible approaches for addressing claims that existing access charge levels are excessive, for establishing a transition to access charges that more closely reflect economic costs, and for deregulating incumbent LEC exchange access services as competition develops in the local exchange and exchange access market. The first is a marketbased approach under which we would rely on potential and actual competition from new facilitiesbased providers and entrants purchasing unbundled elements to drive prices for interstate access services toward economic cost. Under this approach, we would gradually relax and ultimately remove existing Part 69 rate structure requirements and Part 61 restrictions on rate level changes as marketplace forces provide the discipline on incumbent LEC access prices that our rules are currently needed to apply. The second is a more prescriptive approach to access reform under which this Commission would specify the nature and timing of the changes to the existing rate levels. These approaches could be employed singly or in combination. We emphasize, however, that under either approach, our ultimate goal is the same adoption of revisions to our access charge rules that will foster competition for these services and enable marketplace forces to eliminate the need for price regulation of these services. x15. Under the marketbased approach to access reform, we propose two intermediate phases, each of which would require an incumbent LEC to demonstrate that certain circumstances exist in order to obtain greater pricing flexibility than the current rules permit. We also propose that an incumbent LEC's access services be deregulated, that is, removed from price cap and tariff regulation, once they are subject to substantial competition. At the first phase, an incumbent LEC would have to show that its local market has been opened to competition and potential rivals are able to enter through any of the three avenues mandated by the 1996 Act interconnection, unbundled network elements, and resale. We ask whether an incumbent LEC making such a showing should be permitted to deaverage geographically its rates for interstate access services, to offer volume and term discounts, and to offer contractbased tariff offerings for interstate access. We also ask whether new services should be deregulated at that phase. At the second phase in our marketbased approach, an incumbent LEC would have to show that it faces actual competition in the local exchange marketplace. We ask whether, at that phase, we should eliminate service categories within baskets, permit incumbent LECs to engage in differential pricing of access to residential, singleline business, and multiline business customers, and eliminate mandatory rate structures for local switching and transport. We also seek comment on combining the trunking and trafficsensitive baskets at that stage. x16. A second option for access reform is a more prescriptive approach. Marketplace forces alone may not be sufficient to drive access rates to forwardlooking economic costs. Under this approach, we ask whether we should require incumbent LECs to move prices for interstate access in their service areas to more economicallyefficient levels pursuant to rules adopted in this proceeding. As with a marketbased approach, we also propose under this"h$ 0*&&aa(#" prescriptive approach that we remove incumbent LEC access services subject to substantial competition from price cap and tariff regulation. x17. In Section II, below, we seek comment on issues affecting the scope of this proceeding. In Section III, we propose changes to our existing interstate access charge rate structures to make them more conducive to economic efficiency. We also discuss in Section III the reassignment of certain network facilities costs that under current rules are allocated to the Transport Interconnection Charge for recovery. In Section IV, we summarize our two basic approaches to access reform and propose eliminating price cap and tariff regulation for services subject to substantial competition. We also there seek comment on whether and when one approach or the other is preferable, or if a combination of these approaches should be used, and also, how such a combined approach should be structured. In Section V, we discuss in detail a marketbased approach to access reform. In Section VI, we outline a more prescriptive approach to access reform. x18. In Section VII, we first discuss adjustments to the current interstate access charge regime that may be required due to actions taken in the FederalState Universal Service Joint Board proceeding. We also raise in that section the issue of whether there is a significant difference between embedded incumbent LEC costs currently allocated to the interstate jurisdiction and recovered through access charges, and the forwardlooking economic costs of interstate access. To the extent that implementation of access charge reform is expected to cause a significant reduction in incumbent LEC access revenues from current levels, we seek comment on whether such LECs are entitled or should be permitted to recover some or all of that difference through a temporary special recovery mechanism. x19. In Section VIII, we seek comment on possible additional changes to our access charge rules that may be necessary to make them compatible with the competitive market envisioned by the 1996 Act, including whether there is any special need for regulating terminating interstate access service and "openend" services, whether provided by incumbent LECs or new entrants. We also discuss possible changes to our existing treatment of the use by interstate information service providers, such as Internet service providers, of incumbent LEC switched access networks to originate interstate traffic. In Section IX, we issue a Report and Order implementing the changes to the LEC price cap rules discussed above that were  X -proposed in the Price Cap Second FNPRM." 0 yO -ԍ Second Further Notice of Proposed Rulemaking in CC Docket No. 941, Further Notice of Proposed Rulemaking in CC Docket No. 93124, and Second Further Notice of Proposed Rulemaking in CC Docket No. 93197, 11 FCC Rcd 858 (1995) (soliciting comments on proposed and other possible changes to the price cap  {O"-plan to reflect emerging competition in telecommunications services) (Price Cap Second FNPRM).  " 0*&&aa"Ԍ X-x20. Finally, in Section X, we issue a Notice of Inquiry to examine fundamental issues about the implications of usage of the public switched network by information service and Internet access providers.  X-,!R, J:\ACCESS.REF\IB.KLS #X\  P6G;ɒP#X01Í ÍX01Í Í#Xj\  P6G;ynXP#  , vB.xBackground  Xv-x 1.` ` Regulation of Interstate Exchange Access Service x` ` x21. For much of this century, most telephone subscribers obtained both local and long distance services from the same company, the predivestiture, integrated Bell System, ownedv and operated by AT&T. Although some telephone subscribers received local telephone service from nonBell independent companies, AT&T still provided long distance service to these customers. AT&T compensated its Bell Operating Company subsidiaries for originating and terminating interstate calls through revenue division arrangements and compensated the independent companies for access pursuant to settlement agreements. In the 1970s, MCI and other IXCs (then called "other common carriers," or OCCs) began to provide switched long distance services in competition with AT&T Long Lines by attaching their own switches to  Xy-local business lines purchased from the incumbent LECs and reselling AT&T services.Y^y0 {O-ԍ See MCI Telecommunications Corporation, Docket No. 20640, Decision, 60 FCC 2d 25 (1976); MCI v.  {O-FCC, 561 F.2d 365 (D.C. Cir. 1977), cert. denied, 434 U.S. 1040 (1978); MCI v. FCC, 580 F.2d 590 (D.C. Cir.  {O-1978), cert. denied, 439 U.S. 980 (1978).Y In 1979, AT&T and the OCCs, under Commission supervision, entered into a comprehensive interim agreement, known as Exchange Network Facilities for Interstate Access (ENFIA), to replace the local business rates with a different set of rates AT&T would charge OCCs for  X-originating and terminating interstate traffic over the facilities of its local exchange affiliates.Z0 {O-ԍ For additional background on the ENFIA agreement, see, e.g., Investigation of Access and DivestitureRelated Tariffs, CC Docket No. 831145, Phase I and Phase II, Part 1, FCC 85100, 57 Rad.Reg.2d 1229, 1241 (rel. March 8, 1985).  AT&T Long Lines continued to compensate its local exchange affiliates and the independent exchange carriers for the use of their facilities pursuant to their division of revenues and settlements arrangements. Following a lengthy proceeding, the Commission in 1983 adopted uniform access charge rules that govern the provision of interstate access services by all  X-incumbent LECs, BOCs as well as independents.0 yOk -ԍ MTS and WATS Market Structure, Third Report and Order, CC Docket No. 7872, Phase 1, 93 FCC 2d  {O3!-241 (Access Charge Order), recon., 97 FCC 2d 682 (1983), second recon., 97 FCC 2d 834 (1984). x22. The costs that incumbent LECs recover through interstate access charges are determined by a multistep process. Incumbent LECs first record all their booked expenses  XN-and their cost of investment in the accounts prescribed by the Commission's Part 32 Uniform"N j 0*&&aa"  X-System of Accounts (USOA).F0 {Oy-ԍ  See 47 C.F.R. Part 32.F They next divide the recorded investment and expenses between regulated and nonregulated services, pursuant to Part 64 of our Rules. Incumbent LECs then divide regulated expenses and investment between state and interstate jurisdictions  X-pursuant to the separations procedures contained in Part 36 of the Commission's rules.ZZ0 {O-ԍ See 47 C.F.R. Part 36. The fundamental principles of jurisdictional separations were described by the Supreme Court in Smith v. Illinois Bell Telephone Co., 282 U.S. 133 (1930). Our Part 36 rules address this jurisdictional distinction. Incumbent LECs then apportion their regulated interstate costs among the interstate access and interexchange service categories. Finally, to recover their access costs, incumbent LECs charge IXCs and end users for access services in accordance with the Part 69 access charge rules and, for incumbent LECs under price cap regulation, with the provisions of the Part 61 price cap rules. x23. Commentators have pointed out that, because each of these divisions of costs occurs pursuant to regulation rather than through operation of a competitive marketplace,  X -these divisions are subject to distortions. |0 {O-ԍ See, e.g., Proposal for Universal Service and Access Reform: Post 9698 Interconnection Order, NYNEX,  {O-Nov. 5, 1996 (NYNEX November 5 Proposal), at 13. In particular, commentators have focused on the separations process, which apportions costs between the intrastate and interstate jurisdictions.  X -These commentators suggest that separations allocation, in particular allocation of common plant, reflects not only economic considerations, but also public policy considerations related  X-to universal service and the desirability of low local rates.D\0 {O-ԍ See Halprin, Albert, "Separations' Legacy of Subsidy", Exhibit 7 to the The NYNEX Telephone Companies Petition for Waiver, Transition Plan to Preserve Universal Service in a Competitive Environment,  {O-Dec. 15, 1993; AT&T November 22 Letter at 12.D To the extent these allocation decisions have resulted in greater allocations to interstate services than would be economically justified, these distortions flow through Parts 69 and 61 into access charges. x24. Part 69 establishes two basic categories of access services: special access services  X-and switched access services. Special access services do not use the local switch; they use dedicated facilities that run directly between the end user and the IXC's point of presence  X-(POP).,X 0 yO!-ԍ Dedicated facilities or "circuits" come in varying degrees of capacity, from a single voicegrade circuit, with sufficient bandwidth to carry a single voice conversation, to fiber optic circuits capable of carrying thousands of conversations simultaneously. , By contrast, switched access services use the local exchange switch to route  X-originating and terminating interstate toll calls. The special access category includes a wide" 0*&&aa"  X-variety of services and facilities, such as wideband data, video, and program audio services.0 {Oy-ԍ See Investigation of Access and Divestiture Related Tariffs, CC Docket No. 831145, Phase I and Phase II, Part 1, FCC 8570, 57 Rad.Reg.2d 1459, 1465 (Com. Car. Bur. 1985). The Commission does not prescribe specific rate elements for special access services in Part  X-69."0 {O-ԍ  See Access Charge Order, 93 FCC 2d at 315; see also 47 C.F.R.  69.114. Part 69 does, however, establish specific switched access elements and a mandatory switched access rate structure for each element tailored to the nature of each service in order to promote competition in the interexchange services market and eliminate discrimination within or among services. In general, we have attempted to move toward rate structures that  Xv-create incentives for the most efficient utilization of all telecommunications facilities. "v0 {O -ԍ See Access Charge Order, 93 FCC 2d at 253, 268. Part 69 also prescribes cost allocations for each  yO -switched access service element. Under the price cap rules discussed below, however, the cost allocation sections of Part 69 no longer play a role in setting the actual price levels for the access element charges of price cap carriers. These elements generally correspond to the components of switched access service, as shown in Figure 1. T"  0*&&aa$ "Ԍ y!a|xddP y T T TP x25. Interoffice transmission services, known as transport services, carry interstate switched access traffic between an IXC's POP and the end office that serves the end user customer. Incumbent LEC transmission facilities that carry interstate traffic between an IXC's POP and the incumbent LEC end office serving the POP (called the serving wire center or SWC) are known as entrance facilities. Part 69 requires incumbent LECs to impose flatrate charges on IXCs to recover the costs of entrance facilities. Incumbent LECs currently offer  X -two types of interstate switched transport service between a SWC and an end user's end office. Under the first service, directtrunked transport, calls are transported between the SWC and the end office by means of a direct trunk that does not pass through an intervening  X#-switch. To recover the costs of directtrunked transport facilities, Part 69 requires incumbentX# 0*&&aa(#3@a6 8!era.d06irfa12.sjtv.nX  X-LECs to impose a flatrate charge on IXCs.V!0 {Oy-ԍ See 47 C.F.R.  69.110, 69.112.V The second service, tandemswitched transport, routes calls from the SWC to the end office through a tandem switch located between the SWC and the end office. Traffic travels over a dedicated circuit from the SWC to the tandem switch, and then, over a shared circuit that carries the calls of many different IXCs, from the  X-tandem switch to the incumbent LEC end office."Z0 yO-ԍ Such shared circuits, as well as tandem switches, may also be used to carry intrastate toll and local calls. For tandemswitched transport, Part 69  X-prescribes a perminute tandemswitching charge and a perminute transmission charge  Xv-assessed on IXCs.K#v0 {O -ԍ See 47 C.F.R.  69.111. K  XH-x26. Incumbent LEC end offices serving end users switch interstate traffic between the transport trunks carrying traffic to and from the IXC POPs and the end users' local loops. Our Part 69 rules require incumbent LECs to recover the costs of the local switch through a  X -perminute local switching charge assessed on IXCs.L$ |0 {O0-ԍ See 47 C.F.R.  69.106. L Part 69 also requires incumbent LECs  X -to impose a perminute TIC on interstate switched access traffic.% 0 {O-ԍ See 47 C.F.R.  69.124. We note that our rules do not constrain an incumbent LEC's downward pricing flexibility for the TIC. 47 C.F.R.  61.47(g)(3). We note that an incumbent LEC's provision of transport and local switching for terminating interstate traffic is functionally the same as its provision of transport and termination service under the 1996 Act. x27. Finally, incumbent LECs assess end users a flat end user common line charge  Xy-(EUCL), also known as the subscriber line charge (SLC), to recoup part or all of the local loop costs allocated to the interstate jurisdiction. The SLC currently may not exceed the lesser of the actual interstate loop cost, or $6 per month for multiline business customers and  X4-$3.50 for residential and singleline business customers.J&4h 0 {OM-ԍ See 47 C.F.R.  69.104.J In addition, IXCs are assessed a perminute CCL charge to recover the remaining interstate allocation of loop costs that is not  X-recovered through SLCs.J' 0 {O -ԍ See 47 C.F.R.  69.105.J IXCs with at least .05 percent of the total common lines  X-presubscribed to IXCs in all study areas are also assessed Universal Service Fund and Lifeline" '0*&&aa "  X-service charges based on each IXC's share of presubscribed access lines.V(0 {Oy-ԍ See 47 C.F.R.  69.116, 69.117.V In addition, Part  X-69 identifies several other charges, including those for signalling and database queries.\)Z0 {O-ԍ See generally 47 C.F.R.  69.101129.\  X-x28. The specific access charges currently assessed on interexchange carriers and end users under our rules vary among incumbent LECs because their embedded costs, on which access charges (even for price cap incumbent LECs) are based, vary from state to state. Significant differences in factors that affect a carrier's cost of providing service, such as the topography and population density of its service area, are reflected in different prices for access service. x29. The total regulated revenues of Class A incumbent LECs by service rate elements  X -are shown in Table 1, below.* 0 yO-ԍ Class A companies are those having annual revenues from regulated telecommunications operations of $100 million or more. 47 C.F.R.  32.11(a)(1). In 1996, the Class A companies included all price cap LECs. As indicated there, more than 25 percent of the incumbent LECs' total regulated revenues are derived from interstate access services. In addition, of the $11.9 billion in interstate switched access revenues that incumbent LECs recover from IXCs,  X -approximately 90 percent ($10.8 billion) is recovered through perminute charges (i.e., CCL, TIC, and local switching).  X-"D*0*&&aaj"Ԍ X-U%< Table 1 ă T  X-+  Class A Incumbent Local Exchange Carriers' t1995 Total Regulated Revenues  X-0 (in Billions)+0 yO-ԍ Source: ARMIS Data compiled by Industry Analysis Division, Common Carrier Bureau. Totals reflect rounding to the nearest hundred million. TP  Xv- Interstate Revenues  X_-X` hp x (#%'0*,.8135@8:-ԍ Price Cap Second FNPRM, 11 FCC Rcd at 862.` Price cap regulation encourages incumbent LECs to improve their efficiency by harnessing profitmaking incentives to reduce costs, invest efficiently in new plant and facilities, and develop and deploy innovative service offerings. x31. The price cap rules split interstate access services into three discrete groups, called  X -baskets.p3 0 yO]-ԍ The price cap rules create a fourth basket for interexchange services.p Two baskets are further grouped into narrower service categories and subcategories. Price cap incumbent LECs have some ability to raise and lower the charges for elements or services that are included in the same basket as long as the actual price index (API) for the basket does not exceed the price cap index (PCI) for that basket. This pricing flexibility is limited by banding rules that establish separate upper and lower pricing bands for each service category or subcategory within a basket. The price cap for each basket and the pricing bands  Xb-for each service category and subcategory are adjusted annually based on defined formulas.J4bP 0 yOc-ԍ 47 C.F.R.  61.45, 61.47.J The price cap rules place services subject to different competitive pressures into different baskets, service categories, and service subcategories. These measures limit the incumbent LECs' ability to offset reductions in service prices that are subject to competition with increases in service prices that are not subject to competition. "40*&&aa"Ԍ X-x 2.` ` The 1996 Telecommunications Act x32. The 1996 Act seeks to open for all carriers the local and long distance telecommunications markets to competition by removing economic, regulatory, and operational impediments that have protected monopolies in the local exchange market. The 1996 Act requires incumbent LECs to open their networks to competition, and permits the BOCs, upon meeting certain conditions, to enter the interLATA market within their respective  X_-service areas.G5_0 {O-ԍ See 47 U.S.C.  271.G The 1996 Act also requires the Commission to forbear from applying any regulation or any provision of the Communications Act to telecommunications carriers or telecommunications services, or classes thereof, if the Commission determines that certain  X -specified conditions are satisfied.6x Z0 yO% -ԍ 47 U.S.C.  160. The Commission must forbear if the Commission determines: (1) that enforcement of the regulation or provision is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or service are just and reasonable and are not unjustly or unreasonably discriminatory; (2) that enforcement is not necessary for the protection of consumers; and (3) that forbearance consistent with the public interest. 47 U.S.C.  160(a). The forbearance authority applies to all provisions of the Communications Act, except the provisions added by the 1996 Act relating to interconnection and BOC entry into longdistance services. 47 U.S.C.  160(d).  X -x` ` a. Local Competition x 33. The local competition provisions of the 1996 Act added new sections 251, 252, and 253 to the Communications Act. Section 251 establishes general interconnection  X-obligations for all telecommunications carriers,@70 yO-ԍ 47 U.S.C.  251(a).@ delineates further obligations for LECs,@8* 0 yOk-ԍ 47 U.S.C.  251(b).@ and  Xy-prescribes additional requirements for incumbent LECs.A9y 0 yO-ԍ 47 U.S.C.  251(c). A Sections 251(c)(2) and (c)(3) require that incumbent LECs' "rates, terms, and conditions" for interconnection, unbundled network elements be "just, reasonable, and nondiscriminatory in accordance with . . . the  X4-requirements of sections 251 and 252."R:4J 0 yO/!-ԍ 47 U.S.C.  251(c)(2) and (c)(3).R Section 252 generally sets forth the procedures that state commissions, incumbent LECs, and new entrants must follow to implement the  X-requirements of section 251 and establish specific interconnection arrangements. Finally,":0*&&aa" Section 253 bars state and local regulations that prohibit or have the effect of prohibiting  X-entities from offering telecommunications services.;0 yOb-ԍ 47 U.S.C.  253(a). Section 253 also authorizes the Commission to preempt any law or regulation that is  yO*-violative of this section.  47 U.S.C.  253(d).  X-x!34. The terms and conditions under which such facilities and services are made available by incumbent LECs may be the subject of negotiated agreements between an  X-incumbent LEC and a requesting carrier.D< 0 yO^ -ԍ 47 U.S.C.  252(a)(1). D If an incumbent LEC and requesting carrier are unable to reach a negotiated agreement, either party may ask a state to arbitrate the disputed issues.  X1-x"35. As required by the 1996 Act, incumbent LECs must provide interconnection and nondiscriminatory access to network elements on an unbundled basis. In implementing the  X -Act, we identified the following minimum set of network elements that incumbent LECs must provide to requesting telecommunications carriers, many of which are analogous to interstate access rate elements: network interface devices; local loops; local and tandem switches (including all software features provided by such switches); interoffice transmission facilities; signalling and callrelated database facilities; operations support systems and information; and  X-operator and directory assistance facilities.W=0 {O-ԍ  Local Competition Order at para. 366. W States may require unbundling of additional  Xy-elements.  XK-4x` ` b. Universal Service  X-x#36. Section 254, added by the 1996 Act, for the first time codifies the role of  X-universal service in federal telecommunications regulation.=>B0 yO-ԍ 47 U.S.C.  254.= Section 254 directs the4  X-Commission to commence a proceeding to implement sections 254 and 214(e) of the Act, and to refer such proceeding to a FederalState Joint Board. The Joint Board was given nine months to make recommendations to the Commission, including a definition of the services to be supported by federal universal service support mechanisms and a timetable for the implementation of such recommendations. We initiated the Joint Board proceeding in March  X|-1996,?|0 yO"-ԍ FederalState Joint Board on Universal Service, Notice of Proposed Rulemaking and Order Establishing  {O#-Joint Board, CC Docket No. 9645, FCC 9693 (rel. Mar. 8, 1996) (Universal Service NPRM). and the Joint Board issued its Recommended Decision in November 1996.  Xg-"g, ?0*&&aa"Ԍ X-x$37. The 1996 Act established several requirements for federal universal service support mechanisms. The Commission, after receiving the recommendations of the Joint  X-Board, is to designate specific services for federal universal service support.@@0 yOK-ԍ 47 U.S.C.  254(c).@ Such support is to be available for the provision, maintenance and upgrading of facilities and services for  X-which the support is intended, and not for other purposes.EAX0 yO-ԍ 47 U.S.C.  254(e), (k).E Such support is to be available to  X-all eligible telecommunications carriers.B\0 {O& -ԍ 47 U.S.C.  254(e), 214(e); see also Joint Board Recommended Decision at paras. 15562; Joint  {O -Explanatory Statement at 131 (1996) ("The conferees intend that only eligible telecommunications carriers should receive support from specific Federal universal service support mechanisms . . . ."). Such support is to be explicit,AC 0 yOJ -ԍ 47 U.S.C. 254(e).A and, as the  Xv-Conference Report makes clear, shall not be implicit.Dv0 {O-ԍ Joint Explanatory Statement at 131 ("In keeping with the conferees' intent that universal service support should be clearly identified, [section 254(e)] states that such support should be made explicit . . . ."). Such support is also to be funded on an equitable and nondiscriminatory basis by all telecommunications carriers that provide  XH-interstate telecommunications services.@EH 0 yO-ԍ 47 U.S.C.  254(d).@  X -x%38. In its Recommended Decision, the FederalState Joint Board concluded that  X -several universal service mechanisms currently implemented through the jurisdictional separations and access charge structures must be replaced or modified in order to meet the Act's requirements that support mechanisms be explicit, specific, predictable and sufficient to preserve and advance universal service. Accordingly, the Joint Board recommended that  X -changes be made to the high cost assistance fund,QF 0 {O-ԍ 47 C.F.R.  36.601 et seq.Q and that the Dial Equipment Minutes  X-(DEM) weighting programCG0 yO[-ԍ 47 C.F.R.  36.125(b).C and Long Term Support (LTS)_H0 yO-ԍ 47 C.F.R.  69.105, 69.502, 69.603(e), 69.612._ be phased out, eliminated, and  X{-replaced by a new explicit universal service mechanism.bI{80 {Od"-ԍ Joint Board Recommended Decision at paras. 26882.b If the Commission adopts the Joint Board's recommendations, our access charge rules must be adjusted to reflect these changes, to prevent incumbent LECs from recovering the same costs twice, and to provide the same"MI0*&&aa" subsidies to nonincumbent LECs as are provided to incumbent LECs for serving highcost or  X-lowincome subscribers.OJ0 {Ob-ԍ See Section VII.A, infra.O x&39. At the same time, we must also examine other features of our access charge system to determine whether they contain implicit universal service support, in contravention of the Act's requirement that all universal service support be explicit and its requirements as  Xv-to funding of federal universal service support. In our Universal Service NPRM, we asked  Xa-whether the CCL charge is an implicit universal service support mechanism.XKaZ0 {Ol -ԍ Universal Service NPRM at paras. 11314.X While the Joint Board did not reach this question, it suggested that it would be desirable for the CCL charge to be restructured to be collected on a flatrate rather than a perminute basis because per X -minute collection is economically inefficient.bL 0 {O-ԍ Joint Board Recommended Decision at paras. 77576.b x'40. We continue to recognize that, because of the role that access charges have played in funding and maintaining universal service, it is important to implement changes in the access charge system together with complementary changes in the universal service system. In Sections III.B., below, we discuss whether the CCL charge must be restructured to comply with the Act's universal service requirements.  Xd-x 3.` ` Need for Access Reform (#` x(41. There is a consensus among virtually all participants in the telecommunications industry on the need to reform our interstate access charge rules. IXCs and incumbent LECs, for example, agree that current perminute interstate access charges exceed economically  X-efficient levels and that, consequently, perminute interstate access charges must be reduced.M~0 {O -ԍ See generally, e.g., AT&T November 22 Letter at 14; NYNEX November 5 Proposal at 1617. They differ, however, as to the reasons why current charges exceed forwardlooking economic cost, the aggregate amount by which current charges exceed economic cost, and the effects of  X-particular factors (e.g., alleged excessivelylong prescribed depreciation schedules, separations distortions, strategic investments, and operational inefficiency). They also disagree on what portion, if any, of the difference between forwardlooking economic cost and the portion of embedded costs allocated to the interstate jurisdiction incumbent LECs should be permitted to recover. x)42. Current access charges distort competition in the markets for local exchange access. Our access charge rules create incentives for IXCs to bypass the LEC switched access" M0*&&aay" network for reasons that have nothing to do with the economics of operating an access network. This uneconomic bypass may occur for a variety of reasons; rates may be too high, or our access charge rules may require rates for a LEC access service to be too high in relation to the rates for an alternative LEC service or for a comparable service offered by an alternative supplier. Inefficient entry may occur if the price for a package of jointlyprovided services is above economic cost, even if the LEC would actually be the most efficient provider of the service. Conversely, if a package of jointlyprovided services, including access, is priced too low because of regulatory requirements, efficient entry by an otherwise efficient provider may be precluded. In either case, the total cost of telecommunications service will not be as low as it could be if all services were priced at economic levels, thereby providing accurate price signals to all market participants. High access charges may also keep longdistance rates higher than they would otherwise be, which restricts demand for service and harms longdistance consumers. We describe more fully some of the causes of uneconomic bypass below. x*43. Inefficient, mandatory rate structures are one reason that perminute interstate access charges exceed the economic cost of providing service to certain customers. One example is the recovery through a perminute CCL charge of part of the allocated interstate costs for incumbent LECs to provide local loops to end users. Recovering on a perminute basis the cost of the local loop, which is a fixed cost that does not vary with usage, results in highvolume toll users paying charges to their IXCs that exceed the cost of serving those customers, while some lowvolume toll users may pay rates that are below cost. Mandatory perminute charges for local switching, which probably has significant fixed costs, also results in IXCs paying access charges for highvolume toll users that exceed the cost of serving those  X-customers. Finally, the requirement that most rates be averaged on a "study area" basis (i.e. generally, statewide) precludes incumbent LECs from setting rates to reflect cost differences in highdensity and lowdensity areas, leaving incumbents vulnerable to niche entry in highdensity areas, and precluding entry by firms that might otherwise seek to serve lowdensity areas. x+44. Assignment of costs to the wrong elements may also contribute to high perminute interstate access rates. As discussed in Section III.E. below, the TIC currently recovers some costs that may be appropriately included in the rates for services in the trunking basket. This also results in highervolume switched access toll users paying rates that exceed cost. x,45. Incumbent LECs, and to a lesser degree others such as AT&T, argue that another reason current interstate access charges exceed forwardlooking economic cost is the overallocation of costs to the interstate jurisdiction in the separations process, which allocates costs  X"-between the interstate and intrastate jurisdictions.N"0 {O%-ԍ See generally, e.g., AT&T November 22 Letter at 2; NYNEX November 5 Proposal at 8. According to these parties, the revenues now recovered through interstate switched access rate elements in the trafficsensitive basket"#ZN0*&&aae"" exceed the cost of providing interstate switched access services, while intrastate rates do not recover enough to cover the economic cost of providing intrastate exchange and exchange  X-access services.  X-x-46. A major focus of the IXCs, on the other hand, is the contention that current interstate access charges exceed economic cost levels because the incumbent LECs are  Xv-inefficient.^Ov0 {O-ԍ See, e.g., AT&T November 22 Letter at 2.^ As a result, they argue, the incumbent LECs' unseparated rate base is higher than it should be, and all prices in both the interstate and intrastate jurisdictions exceed economic costbased levels that an efficient provider would charge. x.47. Several parties, including AT&T and MCI, argue that, to the extent access services are not available to IXCs at their forwardlooking economic cost, incumbent LECs and their longdistance affiliates will have an unfair competitive advantage in the market for  X -longdistance services.cP Z0 {O-ԍ See e.g., AT&T November 22 Letter at 3.c According to these IXCs, this is because the incumbent LEC's affiliate's effective cost of obtaining "in region" access service is the incremental cost that its affiliated LEC incurs in providing access. If an incumbent LEC that also provides longdistance service can charge unaffiliated IXCs access prices that are significantly higher than forwardlooking economic cost, the IXCs argue that the incumbent LEC may be able to create a "price squeeze" by raising rivals' costs. Under these circumstances, the incumbent LEC affiliate could lower its retail price to reflect its cost advantage, and competing unaffiliated IXCs would be forced either to match the price reduction and absorb profit margin reductions or maintain their prices at existing levels and accept reductions in their market shares. x/48. Additionally, to the extent that unbundled network elements become available from incumbent LECs at economically efficient prices, IXCs will have the ability to avoid paying access charges by purchasing such elements to provide both local exchange and exchange access service to enduser customers. IXCs may also take access service from a competitive LEC that either provides its own facilities or takes unbundled elements from the  X|-incumbent LEC. The availability of unbundled network elements at their forwardlooking economic cost would appear to reduce the danger of a price squeeze insofar as IXCs can use those elements to provide their own access to customers for whom they are the local service provider. There may, however, be limits on the extent to which access charges can be replaced by unbundled elements in either the short or longterm, because an IXC may have to  X -take access service for those enduser customers for which it does not provide local service.uQ" 0 {O#-ԍ See Local Competition Reconsideration Order at para. 13 (stating that a requesting carrier that purchases an unbundled local switching element for an end user may not use that switching element to provide interexchange service to end users for whom that requesting carrier does not also provide local exchange service).u" Q0*&&aa="Ԍx049. Apart from any revisions to our rules that we may adopt in this proceeding, the availability of this alternative to interstate access service may force incumbent LECs to move their access charges to more economically efficient levels, and may necessitate relief from mandatory access charge rate structures that are not economically efficient. We seek in this proceeding to explore ways in which we can harness competitive forces to further our efforts to make our system of interstate access charges more economically rational and compatible with competitive local markets. We also seek to adopt rules and policies that will facilitate a smooth transition from the current system to one that can be sustained in competitive local markets.  X -,!R- J:\ACCESS.REF\II.KLS , 9  II. ACCESS REFORM FOR INCUMBENT LOCAL EXCHANGE CARRIERS  X -A.xApplication of Reforms to Price Cap Carriers and NonPrice Cap Carriers  X -  X -x150. Because our access charge rules apply only to dominant LECs, the focus of this  X-proceeding is reform of our access charge regime that currently applies to incumbent LECs.R0 {O -ԍ We consider in Section VIII.A., infra, whether to establish access charge rules for nonincumbent LECs, or competitive LECs, to the extent they provide terminating access service.  Although many of the reforms we propose in this Notice may be desirable changes to our regulation of nonprice cap incumbent LECs, we are limiting the scope of this proceeding to  XK-incumbent LECs subject to price cap regulation,SXK"0 yO-ԍPRICE CAP LECS These incumbent LECs are the seven Regional Bell Operating Companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Bell, SBC, US West), Citizens, Frontier, GTE, Aliant (formerly Lincoln), SNET, and United/Central. with limited exceptions discussed below. x251. We note that price cap regulation governs almost 91 percent of the interstate  X-access charge revenuesTB0 yO-ԍ Universal Service Fund Data Collection, CC Docket No. 80286, Universal Service Fund 1996 Submission of 1995 Study Results by NECA, Oct. 1, 1996. and more than 92 percent of the total incumbent LEC access lines.|U0 yOQ-ԍ Data based on LECs' 1995 and 1996 Annual Access Tariffs filed with the Commission.| Currently, all ten of the incumbent LECs with more than two million access lines and 13 of the 17 nonNECA incumbent LECs with more than 50,000 access lines are subject to price  X-cap regulation.|V* 0 yO"-ԍ Data based on LECs' 1995 and 1996 Annual Access Tariffs filed with the Commission.| The remaining incumbent LECs are telephone companies subject to various  X-forms of rateofreturn regulation.W 0 {O%-ԍ  See, e.g., Regulatory Reform for Local Exchange Carriers Subject to Rate of Return Regulation,  {O%-CCDocket No. 92135, 8 FCC Rcd 4545 (1993), recon. pending. Therefore, even though this proceeding applies only to"W0*&&aaR" price cap incumbent LECs, it would nonetheless affect the vast majority of all access lines and interstate access revenues. x352. The need for access reform is most immediate for those incumbent LECs that may soon be subject to competition from the availability of unbundled network elements. These are primarily the price cap incumbent LECs. Many, if not all, nonpricecap incumbent LECs may be exempt from, or eligible for a modification or suspension of, the interconnection and  X_-unbundling requirements of the 1996 Act.3X_0 yO-ԍ For example, section 251(f)(1) exempts rural telephone companies from the requirements of section 251(c)(2) until the rural telephone company has received a bona fide request for interconnection, services, or network elements, and the state commission determines that the exemption should be terminated. In addition, section 251(f)(2) permits LECs with fewer than two percent of the nation's subscriber lines to petition a state commission for a suspension or modification of any requirements of sections 251(b) and (c).3 By contrast, all incumbent LECs that are ineligible for section 251(f) exemptions, suspensions, or modifications are incumbent price  X1-cap LECs.]Y1x0 {OZ-ԍ See, e.g., USTA Holding Company Report, 1996.] Because the latter incumbent LECs must fulfill the section 251(b) and (c) duties  X -to provide interconnection and unbundled elements to new entrants, Zz 0 yO-ԍ Although several incumbent price cap LECs may be eligible to request suspension or modification under  {O-section 251(f)(2) (e.g., Citizens, Frontier, Aliant, and SNET), we note that these LECs may not receive state  yOg-approval of any such petition for suspension or modification. For example, the Connecticut Department of Public Utility Control recently rejected a SNET request pursuant to section 251(f)(2) for limited suspension of the application of section 251(c)(4)(A). Connecticut Department of Public Utility Control, Docket No. 960319, Petition of the Southern New England Telephone Company for Suspension of Section 251(c)(4) of the Telecommunications Act of 1996, May 17, 1996.  these incumbent LECs are likely to face significant competition in the interstate exchange access market from new entrants using unbundled network elements before the small and midsized rateofreturn incumbent LECs face such competition. Thus, we conclude that we should focus our efforts here on the immediate task of reforming the access charge regime for price cap incumbent LECs. We plan to initiate a separate proceeding in 1997 to undertake comprehensive review of our regulation of rateofreturn incumbent LECs. That inquiry will take up the issue of whether substantial changes in our Part 69 cost allocation rules for the development of access  Xb-charges for rateofreturn carriers are needed.N[bL 0 yO_-ԍ 47 C.F.R. Part 69, Subparts D and E.N x453. We propose, however, limited exceptions to our decision to confine this proceeding to price cap incumbent LECs. Specifically, we propose to apply to all incumbent LECs the rules discussed in Section VII.A, which addresses allocation of universal service support to the interstate revenue requirement, and Sections III.D and E, which propose reforms to the transport rate structure, including the TIC. Because rateofreturn incumbent LECs will collect revenues from the new universal service support mechanism, we need to"[0*&&aaq" determine in this proceeding how these payments should alter the access charges currently assessed by such incumbent LECs. Moreover, any changes we adopt to the TIC pursuant to  X-the court's remand in CompTel v. FCC\0 {OK-ԍ Competitive Telecommunications Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996) (CompTel v. FCC). should also apply to rateofreturn incumbent LECs because their transport rules were subject to the rates that were remanded by the court in that decision. In Section III.B, we seek comment on whether we should also apply our proposed changes to the common line rate structure to rateofreturn incumbent LECs. In Section VIII.C., we seek comment on updating the Part 69 access rules in light of various developments. We seek comment on these tentative conclusions regarding the scope of this proceeding. We further invite parties to comment on the effect of these proposals and tentative conclusions on small business entities, including small incumbent LECs and new  X -entrants.s] Z0 {O' -ԍ  See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s  X - B.xApplicability of Part 69 to Unbundled Elements x554. Pursuant to our jurisdiction over interstate access charges under section 201 of the Act, we tentatively conclude that unbundled network elements should be excluded from the Part 69 access charge regime, regardless of whether the carrier that purchases unbundled network elements uses those elements to provide local exchange services or exchange access  Xd-services.0^d0 {O-ԍ In the Local Competition Order, we determined that section 251 allows entrants to use unbundled network facilities to provide access services to customers they win from incumbent LECs, without having to pay access  {O-charges. Local Competition Order at para. 717. We also established a temporary transition mechanism that would permit incumbent LECs to recover a certain portion of access charges from purchasers of unbundled  {O%-network elements based on usage of the unbundled local switching element. Local Competition Order at paras.  {O-71625. These provisions are among those that have been stayed by the Eight Circuit. Iowa Utilities Board et.  {O-al v. FCC. 0 Thus, when using unbundled network elements to originate and terminate interstate calls, requesting carriers should not be required to pay the Part 69 access charges corresponding to those elements. The 1996 Act permits telecommunications carriers that purchase access to unbundled network elements from incumbent LECs to use those elements to provide all telecommunications services to customers, including access in order to originate  X-and terminate interstate calls._6 0 {O -ԍ Local Competition Order at para. 356; Local Competition Reconsideration Order, 11 FCC Rcd at 1304849. The 1996 Act in turn requires requesting carriers to pay costbased rates to compensate incumbent LECs for all such use of the unbundled network  X-elements.F` 0 yO%-ԍ 47 U.S.C.  252(d)(1)(A).F Thus, the requesting carrier has already paid for the ability to originate and terminate interstate calls. Nothing in the text of the 1996 Act compels telecommunications" `0*&&aap" carriers that use unbundled elements to pay interstate access charges, nor limits these carriers' ability to use unbundled elements to originate and terminate interstate calls. Nothing in sections 201205 of the Act requires a contrary result. We seek comment on this tentative conclusion. We also note that the Part 69 interstate access charge rules do not apply to the  X-transport and termination of local traffic provided pursuant to section 251(b)(5).Va0 {O-ԍ Local Competition Order at para. 1034.V  Xv-,!R. J:\ACCESS.REF\III.SS ,  vIII. RATE STRUCTURE MODIFICATIONS TP  XH- A.xOverview x655. We tentatively conclude that several provisions in Part 69 of our rules compel incumbent LECs to impose charges for access services in a manner that does not accuratelyv reflect the way those LECs incur the costs of providing those services. For example, generally the costs associated with the local loop are nontrafficsensitive (NTS), but our rules require incumbent LECs to recover a portion of those costs through perminute CCL charges. Similarly, at least some portion of the costs of local switching is NTS, but our rules require incumbent LECs to recover all local switching costs through perminute charges. In these and other cases, our rate structure rules do not send accurate pricing signals to customers, and consequently, encourage inefficient use of telecommunications services. These inaccurate pricing signals encourage uneconomic bypass of incumbent LEC facilities and could very well skew or limit the development of competition in the markets for telecommunications services. Furthermore, these rates may not be sustainable in the long run if unbundled network elements are made available at costbased prices and used to provide exchange access services. x756. We propose to revise our rate structure requirements for switched access service by eliminating some rate structure requirements, prescribing some new requirements, or a combination of both. We tentatively conclude that, regardless of which of the approaches to access reform discussed in Section IV we choose, establishing more economically rational rate structure rules is a necessary first step in the new procompetitive era. We seek through these changes to establish rate structures for interstate access services that send more accurate pricing signals to both consumers and competitors. Below, we invite comment on proposals for rate structure rule changes to be applicable to all price cap incumbent LECs. Specifically, we invite comment on rate structure rule changes for common line, local switching, and transport. We then seek comment on a number of proposals for phasing out the transport interconnection charge, and on establishing rate structure rules for SS7 signalling services. With the exception of the transport rule revisions considered in Section III.D, and the revisions to the TIC considered in Section III.E, we propose applying the rate structure rule changes discussed in Section III only to incumbent price cap LECs. As noted in Section II,""Za0*&&aa!" rate structure revisions for nonprice cap incumbent LECs will be addressed in a separate proceeding.  X- vB.xCommon Line  X-x 1.` ` Background  X_-x857. Common line costs are the costs associated with the line connecting the end user's premises with the local switch that have been assigned to the interstate jurisdiction throughv  X1-the jurisdictional separations process. These costs are not trafficsensitive.b&10 {O -ԍ See, e.g., Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, 5 FCC Rcd  {Ot -6786, 6793 (1990) (LEC Price Cap Order); Erratum, 5 FCC Rcd 7664 (Com. Car. Bur. 1990); modified on  {O> -recon., 6 FCC Rcd 2637 (1991) (LEC Price Cap Reconsideration Order); aff'd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993). A portion of the incumbent LEC's common line costs are recovered through EUCL charges, also called SLCs.  X -These charges currently are limited to the actual cost of the interstate portion of the local loop or $3.50 per month for residential and single line business users, and $6.00 per month for  X -multiline business users.Ic 0 {O<-ԍ See 47 C.F.R  69.104.I The remaining common line costs, if any, are recovered through  X -carrier common line charges, which are perminute rates imposed on access customers.Id H0 {O-ԍ See 47 C.F.R  69.105.I x958. The current common line rate structure, in which only a portion of common line costs are recovered through flat monthly rates, does not reflect the manner in which loop costs are incurred. As a result, the common line rate structure forces incumbent LECs to recover costs in an economically inefficient manner, and so may cause inefficient use of the network and uneconomic bypass, as discussed in Section III.A, above. Furthermore, in the original  X-Access Charge Order, the Commission found that recovering NTS costs through flat monthly charges imposed on end users by incumbent LECs would promote optimal utilization of  X-telecommunications facilities.Ve0 {O|-ԍ Access Charge Order, 93 FCC 2d at 279.V The Commission decided at that time, however, to place a limit on the SLC, and, consequently, required incumbent LECs to recover the remainder of  X-their common line costs through perminute CCL rates.Vfl 0 {O!-ԍ Access Charge Order, 93 FCC 2d at 284.V The current CCL charge has been uniformly criticized by both incumbent LECs and IXCs because it discourages efficient use of the network and encourages uneconomic bypass. We invite comment below on alternative  X~-common line rate structures.  Xg-"g f0*&&aa"Ԍ X-x 2.` ` Alternative Methods of Recovery of CCL Portion of Subscriber Loop Costs (#`  X-x:59. The Joint Board in its Recommended Decision recognized that the current, trafficsensitive CCL charge structure is economically inefficient because the charge requires incumbent LECs to recover a nonusagesensitive cost in part through a usagesensitive  X-charge.eg0 {O-ԍ Joint Board Recommended Decision at para. 776. e The Joint Board suggested that the Commission change the existing rate structure so that incumbent LECs are no longer required to recover any of the NTS cost of the local  Xa-loop from IXCs on a perminute basis.ehaZ0 {Ol -ԍ Joint Board Recommended Decision at para. 776. e The Joint Board noted that it would be preferable for costs related to the loop to be recovered in a manner that is consistent with the manner in  X3-which the costs are incurred.di30 {O -ԍ Joint Board Recommended Decision at para. 775.d Because the cost of a loop generally does not vary with the  X -minutes of use transmitted over the loop,lj ~0 {OK-ԍ Joint Board Recommended Decision at para. 775, n.2480.l the Joint Board concluded that the current CCL charge that mandates recovery of a portion of loop costs through perminute charges is an inefficient costrecovery mechanism. x;60. We seek comment on possible revisions to the current CCL charge structure so that incumbent price cap LECs are no longer required to recover any of the NTS costs of the loop from IXCs on a trafficsensitive basis. One possible alternative, mentioned by the Joint  X{-Board, involves permitting incumbent LECs to recover the costs not recovered from SLCs  Xd-through a flat, perline charge paid by IXCs.^kd0 {O%-ԍ Joint Board Recommended Decision at para. 776.^ An administratively simple mechanism for recovery of such a flatrate charge would be to assess it against each customer's presubscribed interexchange carrier (PIC). If carriers seek to pass on that charge to end users, however, such an approach might encourage end users not to select a PIC. To resolve this problem, the Joint Board suggested that the Commission allow incumbent LECs to collect the flatrate  X-charge that would otherwise be assessed against the PIC directly from any customer who  X-elects not to choose a PIC.^l0 {O- -ԍ Joint Board Recommended Decision at para. 776.^ We seek comment on this approach and invite parties to discuss the potential problem created when enduser customers have selected PICs but use other IXCs for Internet, fax, interexchange or other interstate services by "dialingaround" the PIC.  X-"4 l0*&&aao"Ԍ X-x<61. The Competition Policy Institute (CPI) has suggested several other alternatives to  X-the perminute recovery of interstate NTS loop costs.m0 yOb-ԍ Ideas for Access Charge Reform, prepared by the Competition Policy Institute, Dec. 5, 1996, at 34. For example, interstate NTS loop costs may be recovered through "bulk billing," in which carriers are assessed a charge based upon their percentage share of interstate minutes of use or revenues. An additional possible approach to recovering interstate NTS loop costs is a "capacity charge" assessed on carriers based upon the number and type of trunks that they purchase from the incumbent LECs. Alternatively, LECs could assess a "trunk port charge" to each carrier based upon the number of trunkside ports, or connections it has to the local switch. Another possibility is a "trunk port and line port" charge, which would be based upon the number of trunkside ports and the number of lineside ports. We seek comment on these approaches to recovery of interstate NTS local loop costs and ask parties to propose other efficient recovery mechanisms. We invite parties to comment on whether any changes that we adopt to the recovery of interstate NTS local loop costs for price cap LECs should be extended to rateofreturn LECs, and the  X -relationship of interstate NTS loop cost recovery under access charges to the Joint Board  X -Recommended Decision. Interested parties should address how such an extension to rateof X -return LECs would affect small business entities, especially small incumbent LECs.sn X0 {O-ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s  X}-x=62. Parties should also address whether, in the event that we eliminate the SLC cap for lines used by multiline business customers and residential lines beyond the primary residential line as discussed below, we need to adopt an alternative mechanism for recovering common line costs currently recovered through the CCL charge imposed on such lines. We also seek comment, in conjunction with our marketbased approach to access reform, on the circumstances under which we should grant LECs rate structure flexibility in their recovery of interstate common line costs from IXCs. Interested parties should also address the extent to which any proposed alternative recovery mechanism for recovering common line costs currently recovered through the CCL charge will affect small business entities, including small  X-incumbent price cap LECs and new entrants.so0 {OI-ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s  X-x>63. Finally, we seek comment on whether there are any limitations on our authority to assess flatrated CCL charges on IXCs. In particular, we note that section 254(g) also requires IXCs to charge their subscribers in rural and high cost areas within a state the same rates they charge to their subscribers in urban areas in that state. Section 254(g) also requires  X$-IXCs to charge their subscribers in each state rates no higher than the rates charged to"$ |o0*&&aaz"  X-subscribers in any other state.&pZ0 {Oy-ԍ 47 U.S.C.  254(g). See also Policy and Rules Concerning the Interstate, Interexchange Marketplace, Implementation of Section 254(g) of the Communications Act of 1934, as Amended, CC Docket No. 9661, Report and Order, 11 FCC Rcd 9564 (1996).& Would this requirement preclude an IXC from charging its customers the flat monthly rate assessed for that line if the amount of that charge varied among states, or between urban and rural areas within a state? If so, do conditions exist sufficient to require the Commission to forbear from the application of section 254(g) to IXC recovery of flatrate CCL charges? Parties should also address the effect of section 254(g) if CCL charges vary among the states, but enduser rates may not vary.  Xv-x  X_-x3.` ` Alternative Methods of Recovery of SLC Portion of Subscriber Loop Costs (#`  X1-x?64. In its Recommended Decision, the Joint Board determined that eligible carriers should receive support for designated services carried on the initial connection to a customer's  X -primary residence and singleline business customers.aq 0 {O-ԍ Joint Board Recommended Decision at paras. 9091.a The Joint Board, however, recommended that universal service support should not be provided for multiline business or  X -residential connections beyond the primary residential connection.ar |0 {O-ԍ Joint Board Recommended Decision at paras. 8992.a The Joint Board further concluded that the current $3.50 SLC cap for primary residential and singleline business lines should not be increased, but did not state that the SLC cap should be maintained for multi X-line business or residential connections beyond the primary residential connection..s0 {OQ-ԍ Joint Board Recommended Decision at para. 769. We note that the Joint Board recommended that, in the event the Commission assesses carriers' universal service contributions based on all telecommunications revenues regardless of jurisdictional classification, the SLC cap for primary residential and singlelinebusiness local exchange subscribers, as well as the CCL charge, should be reduced after removal of LTS and pay  {Os-telephone costs from the CCL rate element. Id. at para. 773.. Loop costs not recovered from the current multiline business SLCs, and SLCs for residential lines in addition to the primary connection, are recovered through usagesensitive CCL charges, which in turn are recovered from toll users. Since end user customers of multiline business and multipleline residential services do not necessarily make large numbers of toll calls, the toll payments of these end users may not cover the portion of loop costs not recovered through the SLC. Moreover, toll rates are higher than they otherwise would be, which discourages demand for such services. x@65. For these reasons, we propose to increase the cap on the SLC for the second and additional lines for residential customers and for all lines for multiline business customers to the perline loop costs assigned to the interstate jurisdiction. This would allow incumbent LECs to recover interstate common line costs for multiline business customers and for"~! s0*&&aa" residential connections beyond the primary residential connection in a manner consistent with the way costs are incurred. Alternatively, we could eliminate the cap for multiline business customers and for residential connections beyond the primary connection, especially where the incumbent LEC has entered into interconnection agreements and taken other steps to lower barriers to actual or potential local exchange competition. Under that approach, we would not prohibit an incumbent LEC from charging a SLC for second and additional lines for residential customers and for all lines for multiline business customers that exceeds the perline loop costs assigned to the interstate jurisdiction. We emphasize that this proposal would not affect the current cap of $3.50 on the SLC that is charged to a residential customer's primary line and to a singleline business customer. We invite parties to comment on this proposal. We also invite parties to comment on whether any changes that we adopt to the cap on SLCs for price cap LECs should be extended to rateofreturn LECs, and the relationship  X -of any such changes to the Joint Board Recommended Decision. Interested parties should address how applying such a cap on SLCs to rateofreturn LECs would affect small business  X -entities, especially small incumbent LECs.st 0 {O9-ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s  X-xA66. In the event we decide to increase or eliminate the cap on SLCs for multiline business lines and residential lines in addition to the primary line, we also solicit comment on whether we should establish a transition mechanism for this increase, whether such a transition could be implemented consistent with section 254, and if so, how long this transition period should be. We propose establishing no transition period if the increase in the SLC is less than one dollar, and establishing a threeyear transition period if the increase is one dollar or more, but we invite comments on other alternatives in addition to these.  X-xB67. Finally, we seek comment on whether we should permit or require incumbent LECs to deaverage SLCs as part of the baseline rate structure that would be imposed on all  X-incumbent price cap LECs.uZ0 {O-ԍ In Section V, infra, we also invite comment on whether we should permit incumbent LECs to deaverage  yO-SLCs, and other access charges, as part of any marketbased approach to access reform that we may adopt.  In particular, we note that section 254(e) requires us to adopt only explicit support subsidies for universal service support. We seek comment on whether geographic averaging of SLCs is an implicit subsidy that is inconsistent with the requirements of section 254(e), and thus on whether we are required to deaverage SLCs.  XP- "P"u0*&&aa"Ԍ X-Tx 4.` ` Assessment of SLCs on Derived Channels  X-xC68. Integrated services digital network (ISDN) services permit digital transmission  X-over ordinary local loops through the use of advanced hardware and software.v 0 yO4-ԍ In order for a LEC to provide ISDN, it must have a digital switch in the central office serving the customer, and substitute an ISDN line or trunk card for the standard cards that would otherwise be used in the central office with the loop facilities serving the customer. The customer also must use special ISDNcapable customer premises equipment. ISDN offersT data transmission at higher speeds and with greater reliability than standard analog service.  X-Most incumbent LECs currently offer two types of ISDN service, Basic Rate Interface (BRI) service and Primary Rate Interface (PRI) service. BRI service allows a subscriber to obtain two voicegradeequivalent channels and a signalling/data channel over an ordinary local loop,  XH-which generally is provided over a single twisted pair of copper wires.^wH0 yO -ԍ The two voicegradeequivalent channels, which are called bearer or B channels, can be used for voice local exchange service or for data transmission at speeds up to 64 kbps. The third channel is a 16 kbps data  yO9-channel, called the delta or D channel, which is used for signalling and packet data services. The Bell Atlantic Telephone Companies Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with  {O-ISDN Services (filed Feb. 10, 1995) at 4 n.8 (Bell Atlantic Waiver Petition).^ PRI service allows subscribers to obtain 23 voicegradeequivalent channels and one data signalling channel over  X -two pairs of twisted copper wires.x" b 0 yO--ԍ In the case of PRI ISDN, the 23 B channels and the D channel can transmit voice or data at speeds up to 64 kbps. When a customer has more than one PRI connection at a given location, all of the B channels can share a single D channel, permitting the customer to obtain 24 voicegradeequivalent channels for each PRI  {O-connection after the first one. Bell Atlantic Waiver Petition at 4, n.8 BRI service generally is used by individuals and small  X -businesses, and PRI service generally is used by larger businesses. LEC services other than  X -ISDN use derived channel technology to provide multiple channels over a single facility.7y  L 0 yO-ԍ For example, NYNEX Telephone Companies (NYNEX) uses derived channel technology to provide FLEXPATH service, which provides a customer with 24 digital voicegradeequivalent trunk channels over a T1 facility between a suitably equipped central office and a digital PBX. PBX Conversion Service, another NYNEX offering, provides digital trunking capability, with up to 24 trunk access lines, between a customer's digital PBX and an analogtodigital interface located at the central office switch. NYNEX's Data Over Voice service  yO-provides customers with a voicegrade channel and a data channel over a single copper pair. Memorandum Opinion and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938 n.11  {Oa-(Com. Car. Bur. 1992), aff'd on recon., 10 FCC Rcd 2247 (1995).  Several other LECs provide similar services  {O+ -using derived channel technology. See, e.g., Cincinnati Bell Comments at 6.7 The LECs also use derived channel technologies within their networks, for example, to provide customers with individual local loops. In such situations, the end user generally is not aware that the LEC is using this technology.  Xy-xD69. In the ISDN SLC NPRM, we noted that the application of SLCs under our existing rules to ISDN services may discourage demand for these services, and we sought comment on"d# y0*&&aaJ"  X-whether more than one subscriber line charge should be applied to ISDN services, and if so,  X-how many charges.z0 yOb-ԍ End User Common Line Charges, CC Docket No. 9572, Notice of Proposed Rulemaking, 10 FCC Rcd  {O*-8565 (1995) (ISDN SLC NPRM). Several parties submitted comments in response to that Notice, and  X-those parties are listed in Appendix A.{$"0 {O-ԍ We incorporate by reference in this proceeding all pleadings filed in response to the ISDN SLC NPRM, as listed in Appendix A. Citations to "Comments" or "Replies" in this Section of the Notice therefore refer to  {O7-pleadings filed in response to the ISDN SLC NPRM. Parties may attach their ISDN SLC NPRM comments as appendices and incorporate them by reference. All of the commenting parties except AT&T oppose  X-our current rule that assesses a SLC per derived channel.|0 {Oz -ԍ Compare AT&T Comments at 34 with, e.g., America Online Comments at 810 (citing U.S. Industrial  {OD -Outlook 1994, U.S. Department of Commerce at 251, January 1994, and citing Bell Atlantic Waiver Petition at 78, which estimates that requiring a SLC per derived channel would reduce demand for BRI service by about 60  yO -percent and demand for PRI service by about 35 percent); Cable & Wireless Comments at 34; Microsoft Comments at 4; TCA Comments at 4; ITIC Reply at 3; Roseville Reply at 4; Northern Telecom Reply at 5; Bell Atlantic Reply at 3. Almost all of the LECs, user  X-groups, equipment manufacturers, IXCs, and other commenters support a rule that would  X-assess a SLC for each pair of copper wires,} 0 {O-ԍ See, e.g., Roseville Comments at 2; TCA Comments at 1; Tennessee Public Service Commission Comments at 23. or a SLC for each ISDN facility.~Z0 {O"-ԍ See, e.g., Ameritech Comments at 2; BellSouth Comments at 45; Cincinnati Bell Comments at 3, 6; NTCA Comments at 12; NYNEX Comments at 16; Southwestern Bell Comments at 3; USTA Comments at 2; 3Com Reply at 6. Under such a rule, LECs would assess one SLC for BRI service and one or two SLCs for PRI service. Many parties, including at least one BOC, support assessing SLCs for ISDN based on the  XH-relative NTS costs of providing ISDN service compared to standard analog service.H0 yO-ԍ The California Bankers' Clearing House Comments at 4; US West Comments at 4; AT&T Comments at 5; AT&T Reply at 5.  X -xE70. As shown in Table 2 below, the cost data submitted in response to the ISDN SLC  X -NPRMJ ^0 yO -ԍ In their responses, three of the BOCs, BellSouth, NYNEX, and Southwestern Bell, asked for confidential treatment of portions of the information submitted. NYNEX publicly filed the information we requested, but submitted as confidential additional information that contained more detailed cost data. The confidential data were not necessary to perform our analysis, and the following tables only include data that was filed on the public record. We have returned to the respective companies data for which confidential treatment was sought. J indicates that the ratio of NTS costs of BRI ISDN to standard analog service is approximately 1.24 to 1. The ratio of NTS costs of PRI ISDN to standard analog service, excluding NYNEX's data, is roughly 10.5 to 1. As shown in Table 3, NYNEX's data appear to be outliers and are therefore excluded from the calculation of the average ratio for PRI" $0*&&aa " ISDN to standard analog service because the ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost twice those of other incumbent LECs. Interested  X-parties filed their comments in the ISDN SLC proceeding prior to the enactment of the 1996 Act. We ask for comment on the effect of the 1996 Act on determining how many SLCs should be applied to ISDN services. Finally, we solicit comment on whether mandatory rate structures or rate caps should be prescribed for ISDN service or other derived channel services.  Xa- "J%0*&&aa"  X- I7TABLE 2  X- Ratio of Costs of Standard Analog Service to BRI ISDN Service TT T T ddx !ddx& T  z  g  5 Outside Plant (loop only) costsg All NTS costsz q  gh  Ameritechh 1:1.07h 1:1.45q q  Bell Atlantic h 1:1.01 h 1:1.36q q  NYNEXq h 1:0.85q h 1:1.23q q   Pacific Bell h 1:1.05 h 1:1.13q q q  US WestS h 1:0.80S h 1:1.07q q   h h q   S  hv  Average ratio of costsNv 1:0.96*Nv 1:1.24*  v XN-TT  X7-7I TABLE 3  X -T  Ratio of Costs of Standard Analog Service to PRI ISDN Service T T ^ !ddx& A(& ^          3; Outside Plant (loop only) costs  Outside Plant (loop only) costs (excluding NYNEX) All NTS costs All NTS costs (excluding NYNEX data) !    Ameritech 1:5.68 1:5.68 1:8.9 1:8.9! !  Bell Atlantic0 1:4.130 1:4.130 1:15.800 1:15.80! !  NYNEXQ 1:10.94Q excludedQ 1:27.74Q excluded! ! 0 Pacific Bellr 1:4.67r 1:4.67r 1:8.70r 1:8.70! ! Q US West 1:5.33 1:5.33 1:10.60 1:10.60! ! r     ! :   +  Average ratio of costs!+ 1:6.5*!+ 1:4.95*!+ 1:15.13*!+ 1:10.5*:  + X!-TP *Averages may differ due to rounding. "#&0*&&aa""  X- C.xLocal Switching xF71. The local switch connects a call coming in on one line or trunk to another line or trunk connected to the switch. A local switch consists of line and trunk cards, and an analog or digital switching system. Line cards provide interfaces between subscriber lines and the switch. Trunk cards or "ports" provide interfaces between the switch and interoffice trunks. Because line cards, as well as trunk cards, are deployed within the central office, they are accounted for in the switching accounts of the USOA. These costs are therefore included in the switching category for separations and cost allocation purposes. The central processing portion of the switch performs the routing function based on the telephone numbers dialed by the end user placing the call.  X - x1.` ` NonTrafficSensitive Charges  X -xG72. Currently, Section 69.106 of our rules requires incumbent LECs to charge per X -minute rates for local switching.L  {O -ԍ See 47 C.F.R.  69.106. L A significant portion of local switching costs, however, likely do not vary with usage. For example, the costs associated with line cards or lineside ports appear to vary with the number of loops connected to the switch, not with the level of  Xb-traffic over the loops. We tentatively conclude that it is more reasonable and economically  XK-efficient to recover dedicated line card costs through flat charges.KZ {OV-ԍ See Letter from Anthony Alessi, Federal Relations Director, Ameritech, to William F. Caton, Acting  {O -Secretary, FCC, Dec. 6, 1996 (Ameritech December 6 Letter), at 8. We solicit comment on establishing a flat rate element for NTS local switching costs. We also invite commenters to recommend methods of identifying line card costs and other NTS local switching costs.  X-xH73. The central processing portion of the switch, and many trunkside ports, are shared local switching facilities because they are used to carry the traffic of several access customers, and so should be priced on a usagesensitive basis. By contrast, because trunks for dedicated transport service are dedicated to individual IXCs, ports for dedicated transport service also appear dedicated to individual customers, and, consequently, the charges for such facilities should be flatrated. While flat rates appear reasonable for recovering costs associated with dedicated ports and line cards, it is not clear what rate structure would best  XN-reflect the manner in which incumbent LECs incur costs associated with shared local switching facilities. If all shared local switching costs are driven by the number of lines and  X -trunks served by the switch, flat rates would appear appropriate.[&  {O#-ԍ We sought comment on this approach in the Local Competition NPRM, noting that the Illinois Commerce Commission was considering a "local switching platform" approach for local switching prices at the  {O%-time we adopted that Notice. Local Competition NPRM at paras. 100, 153. We concluded that a state could  {O%-reasonably find that capacitybased flat rates reasonably reflect the costs of shared facilities. Local Competition"%0*&& &"  {O-Order at para. 757. [ On the other hand, usage" 'Z0*&&aa\"ԫsensitive charges might better reflect the way incumbent LECs incur costs for shared local switching facilities. Finally, a combination of flatrate and usagesensitive charges may best reflect cost causation principles. AT&T and MCI have argued that a substantial portion of  X-local switching costs are nonusagesensitive, and the local switching rate structure, therefore,  X-should include both usagesensitive and nonusagesensitive rate elements.VZ {O-ԍ Local Competition Order at para. 799. V Ameritech has stated that, for a majority of the switches in its network, more than 40 percent of switching  Xv-costs are NTS.v yO -ԍ Access Reform Recommendation, Ameritech, Oct. 9, 1996, at Attachment. For 5ESS switches, however,  {O -Ameritech asserts that only three percent of local switching costs are not trafficsensitive. Id. We seek comment generally on this analysis, and on how we should establish an appropriate, efficient rate structure for switching. We note that states may be considering this same issue in the context of establishing rates for unbundled local switching, and we seek comment on, and analysis of how, states are addressing these issues under Section 252.  X -x 2.` ` TrafficSensitive Charges xI74. In the following paragraphs, we seek comment on a number of specific proposals for rate structures governing rates designed to recover usagesensitive local switching costs. Interested parties should discuss which of these rate structure proposals most accurately reflect trafficsensitive local switching costs, and whether we should permit or require incumbent LECs to assess these trafficsensitive charges. Parties advocating a particular rate structure should address all the issues raised by that approach. We also invite parties to propose other rate structures.  X-x` ` a. CallSetup Charges xJ75. Call setup is the process of establishing a transmission path over which a phone call will be routed. We could permit or require incumbent LECs to develop callsetup charges if we find that usagesensitive charges might better reflect the way they incur certain  X-costs for shared local switching facilities. The perminute rate structure prescribed by Part 69 for local switching does not separately address costs that incumbent LECs may incur for call setup and takedown. Callsetup costs would be incurred for each call regardless of its duration or whether it is completed. Because no separate charge exists for call setup, incumbent LECs must recover these costs through the perminute local switching charges, or  X -possibly through other rate elements. F yO%-ԍ It is possible that some SS7 callsetup costs are currently recovered through the TIC. Thus, longerduration calls recover a greater portion" (0*&&aa\" of callsetup costs than shorter calls even if they do not impose greater callsetup costs. A percall rate element for call setup would more rationally reflect these costs.  X-xK76. In the past, the Commission has rejected incumbent LEC petitions for waiver of Part 69 for purposes of imposing a callsetup charge, on the grounds that such proposals  X-should be considered in a broader rulemaking.  yO-ԍ Bell Atlantic Telephone Companies, Petition for Waiver of Sections 69.106 and 69.205 of the Commission's Rules to Permit a Call Setup Charge, Memorandum Opinion and Order, 4 FCC Rcd 7210 (Com. Car. Bur. 1989); US West Communications, Inc., Petition for Waiver of Part 69 of the Commission's Rules, Order, 7 FCC Rcd 4043 (Com. Car. Bur. 1992). Pacific Bell filed a similar petition on June 30, 1994. Accordingly, we now seek comment on whether we should permit or require incumbent LECs to include a callsetup charge in their local switching rate structures. We also request comment on the extent to which the current local switching rate element recovers costs that vary with the number of calls, rather than their duration. Should a callsetup charge apply to all call attempts, or only to completed calls? We seek comment on whether incumbent LECs incur different callsetup costs depending on whether a call is delivered via directtrunked or tandemswitched transport service, and on the different costs incurred when multifrequency (MF) and SS7 signalling are used for call setup. Finally, we invite comment on whether any of these cost differences should be reflected by establishing different charges for different kinds of call setup. To the extent that parties support a separate charge for SS7 call setup, those parties should explain how such a charge would be consistent with the rate structure for other SS7 services we discuss below.  XK-x ` ` b. Peak and OffPeak Pricing xL77. We could direct or allow incumbent LECs to develop peak and offpeak pricing for shared local switching facilities. When incumbent LECs select the types of switches that they will deploy in their networks, they base their decisions on the anticipated peak  X-demand.} {O9-ԍ See generally, Engineering and Operations in the Bell System (2nd ed., 1983).} Thus, incumbent LECs arguably should be permitted to establish separate rate elements for local switching provided during peak periods and offpeak periods. The peak prices would be perminute rates, and designed to recover the costs of additional capacity that an incumbent LEC must install to meet the peak demand. Because offpeak traffic requires no additional capacity, the costs of this traffic are lower, and accordingly, the access charges for that traffic should be lower as well.  X7-xM78. We previously sought comment on peak and offpeak pricing in the LEC/CMRS  X"-NPRM,"B yO%-ԍ Interconnection Between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket No. 95185, Notice of Proposed Rulemaking, 11 FCC Rcd 5020, 5042 (1996). and addressed those comments in the Local Competition Order.\" {O-ԍ See Local Competition Order at para. 756. \ We recognized"")Z0*&&aa\"  X-in the Local Competition Order that there might be practical problems with a rate structure  X-that had different peak and offpeak pricing.ZZ {O-ԍ See Local Competition Order at para. 756. Z Therefore, we did not mandate a peak X-sensitive rate structure for unbundled network elements,Z {Oq-ԍ See Local Competition Order at para. 757. Z although we also did not preclude use of peak/offpeak pricing. Parties supporting requiring rather than merely permitting peak and offpeak pricing for local switching should explain why this rate structure is more suitable  X-for access rates than it is for unbundled network elements.~ yO -ԍ In 1986, the Commission concluded that peak and offpeak pricing might better reflect the manner in which incumbent LECs incur costs in providing trafficsensitive access services. Nevertheless, because of the potential difficulties in determining the peak period, and other issues discussed in this section, the Commission did not require carriers to develop peaksensitive access rate structures. Instead, the Commission stated that it would consider granting waivers of its Part 69 rules to permit incumbent LECs to develop voluntarily peak and offpeak pricing for trafficsensitive access services, and would permit incumbent LECs to submit tariffs establishing such a rate structure at the same time they filed their petition for waiver. WATSRelated and Other Amendments of Part 69 of the Commission's Rules, CC Docket No. 861, Report and Order, FCC 86115 (rel. Mar. 21, 1986), at paras. 3537.   Xa-x` ` c.  Current Rate Structure xN79. As another alternative, we could retain the existing perminute local switching rate structure. Because a significant portion of local switching costs may not vary with minutes of use, however, the existing rate structure may be less desirable than the other options discussed above. We invite parties supporting the current rate structure to explain why they believe that it adequately reflects the manner in which trafficsensitive local switching costs are incurred.  X - vD.xTransport  X{-x 1.` ` Background xO80. Transport service is the component of interstate switched access service corresponding to the transmission and switching of traffic between incumbent LEC end officesv and IXC POPs. Part 69 of our rules requires incumbent LECs to develop charges for transport service that may not reflect in some cases the manner in which they incur the costs  X-of providing these services.fN  {O#-ԍ See 47 C.F.R.  69.110, 69.111, 69.112, 69.124.f Thus, as we discussed with respect to local switching charges above, it may be necessary to revise our Part 69 rate structure requirements for transport services."*0*&&aaq"Ԍ X-ԙxP81. Since December 1993, transport has been provided pursuant to interim rules;( {Oy-ԍ Transport Rate Structure and Pricing, CC Docket No. 91213, 7 FCC Rcd 7006 (1992) (First Transport  {OC-Order); recon. 8 FCC Rcd 5370 (1993) (First Transport Reconsideration Order); further recon. 8 FCC Rcd 6233  {O -(1993) (Second Transport Reconsideration Order); further recon. 10 FCC Rcd 3030 (1994) (Third Transport  {O-Reconsideration Order); further recon. 10 FCC Rcd 12979 (1995) (Fourth Transport Reconsideration Order).; that  X-replaced the "equal charge per unit of traffic" requirement of the MFJ.V {OR-ԍ See MFJ, 552 F.Supp. at 23334. V We required incumbent LECs to establish flat rates for: (1) "entrance facilities," transport service from the IXC POP to the SWC, and (2) "directtrunked transport," transport service from a SWC to an  X-end office on dedicated facilities without switching at a tandem switch.\J {O -ԍ First Transport Order, 7 FCC Rcd at 700910.\ In addition, incumbent LECs were directed to establish usagebased charges for "tandemswitched transport," a transport service from the SWC to the end office that provides switching at a tandem switch. The tandemswitched transport service charge includes an interoffice  XJ-transmission charge, and a charge for the tandem switch.YJ {O-ԍ First Transport Order, 7 FCC Rcd at 7010.Y xQ82. The initial rate levels for directtrunked transport were generally presumed  X -reasonable if they were based on rates for comparable special access services._ n  {O$-ԍ First Transport Order, 7 FCC Rcd at 703435. _ The perminute tandemswitched transport transmission charge was based on assumptions about  X -average monthly DS1 and DS3 usage.\  {O-ԍ First Transport Order, 7 FCC Rcd at 703637.\ The charge for the tandem switch was initially set to  X -recover 20 percent of the Part 69 tandem revenue requirement.]  {O-ԍ First Transport Order, 7 FCC Rcd at 703738. ] Finally, to make the restructure revenue neutral initially, we required incumbent LECs to establish a noncostbased transport interconnection charge (TIC), to recover the revenue difference between what the LECs would have realized under the equal charge rate structure and what they would realize from the interim facilitybased transport rates, including the remaining 80 percent of  XM-the tandem revenue requirement.zM$ {O"!-ԍ First Transport Order, 7 FCC Rcd at 7038. The TIC is a nonfacilitiesbased, usagesensitive charge that  {O!-currently accounts for some 70 percent of incumbent LEC transport revenues. In CompTel v. FCC, the court has directed the Commission to eliminate the TIC, or to provide a reasoned explanation for retention of this non yO~#-costbased rate element. 87 F.3d at 532. The TIC is sometimes referred to as the Residual Interconnection Charge (RIC) or Residual Charge, because it was initially priced on a residual basis. z "6+0*&&aa"Ԍ X-xR83. Subsequently, in the First Transport Reconsideration Order, the Commission required incumbent LECs to offer two pricing options for tandemswitched transport service. First, an IXC may purchase tandemswitched transport at usagesensitive rates with any mileage component computed on the basis of the distance between the SWC and the end office, regardless of the actual physical routing. Second, an IXC may purchase directtrunked transport between the SWC and the tandem office and usagerated tandemswitched transport between the tandem office and the end office, with any tandemswitched transport mileage component computed on the basis of the distance between the tandem office and the end  XJ-office.G\J {O -ԍ First Transport Reconsideration Order, 8 FCC Rcd at 5372. See also Third Transport Reconsideration  {O -Order, 10 FCC Rcd at 3036 and 3037, Figure 2; 47 C.F.R.  69.111, 69.112; Transport Order, 7 FCC Rcd at 7009 n.7, and 7077, Diagram 3.G xS84. In this section, we seek comment on whether to revise the facilitybased components of the transport rate structure. In the following section, we seek comment on phasing out the TIC. Unlike the other rate structure rules we consider in Section III, we contemplate imposing any rules adopted relating to the transport rate structure or the TIC on  X -all incumbent LECs. We propose, for reasons articulated in the First Transport Order,\  {O]-ԍ First Transport Order, 7 FCC Rcd at 701619.\ that  X -the transport rate structure be divided into three parts: (1) charges for entrance facilities; (2) charges for directtrunked transport service; and (3) charges for tandemswitched transport service. We seek comment on adopting this basic framework for the transport rate structure rules. In commenting on the transport issues in this section, parties should bear in mind the interrelationship of these issues with those relating to the TIC, which is discussed in Section III.E, below.  X -xT85. We also seek comment here and in Section III.E on the issues remanded in  X-CompTel v. FCC, in which the court remanded the Orders in which we established the  X-transport rate structure rules.X~ {O -ԍ CompTel v. FCC, 87 F.3d at 53233.X The court held that we did not adequately explain our  X-decision to require incumbent LECs to charge a noncostbased TIC.R {O-ԍ CompTel v. FCC, 87 F.3d at 52931.R The court remanded our decision to set the tandembased transport rate element to recover 20 percent of the Part 69 tandem revenue requirement and to allocate the remaining revenue requirement to the TIC, because the Commission did not adequately explain why 20 percent would be more equitable  Xk-than some other allocation.Rk {O$-ԍ CompTel v. FCC, 87 F.3d at 53132.R The court also found that we did not explain our decision to require incumbent LECs to allocate a greater proportion of overhead costs to the tandem"T,4 0*&&aa"ԫ X-switched transport switching charge than to directtrunked transport service rates.R {Oy-ԍ CompTel v. FCC, 87 F.3d at 53233.R We address the TIC issue in Section III.E below, and the other two remand issues in this section.  X-x 2.` ` Entrance Facilities and DirectTrunked Transport Services (#`  X-xU86. For entrance facilities and directtrunked transport service, we tentatively conclude that the transport rate structure rules should mandate flatrated charges. These transport facilities appear to be dedicated to individual customers, and we believe that flat rates reflect the way incumbent LECs incur costs for dedicated facilities. We invite comment on this tentative conclusion. We also seek comment on whether incumbent LECs should be permitted to offer transport services differentiated by whether the LEC or the IXC is responsible for  X -channel facility assignments. Z yO-ԍ A channel facility assignment is the actual designation of the routing that a circuit takes within the LEC network. In the past, Ameritech and Bell Atlantic have sought waivers of our Part 69 rules to offer such a switched access service, alleging that it would permit them  X -to utilize the access network more efficiently.x"  {O8-ԍ See, e.g., Ameritech Operating Companies Petition for Waiver of Part 69.112 of the Commission's Rules to Provide Bulk Capacity Transport (filed April 14, 1993); Bell Atlantic Telephone Companies Petition for Waiver of Part 69.112(b) and (c) of the Commission's Rules To Offer Facilities Management Service (filed April 4, 1994).x We seek comment on whether any rules beyond those included in the interim rules are necessary to govern rate levels for these services.  Xy-vx 3.` ` TandemSwitched Transport Services  XK-x` ` a. Rate Structure  X-xV87. We present several options for the rate structure associated with tandemswitched transport service facilities. The first option would maintain the interim rate structure'sv treatment of the tandemswitched transport charge, which gives IXCs a choice of two pricing alternatives for purchase of tandemswitched transport service. IXCs may elect to pay a single usagesensitive charge, with distance measured in airline miles from the SWC to the end office, if applicable. Alternatively, IXCs may choose a flatrated charge for a dedicated facility from the SWC to the tandem office, and a usagesensitive charge for tandemswitched"-0*&&aa" transport service from the tandem office to the end office, with mileage computed separately  X-for the two segments, if applicable.-Z {Ob-ԍ First Transport Reconsideration Order, 8 FCC Rcd at 5372. See also Local Exchange Carrier Switched Local Transport Restructure Tariffs, Petitions for Waiver or Clarification, Memorandum Opinion and Order, 11 FCC Rcd 14328 (Com. Car. Bur. 1996). -  X-xW88. The second option would eliminate an IXC's ability to select the first choice and require incumbent LECs to assess flatrated charges for the circuit between the SWC and the tandem, which typically is a dedicated circuit, and to apply usagebased rates to the tandemtoend office link. This was the original transport rate structure the Commission established  X_-in 1983 in the Access Charge Order.V_ {O -ԍ Access Charge Order, 93 FCC 2d at 313.V   X3-xX89. In conjunction with either of the two options for pricing tandemswitched transport service transmission facilities, we could treat tandem switching similarly to one of our proposals for the local switching rate structure, discussed in Section III.C above.  As with the endoffice switch, the tandem switch may include equipment dedicated to particular customers, such as the network ports through which a particular IXC's traffic enters and leaves the tandem switch. Thus, we could require incumbent LECs to develop usagesensitive charges for shared facilities (the tandem switching functions and the ports on the end office side of the tandem switch), and a flatrated charge for the dedicated ports on the SWC side of the tandem switch. Alternatively, shared tandem switching costs may be driven by the number of trunks on the endoffice side and the SWC side of the tandem switch, just as shared local switching costs may be driven by the number of lines and trunks connected to the  X6-switch.Q6| {Oc-ԍ See Section III.C.1, supra.Q If this is the case, then flat monthly rates may better reflect shared tandem switching costs. Parties are invited to comment on whether tandem switches differ in any fundamental way from end office switches with respect to the division of costs associated with shared and dedicated facilities.  X-xY90. In addition to any of the tandemswitched transport service options discussed above, we could permit or require incumbent LECs to develop peak load pricing for tandemswitched transport service. Most small IXCs use tandemswitched transport service for all or most of their access traffic, while larger IXCs may use tandemswitched transport service on relatively fewer routes, or may use it only to handle their overflow traffic during peak hours. Thus, some portion of tandem costs may be attributable to the need to accommodate this overflow traffic from directtrunked transport facilities. We invite comment on whether to permit or require incumbent LECs to develop peak and offpeak pricing for tandem switching. We also invite comment on whether some portion of tandem switching costs should be" .0*&&aa[" recovered from directtrunked transport service customers, if in fact a portion of tandem switching capacity is necessary to meet demand from directtrunked transport customers during peak period. Parties advocating peak pricing should propose a method to determine the peak period. Because some access customers may use some SWCside trunks and ports to carry overflow traffic, and the costs of those ports are not trafficsensitive, flat rates may better recover the tandemswitched transport costs generated by that overflow traffic. We invite comment on this analysis.  XH-xZ91. We seek comment on the benefits and detriments of each of the above options for reforming the tandemswitched transport rate structure. Parties are specifically asked to discuss whether any of these options accurately reflect the way incumbent LECs incur tandem switching costs. For example, we seek comment on the extent to which tandemswitched and directtrunked transport use the same or different physical routing, and in light of this, on whether the distance component of setting tandemswitched transport rates is most appropriately measured between the SWC and the end office, or in two charges, one for the SWCtotandem circuit and one for the tandemtoend office circuit. We invite parties to identify and quantify the specific NTS costs associated with the tandem switch that they believe are currently recovered through the usagesensitive tandem charge. We also invite parties to suggest additional options for the tandemswitched transport charge.  X4-x` ` b. Rate Levels  X-x[92. We seek comment on how to establish a reasonable tandem switching charge in  X-light of the court's remand.R {Oh-ԍ CompTel v. FCC, 87 F.3d at 53132.R The interim transport restructure rules, which the court remanded, required incumbent LECs to base their initial tandem switching charge on 20 percent of the interstate revenue requirement for tandem switching, with the remaining 80  X-percent to be recovered through the TIC.\Z {O-ԍ First Transport Order, 7 FCC Rcd at 701719.\ Thus, both the tandem charge and some portion of the TIC were designed to recover the costs included in the tandemswitched transport  X|-revenue requirement. The Commission found in the First Transport Order that this revenue  Xg-requirement included some SS7 signalling cost, in addition to tandem switching costs.Yg {O -ԍ First Transport Order, 7 FCC Rcd at 7019.Y In Section III.E, below, we propose to reassign costs included in the TIC to those rate elements to which they are related, including the different transport rate elements. We seek comment on what costs are appropriately associated with the tandem switching function. Parties commenting on this issue should address how their proposals are consistent with the court's remand directives. We also ask parties to comment on whether, if we permit directtrunked transport or entrance facility rate structure options based on whether the channel facility"/~0*&&aa" assignment is done by the IXC or the LEC, a similar option should be available for tandemswitched transport. We ask parties to comment on the interrelationship of the rate level issue and how any decision on transport rate levels affects the options for phasing out the TIC that are discussed in the following section.  X-x\93. The court in CompTel v. FCC also directed us to explain why we permitted incumbent LECs to load a relatively large portion of their transport overhead costs to tandemswitched transport rates, and to base their directtrunked transport overhead loadings on the  XJ-lower overhead loading factors used for special access.OJ {O -ԍ CompTel v. FCC, 87 F.3d at 533.O Our resolution of the transport overhead loadings issue remanded by the court is also affected by our treatment of the TIC. If we decide to reallocate costs currently recovered through the TIC to other rate elements, this could change the amount of overhead costs allocated to both directtrunked transport and tandemswitched transport. It is possible that reallocating costs from the TIC to directtrunked transport and tandemswitched transport charges would result in costbased directtrunked transport and tandemswitched transport charges, that is, directtrunked transport and tandemswitched transport charges that recover a proportionate amount of overhead costs. Thus, reallocating costs from the TIC could contribute to correcting any imbalance in overhead cost allocations between transport rate elements. We invite parties to discuss what other regulatory  Xd-requirements are necessary to comply with the court's mandate on transport service overhead loadings.  X-x]94. Furthermore, initial tandemswitched transport transmission rates were presumed reasonable if set as a weighted average of the perminute cost of DS3 and DS1 rates  X-calculated using 9000 minutes of use per month.\Z {O-ԍ First Transport Order, 7 FCC Rcd at 703637.\ We note that USTA has alleged that the number of actual minutes traversing tandem circuits is significantly below 9000 minutes per month. We solicit comment on whether we should revise any transport rate structure  X-requirement, either as a result of CompTel v. FCC, or for any other reason.  X-x^95. Finally, we solicit comment on the relationship between our transport rate structure rules and the marketbased access reform proposals we discuss in Section IV, and on the relationship between the transport rate structure rules and the prescriptive access reform proposals we discuss in Section V. Is our goal of driving interstate access rates to forwardlooking economic cost consistent with retaining rules governing transport rate level relationships? Is it possible to comply with the court's mandate with regard to the tandem switching charge and transport overhead cost allocations without retaining some rules governing transport rate level relationships? " 00*&&aa"Ԍ X--!R/ J:\ACCESS.REF\IIIE.DS - vE.xTransport Interconnection Charge  X-x 1.` ` Background x_96. Under our Part 36 separations rules, certain costs of the incumbent LEC network are assigned to the interstate jurisdiction. The Part 69 cost allocation rules allocate these costsv  Xv-among the various access and interexchange services, including transport. In the First  Xa-Transport Order,Va {O-ԍ First Transport Order, 7 FCCRcd 7006.V we restructured interstate transport rates for incumbent LECs. The restructure created facilitybased rates for dedicated transport services based on comparable special access rates as of September 1, 1991, derived per minute tandemswitched transport transmission rates from those dedicated rates, established a tandem switching rate, and established a TIC that initially recovered the difference between the revenues from the new facilitybased rates and the revenues that would have been realized under the preexisting "equal charge rule." The TIC was intended as a transitional measure that initially made the transport rate restructure revenue neutral for incumbent LECs and reduced any harmful  X -interim effects on small IXCs caused by the restructuring of transport rates.\ Z {O-ԍ First Transport Order, 7 FCC Rcd at 703840.\ Approximately 70 percent of incumbent LEC transport revenues are generated through TIC charges, or approximately $2.9 billion out of $4.0 billion in transport revenues. x`97. The TIC is a perminute charge assessed on all switched access minutes, including those of competitors that interconnect with the LEC switched access network through expanded interconnection. The usagerated TIC increases the perminute access charges paid by IXCs and longdistance consumers, thus artificially suppressing demand for such services and encouraging customers to bypass the LEC switched access network, particularly through the use of switched facilities of providers other than the incumbent LEC. In addition, to the extent that any portion of the TIC should properly be included in LEC transport rates, other than the TIC, the TIC provides the LECs with a competitive advantage for their interstate transport services because incumbent LEC transport rates are priced below cost while the LECs' competitors using expanded interconnection must pay a share of incumbent LEC transport costs through the TIC. xa98. Our goal in this proceeding is to establish a mechanism to phase out the TIC in a manner that fosters competition and responds to the court's remand. The resolution of the TIC issues is also related to the resolution of three other issues. First, the Universal Service Joint Board recently recommended establishing a universal service support mechanism. In Section VII.A, below, we seek comment on how any support amounts should be allocated to reduce interstate rates. Some of those support amounts may reduce the amount that would otherwise be recovered through the TIC. Second, the adoption of either the marketbased or"!10*&&aa " prescriptive approach to access reform will establish the extent to which incumbent LEC costs will be recovered through facilitybased access charges. Third, if we conclude that incumbent LECs should be permitted to recover some embedded access costs for some period in a competitively neutral manner, as discussed in Section VII.B, below, some of those costs may be costs that are currently included in the TIC. Consequently, resolution of these issues may reduce the costs currently included in the TIC. xb99. As we discuss more fully below, the costs now recovered in the TIC could be addressed in several different ways. Some incumbent LECs have urged us to give them significant pricing flexibility and allow market forces to discipline the recovery of the TIC, either alone, or in conjunction with a phaseout of the TIC. A second method of eliminating the TIC would be to quantify and correct all identifiable cost misallocations and other practices that result in costs being recovered through the TIC. A third approach would be a combination of these approaches. For example, we could address directly the most significant and readilycorrected misallocations, and then rely on a marketbased approach to reducing what remains of the TIC. Finally, we could provide for the termination of the TIC over a specified time period, such as three years.  Xb-xc100. We address below some explanations for the amounts in the TIC, and then seek comment on possible means of reducing or eliminating the TIC.  X-x 2.` ` Possible Sources of Costs in the TIC  X-xd101. In the Notice included in the First Transport Order, the Commission sought comment on the nature of the costs included in the TIC so that those costs could be  X-reallocated.\ {O<-ԍ First Transport Order, 7 FCC Rcd at 703839.\ Parties in the Transport proceeding and in more recent ex parte filings have offered various explanations of the composition of the costs included in the TIC. We summarize below several of the more significant explanations presented by the parties. Our discussion of these comments is divided into two parts. One group of comments describes the costs included in the TIC as the result of transport rate setting choices. The other group of comments describes the costs as related to potential cost misallocations.  X$-x` ` a. Transport Rate Setting  X-xe102. Tandem Switching and SS7 Costs. In the First Transport Order, we concluded  X-that the interim transport rate structure should include a tandem element that would initially recover 20 percent of the interstate revenue requirement associated with the tandem switch, while the remaining 80 percent of the interstate revenue requirement would be assigned to the TIC. We took this action because of our uncertainty about the specific sources of the costs that were in the tandem switching revenue requirement and because of our concern about"#2Z0*&&aae"" possible adverse impacts on small and medium IXCs as the new rate structure was  X-introduced.\ {Ob-ԍ First Transport Order, 7 FCC Rcd at 703839.\  X-xf103. USTA submits that the portion of the tandem interstate revenue requirement that is included in the TIC includes some costs incurred in the provision of SS7 signalling, line  X-information database (LIDB), and other related signalling services.Z yO-ԍ Letter from Frank McKennedy, Director, Legal and Regulatory Affairs, USTA, to James Schlichting,  {O` -Chief, Competitive Pricing Division, October 10, 1996, Attachment at 3 (USTA October 10 Letter). These costs bear no particular relationship to the operation of the tandem switch. As discussed below, under the interim transport rate structure, LECs recover a portion of their SS7 costs through a flatrated dedicated signalling transport charge assessed on a perline basis and a flatrated STP port termination charge. The costs associated with other signalling functions, such as transporting SS7 messages within the signalling network, are not recovered through any facilitybased rate element, having generally been incorporated in the transport function, and thus are presumably embedded in the TIC. These SS7 costs relate to services used by all LEC transport  X -customers, and, in the future, potentially to users who are not LEC transport customers. The costs associated with the provision of signalling services are related to the new signalling rate elements discussed below, and if we establish such signalling rate elements, they would not  X-need to be recovered through the TIC.Q {O-ԍ Ameritech December 6 Letter at 9.Q  Xb-xg104. TandemSwitched Transport Rate Setting. The Commission employed several  XM-assumptions in setting tandemswitched transport rates, which USTA alleges understate the  X6-rates for tandemswitched transport.\6F {O--ԍ USTA October 10 Letter, Attachment at 1011.\ First, under the interim transport rules, per minute tandemswitched transport transmission rates between the SWC and the end office were presumed reasonable if they were based on a weighted mix of DS1 and DS3 special access rates and assumed 9000 minutes of use per voice grade circuit per month. USTA argues that the Commission's assumption of 9000 minutes of use per circuit per month for tandem X-switched transport circuits resulted in tandemswitched transport rates that were too low.^ {OL -ԍ USTA October 10 Letter, Attachment at 1011. ^ It contends that the actual usage on tandem circuits can be measured and often is far less than the 9000 minutes assumed by the Commission. Second, USTA contends that the use of a per minute tandemswitched transport transmission rate from the SWC to the end office ignores  Xg-that the SWCtotandem segment of tandemswitched transport is provided over a circuit that"g3j 0*&&aa"  X-is dedicated to an IXC.Y {Oy-ԍ USTA October 10 Letter, Attachment at 10.Y It argues that the failure to price the SWCtotandem segment of tandemswitched transport on a flatrated basis led to some of those costs being included in the TIC. Third, USTA also alleges that tandemswitched transport uses lowdensity routes between small end offices and tandem switches and thus does not use DS3 circuits to the  X-same extent that DS3 circuits are used for directtrunked transport service.ZZ {O-ԍ USTA October 10 Letter, Attachment at 10. Z Thus, according to USTA, the tandemswitched transport rate applicable to these lowdensity routes is too low. Finally, USTA asserts that distancesensitive tandemswitched transport rates are too low because the rules used airline miles from the SWC to the end office rather than measuring  XH-distance through the tandem office.YH {O -ԍ USTA October 10 Letter, Attachment at 10.Y Each of these assumptions has been said to result in tandemswitched transport rates that produce revenues that are less than costs, with the difference being assigned to the TIC.  X -xh105. HostRemote Trunking Rate. The interim transport rules require incumbent LECs to assess tandemswitched transport rates for the carriage of traffic between a host switch and its remote. As with the tandemswitched transport rate itself, USTA argues that the 9000 minutes of use per circuit reflects more usage than actually transits a circuit, and that the trunks do not exhibit the ratio of DS3DS1 relationship that was employed in setting the tandemswitched transport rate. USTA contends that the rate therefore does not recover all the costs of hostremote trunking.  X6-xi106. Multiplexing Costs. USTA asserts that the existing transport rates for transmission facilities do not account for all multiplexing costs in two instances, and that this  X -results in costs being recovered through the TIC rather than in appropriate facilitybased  X-rates.Y~ {O"-ԍ USTA October 10 Letter, Attachment at 10.Y First, it alleges that none of the transmission rates reflects the cost of the DS1/DS0 multiplexing needed to access those end office switches that cannot handle DS1 interfacing, such as analog electronic switches. Such switches constitute approximately 25 percent of the  X-BOC switches.Y {Oo -ԍ USTA October 10 Letter, Attachment at 9. Y Second, USTA contends that the TIC also includes the two additional multiplexers needed in order to multiplex a DS3 circuit down to a DS1 level before being switched at the tandem, and then back up to DS3 afterward for transmission to an end office. To the extent that analog tandem switches exist, two additional DS1/DS0 multiplexers are needed to achieve the voicegrade interface with the tandem switch. ";40*&&aa"Ԍ X-xj107. DirectTrunked Transport Rate. In the First Transport Order we established initial directtrunked transport rates that generally were presumed reasonable if set at the  X-LECs' September 1, 1992, rates for comparable special access services. USTA and other incumbent LECs argue that this resulted in costs being included in the TIC because facilitiesbased transport rates are too low outside highvolume, lowcost areas. These LECs argue that highcapacity special access is provided primarily in highvolume, lowcost areas, making  Xx-special access rates a good surrogate for transport rates only in such areas.\x {O-ԍ USTA October 10 Letter, Attachment at 1213.\ They assert that transport in lowvolume areas has significantly higher costs that are not recovered by rates for  XJ-transport facilities because those rates were based on rates for special access service, which is more heavily concentrated in lowcost urban areas than is transport. SBC, for example, contends that a study of its interoffice facilities indicates that transport may cost over five  X -times more in low-density areas than in high-density areas. Z {O-ԍ See Southwestern Bell Comments in CC Docket No. 91213, filed Feb. 1, 1993, at 3945. These parties submit that these higher costs are included in the TIC.  X -x` ` b.  Possible Cost Misallocations xk108. As we noted above, the Commission's Part 36 separations and Part 69 cost allocation rules assign costs to access categories, including transport. Some of these costs were included in the TIC when it was established in 1993. Some LECs have indicated that some of the costs included in the TIC result from cost misallocations in these processes, as described below. x  X-xl109. Central Office Equipment (COE) Maintenance Expenses. USTA alleges that the TIC includes costs allocated to transport by current separations and cost allocation procedures that are properly excluded from facilitybased transport rates. For instance, the separations rules allocate all expenses for maintaining central office equipment (including circuit equipment, switches, and operator services equipment) among the separations categories for circuit equipment, switching, and operator service on the basis of the apportionment of total COE investment that is allocated to each of those three categories. The separations expense allocations are then carried over into Part 69 and allocated among the interexchange and access categories. These parties contend that a more costcausative approach would allocate each of these three types of expense based on the allocation of the investment associated with  X$-that type of expense. For example, they would allocate circuit equipment maintenance expenses between the jurisdictions and among the Part 69 elements based on the allocation of" 50*&&aa="  X-circuit equipment investment.  yOy-ԍ For example, if investment was identical for each category, but the expenses were $25, $45, and $20, the  yOA-separations rules would allocate $30 to each category rather than the actual expense amounts.  The LECs allege that this change would move costs  X-primarily from the TIC to the local switching category.]  {O-ԍ USTA October 10 Letter, Attachment at 1213. ]  X-xm110. Use of Circuit Terminations in Separating Costs Between Private Line and  X-Message Services. Some parties contend that costs are included in the TIC because the  X-separations procedures do not allocate costs to special access and transport categories in the  Xz-same way, even though, as we concluded in the First Transport Order, the two categories of service use similar facilities. Specifically, these parties argue that the use of circuit termination counts in allocating trunking facilities underallocates costs to the private line separations category. This occurs because a DS1 circuit (which generally carries 24 voicegrade circuits) used for private line service is counted as having only two terminations, while a similar circuit used for switched message services is counted as having 48 terminations (two per voicegrade circuit). Because the Commission used special access rates to establish the initial facilitybased transport rate levels, and the TIC was derived from those rates, any underallocation of costs to special access could result in the TIC containing costs that may be more appropriately recovered through facilitybased special access rates. x  X-xn111. Overallocation of costs to the interstate jurisdiction. Some parties also allege that the TIC recovers costs allocated to the interstate jurisdiction that should properly be  XS-allocated to the intrastate jurisdiction.pSz {O~-ԍ See, e.g., USTA October 10 Letter, Attachment at 14.p These parties contend that such costs were not included in the special access rates that were the basis for the initial transport rates, and that these costs therefore were included in the TIC.  X-x 3.` ` Possible Revisions to the TIC (#` xo112. As we have noted earlier, our goals are to move towards significantly more costbased access rates and competition in the access and interexchange markets. The development of a competitive access market will be distorted by the assessment of the TIC as a surcharge on local switching. The TIC therefore will be unsustainable. In this section we describe several approaches for revising the TIC and raise specific questions concerning the various  XV-approaches. ` `  X(- xp113. As discussed further below, one approach to revising the TIC that has been suggested by some incumbent LECs would be to give them significant pricing flexibility,"6 0*&&aa[" thereby permitting them to address the TIC problem in a manner consistent with the dictates of the market. These LECs argue that the presence of unbundled elements makes it possible for competitors to reach all customers immediately and warrants significant pricing flexibility. They request various types of pricing flexibility now, including deaveraged rates, consolidation of price cap baskets, contract carriage, and access rates based on enduser customer class distinctions.  X_- xq114. Ameritech and NYNEX have made such proposals.Z_ {O-ԍ Ameritech December 6 Letter; Proposal for Universal Service and Access Reform: Post 9698 Interconnection Order, NYNEX, Nov. 5, 1996. Ameritech favors phasing the TIC down over a short transition period of three to five years. Under this plan, the TIC reductions would not affect the basket PCI and thus rate increases for other services would be possible within the current bounds of the price cap rules. NYNEX claims that, if given sufficient pricing flexibility for facilitybased rates and the TIC, it will be able to manage access pricing in a way that permits it a reasonable opportunity to recover its costs, while minimizing the effect on the competitive marketplace. For example, NYNEX would deaverage its rates downward in highdensity areas to permit it to respond to competition, while leaving its other rates unchanged in order to permit it to continue recovering the existing contribution included in those rates. NYNEX does not propose any specific phase out of the TIC, because it asserts that the market will discipline its pricing practices. xr115. We ask parties to comment on the need for some transitional mechanisms given that approximately seventy percent of interstate transport revenues are currently generated from TIC charges. We seek comment on what would constitute a sufficient reason to use a transition mechanism. For example, should any transition consider the extent to which IXCs must make significant adjustments to their network configurations in response to any revised TIC recovery methods? We also seek comment on the duration of any transition period. xs116. Alternatively, we could revise the TIC by quantifying and correcting all identifiable cost misallocations and other practices that cause costs to be included in the TIC. This approach would require difficult, detailed analysis of individual LEC cost data and probably would not provide an explanation for all the costs in the TIC. Furthermore, it would undoubtedly identify cost allocation problems that we could not remedy in this proceeding because of the need to refer jurisdictional costs allocation issues to a FederalState Joint Board. Once identified and quantified, the costs comprising the TIC could be: (1) left in the TIC subject to market pressures; (2) reassigned to various access services (including transport facilitybased elements) and to nonregulated activities, as appropriate; (3) recovered in a competitivelyneutral manner as a matter of public policy; or (4) removed from the regulated books of account. In evaluating these options, we would bear in mind that the incumbent LECs are in the best position to identify and quantify the reasons costs are in the TIC, and we"!70*&&aa " would therefore place the burden on them to justify particular treatment of TIC costs. As with the preceding approach, we seek comment on the need for, and the duration of, any transition period. xt117. As a third method, we could combine the forgoing alternatives. That is, we could reassign some costs to facilitybased elements when warranted by forwardlooking cost indicia and address the remaining costs in the TIC through a phaseout methodology. Under this approach, we could, for example, reassign those costs that were readily identifiable and quantifiable, or necessary to respond to the court's remand directives, and phase out the remainder of the TIC under either the marketbased or prescriptive approach to access reform. We tentatively conclude that this approach better serves the public interest than would an attempt to determine exhaustively the sources of the costs included in the TIC because it is administratively simpler, and it is likely that we could not establish the causes for all the costs included in the TIC. We seek comment on the relationship of this method to whether we select a marketbased or prescriptive approach to rate levels, as discussed further below. As with the preceding two approaches, we seek comment on the need for, and the duration of, any transition period.  Xb- xu118. Finally, as a fourth option, we could establish a schedule under which the costs included in the TIC are phased out. Under this option, we would establish a fixed time period during which incumbent LECs could in succeeding years recover a declining portion of the amounts included in the TIC. At the conclusion of the period, LECs could no longer recover any TIC revenues. In conjunction with the option of phasing out of the TIC, a LEC's PCIs, or SBIs, could be adjusted to reflect the phaseout of the TIC, or they could be left unchanged. Again, we seek comment on the relationship of this method to whether we select a marketbased or prescriptive approach to rate levels, as discussed further below.  X- xv119. We seek comment on the extent to which the above approaches to revising the TIC will achieve the goals of this proceeding. Parties should address the relative merits of  Xe-each, or of other approaches that they may suggest. In particular, they should address how each plan would accommodate any universal service or residual cost amounts that might be allocated to the TIC. We also seek comment on how each of the above approaches affects  X -small business entities, including small LECs and new entrants.s  {O-ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s Below, we inquire about specific issues concerning these approaches. xw120. In evaluating possible approaches to recovery of the TIC, parties should address the possible explanations set out above for the sums in the TIC, including the reasonableness and significance of each of the explanations. We invite incumbent LECs to quantify the amounts attributable to each explanation. Parties presenting data to quantify amounts in the TIC should include sufficient detail to permit the Commission and interested parties to"#8Z0*&&aae"" evaluate the procedures used and to adjust the results, if necessary, to address concerns raised in the record. Parties are also asked whether there are any additional explanations for the amounts included in the TIC. Parties should quantify their explanations to the extent possible. Finally, we ask parties to comment on whether any interstate costs are included in the TIC that the LECs should be required to write off their regulated books of account as not prudently invested, no longer used and useful, or for some other reason. Any party believing that such costs exist should explain why they should be written off, and provide the legal basis and methodology for doing so. In this connection, they should comment on the approaches discussed in Section VII.B.3, below regarding possible disallowances.  xx121. In Section V, below, we discuss giving incumbent LECs additional pricing flexibility as certain triggers are satisfied. We ask parties to comment on the relationship of those pricing flexibility approaches to the need for pricing flexibility in conjunction with revising the TIC under any of the methods discussed above, or suggested by any party. For example, because some of the costs in the TIC may result from facilitybased rates not reflecting the full costs of serving rural or lowdensity areas, we ask parties to comment on whether deaveraged pricing is essential to the achievement of our goals with respect to the TIC. We also seek comment on whether other forms of pricing flexibility are essential to reform of the TIC. We invite parties to comment on how any pricing flexibility needed for this purpose would affect the competitive development of the broader access market. We invite parties to comment on whether any public policy reasons would support retaining some costs in the TIC.  X- xy122. Any reallocations that may be necessary to implement the elimination or revision of the TIC will give rise to exogenous cost adjustments for price cap LECs under our price cap rules. Parties therefore are asked to comment on whether any special exogenous cost adjustment procedures are necessary to adjust the affected PCIs, APIs, or SBIs. Parties are asked to comment on whether any downward exogenous cost adjustments resulting from access reform should be targeted to the TIC. We also ask parties to comment on what modifications to our access charge rules for rateofreturn LECs are necessary to address any revisions to the TIC that may be adopted. Finally, we ask whether any modifications to the rules applicable to special access services are necessary to accommodate any of the modifications discussed in this section of the Notice. " 90*&&aa"Ԍ X-.!R0 J:\ACCESS.REF\IIIFG.SS . ^ F.xSS7 Signalling  X-x 1.` ` Background xz123. SS7 is the international standard network protocol currently used to transmit  X-signalling information over common channel signalling (CCS) networks,_X yO-ԍ "Common channel" refers to the capability of one channel to carry the signalling for many calls simultaneously. Several different terms are used to describe the information that passes over CCS networks; in this Notice we will use the terms "signalling," "messages," and "queries" relatively interchangeably._ and consequently^ those networks are often described as "SS7 networks." The Part 69 rate structure for SS7 services or facilities may not currently reflect the manner in which incumbent LECs incur SS7 costs, and so may skew the development of competition for SS7 services. Therefore, we seek comment in this section on whether and how to revise the rate structure for SS7 services. x{124. SS7 networks consist of highspeed packet switches and dedicated circuits that are separate from, but interconnected with, the telecommunications networks over which telephone calls are carried. Incumbent LECs typically use SS7 networks for three purposes: (1)for call setup; (2)to obtain information from remote databases, such as billing information that must be obtained from the line information database (LIDB) to determine whether a calling card is valid, or information identifying the designated carrier of a tollfree 800 service subscriber; and (3)to transmit the information and instructions necessary to provide custom local area signaling services (CLASS features), such as automatic call back and caller ID. The SS7 signalling networks will also play an important role in the implementation of  X4-intelligent network (IN) functionality in incumbent LEC networks.4 {O-ԍ See, e.g., Intelligent Networks, CC Docket No. 91346, Notice of Inquiry, 6 FCC Rcd 7256 (1991). x":z0*&&aa"Ԍ yAxa0*ddNh;xy x|125. As illustrated in Figure 2 above, incumbent LEC CCS networks generally include the following basic components. Dedicated network access lines (DNALs) are dedicated circuits that transmit queries between incumbent LECs' signalling networks and the signalling networks of other carriers, such as IXCs. The DNAL can be provided by the incumbent LEC or by the other carrier, although incumbent LECs generally provide the DNAL under their current SS7 tariffs. The DNAL is connected to a port on an incumbent LEC's signal transfer point (STP), a specialized packet switch that performs screening and security functions, and switches SS7 messages within the incumbent LEC signalling network. Messages within the incumbent LEC signalling network travel over signal transport links, which are typically dedicated DS1 circuits. SS7 messages are formulated within the incumbent LEC signalling network at service switching points (SSPs), which are generally end office and tandem switches with the necessary software. Finally, service control points (SCPs) are computer databases that respond to network signalling queries and perform related functions. An additional term that is often used in describing SS7 networks is a signalling point (SP), which refers to any point on an SS7 network that formulates or switches signalling queries. x}126. Under the interim transport rate structure, incumbent LECs charge IXCs and other access customers a flatrated charge (called "dedicated signalling transport" in Part 69 of the rules) for the use of dedicated facilities to connect to the incumbent LECs' signalling  X<"-networks.F<" yO$-ԍ 47 C.F.R.69.125.F This rate element is composed of two subelements: a flatrated signalling link charge for the DNAL, and a flatrated STP port termination charge. Most other SS7X%#;X0*&&aa"3@a'#A;erah.d06irfa12.sjtv.nX signalling costs, including those for switching messages at the local STP, for transmitting messages between an STP and the incumbent LEC end office switch or tandem switch, and for processing and formulating signal information at an end office or tandem switch, are not recovered through facilitybased charges, and thus most, if not all, of these costs are presumably embedded in the TIC and the local switching charge. At SCPs, such as the 800 and LIDB databases, incumbent LECs typically assess a perquery charge for the retrieval of  Xv-information and the transmission of the query to and from the database.vv {O-ԍ See, e.g., 47 C.F.R.  69.120 (defining the LIDB perquery charge).v Incumbent LECs also recover costs associated with the provision of certain signalling information necessary for thirdparties to offer tandem switching through the "signalling for tandem switching" rate  X1-element.1Z {O< -ԍ 47 C.F.R. 69.129. In the Expanded Interconnection proceeding, the Commission required Tier1 incumbent LECs (excluding members of the National Exchange Carrier Association (NECA)) to provide to interested third parties signaling information necessary to provide tandem switching. Expanded Interconnection with Local Telephone Company Facilities, CC Docket No. 94141, Transport Phase II, Third Report and Order, 9 FCC Rcd 2718 (1994). This requirement was intended to permit competitive access providers (CAPs), IXCs, and end users with the ability to offer competitive tandemswitching services.  X -x 2.` ` Ameritech's SS7 Rate Structure x~127. On March 27, 1996, the Common Carrier Bureau granted Ameritech a waiver to restructure the manner in which it recovers its SS7 costs. The rate structure established by Ameritech pursuant to that waiver recovers costs associated with the provision of SS7 signalling services through four unbundled charges for the various functions performed by incumbent LEC CCS networks: (1) signal link; (2) STP port termination; (3) signal transport;  Xb-and (4) signal switching.3\b yO-ԍ Ameritech Operating Companies Petition for Waiver of Part 69 of the Commission's Rules to Establish  {O-Unbundled Rate Elements for SS7 Signalling, Order, 11 FCC Rcd 3839 (Com. Car. Bur. 1996) (Ameritech SS7  {Oy-Waiver Order). 3 We invite comment on using the waiver granted to Ameritech as a model for a revised SS7 rate structure for the industry as a whole.  X-x128. Signal Link. We seek comment on whether costs associated with the DNAL the dedicated facility connecting an SS7 customer's network to a dedicated port on the incumbent LEC's STP should continue to be recovered through a flatrated distance X-sensitive signal link charge.C  yO"-ԍ 47 C.F.R.  69.125(b).C Flatrated cost recovery appears reasonable because the DNAL is a dedicated circuit serving a single SS7 customer, similar to those circuits used to provide special access or directtrunked transport. Incumbent LECs' SS7 customers could provide their own DNAL, or purchase a DNAL from the incumbent LEC by paying the signal link"< 0*&&aa3" charge. We also seek comment on whether the signal link should remain in the transport  X-service categories in the trunking basket.O {Ob-ԍ See 47 C.F.R.  61.42(d)(3).O  X-x129. STP Port Termination. We seek comment on whether the costs associated with the dedicated port on the incumbent LEC's local STP that connects to a customer's DNAL should be recovered through a flatrated charge. This charge would include the portion of costs currently recovered through the STP port termination subelement associated with the STP port, but not the costs recovered through that subelement today associated with the screening and switching functions of the STP, which we understand are not performed by the port. Because the STP port termination costs are dedicated to a particular SS7 customer, we ask whether they should be recovered on a flatrated basis. x130. We also seek comment on whether the STP port termination element should be placed in a new service category in the trafficsensitive basket. Although STP port termination rates today are in the same service category as the signalling link, these two services are subject to different competitive conditions. Specifically, although interconnectors can provide their own signal link, the STP port is part of the incumbent LEC's STP and therefore must be purchased from the incumbent LEC. Consequently, incumbent LECs could offset reductions in their charges for the signal link with increases in the STP port charges if STP port termination and the signal link remained in the same service category. The STP port termination element appears analogous to the dedicated line cards and trunk cards discussed in the local switching rate structure discussion above, and therefore we seek comment on whether it should be placed in a new "signalling" service category in the trafficsensitive basket. Recognizing that STP port costs may be relatively small compared to signal link costs, we seek comment on whether the benefits we have identified outweigh the administrative burdens of implementing such a system and creating a new price cap service category. Another alternative would be to remove the STP port termination element, and other noncompetitive SS7 elements essential for interconnection, from price caps entirely, as we have done for expanded interconnection. We seek comment on this option.  XN-x131. Signal Transport. The circuits that carry SS7 queries between STPs, switches, and SCPs within incumbent LEC signalling networks are comparable to the shared circuits incumbent LECs use to provide transport between end office and tandem switches. SS7 queries associated with many different calls traverse the same signal transport links simultaneously, and so a usagesensitive charge for these shared facilities appears appropriate. As with signal switching, discussed below, the costs of signal transport appear most closely related to the number of queries, and therefore we seek comment on whether this charge should be assessed on a perquery basis. We also seek comment on whether incumbent LECs should be permitted to charge distance sensitive rates for signal transport, and the appropriate level of distance sensitivity that should be allowed. "#=Z0*&&aae""Ԍx132. It appears that signal transport is a form of transport, and therefore we invite comment on placing this service in the trunking basket. We also invite comment on placing signal transport in the existing "signalling for tandem switching" service category. In addition, interested parties may discuss whether to place this service in a separate service category from the signal link, because the signal link may be provided by other carriers while signal transport generally must be performed by the incumbent LEC.  X_-x133. Signal Switching. We seek comment on whether costs related to processing and  XH-switching by the STP should be recovered on a perquery, usagesensitive basis. H yO -ԍ "Perquery" here is used to refer to a charge for each SS7 message passing through a particular point. Although the term "permessage" is used in some contexts with this meaning, this term is also used in some contexts to refer to charges that vary based on the number of calls, rather than on the number of signalling queries, and so we will avoid it here in the interest of clarity. These costs are similar to the costs incurred in switching telephone calls at end office and tandem switches. Unlike end office and tandem switches, however, STPs switch only data, and a single call may involve multiple instances of signal switching. Because the costs associated with signal switching relate more to the number of SS7 queries switched than to the number or duration of calls, we ask whether the signal switching charge should be assessed based on the number of SS7 messages switched. For the reasons we have identified above in the context of central office and tandem switching, we seek comment on whether peak load pricing would be appropriate for signal switching. x134. We propose to place this service in the trafficsensitive basket. We further seek comment on whether to place this service in the same service category as the STP port termination charge, or whether to create a new service category for signal switching.  X-x 3.` ` Other SS7 Issues x135. We also invite parties to suggest alternative rate structures for SS7 signalling. For example, we permitted Ameritech to implement rate elements for signal tandem switching, signal formulation, and optional parameters. We also seek comment on whether incumbent LECs should be permitted to impose separate charges for ISDN User Part (ISUP) messages, which are used in setting up and taking down calls, and Transaction Capabilities Application Part (TCAP) messages, which are used primarily for database queries and CLASS services such as enhanced caller ID, or whether some other differentiation should be made  X7-between charges for different types of SS7 messages.7 yO"-ԍ The designation "ISDN User Part" refers only to an official protocol that supports ISDN connections, and does not mean that only calls using ISDN can be set up using these messages. Although such differentiation could be economically justified on the basis of the different average lengths of ISUP and TCAP queries (and therefore the differential load they tend to place on the SS7 network), we" >0*&&aa=" question whether we should do so in the interests of rate structure simplicity. To the extent that parties contend that differentiated charges for TCAP and ISUP messages should be adopted, we ask those parties to provide specific information and data to support such a claim. Parties that favor an alternate structure are asked to provide details of any such alternatives, and to explain how such alternatives would be consistent with the goals of this proceeding. In particular, we ask parties to discuss ways in which the SS7 rate structure we have proposed could be simplified. The desire for rate structure simplicity may conflict with the goal of economic costcausation, and we seek comment on the appropriate manner in which we should strike this balance for SS7 signalling. x136. We seek comment on whether the pricing for facilitybased signalling rate elements should be determined under the price caps new services test. As we discussed in the  X -Ameritech SS7 Waiver Order, although the proposed SS7 rate elements would probably be considered restructured services under our price cap rules, we tentatively conclude a requirement of revenue neutrality and the cost showing specified under the new services test  X -would serve the public interest in this context.c  {O"-ԍ Ameritech SS7 Waiver Order, 11 FCC Rcd at 385657. c The different SS7 elements are likely to be subject to different competitive pressures, and the current rate structure does not provide a sufficient basis, absent a cost showing by incumbent LECs, on which to base the rates for these new charges. x137. Incumbent LECs may need to install additional monitoring equipment in order to bill properly for unbundled SS7 services. Some incumbent LECs may not currently have the capacity to meter any SS7 traffic, and some incumbent LECs may only have such metering  X-capacity at STPs, not at signalling points in tandem offices.Z yO-ԍ Ameritech, for example, stated that it currently is capable of metering SS7 traffic only at STPs. Because Ameritech's STPs were not capable of distinguishing directrouted and tandemswitched calls, and tandemswitched calls require additional use of the signalling network, Ameritech proposed an additional "signal tandem switching" rate element to recover the signal switching and signal transport costs involved with providing signalling for a tandemswitched call.  We seek comment on the feasibility and cost of mandating a rate structure for SS7 services that would require incumbent price cap LECs to install equipment for metering SS7 traffic in their networks. We also invite comment on whether and the extent to which the costs of any equipment needed to comply with our proposed rules warrant exogenous cost treatment under our price  X~-cap rules.U~  {O9"-ԍ See 47 C.F.R.  61.45(d)(1)(vi). U In the 800 Database proceeding, the Commission permitted incumbent LECs exogenous treatment of the reasonable costs they incurred specifically to provide basic 800"i?0*&&aa"  X-database service. yOy-ԍ Provision of Access for 800 Service, CC Docket No. 8610, Second Report and Order, 8 FCC Rcd 907, 911 (1993). Unlike the rules we adopted in the 800 Database proceeding, however, the SS7 rules we are contemplating here would not require incumbent LECs to provide any service they are not currently providing. The rules instead would require incumbent LECs to recover the costs of any SS7 service they choose to provide in a fashion that reflects the way they incur those costs. Thus, the costs of SS7 metering equipment may not warrant exogenous cost treatment. x138. We tentatively conclude that, under the proposal described above, the existing charge incumbent LECs assess on third party tandem switching providers (TSPs) for the provision of signalling codes necessary for those TSPs to interconnect their tandem switches with incumbent LEC transport networks should be eliminated and replaced by charges for the specific SS7 functions associated with providing this signalling information. Although this charge serves a particular purpose, this service appears to use the same basic SS7 functions as other signalling services. Thus, although the "signalling for tandem switching" service category would remain in the trunking basket, that category would include only the newlycreated signal transport element, and would be renamed as the "signalling transport" service category. We seek comment on this analysis. Even if we do not eliminate the existing signalling for tandem switching charge, we have proposed to place several new rate elements into the existing signalling for tandem switching service category that recover some costs not related to tandem switching. Signal transport, for example, recovers costs for signalling associated both with tandemswitched and with directtrunked calls. In order to avoid confusion, we tentatively conclude that the signalling for tandem switching service category in the trunking basket should be renamed as the "signalling" service category.  X- G. xNew Technologies  X-x139. Developments in switching and transmission technology are producing new telecommunications capabilities that offer the potential for new services and lower prices in  X~-the future.~  {OO-ԍ See Letter from Kenneth McClure, Chairman, NARUC Communications Committee, to Reed Hundt,  {O-Chairman, FCC, dated Oct. 23, 1996 (NARUC October 23 Letter) at 55. These include synchronous optical networks (SONET),Tz~| yO -ԍ SONET uses a synchronized digital fiber optic hierarchy to transport special access services at operating speeds from 1.5 Mbps to 2.4 Gbps, with circuit performance monitoring and advanced network alarming and  {O;"-management. See, e.g., Pacific Bell Tariff F.C.C. No. 128, Transmittal No. 1790, Order, 10 FCC Rcd 7362 (Com. Car. Bur. 1995); US West Communications Revisions to Tariff F.C.C. No. 1, Transmittal No. 80, Order, 5 FCC Rcd 5546 (Com. Car. Bur. 1990); Petitions for Waiver of Part 69 of the Commission's Rules to Establish Switched Access Rate Elements for SONETbased Service, Memorandum Opinion and Order, DA 962004 (Com. Car. Bur., rel. Dec. 2, 1996). SONET may be deployed in the traditional star configuration, or in a fiber"]%0*&&%" ring arrangement. In the star configuration, SONET provides wider transmission band widths (or higher speeds) than nonSONET "asynchronous" digital networking technologies. It also provides an easier means of adjusting band widths at nodes within the network, because it allows information to be easily added to, and dropped off, a highspeed fiber optic circuit without the need to demultiplex the entire signal down to its component lowerspeed channels and then multiplex the signal back to its original speed. T Asynchronous"~@x0*&&aa"  X-Transfer Mode (ATM)x yO)-ԍ ATM is a packet switching protocol in which all information transmitted over the network whether  {O-voice, video, or data is split into small fixedlength cells. See generally Sharon Watson, Have ATM, Will  {O-Travel, Telephony, Apr. 24, 1995, at 32. ATM networks are especially wellsuited for broadband multimedia transmission, because they allow extremely highspeed transmission and switching of different types of information. switching, and advanced intelligent networks (AIN).RZ,  yO -ԍ AIN is a telecommunications network in which call processing and routing, and network management are provided by means of centralized databases, rather than from a comparable database at every switching system.  {Om -See Ameritech SS7 Waiver Order, 11 FCC Rcd at 3868. R We seek comment on whether, and how, we should take these new technologies into account in adopting access charge rules. We also invite parties to recommend specific rate structure rules that would reflect the manner in which incumbent LECs incur costs when providing services using these technologies. We also seek comment on whether we should adopt access charge rules to govern rate structures for services employing any other new technologies.  X_-M!R0 J:\ACCESS.REF\IIIFG.SS J:\ACCESS.REF\IV.RL MHo IV. APPROACHES TO ACCESS RATE REFORM AND DEREGULATION ă  X1- A.xDifferent Approaches to Access Reform x140. Our overriding goal in this proceeding is to adopt revisions to our access charge rules that will foster competition for these services and eventually enable marketplace forces to eliminate the need for price regulation of these services. In addition to the rate structure Hchanges discussed above, we suggest in this Notice two different approaches to access reform a marketbased approach and a more prescriptive approach. We could adopt a marketbased approach to access reform under which we would let marketplace pressure move interstate access prices to competitive levels. This approach could be implemented incrementally, first eliminating certain regulatory constraints as incumbent price cap LECs demonstrate through credible, verifiable evidence that the conditions necessary for efficient local competition to develop in their service areas exist. Then, as incumbent LECs show that competition has emerged, additional regulatory constraints, including mandatory rate structures, would be eliminated to allow those LECs to adjust their interstate access rates. Finally, when substantial competition has developed, price regulation would be eliminated. x x141. Some parties, however, may contend that a marketbased approach will allow incumbent LECs to continue indefinitely to assess inflated prices for some or most access"AN 0*&&aa"  X-services in some or most geographic areas. {Oy-ԍ See, e.g., "MCI Urges FCC to Fold Price cap Proceeding Into Access Charge Reform," Communications Daily, Vol. 16, No. 239, Dec. 11, 1996, at 2. These parties would urge us to adopt a prescriptive approach to access reform. Under this approach, we would require incumbent LECs to move their prices to specified levels and allow such LECs limited pricing flexibility until they can demonstrate they face actual competition for access. x142. A marketbased approach has a number of advantages. It creates incentives for incumbent LECs to act quickly to open the local exchange and exchange access market to competition, by making that a condition for having additional flexibility to respond to competition from facilitiesbased competitors. It allows marketplace forces, rather than regulation, to determine how quickly prices move to costbased levels. A marketbased approach also has some disadvantages. Marketplace forces may not require incumbent LECs to assess costbased prices for access prices as quickly as a prescriptive approach. It may also be difficult to develop reliable, administratively simple criteria for assessing evidence of competitive entry and determining the existing regulatory constraints that should be relaxed based on such a showing. x143. Conversely, the advantages to a prescriptive approach are that the Commission can move prices to costbased levels quickly and avoid the need to develop criteria for determining whether competition is sufficient to allow incumbent LECs additional pricing flexibility. The principal disadvantage to a prescriptive approach is that it requires the Commission to make detailed determinations of appropriate price levels for multiple services throughout the country. Another disadvantage is that, in the event an incumbent LEC can show its embedded costs are significantly higher than its forwardlooking costs, the Commission would be required to determine how much of the difference incumbent LECs should be given a reasonable opportunity to recover and the method for that recovery. x144. We set forth below both a marketbased approach and a more prescriptive approach. We seek comment on whether we should: select one of the two approaches as our exclusive method of reforming access charges in a manner that is most likely to lead to the conditions that will enable us to deregulate access charges; adopt both approaches as alternatives; or merge the two approaches in some fashion. For example, if barriers to competition are not eliminated, a marketbased approach to access reform likely would not work. If a marketbased approach were adopted, we might nonetheless seek to ensure that prices move toward economic cost even though barriers to competition are not eliminated within a reasonable time for certain services or in some geographic areas, by adopting an alternative prescriptive approach for those services or geographic areas. x145. Commenters advocating a merger of both a marketbased approach and a prescriptive approach should describe how the two approaches can be melded. For example,""B"0*&&aa!" what criteria should be used for determining whether to impose prescriptive access reform and at what time? How would a combination of the two approaches work if barriers to competition were eliminated, but later reinstituted? x146. Commenters proposing a melding of both approaches should also discuss any regulatory safeguards that may be needed. For example, an incumbent LEC might face different regulatory regimes in different parts of its service region, or for different access services. This may create an incentive for incumbent LECs to increase costs artificially for the services or areas that are subject to prescriptive regulation or less competition. Incumbent LEC incentives to misallocate costs in this manner would depend on whether such cost changes would affect incumbent LEC rates under prescriptive regulation, and on the magnitude of any such effect. x147. We have previously faced issues that arise when an incumbent LEC is subject to different regulatory regimes for different access services, in the context of the BOCs' provision of enhanced services. Specifically, the Commission decided not to regulate  X-enhanced services because the market for such services is competitive.Z {O -ԍ See, e.g., Regulatory and Policy Problems Presented by the Interdependence of Computer and Communications Services and Facilities, Docket No. 16979, Final Decision and Order, 28 FCC 2d 267, 270 (1971).  The Commission currently employs accounting safeguards designed to prevent common carriers from shifting costs from nonregulated to regulated services, without precluding them from taking advantage  XK-of any economies of scope.&K {O-ԍ See, e.g., Amendment of Section 64.702 of the Commission's Rules and Regulations, CC Docket No. 85 {O-229, Phase I, Report and Order, 104 FCC 2d 958 (1986); recon. 2 FCC Rcd 3035 (1987); further recon. 3 FCC  {Oz-Rcd 1135 (1988); second further recon. 4 FCC Rcd 5927 (1989); vacated in part sub nom. People of the State of California v. FCC, 905 F.2d 1217 (9th Cir. 1990). We adopted the "all or nothing" rule in the LEC Price Cap  X6-Order to address similar concerns about incumbent LECs shifting costs from affiliates  X!-governed by price cap regulation to affiliates governed by rateofreturn regulation.,Z! {O-ԍ LEC Price Cap Order, 5 FCC Rcd at 681920. The "all or nothing" rule requires all LECs adopting price cap regulation to convert all its subsidiaries to price cap regulation, and to convert any LECs it may acquire in the future to price cap regulation., Should similar safeguards be adopted if a combination of marketbased access reform and prescriptive access reform is adopted? We also invite comment on whether there are any other issues raised by applying different regulations to different services or areas. x148. We also seek comment generally on how incumbent LEC provision of inregion interLATA services either by independent incumbent LECs or potentially by BOCs upon FCC approval under section 271 should affect our choice of a marketbased or prescriptive approach, or the phases for implementing each approach. Conversely, we seek comment on"iC 0*&&aa" how our selection of a marketbased or prescriptive approach should affect, if at all, our consideration, of BOC applications, for inregion provision of interLATA services. As discussed earlier in Section I.B, IXCs argue that, to the extent access services are not available to IXCs at their forwardlooking economic cost, incumbent LECs and their longdistance affiliates will have an artificial competitive advantage in the market for longdistance services that may distort the effects of competition and result in inflated retail prices. We ask parties concerned about a possible "price squeeze" to identify the conditions under which we should be concerned. We ask parties to comment on whether the availability of unbundled network elements at their forwardlooking economic cost would reduce the danger of a price squeeze insofar as IXCs might use those elements to provide their own access to customers for whom they are the local service provider.  X - _B.XxThe Goal Deregulation in the Presence of Substantial Competition(#  X -x1.` ` Objectives x149. Regardless of the specific approach that we adopt in this proceeding marketbased, prescriptive, or some combination of the two our goal is to foster the development of substantial competition for interstate access services. Once substantial _competition is present for a particular service in a particular area, we propose to remove that service from price cap and tariff regulation for that area. x150. Our plan to remove from price cap regulation interstate access services that are subject to substantial competition is consistent with prior decisions in which the FCC  X-gradually removed AT&T's services from price cap regulation.P\ {OQ-ԍ See Competition in the Interstate Interexchange Marketplace, CC Docket No. 90132, Report and Order,  {O-6 FCC Rcd 5880 (1991) (Interexchange Order); Revisions to Price Cap Rules for AT&T Corp., CC Docket No. 93197, Report and Order, 10 FCC Rcd 3009 (1995). P Our analysis of whether AT&T's services were subject to substantial competition rested on considerations of market share, demand responsiveness, supply responsiveness, and AT&T's pricing behavior. We recognize, that unlike AT&T, incumbent LECs control bottleneck facilities, particularly the loop. Nevertheless, the 1996 Act seeks to erode this source of market power by requiring incumbent LECs to make unbundled network elements and resale available. In view of the similarities between the structure of and purposes behind the AT&T and the LEC price cap plans, the analytical framework that we used to streamline AT&T's services would appear to be an appropriate method for effectively deregulating incumbent LEC services. We also  X -propose to eliminate tariff filing requirements for services subject to substantial competition.@  yO#-ԍ 47 U.S.C.  160(a).@ We seek comment on whether these actions are appropriate under these conditions, and whether we should adopt any other deregulatory measures when an incumbent LEC service is"D|0*&&aa" subject to substantial competition. Below, we seek comment on the factors used in examining AT&T's pricing behavior. We invite comment on which of these, alone or in conjunction with these or other factors, could be used to determine when to remove incumbent LEC access services from price cap regulation. x151. We propose that the substantial competition analysis should be considered on a servicebyservice basis so that, for example, directory assistance could be removed from price cap regulation where substantial competition exists for directory assistance, even if not for local switching. Such an approach is consistent with our approach to removing AT&T's services from price cap regulation, and would allow incumbent LECs to price competitively where competition has developed, while not permitting incumbent LECs to raise prices for  X -services for which competition has not developed sufficiently."  yO| -ԍN Such an approach appears to be favored by incumbent LECs; we have received several petitions in which incumbent LECs seek exemption from price cap regulation for particular services in certain geographic markets.  {O -See Petition to Regulate Bell Atlantic as a Nondominant Provider of Interstate InterLATA Corridor Service (filed July 7, 1995); Ameritech Communications, Inc. Petition for Nondominant Status (filed July 21, 1995).  x152. We ask commenters to address whether, instead of requiring the presence of substantial competition, we should remove from price cap regulation services for which the incumbent LEC cannot influence price movements. There may be circumstances in which incumbent LECs cannot affect price changes in the market, even in the absence of substantial competition. Our public interest concern is whether incumbent LECs can adversely affect price movements. Using such an approach may remove an incumbent LEC's services from price cap regulation even if no competitors enter the market, but the incumbent LEC has complied with the requirements of the 1996 Act.  X-x153. We further ask whether highcapacity special access services, e.g., those special access services offered at speeds of DS1 or higher, should be removed immediately from price cap regulation. Many incumbent LECs contend that for certain geographic markets these special access services are already subject to intense competitive pressures that today discipline incumbent LEC pricing of such services. If these allegations are correct, our procompetitive goals could be served by removing these services from price caps. We ask parties to address the degree of competition that exists for such services, including any quantification that may be available. We invite parties to comment on whether any other incumbent LEC services in particular geographic areas are already subject to substantial  X9-competition and therefore should be removed from price cap regulation.9 {O"-ԍ See n.  N211 , supra; see also Ameritech Dec. 6 Letter at Appendix A at 12. x154. We solicit comment on the procedures that an incumbent LEC should follow to demonstrate that one or more services are subject to substantial competition. Parties should"ED0*&&aa" discuss whether an incumbent LEC should file a petition for waiver, a petition for declaratory ruling, or some other filing, and how the incumbent LEC should satisfy its burden of proof. In addition, we tentatively conclude that we should adopt rules governing the recalculation of the price cap indices when one or more services in a basket are removed. Such rules would speed the review of the tariffs that incorporate the recalculated indices. We invite parties to comment on this tentative conclusion, and to propose particular rules that we should adopt. x155. We also seek comment on what geographic area should be used in examining whether a service is subject to substantial competition. The level of competition for different services likely will vary by geographic area, even within the same state. Thus, we propose not to rely on a statewide analysis of competition. We seek comment on whether the relevant geographic areas should conform to the areas implemented by the relevant state in making unbundled network elements available to competitors. Because the costs of competitors using unbundled network elements will be affected by these geographic areas, it may be appropriate that incumbent LEC access prices vary according to them. We acknowledge that it is possible  X -that competition can vary significantly even within such a zone.  {O -ԍ See, e.g., New York Telephone Company and New England Telephone and Telegraph Company, Memorandum Opinion and Order, 10 FCC Rcd 5070 (Com. Car. Bur. 1995). Alternatively, should we require that the geographic areas coincide with the zones adopted in the Universal Service  Xy-proceeding to determine high cost areas?y" yOL-ԍ The Joint Board concluded that the 1996 Act explicitly delegated authority to the state commissions to designate the area throughout which a carrier must provide the defined core services in order to be eligible for universal service support. The Joint Board also recommended that this Commission urge states to designate service areas for nonrural telephone company areas that are of sufficiently small geographic scope to permit  {Ol-efficient targeting of high cost support and to facilitate entry by competing carriers. Universal Service  {O6-Recommended Decision at paras. 17578. A third approach would be to use the same geographic areas that we might select for geographic deaveraging if we were to adopt the marketbased approach set out in Section V, below. We seek comment on these options. "4F0*&&aa"Ԍ X- x 2.` ` Competitive Factors (#`  X-x` ` a. Demand Responsiveness   yOK-ԍ Demand responsiveness measures the sensitivity of the quantity demanded to price changes. Demand responsiveness is typically measured by the elasticity of demand, which is the percentage change in the quantity demanded for a particular product will be following a one percent change in the price of that product. Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics 29 (1992). x156. Incumbent LECs may seek to demonstrate that the market for particular interstate access services is competitive through evidence indicating that, where comparable access services are available to the incumbent LECs' customers, a significant number of those  customers have the ability to evaluate the full range of market options available to them, and the customers do in fact exercise these options. We therefore propose that the demand responsiveness of the incumbent LECs' customers should be an important factor in assessing the level of competition for incumbent LEC services for purposes of determining whether a service should be removed from price cap regulation. We seek comment on this proposal. Parties should identify the relevant factors that should be used in determining whether an incumbent LEC's customers are demandresponsive; the data and information that would be necessary and relevant in determining whether an incumbent LEC's customers are demandresponsive; and whether the fact that incumbent LECs have relatively few customers that account for most of their interstate access demand affects the usefulness of demandresponsiveness as a factor in determining the level of competition. Alternatively, we seek comment on the proposal that a LEC need only provide evidence that comparable access services are available from other carriers and need not provide evidence specifically on demand responsiveness.  X-( x` ` b. Supply Responsiveness 4 yOg-ԍ Supply responsiveness is typically measured using the elasticity of supply, a concept parallel to that used for demand elasticity. Supply elasticity measures the percentage change in the quantity supplied that results from  {O-a one percent change in the price of a product. Id. at 32. A high supply elasticity indicates that entry is relatively easy and that any attempt by an incumbent to raise prices will result in new entry. Conversely, a low supply elasticity is indicative of market power.4(# x157. We invite comment on whether supply responsiveness should be a factor in determining the level of competition for purposes of determining whether specific interstate access services should be removed from price cap regulation. If so, we ask parties to identify the factors that are relevant in ( determining whether an incumbent LEC's competitors have enough readilyavailable supply capacity to constrain the incumbent LEC's market behavior and inhibit it from charging excessive rates; and the data and information that would be necessary and relevant in determining whether an incumbent LEC's competitors are supply"NGb 0*&&aa"ԫ X-responsive.z yOy-ԍ The incumbent LEC's elasticity of demand is affected by new entrants' elasticity of supply. It can be shown that the incumbent LEC's demand becomes more responsive to changes in price as the new entrants' supply becomes more elastic and their market share increases. These results indicate that as new entrants become capable of supplying access services to more customers, an increase in access prices by the incumbent LEC results in a larger decrease in the quantity of access services purchased from the incumbent LEC and an  {Oa-increase in the amount supplied by the new entrants. See Carleton and Perloff, Modern Industrial Organization 15869, 17274 (1993). Supply elasticities of an incumbent LEC's competitors may be important in assessing the level of competition for incumbent LEC services. However, we tentatively conclude that the ready availability of unbundled network elements at forwardlooking economic cost decreases the cost of entry for access services. Their ready availability would indicate a high supply elasticity in the access market.  X-  Xv- x` ` c. Market Share (#  XH-x158. As we observed in the Price Cap Second FNPRM, at the time we considered giving AT&T streamlined regulation for certain longdistance services, we determined that a  X -high market share does not necessarily confer market power. Z  {O-ԍ Price Cap Second FNPRM, 11 FCC Rcd at 922 (citing Interexchange Order, 6 FCC Rcd at 5890; Revisions to Price Cap Rules for AT&T Corp., CC Docket No. 93197, Report and Order, 10 FCC Rcd 3009, 3015 (1995)).  A company that enjoys a very high market share will be constrained from raising its prices above cost if the market is characterized by high supply and demand elasticities at prices even slightly above competitive  X -levels.W ,  {O-ԍ Interexchange Order, 6 FCC Rcd at 5887.W An analysis of the level of competition for incumbent LEC services based solely on an incumbent LEC's market share at a given time may not provide sufficient evidence for us to conclude that substantial competition truly exists. While we do not propose to ignore market share data in assessing the level of competition for incumbent LEC services, we propose to consider market share in conjunction with other factors, including, but not necessarily limited to, supply and demand elasticities and pricing trends. We ask parties whether market share should be a factor in determining the level of competition for purposes of determining whether services should be removed from price cap regulation. If so, we ask parties to discuss how market share should be measured.  X-vx` ` d. Pricing of Services Under Price Cap Regulation  X- x159. Evidence that a price cap LEC is pricing services below the price cap ceiling over a sustained period may indicate that such services are subject to competitive pressures, particularly in markets with high supply and demand elasticities. An incumbent LEC's vbelowcap pricing of services, however, is not necessarily a reliable measure of competition. "~H 0*&&aa" While belowcap pricing may indicate a market with high supply and demand elasticities, it could also occur because the incumbent LEC is behaving strategically in order to be relieved of regulation. Pricing at the cap may be evidence of a lack of competition, or that the cap is close to the forwardlooking economic cost of the service. How much significance should we give to evidence that a price cap LEC is pricing services below the price cap ceiling over a sustained period?  X_- x` ` e. Other Factors  XH- x160. We invite comment and discussion on whether there are other factors in addition to those discussed above that we should consider in an evaluation of the competition faced by an incumbent LEC, for example elimination of barriers to entry in the event it is not otherwise required. Parties that suggest other factors to assess the level of competition for incumbent LEC services should discuss what data and information would be necessary to assess the relative importance of these factors.  X-!R1 J:\ACCESS.REF\V.ARG #X PɒP#X01Í ÍX01Í Í#Xj PynXP#  vV. MARKETBASED APPROACH TO ACCESS REFORM TP  Xb- A.xIntroduction x161. In this section, we seek comment on an approach to access reform that relies on marketplace forces to move interstate access prices to more economically efficient levels.v Under this approach, our primary role would be to remove regulatory requirements that inhibit the operation of market forces. In the Third Report and Order, below, we begin this process by adopting two immediate changes: we eliminate the price caps lower service band indices; and we ease substantially the requirements necessary for the introduction of new interstate  X-access services.L {O#-ԍ See Section IX, infra.L In Section III, above, we propose rate structure changes designed to make the baseline regulatory scheme more efficient. In this section, we propose a plan for reducing regulation in two phases as competitive benchmarks are achieved short of substantial  Xe-competition. eZ {Op-ԍ In the Price Cap Second FNPRM, we mentioned three significant phases at which it may be appropriate to remove regulatory constraints: (1)the removal of certain barriers to competitive entry; (2)the point where a particular service is subject to substantial competition; and (3)the point where a carrier no longer can exercise  {O -market power in the provision of that service. Price Cap Second FNPRM, 11 FCC Rcd at 86162, 90508, 91523, 92730.  x162. Using a competitive paradigm, the issue becomes one of identifying the market conditions that should trigger the removal of existing regulatory constraints. Under the procedure we propose in this section, we would implement regulatory reforms as incumbent" I0*&&aa=" LECs demonstrate that their local markets have achieved predefined, specific transition points, or "competitive triggers." We are seeking comment on removing uneconomic regulatory constraints in two preliminary phases before a finding of substantial competition for access services in specific areas permits the detariffing of access services. x163. We seek comment on whether Phase 1, potential competition, would be achieved when an incumbent LEC has opened its network by removing the most immediate barriers to competitive entry. At this stage, we are seeking comment on targeted reforms that remove uneconomic regulatory requirements that inhibit incumbent LECs from charging access prices that reflect the cost differentials in serving different geographic areas, from lowering access prices nonpredatorily, and from pricing optional new services based on market considerations. We are seeking comment on whether an incumbent LEC should be required to show that some or all of the following conditions exist to trigger Phase 1: (1) unbundled network element prices are based on geographically deaveraged, forwardlooking economic costs in a manner that reflects the way costs are incurred; (2) transport and termination charges are based on the additional cost of transporting and terminating another carrier's traffic; (3) wholesale prices for retail services are based on reasonably avoidable costs; (4) network elements and services are capable of being provisioned rapidly and consistent with a significant level of demand; (5) dialing parity is provided by the incumbent LEC to competitors; (6) number portability is provided by the incumbent LEC to competitors; (7) access to incumbent LEC rightsofway is provided to competitors; and (8) open and nondiscriminatory network standards and protocols are put into effect. We anticipate that at least some incumbent LECs reasonably should be able to satisfy these conditions during 1997. We also invite comment on whether the first three possible conditions, which relate to the pricing of uses of the incumbent LECs' networks other than access, might be sufficient to permit certain of the access pricing reforms about which we are seeking comment. x164. We invite comment on whether Phase 2 would be met when an actual competitive presence has developed in the marketplace. For an incumbent LEC to demonstrate that Phase 2 has been achieved for a particular service or within a given area, we invite parties to comment on the following tests: (1) demonstrated presence of competition; (2) full implementation of competitively neutral universal service support mechanisms; and (3) credible and timely enforcement of procompetitive rules. We also seek comment on whether an incumbent LEC should instead be eligible for Phase 2 treatment if it has made its facilities and services available in a reasonable and nondiscriminatory fashion, but no competitors have  X-entered to serve the incumbent LEC's service area. yOT"-ԍ For example, new carriers may be unlikely to enter a highcost area in the absence of a competitively neutral universal service mechanism. Would this be sufficient to address the public interest considerations involved in implementing the Phase 2 reforms? "!J 0*&&aa "Ԍx165. We invite comment on this general approach to access reform, and on the specific regulatory reforms proposed and their respective competitive benchmarks. We also seek comment on whether these or other regulatory reforms should be implemented without the achievement of any competitive benchmarks, or upon the achievement of benchmarks different from those proposed.  Xv-x166. The 1996 Act became law after we issued the Price Cap Second Further NPRM. Because many of the issues raised in that Notice are closely related to issues central to this proceeding, we here renotice many of the proposed provisions to remove regulatory burdens  X3-contained in the Price Cap Second FNPRM. In developing this Notice we have considered  X -the comments we received in response to the Price Cap Second FNPRM. Because of the intervening passage of the 1996 Act, however, we will limit the record in this proceeding to  X -the comments received in response to this Notice. Parties who filed in response to the Price  X -Cap Second FNPRM should not rely on those comments, but instead should file anew.  {OV-ԍ Parties may attach their Price Cap Second FNPRM comments as appendices and incorporate them by reference. x167. As discussed in Section II.A, above, the removal of regulatory constraints considered in this section is applicable to incumbent LECs subject to price cap regulation. Arguably, small incumbent LECs are affected in the sense that regulatory constraints are not  Xl-being removed for them as are some of the constraints for price cap incumbent LECs.ol" {O?-ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.o Small incumbent LECs will not be otherwise affected by the proposals contained herein. While these proposals may indirectly affect small entities, especially competitive LECs and access customers, we anticipate that they will not have an impact on small entity reporting,  X-record keeping, or other compliance requirements.e {Ou-ԍ See Regulatory Flexibility Act, 5 U.S.C.  603(b).e We invite parties to comment on this  X-analysis.QF {O-ԍ See also Section XI, infra.Q  X- B.XxPhase 1 Potential Competition(#  X- x168. We propose to eliminate four significant regulatory constraints when an incumbent LEC can demonstrate that it faces potential competition for interstate access services in specific geographic areas: the prohibition against geographic deaveraging within a study area; the ban on volume and term discounts for interstate access services; the current prohibition against contract tariffs and individual request for proposals (RFP) responses; and"AK0*&&aa"  X-various restraints on the ability of incumbent LECs to offer new, innovative access services.~ yOy-ԍ The Commission does permit some geographic deaveraging and some volume and term discounts, in  {OA-limited circumstances in conjunction with expanded interconnection offerings. See, e.g., Expanded Interconnection with Local Telephone Company Facilities, CC Docket No. 91141, Report and Order and Notice  {O-of Proposed Rulemaking, 7 FCC Rcd 7369, 745456 (1992) (Special Access Expanded Interconnection Order) (geographic deaveraging); Transport Phase 1, Second Report and Order and Third Notice of Proposed  {Oe-Rulemaking, 8 FCC Rcd 7374, 743336 (1993) (Switched Transport Expanded Interconnection Order) (volume and term discounts). We note that Ameritech has proposed conditioning simplification of price cap regulation upon  X-the achievement of certain competitive triggers.U {O -ԍ Ameritech December 6 Letter at 1011.U We propose these changes because, once a LEC satisfies the triggers we have identified, competitive forces should come most quickly to bear on the provision of interstate access in lowcost geographic areas and to large customers. Removing these restraints should permit LECs greater ability to price economically and therefore bring more competitive pressures, including lower prices, in areas and for services where we expect competitive forces initially to be strongest. Such reforms would have the goal of fostering efficient and effective competition, to the benefit of customers, wherever possible. Without such reform, continuing uneconomic regulation may serve primarily to permit inefficient new entrants to gain market share among the most attractive customers rapidly. We seek comment generally on this analysis and specifically on the conditions and pricing reforms set out below. We also seek comment on whether we should modify any other of our regulatory pricing constraints at the time the Phase 1 competitive triggers have been met.  X-Xx 1.X` ` Trigger and Geographic Scope (#` x169. We propose that the Phase 1 rule changes take effect when an incumbent LEC's network has been successfully opened to competition. The proposed Phase 1 rule changes remove restrictions that limit the ability of incumbent LECs to reprice access services in ways that respond to competitive pressure, but do not impede competitive entry. We seek comment on whether some or all of the tests described below provide the necessary and sufficient criteria for us to determine, for this purpose, whether an incumbent LEC's network has been opened to competition. We also seek comment on whether we should use any other test instead of, or in conjunction with, those we propose.  X-x170.  Unbundled Network Elements. The first condition we propose is that unbundled network elements be available at forwardlooking economic cost, i.e., on the basis of the TELRIC of the network element (also known as Total Element Long Run Incremental Cost), plus a reasonable allocation of common cost. Unbundled elements provide a ubiquitous substitute for access service. Where access charges exceed forwardlooking economic cost (due to the structure or level of access being inefficient), IXCs have an artificial incentive to""L0*&&aa\" "win" the customer and provide both local and toll service using unbundled elements. We expect that availability of unbundled elements at TELRIC prices as a substitute for access charges will ultimately require the LEC to set its charges in an economically efficient manner so as to give customers the most economic value consistent with covering costs. Will the availability of unbundled network elements at forwardlooking economic costs drive LECs' access charges to efficient levels and structures? Or will it only tend to constrain the overall level of charges, and give incumbent LECs incentives to choose inefficiently high or inefficiently structured access charges, thus disadvantaging IXCs that are not effectively integrated into local service, and thus driving the market, possibly inefficiently, towards onestop shopping? Commenters are asked to outline the specific mechanism by which such competition will affect access rates. Those who believe competition from unbundled network elements will not affect access rates should explain why. x171. In order for unbundled elements to promote ubiquitous competition effectively, prices for unbundled network elements must be geographically deaveraged. Costs may vary across geographic areas based on the density of the area served, topography, or other characteristics of the area. When the prices of elements that vary materially in cost are averaged, the ability to substitute unbundled elements for access will not drive access rates to their efficient level, because such prices will understate the cost of providing services over the elements in highcost areas and overstate the cost of providing services over the elements in lowcost areas. When element prices have been deaveraged to reflect cost differences, any divergence between element prices and access charges required by regulation creates an artificial incentive to substitute unbundled elements for access. x172. We seek comment on whether, for purposes of implementing marketbased access reform, an incumbent LEC should not be deemed to have satisfied the Phase 1 competitive triggers unless and until rates for unbundled network elements are available at geographically deaveraged, forwardlooking economic costs in a manner that reflects the way costs are incurred. For the purpose of determining whether deaveraging has occurred, we tentatively conclude that there should must be at least three geographic zones.  X7-x173. Transport and Termination. The next condition we propose for Phase 1 is that transport and termination be available for local traffic at costbased rates. Because unbundled network elements only act as an effective substitute for switched access where the requesting carrier can provide both local and interexchange service to the end user, a carrier must be able to offer ubiquitous local service at competitive rates. This requires transport and termination on the LEC network to be available at the incumbent LEC's additional cost. Even assuming rates are reciprocal, transport and termination rates that exceed cost impede efficient entry and limit the extent to which competitive LECs will compete for customers in local exchange and exchange access markets. Where a customer makes more calls than he receives, inflated transport and termination rates will impede competition for that customer. We seek comment on whether we should begin to implement marketbased access reform for an incumbent LEC"S%M0*&&aa $" before that incumbent LEC has complied with the statutory requirement to provide transport and termination at costbased rates.  X-x174. Resale. We also propose that, in order to gain Phase 1 treatment, an incumbent LEC must offer its retail services to resellers at a wholesale price, which is equal to the retail price minus the reasonably avoidable cost of providing wholesale rather than retail service. Congress provided that incumbent LECs should make their retail services available to new  Xa-entrants at the retail rate less costs that will be avoided.Ua yO-ԍ 47 U.S.C.  251(c)(4) and 252(d)(3).U Although resellers do not compete with incumbent LECs in the provision of access, this requirement is a "stepping stone" in the provision of other forms of competition. Resale should provide new entrants with a vehicle for rapid entry into the local exchange retail marketplace and with the ability to compete throughout an incumbent LEC's service area. We seek comment on this proposal.  X -x175. Availability of Elements and Services. Fourth, we propose that incumbent LECs be required to demonstrate that competitors are able actually to order and receive elements and services in a commercially reasonable manner and in necessary quantities. Provisioning limits and provisioning delays must not materially limit the flow of customers from the incumbent LEC to its rivals. Incumbent LECs must create wellfunctioning and adequately sized provisioning systems, both for resale and for unbundled elements. We invite parties to comment on this proposal.  X!-x176. Other Factors. We propose several other factors for determining whether a LEC has made its network available to competitors; namely, whether an incumbent LEC provides dialing parity and number portability, whether an incumbent LEC gives competitors access to its rightsofway, and whether network standards are open and nondiscriminatory. For example, without the provision of dialing parity, competitors' customers must dial additional digits. Without number portability, a customer's desire to keep his phone number becomes a barrier to new entrants. We seek comment on these factors, and invite parties to comment on the availability of any factor that should be taken into account in determining whether the Phase 1 trigger has been met. x177. We tentatively conclude that it is important to use objectively measurable criteria for determining whether an incumbent LEC has achieved the Phase 1 trigger, so as to avoid delay caused by protracted proceedings and to minimize administrative burdens for all parties. In determining whether an incumbent LEC meets the Phase 1 criteria, we tentatively conclude that the incumbent LEC seeking Phase 1 treatment offer us objective evidence of the existence of these conditions. After receiving the incumbent LEC's filing, we propose to allow for public comment. We propose that we would then issue our decision within 90 days after the comment period has ended. We seek comment on this proposed review mechanism. "#NX0*&&aae""Ԍx178. We solicit comment on the procedures that an incumbent LEC should follow to demonstrate that it has met the Phase 1 competitive trigger. Petitioners should discuss whether an incumbent LEC should file a petition for waiver, a petition for declaratory ruling, or some other filing, and how the incumbent LEC should satisfy its burden of proof. Because incumbent LECs are required to open their networks throughout each state in which they offer service, we propose to require that incumbent LECs meet this competitive trigger on a statebystate basis in order to qualify for this relief. We ask, however, whether incumbent LECs should be able to seek Phase 1 treatment by geographic area, as discussed in Section IV.B., above, even though these areas would be smaller than study areas. We seek comment on this proposal. x179. We also invite parties to comment on what actions the Commission should take in the event that it is shown that a LEC that has received approval for Phase 1 or Phase 2 relief, or has demonstrated that substantial competition exists for a particular service, no  X -longer satisfies the applicable criteria.e  {O7-ԍ See Sections V.C, infra, and IV.B, supra.e We particularly invite comment on whether the Commission's complaint process is the appropriate vehicle for parties to demonstrate the  X-necessary changed circumstances and the specific remedies t he Commission should employ in the event that an incumbent LEC no longer meets the applicable Phase 1 or Phase 2 criteria, or can no longer demonstrate the existence of substantial competition for a particular service.  X4-1Xx 2.X` ` Reforms (#`  X-x` ` a. Geographic Deaveraging x180. Our Part 69 rules generally require that an incumbent LEC's charges for access  X-elements be averaged within each of its study areas. Z yO-ԍ 47 C.F.R. 69.3(e)(7). A study area is a geographical segment of a carrier's telephone operations. Generally, a study area corresponds to a carrier's entire service territory within a state. Thus, carriers operating in more than one state typically have one study area for each state, and carriers operating in a single state typically have a single study area. Carriers perform jurisdictional separations at the study area level. For jurisdictional separations purposes, the Commission adopted a rule freezing study area boundaries effective November 15, 1984. Part 36 of the Commission's Rules, 47 C.F.R., Part 36, AppendixGlossary, definition of  {O|-"Study Area." See MTS and WATS Market Structure, Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, CC Docket Nos. 78-72 and 80-286, 49 Fed. Reg. 48325 (Dec. 12, 1984), adopted by the Commission, 50 Fed. Reg. 939 (Jan. 8, 1985). We have developed, however, a system1 of density pricing zones, which may be used by an incumbent LEC to deaverage geographically its rates for special access and switched transport services if that incumbent  X|-LEC meets certain threshold interconnection requirements.|,  {OY%-ԍ 47 C.F.R. 69.123. See also Special Access Expanded Interconnection Order, 7 FCC Rcd at 745456. We instituted this density zone"|O 0*&&aa" pricing in response to the emergence of competition in markets for those services. In this Notice, we propose allowing incumbent LECs that have met the Phase 1 trigger to deaverage rates geographically for all access charge elements other than the SLC. We ask generally whether incumbent LECs should also be able to deaverage the SLC geographically. In the case of first residential lines and singleline business lines, should incumbent LECs be permitted only to make geographicallydeaveraged reductions in the SLC, in light of the Joint  Xv-Board's recommended decision that there be no increases in the SLC for those lines?$v {O-ԍ In the Universal Service Recommended Decision, the Joint Board also recommended that there be a reduction in the SLC as applied to first residential lines and singleline business lines, if the Commission bases  {O -universal service contributions on all telecommunications revenues. Universal Service Recommended Decision at paras. 76973.   XH-x181. Incumbent LECs addressing this issue in response to the Price Cap Second  X3-FNPRM generally supported immediate geographic deaveraging of their charges for access elements. They asserted that costs vary significantly between urban and rural areas. They argued that the Commission should allow incumbent LECs to begin to deaverage their rates across geographic regions because noncostbased, averaged rates cannot be maintained when  X -their markets are open to competition.R  {O>-ԍ E.g., Pacific Bell Comments at 27.R Other commenters, particularly IXCs, opposed geographic deaveraging of access charges, arguing that incumbent LECs had not presented evidence that zone pricing would result in the reduction of prices towards cost. In particular, AT&T opposed zone pricing for local switching, arguing that local switching was not subject to competition, and that it is unlikely that the costs of local switching vary with volume or  Xf-geography in a manner similar to transport costs.>fF yO]-ԍ AT&T Reply at 5760.> As a result, AT&T predicted that geographic deaveraging of the remaining access charge elements would lead to higher margins between price and cost and would perpetuate uneconomic crosssubsidies.  X -x182. In this Notice, we propose to permit price cap incumbent LECs that satisfy the Phase 1 eligibility requirements to deaverage geographically their access charge elements. We note that the availability of geographically deaveraged unbundled network elements is proposed as a prerequisite for Phase 1 relief. Where unbundled network elements are deaveraged, continuing to require access rates to be averaged across the study area would foreclose the incumbent LEC from meeting competition from unbundled network elements in lowcost areas, while still requiring the incumbent LEC to charge belowcost access rates in highcost areas. As discussed in Section III.B, above, we seek comment on whether section 254(e) requires geographic deaveraging. We also seek comment on the relationship between  X;-geographic deaveraging of access charges and section 254(g).N; {O%-ԍ See Section II.B, supra.N";Ph 0*&&aa"Ԍx183. Moreover, such discrepancies between price and cost distort competition by creating incentives for entry in lowcost areas by carriers whose cost of providing service is actually higher than the incumbent LEC's cost of serving that area. Similarly, geographic averaging across large geographic areas distorts the operation of markets in highcost areas when we require incumbent LECs to continue offering services in those areas at prices substantially lower than their costs of providing those services. Prices that are below cost reduce the incentives for entry by firms that could provide the services as efficiently, or more efficiently, than the incumbent LEC. Therefore, we propose that once the requirements under Phase 1 have been met, incumbent LECs should be permitted to deaverage geographically rates for access elements.  X -x184. We note that, pursuant to the Special Access Expanded Interconnection Order  X -and the Switched Transport Expanded Interconnection Order, incumbent LECs currently may deaverage access charges for special access and switched transport services when one cross X -connect has been taken within the study area.t\  {O;-ԍ Special Transport Expanded Interconnection Order, 7 FCC Rcd at 745455; Switched Transport  {O-Expanded Interconnection Order, 8 FCC Rcd at 7426 n.230. An interconnector will be deemed to have taken the crossconnect element when it has ordered the crossconnect and the LEC has provided this service.t Phase 1 deaveraging would be broader extending to all access elements other than the SLC, not just special access and switched  X-transport and complementary to deaveraging under our Expanded Interconnection orders. Thus, for any incumbent price cap LECs that have not already met the one crossconnect threshold for transport deaveraging, we propose to permit geographic deaveraging for special access and switched transport when one crossconnect has been taken in the study area or when Phase 1 has been met, whichever is earlier. x185. We seek comment on the variability of the costs of providing access charge elements. In particular, we ask parties to submit evidence indicating whether perline and/or perminute costs of local switching services vary geographically. We also seek comment on the number and size of zones that should be required or allowed. One possible method is to permit or require that the geographic areas for access deaveraging match those implemented by each state pursuant to the 1996 Act. Because the prices for competitors using incumbent LEC unbundled network elements will differ among these density zones, it would seem necessary to permit incumbent LECs to price their own access services using the same areas. If the states deaverage network elements and the Commission does not deaverage access, IXCs would only purchase network elements in lowcost areas, and would only take access in highcost areas. We seek comment on alternative approaches for ensuring that geographic zones generally reflect cost differences and that the zones for unbundled network elements,  X-universal service, and access charges are compatible. yO$-ԍ For example, different geographic zones may work for these purposes so long as the results are not widely disparate in any particular location. We also ask whether any other"QD0*&&aa" geographic areas would be more appropriate than either of these options. Further, we seek comment on whether incumbent LECs should be permitted or required to change the density zones established for special access and switched transport to coincide with the zones we ultimately adopt in this proceeding. In considering how best to deaverage geographically the remaining access elements, we seek to minimize administrative burdens for incumbent LECs and the Commission.  x186. Finally, we note that section 254(g) requires IXCs' rates to subscribers in rural  XH-and high cost areas to be no higher than the rates for subscribers in urban areas.@H yO -ԍ 47 U.S.C.  254(g).@ We therefore invite parties to comment on how IXCs would be affected by incumbent LECs geographically deaveraging their rates for access elements.  X -x` ` b. Volume and Term Discounts x187. In this section, we consider permitting incumbent LECs to offer volume and term discounts for all of their access charge elements upon achievement of the Phase 1 competitive conditions. Volume and term discounts are permitted for special access services  Xy-without any competitive showing or waiver of Part 69 of the Commission's rules.~yX {O-ԍ See Special Access Expanded Interconnection Order, 7 FCC Rcd at 745865.~ We currently per