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Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Access Charge Reform ) CC Docket No. 96-262 ) Price Cap Performance Review for Local ) CC Docket No. 94-1 Exchange Carriers ) ) Low-Volume Long Distance Users ) CC Docket No. 99-249 ) Federal-State Joint Board On Universal Service ) CC Docket No. 96-45 ) NOTICE OF PROPOSED RULEMAKING Adopted: September 14, 1999 Released: September 15, 1999 NPRM Comment Date: October 29, 1999 NPRM Reply Date: November 19, 1999 By the Commission: I. CALLS PROPOSAL 1. In this Notice of Proposed Rulemaking (NPRM), we seek comment on a proposal submitted by the Coalition for Affordable Local and Long Distance Services (CALLS)1 to the Commission on July 29, 1999.2 The CALLS Proposal is an interstate universal service and interstate access reform plan covering price cap incumbent local exchange carriers (LECs). It is designed to be implemented over a five-year period beginning in January 2000 and would apply to those carriers who voluntarily elect to participate. 2. The CALLS Proposal is an integrated proposal developed through negotiation among the LECs and interexchange carriers (IXCs) who make up the coalition. The CALLS members offer the proposal as a comprehensive solution to the membership's access charge, universal service, and price cap concerns. First, the plan would revise the current system of common line charges by combining existing carrier and subscriber charges into one flat-rated subscriber line charge (SLC), and would provide for limited deaveraging of those charges under specific conditions.3 Second, the plan would establish a portable universal service fund that provides explicit support to replace support currently implicit in interstate access charges.4 Third, the plan would establish a "social compact" under which traffic-sensitive switched access rates are reduced annually until they reach an agreed level; once that level is reached, rates for all access elements are frozen until July 1, 2004.5 CALLS asks that the plan be adopted by the Commission without modification as an integrated package, and implemented for the five-year period beginning in January 2000.6 CALLS believes this plan will promote comparable and affordable universal service, reduce long distance bills, and promote competition in rural and residential markets.7 3. The specifics of the CALLS Proposal are set forth in the August 20, 1999 ex parte and its attachments. We incorporate those documents as part of this Notice, and provide the full text of each in the Appendices. Appendix A contains a complete description of the CALLS Proposal. Appendix B contains draft amendments to the Commission's rules. Appendix C is a memorandum prepared by CALLS in support of its proposal. 4. Some of the issues addressed by the CALLS Proposal involve matters that are already the subject of pending Commission and court proceedings. Specifically, we sought comment in May, 1999 on the issue of how incumbent LECs should reduce interstate access rates in order to reflect any increased high cost universal service support that they receive.8 We note that the state members of the Federal-State Joint Board on Universal Service (State Members) submitted comments in response to that notice recommending an approach that differs in critical respects from the CALLS Proposal.9 The State Members would have the Commission reduce or eliminate the SLC as a means of complying with section 254(k) of the Communications Act of 1934 (Act), as amended by the Telecommunications Act of 1996.10 They suggest combining all federal common line charges into a single flat charge assessed upon IXCs. In July 1999, we began an inquiry into the effects of flat-rate charges on single-line residential and business customers who make few, or no, interstate long distance calls. 11 In August 1999, we issued a Further Notice of Proposed Rulemaking in Access Charge Reform proceeding that, inter alia, sought comment on restructuring the recovery mechanism in the traffic-sensitive basket for price cap companies, as well as changing the price cap formula for the traffic-sensitive basket.12 In addition, the United States Court of Appeals for the District of Columbia Circuit recently remanded to the Commission portions of the May 1997 order setting the X-factor in the price cap formula at 6.5 percent. We are currently considering issues raised by the court's remand and intend to seek comment on these issues in a future proceeding. That forthcoming NPRM may likely contain proposals that are different from those in the CALLS Proposal. 5. We seek comment on whether we should adopt the CALLS Proposal in its entirety, as requested by the CALLS members. We also seek comment on whether, in the event we do not adopt the proposal, there are any aspects of the proposal that we should incorporate into any of our concurrent proceedings. We also invite commenting parties to propose alternative plans to that submitted by CALLS. II. PROCEDURAL MATTERS AND ORDERING CLAUSES A. Ex Parte Presentations 6. This is a permit-but-disclose notice and comment rulemaking proceeding. Ex parte presentations are permitted, except during the Sunshine Agenda period, provided that they are disclosed as provided in Commission rules.13 B. Initial Regulatory Flexibility Act 7. As required by the Regulatory Flexibility Act (RFA),14 the Commission has prepared this Initial Regulatory Flexibility Analysis (IFRA) of the possible significant economic impact on small entities by the proposals in the this Notice of Proposed Rulemaking (NPRM). Written public comments are requested on the IFRA. These comments must be filed in accordance with the same filing deadlines as comments on the rest of this NPRM, and should have a separate and distinct heading designating them as responses to the IFRA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA) in accordance with the RFA.15 8. Legal Basis. This rulemaking action is supported by sections 4(i), 4(j), 201-205, 254, and 403 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 201-205, 254, and 403. 9. Description and Estimate of the Number of Small Entities to which the Notice will Apply. The RFA generally defines the term "small entity" as having the same meaning as the term "small business". In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act unless the Commission has developed one or more definitions that are appropriate for its actives.16 A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional criteria established by the Small Business Administration. The Small Business Administration has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be a small entity that has no more than 1500 employees.17 Total Number of Telephone Companies Affected. 10. Price Cap Local Exchange Carriers. This rulemaking applies only to price cap LECs. We do not have data specifying the number of these carriers that are either dominant in their field of operations, are not independently owned and operated, or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of price cap LECs that would qualify as small business concerns under the SBA's definition. However, there are only 13 price cap LECs. Consequently, we estimate that significantly fewer than 13 providers of local exchange service are small entities or small price cap LECs that may be affected by these proposals. Although, we have included small price cap LECs in this RFA analysis, we emphasize that this RFA action has no effect on Commission analyses and determinations in other, non-RFA contexts. In particular, our treatment here of small price cap LECs as "non-dominant" for SBA size standards has no effect on our determinations of "dominance" in other, common carrier, contexts. C. Deadlines and Instructions for Filing Comments 11. Pursuant to Sections 1.415 and 1.419 of the Commission's rules, 47 C.F.R. §§ 1.415, 1.419, interested parties may file comments on or before October 29, 1999 and reply comments on or before November 19, 1999. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS) or by filing paper copies. See Electronic Filing Documents in Rulemaking Proceedings, 63 Fed. Reg. 24,121 (1998). 12 Comments filed through the ECFS can be sent as an electronic file via the Internet to . Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appear in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number referenced in the caption. In completing the transmittal screen, commenters should include their full name, Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e-mail. To get filing instructions for e-mail comments, commenters should send an e-mail to ecfs@fcc.gov, and should include the following words in the body of the message, "get form $0.00, and Zone Average Revenue Per Line - $9.20 > $0.00) (b) Study Area Above Cap Revenues is the sum of Zone Above EUCL Cap Revenues for all zones in the study area. §54.813 Calculation of Study Area Access USF Support for Areas Served by Participating Price Cap LECs The Administrator, based on the data submitted pursuant to § 54.812, shall calculate the Study Area Access Universal Service Support for areas served by participating Price Cap Incumbent LECs according to the following methodology: (1) Calculate Nationwide Total Above Cap Revenues. Nationwide Total Above Cap Revenues is the sum of all Study Area Above Cap Revenues for all price cap ILECs, whether or not participating. (2) Calculate Preliminary Study Area Universal Service Support (PSUASS). (i) If the Nationwide Total Above Cap Revenues is greater than $650 million, then the Preliminary Study Area Universal Service Support (PSAUSS) equals the Study Area Above Cap Revenues multiplied by the ratio of $650 million to Nationwide Total Above Cap Revenues (i.e. Preliminary Study Area Universal Service Support = Study Area Above Cap Revenues X ($650 Million / Nationwide Total Above Cap Revenues). (ii) If the Nationwide Total Above Cap Revenues is not greater than $650 million, PSAUSS equals the Study Area Above Cap Revenues. 2) (3) Calculate the Minimum Delta (MD) by study area. Within each study area the Minimum Delta will be equal to the Minimum Access USFStudy Area less the PSAUSS, if the difference is greater than zero. If the difference is less than or equal to zero, the MD is equal to zero. (4) Calculate the Total National Minimum Delta (TNMD) by summing all study are Minimum Deltas nationwide. (5) Calculate the Minimum Adjustment Amount. (i) If the TNMD is greater than $75 million, then the Minimum Adjustment Amount (MAA) equals the product of the current phased in percentage times the MD by study area times the ratio of $75 million to TNMD Or: Minimum Adjustment Amount = (MAA Phase In Percentage) X (Minimum Delta) X ($75 million / Total National Minimum Delta). (ii) If the TNMD is less than $75 million, then the MAA equals the product of the MAA Phase In Percentage and the MD by study area. (6) Calculate the Total National Minimum Support Requirement (TNMSR), which equals the sum of the MSR for all study areas. The Minimum Support Requirement for a study area is determined as follows: (i) Preliminary Study Area Universal Service Support ( ($650 million - TNMSR) ( Nationwide Sum of PSAUSS for all study areas in which MSR is $0. (ii) If the MAA is equal to zero, the MSR is the Preliminary Minimum Access USFStudyArea. (7) Calculate Study Area Access USF Support (SAAUS). (i) For study areas in which the MAA was zero, and within which the participating price cap incumbent LEC has established geographically deaveraged state-approved rates for UNE loops, the SAAUS for that study area is equal to: Preliminary Study Area Universal Service Support x ($650 million - TNMSR) ( $650 million. (ii) For study areas in which the MAA was zero, and within which the participating price cap incumbent LEC has not established geographically deaveraged state-approved rates for UNE loops, the SAAUS for that study area is the Preliminary Minimum Access USFStudyArea calculated pursuant to 54.811. (iii) For study areas in which the MAA was greater than zero, the SAAUS for that study area is the Minimum Support Requirement (MSR). §54.814 Support When Providing Service. An eligible telecommunications carrier shall receive payment of support pursuant to § 54.810 only for such months the carrier is actually providing service to the end user. The Administrator shall ensure that there is periodic reconciliation of support payments. §54.815 Transition Provisions. Study Area Access USF Support amounts for the area served by each participating price cap incumbent LEC will be recalculated on July 1, 2000, January 1, 2001 and thereafter as determined by the Administrator. PART 54 Subpart A - General Information Terms and Definitions Terms used in this part have the following meanings: Act. The term "Act" refers to the Communications Act of 1934, as amended. Administrator. The term "Administrator" shall refer to the National Exchange Carrier Association, Inc., until the date that an independent subsidiary of the National Exchange Carrier Association, Inc. is incorporated and has commenced the administration of the universal service support mechanisms. On that date and until the permanent Administrator has commenced the permanent administration of the universal service mechanisms, the term "Administrator" shall refer to the independent subsidiary established by the National Exchange Carrier Association, Inc. for the purpose of temporarily administering the portions of the universal service support mechanisms described in §69.616. On the date that the entity selected to permanently administer the universal service support mechanisms commences operations and thereafter, the term "Administrator" shall refer to such entity. Competitive eligible telecommunications carrier. A "competitive eligible telecommunications carrier" is a carrier that meets the definition of and "eligible telecommunications carrier" below and does not meet the definition of an "incumbent local exchange carrier" in §51.5 of this chapter. Contributor. The term "contributor" shall refer to an entity required to contribute to the universal service support mechanisms pursuant to §54.703. Eligible telecommunications carrier. "Eligible telecommunications carrier" means a carrier designed as such by a state commission pursuant to §54.201. High Cost and Low Income Committee. The term "High Cost and Low Income Committee" shall refer to a committee of the Board of Directors of the Administrator's independent subsidiary that will have the power to bind the independent subsidiary's Board of Directors on issues relating to the administration of the high cost and low-income support mechanisms, as described in §69.615. Incumbent local exchange carrier. "Incumbent local exchange carrier" or "ILEC" has the same meaning as that term is defined in §51.5 of this chapter. Information service. "Information service" is offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service. Internet access. "Internet access" includes the following elements: (1) The transmission of information as common carriage; (2) The transmission of information as part of a gateway to an information service, when that transmission does not involve the generation or alteration of the content of the information, but may include data transmission, address translation, protocol conversion, billing arrangement, introductory information content, and navigational systems that enable users to access information services, and that do not affect the presentation of such information to users; and (3) Electronic mail services (e-mail). Interstate telecommunication. "Interstate telecommunication" is a communication of transmission: (1) From an State, Territory, or possession of the United States (other than the Canal Zone), or the District of Columbia, to any other State, Territory, or possession of the United States (other than the Canal Zone), or the District of Columbia, (2) From or to the United States to or from the Canal Zone, insofar as such communication or transmission takes place within the United States, or (3) Between points within the United States but through a foreign country. Interstate Transmission. "Interstate transmission" is the same as interstate telecommunication. Intrastate telecommunication. "Intrastate telecommunication" is a communication or transmission from within any State, Territory, or possession of the United States, or the District of Columbia to a location within that same State, Territory, or possession of the United States, or the District of Columbia. Intrastate Transmission. "Intrastate transmission" is the same as intrastate telecommunication. LAN. "LAN" is a local area network, which is a set of high-speed links connecting devices, generally computers, on a single shared medium, usually on the user's premises. Rural area. A "rural area" is a non-metropolitan county or county equivalent, as defined in the Office of Management and Budget's (OMB) Revised Standards for Defining Metropolitan Areas in the 1990s and identifiable from the most recent Metropolitan Statistical Area (MSA) list released by OMB, or any contiguous non-urban Census Tract or Block Numbered Area within an MSA-listed metropolitan county identified in the most recent Goldsmith Modification published by the Office of Rural Health Policy of the U.S. Department of Health and Human Services. Rural Health Care Corporation. The term "Rural Health Care Corporation" shall refer to the corporation created pursuant to §69.617 that shall administer specified portions of the universal services support mechanisms, as described in §69.618. Rural telephone company. "Rural telephone company" has the same meaning as that term is defined in §51.5 of this chapter. Schools and Libraries Corporation. The term "Schools and Libraries Corporation" shall refer to the corporation created pursuant to §69.617 that shall administer specified portions of the universal services support mechanisms, as described §69.619. State Commission. The term "state commission" means the commission, board or official (by whatever name designated) that, under the laws of any state, has regulatory jurisdiction with respect to intrastate operations of carriers. Technically feasible. "Technically feasible" means capable of accomplishment as evidenced by prior success under similar circumstances. For example, preexisting access at a particular point evidences the technical feasibility of access at substantially similar points. A determination of technically feasibility does not consider economic, accounting, billing, space, or site except that space and site may be considered if there is no possibility of expanding available space. Telecommunications. "Telecommunications" is the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received. Telecommunications Carrier. A "telecommunications carrier" is any provider of telecommunications services, except that such term does not include aggregators of telecommunications services as defined in section 226 of the Act. A telecommunications carrier shall be treated as a common carrier under the Act only to the extent that it is engaged in providing telecommunication services, except that the Commission shall determine whether the provision of fixed and mobile satellite service shall be treated as common carriage. This definition includes cellular mobile radio service (CMRS) providers, interexchange carriers (IXCs) and, to the extent they are acting as telecommunications carriers, companies that provide both telecommunications and information services. Private mobile radio service (PMRS) providers are telecommunications carriers to the extent they provide domestic or international telecommunications for a fee directly to the public. Telecommunications channel. "Telecommunications channel" means a telephone line, or, in the case of wireless communications, a transmittal line or cell site. Telecommunications service. "Telecommunications service" is the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used. Subpart E - Universal Service Support for Low-Income Consumers §54.403 Lifeline support amount. (a) The federal baseline Lifeline support amount shall equal $3.50 per qualifying low-income consumer.the tariffed rate in effect for the primary residential end user common line charge, as determined in accordance with §§ 69.152(d), for the qualifying low-income consumer. If the state commission approves an additional reduction of $1.75 in the amount paid by consumers, additional federal Lifeline support in the amount of $1.75 will be made available to the carrier providing Lifeline service to the consumer. Additional federal Lifeline support in an amount equal to one-half the amount of any state Lifeline support will be made available to the carrier providing Lifeline service to a qualifying low-income consumer if the state commission approves an additional reduction in the amount paid by that consumer equal to the state support multiplied by 1.5. $7.00 Ffor the qualifying low-income consumer, the , The federal Lifeline support amount shall not exceed $7.00 per qualifying low income customer. , $ for the qualifying low-income consumer, the tariffed rate in effect for the primary residential end user common line charge plus $3.50. * * * (d) In addition to the $7.00 per qualifying low-income consumer described in paragraph (a) of this section, eligible incumbent local exchange carriers that serrveserve qualifying low-income consumers who have toll blocking shall receive federal Lifeline support in amounts equal to the presubscribed interexchange carrier charge that incumbent local exchange carriers would be permitted to recover from such low-income consumers pursuant to §§ 69.153(b) of this chapter. Eligible incumbent local exchange carriers that serve qualifying low-income consumers who have toll blocking shall apply this support to waive qualifying low-income consumers' presubscribed interexchange carrier charges. A competitive eligible telecommunications carrier that serves qualifying low-income consumers who have toll blocking shall receive federal Lifeline support in an amount equal to the presubscribed interexchange carrier charge that the incumbent local exchange carrier in that area would be permitted to recover, if it served those consumers. Subpart I - Explicit Funding of Universal Service Support Currently Embedded in Interstate Access Rates § 54.800 Terms and Definitions (a) Average Price Cap CMT Revenue Per LineStudy Area. "Average Price Cap CMT Revenue Per LineStudy Area" has the same meaning as that term is defined in §§ 61.3(d). (b) MAA Phase In Percentage. "MAA Phase-In Percentage" is: 50% as of January 1__, 2000, 75% as of January 1, 2001 100% as of July 1, 2002. . (c) Minimum Adjustment Amount (MAA). "Minimum Adjustment Amount" or "MAA" has the same meaning as that term is definined in §§ 54.813(5). (d) Minimum Delta (MD). "Minimum Delta" or "MD" has the same meaning as that term is defined in §§ 54.813(3). (e) Minimum Support Requirement (MSR). "Minimum Support Requirement" or "MSR" has the same meaning as that term is defined in §§ 54.813(6). (f) Nationwide Total Above Cap Revenues. "Nationwide Total Above Cap Revenues" has the same meaning as that term is defined in §§ 54.813(1). (g) Preliminary Minimum Access USFstudy area . "Preliminary Minimum Access USFstudy area" is the amount calculated pursuant to Section §§ 54.811. (h) Preliminary Study Area Universal Service Support (PSAUSS) . "Preliminary Study Area Universal Service Support" or "PSAUSS" has the same meaning as that term is defined in §§ 54.813(2). (i) Study Area Above Cap Revenues. "Study Area Above Cap Revenues" is is tTthe sum of all Zone Above SLCEUCL Cap Revenues for all zones in the study area. (j) Study Area Access USF Support (SAAUS)). "Study Area Access USF Support" has the same meaning as that term is defined in §§ 54.813(7). (k) Total National Minimum Delta (TNMD) is t. The nationwides sum of all study area Minimum Deltas. nationwide. (l) Total National Minimum Support Requirement (TNMSR) is t. The sum of the MSR for all price cap incumbent LEC study areas. (m) Zone Above SLCEUCL Cap Revenues . "Zone Above SLC Cap Revenues" has the same meaning as that term is defined in §§ 54.812(a)(3). (n) Zone Average Revenue per Line. "Zone Average Revenue Per Line" means Tthe amount calculated as follows: Zone Average Revenue Per Line = (25% * (Loopzone price + (Port)price))+ U where, U(Uniform revenue per line Adjustment) = ((Price Cap CMT Revenue PerLinestudy area * Base Period Lines) - (25% * (LinesUNE Zone x (Loopzone price + Port Price x 12) for each zone))) Base Period LinesStudy Area(s) ÷ 12 Alternative 1: Loopzone price & PortPrice are the rates for unbundled loop and switch ports in a given UNE zone. Alternative 2: Loopzone price & PortPrice are the average cost of a loop and a line port, calculated using an FCC-approved cost model, within each geographic zone within a study area for which a state has created geographically deaveraged UNE loop rates. §54.801 General (a) The total amount of universal service support under this Subpart for areas served by price cap incumbent LECs as of December 31, 1999, is a maximum of $650 million per year, if all price cap incumbent LECs elect to participate and if no exchanges, other than those offered for sale prior to December 31, 1999, are sold to non-price-cap LECs. (b) A price cap LEC may elect to participate in the support mechanism described in this Subpart for all its incumbent LEC study areas by filing a written statement of its intent to do so with the Commission by January __, 1, 2000, or, in the case of a transfer of control within the first six months of calendar year 2000, by June 30, 2000. Such a price cap LEC is a "participating price cap incumbent LEC." A price cap LEC may not elect to participate in this support mechanism unless it also elects to participate in the interstate access charge rules described in Parts 61.--- and 69.--- [price cap and access charge rate structure changes under the plan]. Nothing in this subsection alters a carrier's obligation, or the obligations of providers of interstate telecommunications services, to contribute to universal service support pursuant to Section 54.709706 and 54.709. (c) Support that would be provided, if such incumbent LECs participated in this Subpart, to areas served by price cap incumbent LECs that do not electing to participate in this Subpart will not be distributed or collected. (d) In the event that all or a portion of a study area served by a participating price cap LEC is sold to an entity other than a price cap LEC, and the study area or portion thereof was not offered for sale prior to December 31, 1999, then the support that would otherwise be provided under this Subpart, had such study area or portion thereof not been sold, will not be distributed or collected. (e) In the event that a participating price cap LEC acquires additional exchanges within which it is an incumbent LEC from an entity other than a price cap LEC, that acquisition should be reported to the Administrator pursuant to Section 54.803 and included in the determination of study area support for the acquiring price cap LEC. (f) In the event that a participating price cap LEC acquires additional exchanges within which it is an incumbent LEC from an entity other than a price cap LEC, [I don't remember us setting a rule for this.] that acquisition should be reported to the Administrator pursuant to Section 54.803 and included in the determination of study area support for the acquiring price cap LEC §54.802 Qualification for Universal Service Support. (a) Study Area Access USF Support in excess of the Minimum Support Requirement. In order to receive Study Area Access Universal ServiceSF Support in excess of the Minimum Support Requirement, a participating price cap incumbent LEC must have established state-approved geographically de-averaged UNE Loops rates, according to geographic zones. (b) Participating Price Cap Incumbent LECs. A participating Price Cap Incumbent LEC may receive Portable Access USF Support Per Line if that LEC has submitted the information to the Administrator required pursuant to §§ 54.803. (c) Eligible Telecommunications Carriers. An Eligible Telecommunication Carrier that is not a price cap incumbent LECs but that is provide providing service within areas served by a participating price cap incumbent LECs may receive Portable Access USF Support Per Line for service to end users within areas served by that participating price cap incumbent LECs by submitting the information detailed in §§ 54.803(d) to the fund aAdministrator. §54.803 LECs Obligation to Report Universal Service Data (a) All price cap incumbent LECs shall submit to the Administrator, in accordance with the schedule established by the Administrator, the following information: (a) (1) The Preliminary Minimum Access USF study area; (2) Zone Average SLCEUCL Cap Revenues by zone for each Study Area within which the ILEC has established state state-approved geographically deaveraged rates for UNE loops. When geographically deaveraged UNE loop rates are established or when the rates for such loops change, the ILEC must file changed revised Zone Average SLCEUCL Cap Revenues calculations on or before 30 days prior to the beginning of the next quarter. (b) (b) All Eligible Telecommunications Carriers (ETCs), including price cap incumbent LECs, that provide service within a study area of a participating price cap incumbent LEC must submit by customer classification, and by zones where zones exist, the number of access lines served by in the ILEC study area to the Administrator. § 54.800 Universal Service Zones (a) The zones used for determining universal service will be the same zones that would be used for SLCEUCL de-averaging as described in §§69.152(q)(i). (b) (c) In a price cap study area where the incumbent LEC has not established state-approved prices for Unbundled Network Elements (UNEs) loops by zone, the fund administrator shall develop an estimate of the ILEC's Zone Above SLC EUCL Cap Revenues for transitional purposes, in order to reserve a portion of the fund for that study area. This estimate will be included by the aAdministrator in the nNationwide Study Area Above Cap Revenues calculated pursuant to §54.813. (1) For the purpose of developing this transitional estimate, the loop and port costs estimated by the FCC Proxy cost model, or other substitute method if no model is available, shall be used. (2) For the purpose of developing this transitional estimate, the administrator shall construct three zones. Wire centers within the study area will be grouped into these zones in such a way that each zone is assigned approximately one third of the lines in the study area, with the lowest cost wire centers assigned to Zone 1, the highest cost wire centers assigned to Zone 3, and the remainder to Zone 2. (a) In states where the incumbent LEC has not established state-approved prices for UNE loops by zone, the Administrator shall use the FCC Proxy Cost Model, or other substitute method if no model is available, to create proxy zones for administrative purposes only, by assigning lines to zones as follows: the lowest cost approximately one third of lines will be assigned by wire center to Zone 1, the highest cost approximately one third of lines will be assigned by wire center to Zone 3 and the remaining lines are assigned by wire center to Zone 2. Since lines will be assigned to zones on a wire center basis, the one third guideline is an approximation of the amount of lines to be included per zone. Support must be calculated for all price cap incumbent LECs, whether or not participating, to determine the allocation of universal service support to each LEC. §54.810 Portable Access USF Support (a) Each Eligible Telecommunication Carrier (ETC) that provides local exchange service, except through the resale of ILEC retail services pursuant to 47 U.S.C. §254(c)(4), to an end user within the study area of a participating price cap incumbent LEC shall receive Portable Access USF Per Line for each end user line provided during a given month. (b) In any study area within which the incumbent LEC has not established state approved geographically deaveraged rates for UNE loops, the Portable Access USF Support Per Line is Study Area Access USF Support divided by total lines (both ILEC and CLEC-provided) in that study area, using base period demand. Alternative 1 - Proportionate Allocation (c) Alternative 1 Alternative 1 (Proportionate Allocation): In any study area within which the incumbent LEC has established state approved geographically deaveraged rates for UNE loops, the Portable Access USF Support Per Line is calculated as follows: (1) Within each study area, determine the percentage proportion of Study Area Universal Service Support to Study Area Above Cap Revenues. (2) Within each zone and customer class (i.e. residential/ single line business and multiline business for each zone), Portable Access USF Support Per Line for that zone and customer class is Zone Above SLCEUCL Cap Revenues for that customer class times Study Area Access USF Support divided by Study Area Above Cap Revenues, divided by the number of lines of the customer class within that zone using base period demand. Alternative 2 (-Highest Cost Zone First) c) In any study area within which the incumbent LEC has established state approved geographically deaveraged rates for UNE loops, the Portable Access USF Support Per Line is calculated as follows. The fundingsupport in each study area will be made portable for lines in the highest cost zone first, and will "cascade" to lines in lower cost zones to the extent that sufficient funding is available. Beginning with the zone with the highest Zone Average Revenue Per Line, funding will be applied in the following order of priority: (1) To all lines in the highest zone, to eliminate the amount per line by which Zone Average Revenue Per Line exceeds the higher of $9.20 or the Average Revenue Per Line in the next highest zone; (2) If the Zone Average Revenue Per Line in the next highest zone is greater than $9.20, then to all lines in both zones to eliminate the amount per line by which Zone Average Revenue per Line exceeds $9.20; (3) To all residential and single line business lines in the highest zone, to eliminate the amount per line that Zone Average Revenue Per Line for these lines exceeds the higher of $7.00 or Average Revenue Per Line in the next highest zone; (4) If the Zone Average Revenue per Line in the next highest zone is greater than $7.00, then to all residential and single line business lines in both zones to eliminate the amount per line by which Zone Average Revenue Per Line exceeds $7.00. This "cascade" process will continue until all of the available funding has been assigned to lines by zone and by customer class; it may extend in similar fashion to additional zones, to the extent that their Zone Average Revenue per Line exceeds the $9.20 and $7.00 caps, and available funding permits. The per-line amount assigned to each multiline business line in a given zone would then be portable among eligible telecommunications carriers, as would the per-line amount assigned to each residence line and each single line business line in that zone. §54.811 Preliminary Minimum Access USFStudy Area (a) (a) If Average Price Cap CMT Revenue Per LineStudy Area is greater than $9.20 then: Preliminary Minimum Access USF study area = Price Cap CMT Revenue study area - (($7.00 X Residential & Single Line Business Lines study area X 12) + $9.20 X Multiline Business Lines study area X 12)) (b) If Average Price Cap CMT Revenue Per LineStudy Area is greater than $7.00 but less than $9.20 then: 1) 2) Preliminary Minimum Access USF study area = (Average Price Cap CMT Revenue Per LineStudy Area - $7.00) X (Residential & Single Line Business Linesstudy area X 12) (c) (c) If Average Price Cap CMT Revenue Per LineStudy Area is less than $7.00 then the Preliminary Minimum Access USF study area is zero. §54.812 Zone and Study Area Above SLCEUCL Cap Revenues (a) (a) The following steps shall be performed by the Administrator to determine Zone Above SLCEUCL Cap Revenues for each price cap incumbent LEC, whether or not participating. (1) Calculate Average Price Cap CMT Revenue Per Line study area. (2) Calculate Zone Average Revenue Per Line. (3) Calculate Zone Above SLCEUCL Cap Revenues. Zone Above SLCEUCL Cap Revenues is the sum of Zone Above SLCEUCL Cap RevenuesResidence&SingleLineBusiness and Zone Above SLCEUCL Cap Revenues MultilineBusiness. Zone Above SLCEUCL Cap Revenues Residence&SingleLineBusiness is, within each zone, the product of Zone Average Revenue Per Line minus $7.00 multiplied by line months. If negative, the Zone Above SLCEUCL Cap Revenues Residence&SingleLineBusiness for the zone is zero. Zone Above SLCEUCL Cap Revenues MultilineBusiness is, within each zone, the product of Zone Average Revenue Per Line minus $9.20 multiplied by line months; if negative the Zone Above SLCEUCL Cap Revenues MultilineBusiness for the zone is zero. (i.e.Or: Zone Above SLCEUCL Cap Revenues = ((Zone Average Revenue Per Line - $7.00) X Residential & Single Line Business Lines study area X 12) + ((Zone Average Revenue Per Line - $9.20) X Multiline Business Lines study area X 12) Where Zone Average Revenue Per Line - $7.00 > $0.00, and Zone Average Revenue Per Line - $9.20 > $0.00) (b) (b) Study Area Above Cap Revenues is the sum of Zone Above SLCEUCL Cap Revenues for all zones in the study area. §54.813. Calculation of Study Area Access USF Support for Areas Served by PParticipating Price Cap LECs The Administrator, based on the data submitted pursuant to §§ 54.812, shall calculate the Study Area Access Universal Service Support for areas served by Particpating participating Price Cap Incumbent LECs according to the following methodology: (1) Calculate Nationwide Total Above Cap Revenues. Nationwide Total Above Cap Revenues is the sum of all Study Area Above Cap Revenues for all price cap ILECs, whether or not participating. (2) Calculate Preliminary Study Area Universal Service Support (PSUASS). (i) If the Nationwide Total Above Cap Revenues is greater than $650 million, then the Preliminary Study Area Universal Service Support (PSAUSS) equals the Study Area Above Cap Revenues multiplied by the ratio of $650 million to Nationwide Total Above Cap Revenues (i.e. Preliminary Study Area Universal Service Support = Study Area Above Cap Revenues X ($650 Million / Nationwide Total Above Cap Revenues). (ii) If the Nationwide Total Above Cap Revenues is not greater than $650 million, PSAUSS equals the Study Area Above Cap Revenues. (ii) (3) 2) Calculate the Minimum Delta (MD) by study area. Within each study area the Minimum Delta will be equal to the the difference between the Minimum Access USFStudy Area less theand PSAUSS, if the difference is greater than zero. If the difference is less than or equal to zero, the MD is equal to zero. (4) Calculate the Total National Minimum Delta (TNMD) by summing all study are Minimum Deltas nationwide. (5) Calculate the Minimum Adjustment Amount. (i) If the TNMD is greater than $75 million, then the Minimum Adjustment Amount (MAA) equals the product of the current phased in percentage, times the MD by study area and times the ratio of $75 million to TNMD (i.e., Or: Minimum Adjustment Amount = (MAA Phase In Percentage) X (Minimum Delta) X ($75 million / Total National Minimum Delta)). (ii) If the TNMD is less than $75 million, then the MAA equals the product of the MAA Phase In Percentage and the MD by study area. (6) Calculate the Total National Minimum Support Requirement (TNMSR), which equals the sum of the MSR for all study areas. The Minimum Support Requirement for a study area is determined as follows: (i) If the MAA of the study area is greater than zero then the MSR equals the PSAUSS plus the MAA. (ii) If the MAA is equal to zero, the MSR is also zerothe Preliminary Minimum Access USF for the Sstudy Aarea.. (7) Calculate Study Area Access USF Support (SAAUS). (i) For study areas in which the MAA was zero, and within which the participating price cap incumbent LEC has established geographically deaveraged state-approved rates for UNE loops, the SAAUS for that study area is equal to: the PSAUSSPreliminary Study Area Universal Service Support x ($650 million - TNMSR) multiplied by the ratio of the $650 million minus the TNMSR divided by $650 millionby the sum of the PSAUSS for study areas where the MSR is zero.$650 million. (ii) (ii) For study areas in which the MAA was zero, and within which the participating price cap incumbent LEC has not established geographically deaveraged state-approved rates for UNE loops, the SAAUS for that study area is the the Preliminary Minimum Access USFStudyArea calculated pursuant to 54.811. (iii) For study areas in which the MAA was greater than zero, the SAAUS for that study area is the Minimum Support Requirement (MSR). (iv) §54.814 Support When Providing Service. Minimum Support Requirement (MSR). (iii) For study areas in which the MAA was greater than zero, the SAAUS for that study area is the Minimum Support Requirement (MSR). 54.814 Support only when providing service. Support When Providing Service. An eligible telecommunications carrier shall receive payment of support pursuant to §§ 54.810 only for such months as such the carrier is actually providing service to the end user. The Administrator shall ensure that there are is periodic reconciliationsreconciliation of support payments. §54.815 Transition Pprovisions. (a) Study Area Access USF Support amounts for the area served by each participating price cap incumbent LEC will be recalculated on July 1, 2000, January 1, 2001 and thereafter as determined by the Administrator. § 61.3 Definitions (a) Act. The Communications Act of 1934 (48 Stat. 1004; 47 U.S.C. Chapter 5), as amended. (b) Actual Price Index (API). An index of the level of aggregate rate element rates in a basket, which index is calculated pursuant to § 61.46. (c) Association. This term has the meaning given it in § 69.2(d) (d) Average Price Cap CMT Revenue per Line Month. Price Cap CMT Revenue per Month as of December 31, 1999 (including the adjustments to be made pursuant to § 61.48(1)) using base period demand, divided by the base period demand number of lines as of December 31, 1999. In filing entities with multiple study areas, if it becomes necessary to calculate the Price Cap CMT Revenue Per Line for a specific study area, then the Price Cap CMT Revenue Per Line for that study area is determined as follows, using base period demand revenues (including the adjustments to be made pursuant to § 61.48(1)), Base Factor Portion (BFP) and lines as of December 31, 1999: PriceCapCMTRevenuePerLineStudyArea = PriceCapCMTRevenueFilingEntity ( (BFPStudyArea ( BFPFilingEntity) ( LinesStudyArea Nothing in this definition precludes a price cap local exchange carrier from continuing to average rates across filing entities containing multiple study areas, where permitted under existing rules. Average Price Cap CMT Revenues Per Line may be adjusted after December 31, 1999 to reflect exogenous costs. (e) Average Traffic Sensitive Charge. The Average Traffic Sensitive Charge will be calculated by taking the sum of revenues for Local Switching, Local Switching Trunk Ports, Signalling Transfer Point Port Termination, switched Direct Trunked Transport, Signalling for switched Direct Trunked Transport, Entrance Facilities for switched access traffic, Tandem Switched Transport, the residual and service-related Transport Interconnection Charges, Information Surcharge, and Signalling for Tandem Switching, and dividing that sum of revenues by total Local Switching minutes of use. If a new element is created from existing switched access rate elements (such as creating a call set-up charge out of the existing local switching rate element) the revenues anticipated from that element will be included in the calculation of the Average Traffic Sensitive Charge. (f) Band. A zone of pricing flexibility for a service category, which zone is calculated pursuant to § 61.47. (g) Base period. For carriers subject to §§ 61.41-49, the 12-month period ending six months prior to the effective date of annual price cap tariffs, or for carriers regulated under § 61.50, the 24-month period ending six months prior to the effective date of biennial optional incentive plan tariffs. Base year or base period earnings shall not include amounts associated with exogenous adjustments to the PCI for the sharing or lower formula adjustment mechanisms. (h) Basket. Any class or category of tariffed service or charge: (1) which is established by the Commission pursuant to price cap regulations; (2) the rates of which are reflected in an Actual Price Index; and (3) the related costs of which are reflected in a Price Cap Index. (i) Change in rate structure. A restructuring or other alteration of the rate components for an existing service. (j) Charges. The price for service based on tariffed rates. (k) Commercial contractor. The commercial firm to whom the Commission annually awards a contract to make copies of Commission records for sale to the public. (l) Commission. The Federal Communications Commission. (m) Concurring carrier. A carrier (other than a connecting carrier) subject to the Act which concurs in and assents to schedules of rates and regulations filed on its behalf by an issuing carrier or carriers (n) Connecting carrier. A carrier engaged in interstate or foreign communication solely through physical connection with the facilities of another carrier not directly or indirectly controlling by, or under direct or indirect common control with, such carrier. (o) Contract-based tariff. A tariff based on a service contract entered into between an interexchange carrier subject to § 61.42 (a) through (c) or a nondominant carrier and a customer. (p) Corrections. The remedy of errors in typing, spelling or punctuation. (q) Dominant carrier. A carrier found by the Commission to have market power (i.e., power to control prices. (r) GDP Price Index. (GDP-PI). The estimate of the "Fixed Weight Price Index for Gross Domestic Product, 1987 Weights" published by the United States Department of Commerce, which the Commission designates by Order. (s) GNP Price Index. (GNP-PI). The estimate of the "Fixed-Weighted Price Index for Gross National Product, 1982 Weights" published by the United States Department of Commerce, which the Commission designates by Order. (t) Issuing carrier. A carrier subject to the Act that publishes and files a tariff or tariffs with the Commission. (u) Line Month. Line demand per month multiplied by twelve. (v) Local Exchange Carrier. Any person that is engaged in the provision of telephone exchange service or exchange access as defined in section 3(26) of the Act. (w) New service offering. A tariff filing that provides for a class or sub-class or service not previously offered by the carrier involved and that enlarges the range of service options available to ratepayers. (x) Non-dominant carrier. A carrier not found to be dominant. (y) Other participating carrier. A carrier subject to the Act that publishes a tariff containing rates and regulations applicable to the portion or through service it furnishes in conjunction with another subject carrier. (z) Price Cap CMT Revenue. The maximum total revenue a filing entity would be permitted to receive from End User Common Line charges, Presubscribed Interexchange Carrier charges (PICCs), Carrier Common Line charges, and the portion of local switching reallocated to the Common Line basket pursuant to § 61.48(l). Price Cap CMT Revenue includes marketing expenses presently collected pursuant to § 69.156(a), and residual interconnection charge revenues collected through PICC charges, but it does not recover the current local exchange carrier universal service contributions as of December 31, 1999. (aa) Price Cap Index (PCI). An index of costs applying to carriers subject to price cap regulation, which index is calculated for each basket pursuant to §§ 61.44 or 61.45 (bb) Price cap regulation. A method of regulation of dominant carriers provided in §§ 61.41 through 61.49. (cc) Price cap tariff. Any tariff filing involving a service that is within a price cap basket, or that requires calculations pursuant to §§ 61.44, 61.45, 61.46, or 61.47. (dd) Productivity factor. An adjustment factor used to make annual adjustments to the Price Cap Index to reflect the margin by which a carrier subject to price cap regulation is expected to improve its productivity to the economy as a whole. (ee) Rate. The tariffed price per unit of service. (ff) Rate increase. Any change in a tariff which results in an increased rate or charge to any of the filing carrier's customers. (gg) Rate level change. A tariff change that only affects the actual rate associated with a rate elements, and does not affect any tariff regulations or any other wording of tariff language. (hh) Regulations. The body of carrier prescribed rules in a tariff governing the offering of service in that tariff, including rules, practices, classifications, and definitions. (ii) Restructured service. An offering which represents the modification of a method of charging or provisioning a service; or the introduction of a new method of charging or provisioning that does not result in a net increase in options available to customers. (jj) Service Band Index (SBI). An index of the level of aggregate rate element rates in a service category, which index is calculated pursuant to § 61.47. (kk) Service category. Any group of rate elements subject to price cap regulation, which group is subject to a band. (ll) Supplement. A publication filed as part of a tariff for the purpose of suspending or canceling that tariff, or tariff publication and numbered independently from the tariff page series. (mm) Target Rate. $0.0055 for former Bell Operating Companies and GTE. $0.0065 for other price cap local exchange carriers. (nn) Tariff. Schedule of rates and regulations filed by common carriers. (oo) Tariff publication, or publication. A tariff, supplement, revised page, additional page, concurrence, notice of revocation, adoption notice, or any other schedule of rates or regulations filed by common carriers. (pp) Tariff year. The period from the day in a calendar year on which a carrier's annual access tariff filing is scheduled to become effective through the preceding day of the subsequent calendar year. (qq) Text change. A change in the text of a tariff which does not result in a change in any rate or regulation. (rr) United States. The several States and Territories, the District of Columbia, and the possessions of the United States. (ss) Zone Average Revenue per Line. The Price Cap CMT Revenue per Line allocated to a particular state-defined zone used for deaveraging of UNE loop prices. The Zone Average Revenue per Line is computed according to the following formula: Zone Average Revenue per Line = (25% * (LoopZone Price + PortPrice) + U Where: U (UNIFORM REVENUE PER LINE ADJUSTMENT) = (Price Cap CMT Revenue per lineStudy Area* Base Period Linesstudy area) - (25% * (?(LinesUNE Zone x (Loopzone price +Port Price) UNE Zone x 12) for each zone))) ( Base Period LinesStudy Area(s) ÷ 12 where: (Loopzone price ) UNE Zone = the UNE rates for unbundled loop (Port Price)UNE Zone = price for switch ports in that UNE zone. § 61.41 Price cap requirements generally. (a) Sections 61.42 through 61.49 shall apply as follows: (1) To dominant interexchange carriers, as specified by Commission order; (2) To such local exchange carriers, as specified by Commission order, and to all local exchange carriers, other than average schedule companies, that are affiliated with such carriers; and (3) On an elective basis, to local exchange carriers, other than those specified in paragraph (a)(2), that are neither participants in any Association tariff, nor affiliated with any such participants, except that affiliation with average schedule companies shall not bar a carrier from electing price cap regulation provided the carrier is otherwise eligible. (b) If a telephone company, or any one of a group of affiliated telephone companies, files a price cap tariff in one study area, that telephone company and its affiliates, except its average schedule affiliates, must file price cap tariffs in all their study areas. (c) The following rules apply to telephone companies subject to price cap regulation, as that term is defined in § 61.3(bb), which are involved in mergers, acquisitions, or similar transactions. (1) Any telephone company subject to price cap regulation that is a party to a merger, acquisition, or similar transaction shall continue to be subject to price cap regulation notwithstanding such transaction. (2) Where a telephone company subject to price cap regulation acquires, is acquired by, merges with, or otherwise becomes affiliated with a telephone company that is not subject to price cap regulation, the latter telephone company shall become subject to price cap regulation no later than one year following the effective date of such merger, acquisition, or similar transaction and shall accordingly file price cap tariffs to be effective no later than the date in accordance with the applicable provisions of this Part 61. (3) Notwithstanding the provisions of § 61.41(c)(2) above, when a telephone company subject to price cap regulation acquires, is acquired by, merges with, or otherwise becomes affiliated with a telephone company that qualifies as an "average schedule" company, the latter company may retain its "average schedule" status or become subject to price cap regulation in accordance with § 69.3(i)(3) and the requirements referenced in that section. (d) Local exchange carriers that become subject to price cap regulation as that term is defined in § 61.3(w) shall not be eligible to withdraw from such regulation. § 61.42 Price cap baskets and service categories. (a) Each dominant interexchange carrier subject to price cap regulation shall establish three baskets as follows: (1) A residential services basket (2) An 800 service basket; and (3) A business services basket. (b) (1) The residential basket shall contain such services as the Commission shall permit or require, including the following service categories: (i) Domestic day MTS; (ii) Domestic evening MTS; (iii) Domestic night/weekend MTS ; (iv) International MTS; (v) Operator and credit card services; and (vi) Reach Out America. (2) The 800 service basket shall contain 800 Directory Assistance: (i) Readyline 800; (ii) AT&T 800; (iii) Megacom 800, (iv) Other 800; and (v) 800 Directory Assistance. (3) The business services basket shall contain analog private lines, including analog voice grade private line, unless provided under contract to a government entity, and terrestrial television transmission service. (c) Dominant interexchange carriers subject to price cap regulation shall exclude the following offerings from their price cap baskets: (1) Special construction services relating to services in § 61.42 (b)(1), (b)(2), and (b)(3); (2) All other special construction services; (3) American Telephone and Telegraph Company Tariff F.C.C. No. 11 services; (4) American Telephone and Telegraph Company Tariff F.C.C. No. 12 services; (5) American Telephone and Telegraph Company Tariff F.C.C. No. 16 services; (6) Services subject to below-the-line accounting; (7) International private line and record carrier services; (8) Contract-based tariffs; (9) Services removed from price cap regulation pursuant to the Report and Order in Docket No. 90-132; (10) [Removed and Reserved] (11) All other promotional offerings; (12) Custom tariff services; (13) Readyline 800 service; (14) AT&T 800 service; (15) Megacom 800 service; (16) Other 800 services; (17) Commercial services; and (18) Such other services as the Commission may specify. (d) Each local exchange carrier subject to price cap regulation shall establish baskets of services as follows: (1) A basket for the common line interstate access elements as described in §§ 69.115, 69.152, 69.154, and 69.157 of this chapter, and that portion of the interstate access element described in § 69.153 of this chapter that recovers common line interstate access revenues; (2) A basket for traffic sensitive switched interstate access elements; (3) A basket for trunking services as described in §§ 69.110, 69.111, 69.112, 69.114, 69.125(b), and 69.155 of this chapter, and that portion of the interstate access element described in § 69.153 of this chapter that recovers residual interconnection charge revenues; (4) To the extent that a local exchange carrier specified in § 61.41(a)(2) or (3) offers interstate interexchange services that are not classified as access services for the purpose of part 69 of this chapter, such exchange carrier shall establish a fourth basket for such services. (5) [Removed and Reserved] (6) A basket for the marketing expenses described in § 69.156 of this chapter, including those recovered through End User Common Line charges and Presubscribed Interexchange Carrier charges. (e) (1) The traffic sensitive switched interstate access basket shall contain such services as the Commission shall permit or require, including the following service categories: (i) Local switching as described in § 69.106(f) of this chapter; (ii) Information, as described in § 69.109 of this chapter; (iii) Data base access services; (iv) Billing name and address, as described in § 69.128 of this chapter; (v) Local switching trunk ports, as described in § 69.106(f)(1) of this chapter; and (vi) Signalling transfer point port termination, as described in § 69.125(c) of this chapter. (2) The trunking basket shall contain such transport and special access services as the Commission shall permit or require, including the following service categories and subcategories: (i) Voice grade entrance facilities, voice grade direct-trunked transport, voice grade dedicated signalling transport, voice grade special access, WATS special access, metallic special access, and telegraph special access services; (ii) Audio and video services; (iii) High capacity flat-rated transport, high capacity special access, and DDS services, including the following service subcategories: (A) DS1 entrance facilities, DS1 direct-trunked transport, DS1 dedicated signalling transport, and DS1 special access services; and (B) DS3 entrance facilities, DS3 direct-trunked transport, DS3 dedicated signalling transport, and DS3 special access services; (iv) Wideband data and wideband analog services; (v) Tandem-switched transport, as described in § 69.111 of this chapter; (vi) Interconnection charge, as recovered in §§ 69.153 and 69.155 of this chapter; and (vii) Signalling for tandem switching, as described in § 69.129 of this chapter. (f) Each local exchange carrier subject to price cap regulation shall exclude from its price cap baskets such services or portions of such services as the Commission has designated or may hereafter designate by order. (g) New services, other than those within the scope of paragraphs (c) and (f) of this section, must be included in the affected basket at the first annual price cap tariff filing following completion of the base period in which they are introduced. To the extent that such new services are permitted or required to be included in new or existing service categories within the assigned basket, they shall be so included at the first annual price cap tariff filing following completion of the base period in which they are introduced. * * * § 61.45 Adjustments to the PCI for local exchange carriers. (a) Local exchange carriers subject to price cap regulation shall file adjustments to the PCI for each basket as part of the annual price cap tariff filing, and shall maintain updated PCIs to reflect the effect of mid-year exogenous cost changes. (b) Adjustments to local exchange carrier PCIs for the baskets designated in § 61.42(d) (2), (3), (4), and (6) shall be made pursuant to the formula set forth in § 61.44(b), and as further explained in § 61.44 (e), (f), (g), and (h). (1) Notwithstanding the value of X defined in § 61.44(b), the X value applicable to the baskets specified in § 61.42(d) (2), (3), and (6) shall be 6.5%, to the extent necessary to reduce a tariff entity's Average Traffic Sensitive Charge to the Target Rate for the first time. Once an ILEC tariff entity's Average Traffic Sensitive Charge is equal to the Target Rate for the first time (the former NYNEX telephone companies may be treated as a separate tariff entity), then, except as provided in paragraph (2), X is equal to GDP-PI and no further reductions will be mandated.(i.e. if applying the full X-factor reduction for a given year would reduce the Average Traffic Sensitive Charge below the Target Rate, the amount of X-factor reduction applied that year will be the amount necessary to reach the Target Rate). For companies with separate tariff entities under a single cap, the following rules shall apply: (i) Targeting amounts as defined in 61.45 (i)(1) shall be identified separately, using the revenue for each of the tariff entities under the cap. (ii) Each tariff entity shall only be required to use the amount of targeting necessary to get to the $0.0055 or $0.0065 Target Rate. (2) Once an ILEC achieves the following: 1) the Tariff Entity's Average Traffic Sensitive Charge has at least once reached the Target Rate, even if is subsequently deviated from the Target Rate pursuant to § 61.45(i)(4); 2) the Carrier Common Line and PICC rates are eliminated; and 3) the primary residential and single line business End User Common Line charge reaches the Average Price Cap CMT Revenue Per Line, the X-factor for the Common Line and Marketing baskets will equal GDP-PI as long as GDP-PI is less than or equal to 6.5% and greater than 0%. If GDP-PI is greater than 6.5%, the X-factor for the Common Line and Marketing baskets will equal 6.5%, and all End User Common Line charges will be increased by the difference between GDP-PI and the 6.5% X-factor. If GDP-PI is less than 0, the X-factor for the Common line and Marketing baskets will be 0. (3) For the basket specified in § 61.42(d)(4), the value of X for all local exchange carriers subject to price cap regulation, shall be 3.0%. (c) Adjustments to local exchange carrier PCIs for the baskets designated in § 61.42(d)(1), (2), (3) and (4) shall be made pursuant to the following formulas: (1) Common Line. (i) Subject to paragraphs (c)(ii) and (e) of this section, adjustments to local exchange carrier PCIs for the basket designated in § 61.42(d)(1) shall be made pursuant to the following formula: PCIt = PCIt-1[1+w[(GDP-PI - X - (g/2))/(1 + (g/2))] + ?Z/R] Where the terms in the equation are described in (c)(6) below (ii) The formula set forth in paragraph (c)(1)(i) of this section shall be used by a local exchange carrier subject to price cap regulation only if that carrier is imposing a carrier common line charge pursuant to § 69.154 of this chapter. Otherwise, adjustments to local exchange carrier PCIs for the basket designated in § 61.42(d)(1) shall be made pursuant to the formula set forth below: PCIt = PCIt-1[1+w[(GDP-PI - X) + ?Z/R] where the terms in the equation are described in section (c)(6) below. (2) Adjustments to local exchange carrier PCIs for the Traffic Sensitive basket designated in § 61.42(d)(2) shall be made as follows: PCIt = PCIt-1[1+w[(GDP-PI - X) + ?Z/R] where the terms in the equation are described in section (c)(6) below. (3) Adjustments to local exchange carriers' PCIs for the Trunking basket designated in § 61.42(d)(3) shall be made as follows: PCIt = PCIt-1[1+w[(GDP-PI - X) + ?Z/R] where the terms in the equation are described in section (c)(6) below. (4) Adjustments to local exchange carriers' PCIs for the Interexchange basket designated in § 61.42(d)(4) shall be made pursuant to the following formula: PCIt = PCIt-1[1+wix[(GDP-PI - X) + ?Y/R+ ?Z/R] where the terms in the equation are described in section (c)(6) below. (5) Adjustments to local exchange carriers' PCIs for the Marketing basket designated in § 61.42(d)(6) shall be made pursuant to the following formula: PCIt = PCIt-1[1+w[(GDP-PI - X) + ?Z/R] where the terms in the equation are described in section (c)(6) below. (6) PCI term definitions. PCI formulas in sections (c)(1) through (c)(5), above, contain some or all of the following components, which are defined here: GDP-PI = For annual filings only, the percentage change in the GDP-PI between the quarter ending six months prior to the effective date of the new annual tariff and the corresponding quarter of the previous year. For all other filings, the value is zero. X = For the Common Line, Traffic Sensitive, Trunking, and Marketing baskets, for Annual Filings only, the factor set at the level prescribed in subsection (b)(1)-(2). For the Interexchange Basket, for annual filings only, the factor is set at the level prescribed in subsection (b)(3). For all other filings, the value is zero. g = For annual filings only, the ratio of minutes of use per access line during the base period, to minutes of use per access line during the previous base period, all minus 1. For all other filings, the value is zero. ?Z = the dollar effect of current regulatory changes when compared to the regulations in effect at the time the PCI was updated to PCIt-1, measured at base period level of operations. ?Y = (new access rate - access rate at the time the PCI was updated to PCIt-1) x (base period demand), summed for all access rate elements. R = base period quantities for each rate element "I", multiplied by the price for each rate element "I" at the time the PCI was updated to PCIt-1. w = R + ?Z, all divided by R (used for the common line, traffic sensitive, trunking, and marketing baskets). wix = R - (access rate in effect at the time the PCI was updated to PCIt-1 x base period demand) + ?Z, all divided by R. PCIt = the new PCI value. PCIt-1 = the immediately preceding PCI value. Targeted Reduction = the actual possible dollar value of the (GDP-PI - X) reductions that will be targeted to the Average Traffic Sensitive Charge (as defined in paragraph 61.45(i)(3) of this chapter). (d) The exogenous cost changes represented by the term "?Z" in the formula detailed in paragraphs (b) and (c) of this section shall be limited to those cost changes that the Commission shall permit or require by rule, rule waiver, or declaratory ruling. (1) Subject to further order of the Commission, those exogenous changes shall include cost changes caused by: (i) the completion of the amortization of depreciation reserve deficiencies; (ii) such changes in the Uniform System of Accounts, including changes in the Uniform System of Accounts requirements made pursuant to § 32.16 of this chapter, as the Commission shall permit or require be treated as exogenous by rule, rule waiver, or declaratory ruling. (iii) changes in the Separations Manual; (iv) changes to the level of obligation associated with the Long Term Support Fund and the Transitional Support Fund described in § 69.612; (v) the reallocation of investment from regulated to nonregulated activities pursuant to § 64.901; (vi) such tax law changes and other extraordinary cost changes as the Commission shall permit or require be treated as exogenous by rule, rule waiver, or declaratory ruling. (vii) as of January 1, 2000, the retargeting of the PCI to the level specified by the Commission for carriers whose base year earnings are below the level of the lower adjustment mark will be eliminated until January 1, 2005. (viii) inside wire amortizations (ix) the completion of amortization of equal access expenses. (2) (i) local exchange carriers specified in § 61.41(a)(2) or (a)(3) shall also make such temporary exogenous cost changes as may be necessary to reduce PCIs to give full effect to any sharing of base period earnings required by the sharing mechanism set forth in the Commission's Second Report and Order in Common Carrier Docket No. 87-313, FCC 90-314, adopted September 19, 1990. Such exogenous cost changes shall include interest, computed at the prescribed rate of return, from the day after the end of the period giving rise to the adjustment, to the midpoint of the period when the adjustment is in effect. (ii) local exchange carriers specified in § 61.41(a)(2) or (a)(3) shall not be subject to the sharing mechanism set forth in the Commission's Second Report and Order in Common Carrier Docket No. 87-313, FCC 90-314, adopted September 19, 1990, with respect to earnings accruing on or after July 1, 1997. This paragraph has no effect on any sharing obligation of any local exchange carrier relating to earnings accrued before July 1, 1997. (3) Local exchange carriers specified in § 61.41(a)(2) or (a)(3) shall, in their annual access tariff filing, recognize all exogenous cost changes attributable to modifications during the coming tariff year in the obligations specified in § 61.45(d)(1)(iv) as well as those changes attributable to alterations in their Subscriber Plant Factor and the Dial Equipment Minutes factor, and completions of inside wire amortizations and reserve deficiency amortizations. (4) Exogenous cost changes shall be apportioned on a cost-causative basis between price cap services as a group, and excluded services as a group. Exogenous cost changes thus attributed to price cap services shall be further apportioned on a cost-causative basis among the price cap baskets. (5) After January 1, 2000, exogenous adjustments will be recovered from services other than those used to calculate the Average Traffic Sensitive Charge. (e) The "w[(GDP-PI - X - (g/2))/(1 + (g/2))]" component of the PCI formula contained in paragraph (c)(1)(i) of this section shall be employed only in the adjustment made in connection with the annual price cap filing. (f) The exogenous costs caused by new services subject to price cap regulation must be included in the appropriate PCI calculations under paragraph (c) of this section beginning at the first annual price cap tariff filing following completion of the base period in which they are introduced. (g) In the event that a price cap tariff becomes effective, which tariff results in an API value (calculated pursuant to § 61.46) that exceeds the currently applicable PCI value, the PCI value shall be adjusted upward to equal the API value. (h) [Removed and reserved.] (i) (1) Price cap local exchange carriers that are recovering revenues through rates pursuant to §§ 69.106, 69.108, 69.109, 69.110, 69.111, 69.112, 69.113, 69.118, 69.123, 69.124, 69.125, 69.129 or § 69.155 of this chapter shall target, to the extent necessary to reduce the Average Traffic Sensitive Charge to the Target Rate for the first time, any PCI reductions associated with the dollar impact of the Common Line, Traffic Sensitive, Trunking and Marketing baskets' GDP-PI and productivity factor, as those items are described in paragraph (c)(6) of this section. In order to calculate the actual dollars to transfer to the Trunking and Traffic Sensitive baskets, carriers will first determine a "Targeted Revenue Differential" by basket, and then determine the "Targeted Revenue Differential" that will be transferred to the Trunking and Traffic Sensitive baskets to reduce the Average Traffic Sensitive Charge to $0.0055 or $0.0065, whichever is applicable. Dollars that are transferred to the Trunking and Traffic Sensitive baskets from the Common Line, Traffic Sensitive, Trunking and Marketing baskets shall not be used to reduce the PCIs in those baskets. Before determining the portion of Targeted Revenue Differential that will be targeted to the reduction of the Average Traffic Sensitive Charge, from the Common Line, Traffic Sensitive, Trunking and Marketing baskets, price cap local exchange carriers shall first calculate the Targeted Revenue Differential associated with the Common Line, Traffic Sensitive, Trunking and Marketing baskets. (i) the price cap local exchange carrier shall use the following formula: Targeted Revenue Differential = R * (GDP-PI - X) (2) Any such exogenous adjustments shall be reflected in the various PCIs and SBIs in the same manner as they would if there were no targeting. However, after January 1, 2000, exogenous adjustments will be recovered from services other than those used to calculate the Average Traffic Sensitive Charge. (3) Until a Tariff entity's Average Traffic Sensitive Charge equals the Target Rate for the first time, the aggregate reductions within a given tariff filing entity from application of the X-factor adjustment in the price cap formula across all of that entity's interstate price cap baskets (less access reductions, if any, the ILEC chooses to apply as of July 1, 2001 to reduce Special Access rates, up to the amount of reductions Special Access would get through an untargeted application of the X-factor adjustment) will be targeted to reduce the following rates for that tariff filing entity, in order of priority: (i) To the residual per minute Transport Interconnection Charge, until that rate is $0.00; then (ii) To the Information Surcharge, until that rate is $0.00; then (iii) To the Local Switching charge and Switched Transport charges until the tariff entity's Average Traffic Sensitive Rate equals the Target Rate for the first time. In making these reductions, the reductions to Local Switching rates as a percentage of total X-factor reductions must be greater than or equal to the percentage proportion of Local Switching revenues to the total sum of revenues for Local Switching, Local Switching Trunk Ports, Signalling Transfer Point Port Termination, Switched Direct Trunked Transport, Signalling for Switched Direct Trunked Transport, Entrance Facilities for switched access traffic, Tandem Switched Transport, and Signalling for Tandem Switching (i.e., Local Switching gets at least its proportionate share of reductions). (4) After an ILEC reaches the Target Rate level, the Average Traffic Sensitive Rate will be recalculated each Annual Filing following. This process will identify the new Average Traffic Sensitive Charge for the new base period level. Due to change in base period demand and inclusion of new services for that Annual Tariff filing, the absolute level of a tariff entity's Average Traffic Sensitive Charge may change. The resulting new Average Traffic Sensitive Charge level will be what that tariff entity will be measured against during that base period. For example, if a company was at $0.0055 during the 2000 Annual Filing, that level may change to $0.0058 in the 2001 Annual filing due to demand and new services. Therefore, it will be the $0.0058 that the tariff entity will be measured against for all non-annual filings. Likewise, if a company was at $0.0055 during the 2000 filing, that level may change to $0.0053 in the 2001 Annual Filing due to demand and new services. In that case, it will be the $0.0053 level that the tariff entity will be measured. (j) [Removed and Reserved.] (k) The calculation of the PCI for the basket designated in § 61.42(d)(3) shall include any residual interconnection charge revenues recovered pursuant to §§ 69.153 and 69.155 of this chapter. (l) The calculation of the PCI for the basket designated in § 61.42(d)(6) shall include any marketing expense revenues recovered pursuant to §§ 69.153 and 69.156 of this chapter. § 61.46 Adjustments to the API. (a) Except as provided in paragraphs (d) and (e) of this section, in connection with any price cap tariff filing proposing rate changes, the carrier must calculate an API for each affected basket pursuant to the following methodology: APIt = APIt-1[S 1 vi,(pt/pt-1)i] where APIt = the proposed API value; APIt-1 = the existing API value, pt = the proposed price for rate element "i" pt-1 = the existing price for rate element and "i" vi = the current estimated revenue weight for rate element "i," calculated as the ratio of the base period demand for the rate element "i" priced at the existing rate, to the base period demand for the entire basket of services priced at existing rates. (b) New services subject to price cap regulation must be included in the appropriate API calculations under paragraph (a) of this section beginning at the first annual price cap tariff filing following completion of the base period in which they are introduced. This index adjustment requires that the demand for the new service during the base period must be included in determining the weights used in calculating the API. (c) Any price cap tariff filing proposing rate restructuring shall require an adjustment to the API pursuant to the general methodology described in paragraph (a) of this section. This adjustment requires the conversion of existing rates into rates of equivalent value under the proposed structure, and then the comparison of the existing rates that have been converted to reflect restructuring to the proposed restructured rates. This calculation may require use of carrier data and estimation techniques to assign customers of the preexisting service to those services (including the new restructured service) that will remain or become available after restructuring. (d) (1) Subject to paragraph (d)(2) of this section, and in connection with any price cap tariff proposing changes to rates for services in the basket designated in § 61.42(d)(1), the maximum allowable carrier common line (CCL) charges shall be computed pursuant to the following methodology: CCLMOU = CLMOU * (1 + % change in CL PCI) - (EUCLMOU + PICCMOU) * 1 / (1 +(g/2)) where CCLMOU = the sum of each of the proposed Carrier Common Line rates multiplied by its corresponding base period Carrier Common Line minutes of use, divided by the sum of all types of base period Carrier Common Line minutes of use, CLMOU = the sum of each of the existing maximum allowable Carrier Common Line rates multiplied by its corresponding base period Carrier Common Line minutes of use, plus each existing maximum allowable End User Common Line (EUCL) rate multiplied by its corresponding base period lines, plus the common line portion of each existing maximum allowable Presubscribed Interexchange Carrier Charge (PICC) multiplied by its corresponding base period lines, divided by the sum of all types of base period Carrier Common Line minutes of use, EUCLMOU = maximum allowable End User Common Line rates multiplied by base period lines, and divided by the sum of all types of base period Carrier Common Line minutes of use, PICCMOU = the common line portion of maximum allowable Presubscribed Interexchange Carrier charge rates multiplied by base period lines, and divided by the sum of all types of base period Carrier Common Line minutes of use, and g = the ratio of minutes of use per access line during the base period to minutes of use per access line during the previous base period, minus 1. (2) The formula set forth in paragraph (d)(1) of this section shall be used by a local exchange carrier subject to price cap regulation only if that carrier is imposing a per-minute carrier common line charge pursuant to § 69.154 of this chapter. Otherwise, adjustments to local exchange carrier APIs for the basket designated in § 61.42(d)(1) shall be made pursuant to the formula set forth in paragraph (a) of this section. (e) (1) In addition, for the purposes of paragraph (d) of this section, "Existing Carrier Common Line Rates" shall include existing originating premium, originating non-premium, terminating premium and terminating non-premium rates; and ``End User Common Line Rates'' used to calculate the CLMOU and the EUCLMOU factors shall include, but not be limited to, Residential and Single Line Business rates, Centrex rates, and the Special Access surcharge. (2) For purposes of paragraph (d) of this section, "each existing Presubscribed Interexchange Carrier Charge'' shall include all the charges specified in § 69.153 of this chapter. (f) The "1/(1 + (g/2))" component of the CCLMOU formula contained in paragraph (d) shall be employed only in the adjustment made in connection with the annual price cap filing. (g) The calculation of the API for the basket designated in § 61.42(d)(3) shall include any residual interconnection charge revenues recovered pursuant to §§ 69.153 and 69.155 of this chapter (h) The calculation of the API for the basket designated in § 61.42(d)(6) shall include any marketing expense revenues recovered pursuant to §§ 69.153 and 69.156 of this chapter. § 61.47 Adjustments to the SBI; pricing bands. (a) In connection with any price cap tariff filing proposing changes in the rates of service categories or subcategories, the carrier must calculate an SBI value for each affected service category or subcategory pursuant to the following methodology: SBIt = SBIt-1[Sivi(pt/pt-1)i] where SBIt = the proposed SBI value, SBIt-1 = the existing SBI value, pt = the proposed price for rate element "i," pt-1 = the existing price for rate element "i," and vi = the current estimated revenue weight for rate element "i," calculated as the ratio of the base period demand for rate element "i" priced at the existing rate, to the base period demand for the entire group of rate elements comprising the service category priced at existing rates. (b) New services that are added to existing service categories or subcategories must be included in the appropriate SBI calculations under paragraph (a) of this section beginning at the first annual price cap tariff filing following completion of the base period in which they are introduced. This index adjustment requires that the demand for the new service during the base period must be included in determining the weights used in calculating the SBI. (c) In the event that the introduction of a new service requires the creation of a new service category or subcategory, a new SBI must be established for that service category or subcategory beginning at the first annual price cap tariff filing following completion of the base period in which the new service is introduced. The new SBI should be initialized at a value of 100, corresponding to the service category rates in effect the last day of the base period, and thereafter should be adjusted as provided in paragraph (a) of this section. (d) Any price cap tariff filing proposing rate restructuring shall require an adjustment to the affected SBI pursuant to the general methodology described in paragraph (a) of this section. This adjustment requires the conversion of existing rates in the rate element group into rates of equivalent value under the proposed structure, and then the comparison of the existing rates that have been converted to reflect restructuring to the proposed restructured rates. This calculation may require use of carrier data and estimation techniques to assign customers of the preexisting service to those services (including the new restructured service) that will remain or become available after restructuring. (e) Pricing bands shall be established each tariff year for each service category and subcategory within a basket. Except as provided in paragraphs (f), (g), and (h) of this section, each band shall limit the pricing flexibility of the service category or subcategory, as reflected in the SBI, to an annual increase of five percent, relative to the percentage change in the PCI for that basket, measured from the levels in effect on the last day of the preceding tariff year. For local exchange carriers subject to price caps as that term is defined in § 61.3(x), there shall be no lower pricing band for any service category or subcategory. (f) Dominant interexchange carriers. (1) The upper pricing bands for the evening MTS and night/weekend MTS service categories shall limit the annual upward pricing flexibility for those service categories, as reflected in their SBIs, to four percent, relative to the percentage change in the PCI for the residential and small business services basket, measured from the last day of the preceding tariff year. (2) Dominant interexchange carriers subject to price cap regulation shall calculate a composite average rate for services contained in the residential and small business services basket that are purchased by residential customers. Notwithstanding paragraph (f)(1) of this section, the annual upward pricing flexibility for this composite average rate shall be limited to one percent, relative to the percentage change in the PCI for the residential and small business services basket, measured from the last day of the preceding tariff year. (g) Local Exchange Carriers -- Service Categories and Subcategories. (1) Local exchange carriers subject to price cap regulation as that term is defined in § 61.3(x) shall use the methodology set forth in paragraphs (a) through (d) of this section to calculate two separate subindexes: One for the DS1 services offered by such carriers and the other for the DS3 services offered by such carriers. The annual pricing flexibility for each of these two subindexes shall be limited to an annual increase of five percent, relative to the percentage change in the PCI for the special access services basket, measured from the last day of the preceding tariff year. There shall be no lower pricing band for these two subindexes. (2) The upper pricing band for the tandem-switched transport service category shall limit the annual upward pricing flexibility for this service category, as reflected in its SBI, to two percent, relative to the percentage change in the PCI for the trunking basket, measured from the levels in effect on the last day of the preceding tariff year. There shall be no lower pricing band for the tandem-switched transport service category. (3) The upper pricing band for the interconnection charge service category shall limit the annual upward pricing flexibility for this service category, as reflected in its SBI, to zero percent, relative to the percentage change in the PCI for the trunking basket, measured from the levels in effect on the last day of the preceding tariff year. There shall be no lower pricing band for the interconnection charge. (4) Local exchange carriers subject to price cap regulation as that term is defined in § 61.3(x) shall use the methodology set forth in paragraphs (a) through (d) of this section to calculate a separate subindex for the 800 data base vertical features offered by such carriers. The annual pricing flexibility for this subindex shall be limited to an annual increase of five percent, relative to the percentage change in the PCI for the traffic sensitive basket, measured from the last day of the preceding tariff year. There shall be no lower pricing band for this subindex. (5) The upper pricing band for the "Signalling for tandem switching" service category shall limit the upward pricing flexibility for this service category, as reflected in its SBI, to two percent, relative to the percentage change in the PCI for the trunking basket, measured from the levels in effect on the last day of the preceding tariff year. There shall be no lower pricing band for this service category. (6) [Removed and Reserved] (7) The initial level of the local switch trunk ports service category designated in § 61.42(e)(1)(v) shall be established to include those costs identified pursuant to § 69.106(f)(1) of this chapter. This level shall be assigned a value of 100, and thereafter must be adjusted as provided in paragraph (a) of this section, subject to the banding restrictions of paragraph (e) of this section. (h) Local exchange carriers -- density pricing zones. (1) In addition to the requirements of paragraphs (g)(1) and (g)(2) of this section, those local exchange carriers subject to price cap regulation that have established density pricing zones pursuant to § 69.123 of this chapter shall use the methodology set forth in paragraphs (a) through (d) of this section to calculate separate subindexes in each zone for each of the following groups of services: (i) DS1 entrance facilities, DS1 direct-trunked transport, DS1 dedicated signalling transport, and DS1 special access services; (ii) DS3 entrance facilities, DS3 direct-trunked transport, DS3 dedicated signalling transport, and DS3 special access services; (iii) voice grade entrance facilities, voice grade direct-trunked transport, and voice grade dedicated signalling transport, and (if the Commission, by order, designates such services as subject to competition) voice grade special access; (iv) tandem-switched transport; and (v) such other special access services that the Commission may designate by order. (2) The annual pricing flexibility for each of the subindexes specified in paragraph (h)(1) of this section shall be limited to an annual increase of five percent, relative to the percentage change in the PCI for the trunking basket, measured from the levels in effect on the last day of the preceding tariff year. There shall be no lower pricing band for these subindexes. (3) [Added; redesignated as (h)(2)] (i) [Redesignated as (g)(4)] (i) (1) Through December 31, 1997, notwithstanding the requirements of paragraph (a) of this section, and subject to the limitations of § 61.45(j), if a local exchange carrier is recovering interconnection charge revenues through per-minute rates pursuant to § 69.124 or § 69.155 of this chapter, any reductions to the PCI for the basket designated in § 61.42(d)(3) resulting from the application of the provisions of § 61.45 (b) and the formula in § 61.44(b) and from the application of provision of § 61.45(i)(1) shall be directed to the SBI of the service category designated in § 61.42(e)(2)(vi). (2) Effective January 1, 1998, notwithstanding the requirements of paragraph (a) of this section and subject to the limitations of § 61.45(j), if a local exchange carrier is recovering interconnection charge revenues through per-minute rates pursuant to § 69.155 of this chapter, any reductions to the PCI for the basket designated in § 61.42(d)(3) resulting from the application of the provisions of § 61.45(b), and the formula in § 61.44(b) and from the application of the provisions of § 61.45(i)(1), and (i)(2) shall be directed to the SBI of the service category designated in § 61.42(e)(2)(vi). (3) Through December 31, 1997, the SBI reduction required by paragraph (i)(1) of this section shall be determined by dividing the sum of the dollar amount of any PCI reduction required by § 61.45(i)(1) by the dollar amount associated with the SBI for the service category designated in § 61.42(e)(2)(vi), and multiplying the SBI for the service category designated in § 61.42(e)(2)(vi) by one minus the resulting ratio. (4) Effective January 1, 1998, the SBI reduction required by paragraph (i)(2) of this section shall be determined by dividing the sum of the dollar amount of any PCI reduction required by § 61.45(i)(1) and (i)(2), by the dollar amount associated with the SBI for the service category designated in § 61.42(e)(2)(vi), and multiplying the SBI for the service category designated in § 61.42(e)(2)(vi) by one minus the resulting ratio. (5) Effective January 1, 2000, notwithstanding the requirements of paragraph (a) of this chapter and subject to the limitations of § 61.45(i), if a local exchange carrier is recovering an Average Traffic Sensitive Charge greater than the respective Target Rates of $0.0055 or $0.0065, any reductions to the PCI for the Traffic Sensitive or Trunking baskets designated in §§ 61.42(d)(2) and (3) resulting from the application of the provisions of § 61.45(b), and the formula in § 61.45(c) and from the application of the provisions of §§ 61.45(i)(1), and (i)(2) shall be directed to the SBIs of the service categories designated in §§ 61.42(e)(1) and (2). (j) The calculation of the SBI for the service category designated in § 61.42(e)(2)(vi) shall include any residual interconnection charge revenues recovered pursuant to §§ 69.153 and 69.155 of this chapter. § 61.48 Transition rules for price cap formula calculations. (a) Dominant interexchange carriers subject to price cap regulation shall file initial price cap tariffs May 17, 1989, to be effective July 1, 1989. (b) (1) In connection with the initial price cap tariff filing described in paragraph (a) of this section, each PCI, API, and SBI shall be assigned an initial value prior to adjustment of 100, corresponding to the costs and rates in effect as of December 31, 1988. (2) The PCI and API for offerings under § 61.42(b)(3) shall be assigned a value equal to 100, corresponding to rates in effect as of August 1, 1991. Dominant interexchange carriers subject to price cap regulation shall file new business basket index levels with the first business basket tariff transmittal that is filed subsequent to the effective date of this rule. (c) Local exchange carriers subject to price cap regulation shall file initial price cap tariffs not later than November 1, 1990, to be effective January 1, 1991. (d) (1) In connection with the initial price cap filing described in paragraph (c) of this section, each PCI, API, and SBI shall be assigned an initial value prior to adjustment of 100, corresponding to the costs and rates in effect as of July 1, 1990. (2) Carriers electing price cap regulation under § 61.41(a)(3) of this part in a year after 1991 shall file initial price cap tariffs not later than April 2 of the year of election, to be effective on July 1 of the year of election. Each PCI, API, and SBI shall be assigned an initial value prior to adjustment of 100, corresponding to the costs and rates in effect as of January 1 of the year of election. (e) In connection with the initial price cap filing described in paragraph (c) of this section, initial PCI calculations shall be made without adjustment for any changes in inflation or productivity. Annual price cap filings incorporating the full values of the GNP-PI and productivity offsets will commence April 2, 1991, with a scheduled effective date of July 1, 1991. (f) Local exchange carriers specified in § 61.41(a)(2) or (3) shall, in their initial price cap filings described in paragraph (c) of this section, adjust their PCIs through use of an exogenous cost factor to account for the represcription of the rate of return, effective January 1, 1991. (g) Local Transport Restructure -- Initial Rates. Local exchange carriers subject to price cap regulation shall set initial transport rates, as defined in § 69.2(tt) of this chapter, according to the requirements set forth in §§ 69.108, 69.110, 69.111, 69.112, 69.124, and 69.125 of this chapter. (h) Local Transport Restructure -- Price Cap Transition Rules. (1) Definitions. The following definitions apply for purposes of paragraph (h) of this section: "Effective date" is March 4, 1994. "Initial restructured rates" are rates that are (or should have been) effective on the transport restructure date; and "Revenue weight" of a given group of services included in a basket, service category, or subcategory is the ratio of base period demand for the given service rate elements included in the basket, service category, or subcategory priced at initial restructured rates, to the base period demand for the entire group of rate elements comprising the basket, service category, or subcategory priced at initial restructured rates. "Transport restructure date" is the date on which local exchange carriers' initial transport rates, as defined in § 69.2(tt) of this chapter, became effective; (2) Trunking Basket PCI and API. (i) On the effective date, the PCI value for the trunking basket, as defined in § 61.42(d)(3), shall be computed by multiplying the API value for the special access basket on the day preceding the transport restructure date, by a weighted average of the following: (A) The ratio of the PCI value that applied to the special access basket on the day preceding the transport restructure date, to the API value that applied to the special access basket on the day preceding the transport restructure date, weighted by the revenue weight of the special access services included in the trunking basket; and (B) The ratio of the PCI value that applied to the traffic sensitive basket on the day preceding the transport restructure date, to the API value that applied to the traffic sensitive basket on the day preceding the transport restructure date, weighted by the revenue weight of the transport services included in the trunking basket. (ii) On the effective date, the API value for the trunking basket referred to in § 61.42(e)(2) shall be equal to the API value for the special access basket on the day preceding the transport restructure date. (3) Service Category and Subcategory Pricing Bands for Flat-Rated Transport and Special Access. From the effective date through the end of the tariff year, the following shall govern instead of §§ 61.47(e) and 61.47(g)(1). The pricing bands established for the voice grade and high capacity service categories referred to in §§ 61.42(e)(2)(i) and 61.42(e)(2)(iii), and the DS1 and DS3 service subcategories referred to in §§ 61.42(e)(2)(iii)(A) and 61.42(e)(2)(iii)(B), shall limit the pricing flexibility of the service category or subcategory, as reflected in its SBI, as follows: (i) The upper pricing band shall be a weighted average of the following: (A) The upper pricing band that applied to the special access services included in the category or subcategory on the day preceding the transport restructure date, weighted by the revenue weight of the special access services included in the category or subcategory; and (B) 1.05 times the SBI value for the special access services included in the category or subcategory on the day preceding the transport restructure date, weighted by the revenue weight of the transport services included in the category or subcategory. (ii) The lower pricing band shall be a weighted average of the following: (4) Tandem-Switched Transport and Interconnection Charge SBIs. On the effective date, the SBIs for the tandem-switched transport and interconnection charge service categories defined in § 61.42(e)(2)(v) and (vi) shall be assigned an initial value prior to adjustment of 100, corresponding to the initial restructured rates in those categories. (5) Tandem-Switched Transport and Interconnection Charge Service Category Pricing Bands. From the effective date through the end of the tariff year, the following shall govern instead of § 61.47(g)(2) and (g)(3): (i) The upper pricing band for the tandem-switched transport service category shall limit the upward pricing flexibility for this service category, as reflected in its SBI, to two percent, measured from the initial restructured rates for tandem-switched transport. The lower pricing band for the tandem-switched transport service category shall limit the downward pricing flexibility for this service category, as reflected in its SBI, to ten percent, measured from the initial restructured rates for tandem-switched transport. (ii) The upper pricing band for the interconnection charge service category shall limit the upward pricing flexibility for this service category, as reflected in its SBI, to zero percent, measured from the initial restructured rate for the interconnection charge. (i) Transport and Special Access Density Pricing Zone Transition Rules. (1) Definitions. The following definitions apply for purposes of this paragraph (i): "Special access zone date" is the date on which a local exchange carrier tariff establishing divergent special access rates in different zones, as described in § 69.123(c) of this chapter, becomes effective. "Transport zone date" is the date on which a local exchange carrier tariff establishing divergent switched transport rates in different zones, as described in § 69.123(d) of this chapter, becomes effective. "Earlier date" is the earlier of the special access zone date and the transport zone date. "Later date" is the later of the special access zone date and the transport zone date. "Earlier service" is special access if the special access zone date precedes the transport zone date, and is transport if the transport zone date precedes the special access zone date. "Later service" is transport if the special access zone date precedes the transport zone date, and is special access if the transport zone date precedes the special access zone date. "Revenue weight" of a given group of services included in a zone category is the ratio of base period demand for the given service rate elements included in the category priced at existing rates, to the base period demand for the entire group of rate elements comprising the category priced at existing rates. (2) Simultaneous Introduction of Special Access and Transport Zones. Local exchange carriers subject to price cap regulation that have established density pricing zones pursuant to § 69.123 of this chapter, and whose special access zone date and transport zone date occur on the same date, shall initially establish density pricing zone SBIs and bands pursuant to the methodology in § 61.47(h). (3) Sequential Introduction of Zones in the Same Tariff Year. Notwithstanding § 61.47(h), local exchange carriers subject to price cap regulation that have established density pricing zones pursuant to § 69.123 of this chapter, and whose special access zone date and transport zone date occur on different dates during the same tariff year, shall, on the earlier date, establish density pricing zone SBIs and pricing bands using the methodology described in § 61.47(h), but applicable to the earlier service only. On the later date, such carriers shall recalculate the SBIs and pricing bands to limit the pricing flexibility of the services included in each density pricing zone category, as reflected in its SBI, as follows: (i) The upper pricing band shall be a weighted average of the following: (A) The upper pricing band that applied to the earlier services included in the zone category on the day preceding the later date, weighted by the revenue weight of the earlier services included in the zone category; and (B) 1.05 times the SBI value for the services included in the zone category on the day preceding the later date, weighted by the revenue weight of the later services included in the zone category. (ii) The lower pricing band shall be a weighted average of the following: (A) The lower pricing band that applied to the earlier services included in the zone category on the day preceding the later date, weighted by the revenue weight of the earlier services included in the zone category; and (B) 0.85 times the SBI value for the services included in the zone category on the day preceding the later date, weighted by the revenue weight of the later services included in the zone category. (iii) On the later date, the SBI value for the zone category shall be equal to the SBI value for the category on the day preceding the later date. (4) Introduction of Zones in Different Tariff Years. Notwithstanding § 61.47(h), those local exchange carriers subject to price cap regulation that have established density pricing zones pursuant to § 69.123 of this chapter, and whose special access zone date and transport zone date do not occur within the same tariff year, shall, on the earlier date, establish density pricing zone SBIs and pricing bands using the methodology described in § 61.47(h), but applicable to the earlier service only. (i) On the later date, such carriers shall use the methodology set forth in paragraphs (a) through (d) of § 61.47 to calculate separate SBIs in each zone for each of the following groups of services: (A) DS1 special access services; (B) DS3 special access services; (C) DS1 entrance facilities, DS1 direct-trunked transport, and DS1 dedicated signalling transport; (D) DS3 entrance facilities, DS3 direct-trunked transport, and DS3 dedicated signalling transport; (E) voice grade entrance facilities, voice grade direct-trunked transport, and voice grade dedicated signalling transport; (F) tandem-switched transport; and (G) such other special access services as the Commission may designate by order. (ii) From the later date through the end of the following tariff year, the annual pricing flexibility for each of the subindexes specified in paragraph (i)(4)(i) of this section shall be limited to an annual increase of five percent or an annual decrease of fifteen percent, relative to the percentage change in the PCI for the trunking basket, measured from the levels in effect on the last day of the tariff year preceding the tariff year in which the later date occurs. (iii) On the first day of the second tariff year following the tariff year during which the later date occurs, the local exchange carriers to which this paragraph applies shall establish the separate subindexes provided in § 61.47(h)(1), and shall set the initial SBIs for those density pricing zone categories that are combined (specified in paragraphs (i)(4)(i)(A) and (i)(4)(i)(C), (i)(4)(i)(B) and (i)(4)(i)(D), and (i)(4)(i)(E) and (i)(4)(i)(G) of this section) by computing the weighted averages of the SBIs that applied to the formerly separate zone categories, weighted by the revenue weights of the respective services included in the zone categories. (j) [Removed and Reserved] (k) Marketing expenses. In the January 1, 1998 price cap tariff filing, local exchange carriers shall establish the marketing expense basket designated in § 61.42(d)(6) with an initial PCI and API level of 100. The initial value of 100 for the PCI and API for marketing expenses shall correspond to the marketing expenses described in § 69.156(a) of this chapter. (l) Traffic Sensitive Revenues. (1) On January 1, 2000, ILECs will move 25% of the Local Switching minute of use revenues from the Traffic Sensitive Basket and include those revenues in the Common Line Basket. (2) Notwithstanding paragraph (1), if moving 25% of the Local Switching minute of use revenues from the Traffic Sensitive basket to the Common Line basket would reduce the Average Traffic Sensitive Charge for that Tariff Entity below the Target Rate, then that Tariff Entity will move only as much of the Local Switching MOU revenues from the Traffic Sensitive Basket to the Common Line Basket as is necessary in order for the Average Traffic Sensitive Charge to equal the Target Rate. § 69.152 End user common line for price cap local exchange carriers. (a) A charge that is expressed in dollars and cents per line per month shall be assessed upon end users that subscribe to local exchange telephone service or Centrex service to the extent they do not pay carrier common line charges. A charge that is expressed in dollars and cents per line per month shall be assessed upon providers of public telephones. Such charge shall be assessed for each line between the premises of an end user, or public telephone location, and a Class 5 office that is or may be used for local exchange service transmissions. (b) Except as provided in paragraphs (d) through (i) of this section, the maximum single line rate or charge shall be computed: (1) By dividing one-twelfth of the projected annual revenue requirement for the End User Common Line element by the projected average number of local exchange service subscriber lines in use during such annual period, only so long as a per-minute carrier common line charge is assessed or the maximum PICC assessed on primary residential lines, plus the maximum end user common line charge for primary residential lines, does not recover the full amount of its per-line common line price cap revenues. (2) By dividing one-twelfth of the projected annual revenues permitted for the common line basket under the Commission's price cap rules, as set forth in Part 61 of this chapter, by the projected average number of local exchange service subscriber lines in use during such annual period, if no per-minute carrier common line charge is assessed and the maximum PICC assessed on primary residential lines, plus the maximum end user common line charge for primary residential lines, recovers the full amount of its per-line common line price cap revenues. (3) Provided, however, that the charge for each local exchange service subscriber line shall not exceed $9.00 as adjusted by the inflation factor computed under paragraph (k) of this section.(b) [Removed and Reserved.] (c) The charge for each subscriber line associated with a public telephone shall be equal to the monthly charge computed in accordance with paragraph (k b) of this section. (d) (1) Through December 31, 1997, the monthly charge for each primary residential or single line business local exchange service subscriber line shall be the charge computed in accordance with paragraph (b) of this section, or $3.50, whichever is lower. Except as provided in paragraphs (q), the maximum single line rate, (12) Beginning January 1, 19982000, the maximum monthly charge for each primary residential or single line business local exchange service subscriber line shall be the charge computed in accordance with paragraph (b) of this section, or $3.50, whichever is lower. lesser of the Average Price Cap CMT Revenue Per Line as defined in § 61.3(d) or (i) On January 1, 2000, $5.50 (ii) On January 1, 2001, $6.25 (iii) On July 1, 2002 $6.75. (iv) On July 1, 2003, $7.00 (2) In the event that GDP-PI exceeds 6.5% or is less than 0%, the caps as well as the rates will have to be adjusted pursuant to § 61.45(b)(2). (e) (1) Through December 31, 1997Beginning January 1, 2000, the monthly charge for each non-primary residential local exchange service subscriber line shall be the maximum averaged End User Line Charge for non-primary residential lines in a given entity will be the lesser of: (i) $7.00 or (ii) the greater of: (A) The rate as of December 31, 1999 less amounts of End User Common Line charge reduction needed to ensure over recovery of CMT Revenues does not occur, or (B) Average Price Cap CMT Revenue Per Line. (2) In the event that GDP-PI is greater than 6.5% or is less than 0%, the caps as well as the rates in paragraph (1) above will have to be adjusted pursuant to § 61.45 b(2). (2) Beginning January 1, 1998, the maximum monthly charge for each non-primary residential local exchange service subscriber line shall be the lower of: (i) The maximum charge computed in accordance with paragraph (b) of this section; or (ii) $5.00. On January 1, 1999, this amount shall be adjusted by the inflation factor computed under paragraph (k) of this section, and increased by $1.00. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under paragraph (k) of this section, and increased by $1.00. (3) Where the local exchange carrier provides a residential line to another carrier so that the other carrier may resell that residential line to a residence that already receives a primary residential line, the local exchange carrier may collect the non-primary residential charge described in paragraph (e) of this section from the other carrier. (f) Except as provided in paragraphs (n) and (o) of this section, the charge for each primary residential local exchange service subscriber line shall be the same as the charge for each single line business local exchange service subscriber line. (g) A line shall be deemed to be a residential subscriber line if the subscriber pays a rate for such line that is described as a residential rate in the local exchange service tariff. (h) [Reserved] (i) A line shall be deemed to be a single line business subscriber line if the subscriber pays a rate that is not described as a residential rate in the local exchange service tariff and does not obtain more than one such line from a particular telephone company. (j) No charge shall be assessed for any WATS access line. (k) (1) Beginning on January 1, 2000, and in the absence of voluntary reductions, the averaged End User Common Line Charge for multiline business lines in a given entity that has not deaveraged End User Common Line charges will be the lesser of: (i) $9.20 or (ii) the greater of: (A) the rate as of December 31, 1999, less amounts of End User Common Line charge reductions to ensure over recovery of CMT Revenues does not occur, or (B) Average Price Cap CMT Per Line as defined in § 61.3(d). Except when the incumbent LEC reduces the rate through voluntary reductions, the averaged multiline business End User Common Line charge initially will be frozen until the entity's multiline business PICC and CCL are eliminated. (2) In the event that GDP-PI is greater than 6.5% or is less than 0%, the caps as well as the rates in paragraph (1) above will have to be adjusted pursuant to § 61.45 b(2). (k) (1) On January 1, 1999: (i) The ceiling for multi-line business subscriber under paragraph (b)(3) of this section will be adjusted to reflect inflation as measured by the change in GDP-PI for the 18 months ending September 30, 1998. (ii) The ceiling for non-primary residential subscriber lines under paragraph (e)(2)(ii) of this section will be adjusted to reflect inflation as measured by the change in GDP-PI for the 12 months ending September 30, 1998. (2) On July 1, 2000, the ceiling for multi-line business subscriber lines and non-primary residential subscriber lines will be adjusted to reflect inflation as measured by the change in GDP-PI for the 18 months ending on March 31, 2000. (3) On July 1 of each subsequent year, the ceiling for multi-line business subscriber lines and non-primary residential subscriber lines will be adjusted to reflect inflation as measured by the change in GDP-PI for the 12 months ending on March 31 of the year the adjustment is made. (l) (1) Beginning January 1, 1998, local exchange carriers shall assess no more than one end user common line charge as calculated under the applicable method under paragraph (e) of this section for Basic Rate Interface integrated services digital network (ISDN) service. (2) Local exchange carriers shall assess no more than five end user common line charges as calculated under paragraph (b) of this section for Primary Rate Interface ISDN service. (m) In the event the local exchange carrier charges less than the maximum end user common line charge for any subscriber lines, the local exchange carrier may not recover the difference between the amount collected and the maximum from carrier common line charges or PICCs. (n) Through December 31, 1997, the End User Common Line charge for a residential subscriber shall be 50% of the charge specified in paragraphs (b) and (d) of this section if the residential local exchange service rate for such subscribers is reduced by an equivalent amount, provided that such local exchange service rate reduction is based upon a means test that is subject to verification. (o) Paragraphs (o)(1) and (o)(2) of this section are effective through December 31, 1997. (1) The End User Common Line charge for residential subscribers shall be reduced to the extent of the state assistance as calculated in paragraph (o)(2) of this section, or waived in full if the state assistance equals or exceeds the residential End User Common Line charge under the circumstances described in this paragraph. In order to qualify for this waiver, the subscriber must be eligible for and receive assistance or benefits provided pursuant to a narrowly targeted telephone company lifeline assistance program, requiring verification of eligibility, implemented by the state or local telephone company. A state or local telephone company wishing to implement this End User Common Line reduction or waiver for its subscribers shall file information with the Commission Secretary demonstrating that its plan meets the criteria set out in this section and showing the amount of state assistance per subscriber as described in paragraph (o)(2) of this section. The reduction or waiver of the End User Common Line charge shall be available as soon as the Commission certifies that the state or local telephone plan satisfies the criteria set out in this paragraph and the relevant tariff provisions become effective. (2) (i) The state assistance per subscriber shall be equal to the difference between the charges to be paid by the participating subscribers and those to be paid by other subscribers for comparable monthly local exchange service, service connections and customer deposits, except that benefits or assistance for connection charges and deposit requirements may only be counted once annually. In order to be included in calculating the state assistance, such benefits must be a single telephone line to the household's principal residence. (ii) The monthly state assistance per participating subscriber shall be calculated by adding the amounts calculated in paragraphs (o)(2)(ii)(A) and (o)(2)(ii)(B) of this section. (A) The amount of the monthly state assistance per participating subscriber for local exchange service shall be calculated by dividing the annual difference between charges paid by all participating subscribers for residential local exchange service and the amount which would have been charged to non-qualifying subscribers for comparable service by twelve times the number of subscribers participating in the state assistance program. Estimates may be used when historic data are not available. (B) The amount of the monthly state assistance for service connections and customer deposits per participating subscriber shall be calculated by determining the annual amount of the reductions in these charges for participating subscribers each year and dividing this amount by twelve times the number of participating subscribers. Estimates may be used when historic data are not available. (p) Through December 31, 1997, in connection with the filing of access tariffs pursuant to § 69.3(a), telephone companies shall calculate for the association their projected revenue requirement attributable to the operation of § 69.104 (n) through (o). The projected amount will be adjusted by the association to reflect the actual lifeline assistance benefits paid in the previous period. If the actual benefits exceeded the projected amount for that period, the differential will be added to the projection for the ensuing period. If the actual benefits were less than the projected amount for that period, the differential will be subtracted from the projection for the ensuing period. Through December 31, 1997, the association shall so adjust amounts to the Lifeline Assistance revenue requirement, bill and collect such amounts from interexchange carriers pursuant to § 69.117 and distribute the funds to qualifying telephone companies pursuant to § 69.603(d). (q) End User Common Line De-Averaging. Beginning on January 1, 2000, ILECs may geographically deaverage End User Common Line charges subject to the following conditions: (1) In order for an ILEC to be allowed to de-average End User Common Line charges within a study area, the ILEC must have state Commission approved geographically deaveraged rates for UNE Loops within that study area. Except where an incumbent LEC geographically deaverages through voluntary reductions, before an ILEC may geographically deaverage its End User Common Line rates, its Originating and Terminating CCL and Multiline Business PICC rates must equal $0.00. (2) All geographic deaveraging of End User Common Line charge by customer class within a study area must be according to the state commission-approved unbundled network element loop zone. An ILEC can maintain up to four zones, however, the zones must cover the same geographic areas as state Commission approved Unbundled Network Elements loop zones. In study areas where there are more than 4 UNE zones, such Zones must be collapsed into a maximum of 4 zones, which will be determined at the ILEC's discretion. (3) Within a given zone, Multiline Business End User Common line rates cannot fall below Primary Residence, Single Line Business or Non-Primary charges. Non Primary End User Common Line charges cannot fall below Primary Residence, Single Line Business charges. (4) For any given class of customer in any given zone, the Zone de-averaged End User Common Line Charge in that zone must be greater than or equal to the Zone de-averaged End User Common Line charge in the zone with the next lower Zone Average Revenue Per Line. (5) Alternative 1 - Filing Entity30 The sum of revenues per month that would be generated from all deaveraged End User Common Line charges in all End User Common Line charge deaveraging zones within a filing entity plus revenues per month from all End User Common Line, multiline business PICC and CCL charges from study areas within that filing entity that do not have geographically deaveraged End User Common Line charges plus the sum of all Study Area Access USF Support (as defined in § 54.813(7)) in all study areas within the filing entity, divided by the number of lines cannot exceed Average Price Cap CMT Revenue Per Line as defined in § 61.3(d) for the filing entity. Alternative 2 - Study Area and Filing Entity31 The sum of all revenues per month that would be generated from all deaveraged End User Common Line charges in all zones within a study area plus Study Area Access USF Support (as defined in § 54.813(7)) for that study area divided by the number of lines in that study area cannot exceed Average Price Cap CMT Revenue Per Line as defined in § 61.3(d) for that study area. In addition, the sum of revenues per month that would be generated from all deaveraged End User Common Line charges in all End User Common Line charge deaveraging zones within a filing entity plus revenues per month from all End User Common Line charge, multiline business PICC and CCL charges from study areas within that filing entity that have not geographically deaveraged End User Common Line charges plus the sum of all Study Area Access USF Support (as defined in § 54.813(7)) in all study areas within the filing entity, divided by the number of lines cannot exceed Average Price Cap CMT Revenue Per Line as defined in § 61.3(d) for the filing entity. (6) Maximum Charge. The maximum zone deaveraged End User Common Line Charge that may be charged in any zone is the lesser of the highest Zone Average Revenue Per Line within the study area, or the cap as of January 1, 2000 or the Current Cap for that designated period. Zone Average Revenue Per Line is the Price Cap CMT Revenue per Line allocated to a particular state-defined zone used for deaveraging of UNE loop prices. The zone average revenue per line is computed pursuant to 61.3 (ss). (7) Minimum Charge. Except where an incumbent LEC deaverages through voluntary reductions, the minimum Zone de-averaged End User Common Line Charge in any zone in any area is the lowest Zone Average Revenue per Line for any zone in that study area.32 (8) Voluntary Reductions, A "Voluntary Reduction" is one in which the ILEC reduces prices other than through offset of net increases in End User Common Line charge revenues or study area USF support received pursuant to §§ 54.810 and 54.813, or through increases in other zone deaveraged End User Common Line charges. § 69.153 Multi-Line business presubscribed interexchange carrier charge (PICC). (a) A charge expressed in dollars and cents per line may be assessed upon the Multi-Line business subscriber's presubscribed interexchange carrier to recover revenues totaling Averaged Price Cap CMT Revenues Per Line times the number of base period lines less revenues the common line revenues permitted under the price cap rules in part 61 of this chapter that cannot be recovered through the end user common line charge established under § 69.152, up to a maximum of $4.00 per line per month. residual interconnection charge revenues, and certain marketing expenses described in § 69.156(a). In the event the ceilings on the PICC prevent the PICC from recovering all the residual common line, residual interconnection charge revenues, and marketing expenses, the PICC shall recover all residual common line revenues before it recovers residual interconnection charge revenues, and all residual interconnection charge revenues before it recovers marketing expenses. (b) If an end-user customer does not have a presubscribed interexchange carrier, the local exchange carrier may collect the PICC directly from the end user. (c) The PICC for primary residential subscriber lines and single-line business subscriber shall be the lower of (1) One twelfth of the sum of projected annual common line revenues and residual interconnection charge revenues permitted under our price cap rules divided by the projected average number of local exchange service subscriber lines in use during such annual period, minus the maximum subscriber line charge calculated pursuant § 69.152(d)(2); or (2) $0.53. On July 1, 1999, this amount shall be adjusted by the inflation factor computed under paragraph (e) of this section, and increased by $0.50. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under paragraph (e), and increased by $0.50. (c) [Removed and Reserved.] (d) To the extent that a local exchange carrier cannot recover its full common line revenues, residual interconnection charge revenues, and those marketing expense revenues described in § 69.156(a) permitted under price cap regulation through the recovery mechanisms established in §§ 69.152, 69.153(c), and 69.156(b) and (c), the local exchange carrier may assess a PICC on multi-line business subscriber lines and non-primary residential subscriber lines. (1) The maximum monthly PICC for non-primary residential subscriber lines shall be the lower of: (i) One twelfth of the projected annual common line, residual interconnection charge, and § 69.156(a) marketing expense revenues permitted under our price cap rules, less the maximum amounts permitted to be recovered through the recovery mechanisms under §§ 69.152, 69.153(c), and 69.156 (b) and (c), divided by the total number of projected non-primary residential and multi-line business subscriber lines in use during such annual period; or (ii) $1.50. On July 1, 1999, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.00. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.00. (2) If the maximum monthly PICC for non-primary residential subscriber lines is determined using paragraph (d)(1)(i), the maximum monthly PICC for multi-line business subscriber lines shall equal the maximum monthly PICC of non-primary residential subscriber lines. Otherwise, the maximum monthly PICC for multi-line business lines shall be the lower of: (i) One twelfth of the projected annual common line, residual interconnection charge, and § 69.156(a) marketing expense revenues permitted under parts 61 and 69 of our rules, less the maximum amounts permitted to be recovered through the recovery mechanisms under §§ 69.152, 69.153(c) and (d)(1), and 69.156 (b) and (c), divided by the total number of projected multi-line business subscriber lines in use during such annual period; or (ii) $2.75. On July 1, 1999, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.50. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.50. (e) For the PICC ceiling for primary residential subscriber lines and single-line business subscriber lines under subparagraph (c)(2), non-primary residential subscriber lines under subparagraph (d)(1)(ii), and multi-line business subscriber lines under subparagraph (d)(2)(ii): (1) On July 1, 1999, the ceiling will be adjusted to reflect inflation as measured by the change in GDP-PI for the 18 months ending March 31, 1999. (2) On July 1 of each subsequent year, the ceiling will be adjusted to reflect inflation as measured by the change in GDP-PI for the 12 months ending on March 31 of the year the adjustment is made. (3) On July 1 of each subsequent year, the ceiling will be adjusted to reflect inflation as measured by the change in GDP-PI for the 12 months ending on March 31 of the year the adjustment is made. (f) (1) Local exchange carriers shall assess no more than one PICC as calculated under the applicable method under paragraph (d)(1) of this section for Basic Rate Interface integrated services digital network (ISDN) service. (d2) Local exchange carriers shall assess no more than five PICCs as calculated under paragraph (c)(d)(2) of this section for Primary Rate Interface ISDN service. (eg) The maximum monthly PICC for each Centrex lines shall be one-ninth of the maximum charge determined under paragraph (a)(d)(2) of this section except that if a Centrex customer has fewer than nine lines, the maximum monthly PICC for those lines shall be the maximum charge determined under paragraph (a)(d)(2) of this section divided by the customer's number of Centrex lines. (2) In the event the monthly loop costs for a multi-line business line, as defined in § 69.152(b)(1), exceed the maximum permitted End User Common Line charge, as set in § 69.152(b)(3), the maximum monthly PICC for a Centrex line determined under paragraph (g)(1) of this section shall be increased by the difference between the monthly loop costs defined in § 69.152(b)(1) and the maximum permitted End User Common Line charge set in § 69.152(b)(3). In no event, however, shall the PICC for a Centrex line exceed the maximum established under paragraph (d)(2) of this section. (h) If a local exchange carrier receives low income universal service support on behalf of a customer under § 54.403(d) of this chapter, then the local exchange carrier shall not recover a residential presubscribed interexchange carrier charge from that end-user customer or its presubscribed interexchange carrier. Any amounts recovered under § 54.403(d) of this chapter by the local exchange carrier shall be treated as if they were recovered through the presubscribed interexchange carrier charge. § 69.154 Per-minute carrier common line charge. (a) Local exchange carriers may recover a per-minute carrier common line charge from interexchange carriers, collected on originating access minutes and calculated using the weighting method set forth in paragraph (c) of this section. The maximum such charge shall be the lower of: (1) The per-minute rate that would recover annual common line revenues permitted less the maximum amounts allowed to be recovered under §§ 69.152 and 69.153; or (2) The sum of the local switching, carrier common line and interconnection charge charges assessed on originating minutes on December 31, 1997, minus the local switching charges assessed on originating minutes. (b) To the extent that paragraph (a) of this section does not recover from interexchange carriers all permitted carrier common line revenue, the excess may be collected through a per-minute charge on terminating access calculated using the weighting method set forth in paragraph (c) of this section. (c) For each Carrier Common Line access element tariff, the premium originating Carrier Common Line charge shall be set at a level that recovers revenues allowed under paragraphs (a) and (b) of this section. The non-premium charges shall be equal to .45 multiplied by the premium charges. § 69.155 Per-minute residual interconnection charge. (a) Local exchange carriers may recover a per-minute residual interconnection charge on originating access. The maximum such charge shall be the lower of: (1) The per-minute rate that would recover the total annual residual interconnection charge revenues permitted less the portion of the residual interconnection charge allowed to be recovered under § 69.153; or (2) The sum of the local switching, carrier common line and residual interconnection charges assessed on originating minutes on December 31, 1997, minus the local switching charges assessed on originating minutes, less the maximum amount allowed to be recovered under § 69.154(a). (b) To the extent that paragraph (a) of this section prohibits a local exchange carrier from recovering all of the residual interconnection charge revenues permitted, the residual may be collected through a per-minute charge on terminating access. (c) (1) No portion of the charge assessed pursuant to paragraphs (a) or (b) of this section that recovers revenues that the local exchange carrier anticipates will be reassigned to other, facilities-based rate elements, including the tandem-switching rate element described in § 69.111(g), the three-part tandem switched transport rate structure described in § 69.111(a)(2), and port and multiplexer charges described in § 69.111(l), shall be assessed upon minutes utilizing the local exchange carrier's local switching facilities, but not the local exchange carrier's transport service. (2) If a local exchange carrier cannot recover its full residual interconnection charge revenues through the PICC mechanism established in § 69.153, and will consequently recover a portion of its residual interconnection charge revenues through per-minute charges assessed pursuant to paragraphs (a) and (b) of this section, then the local exchange carrier must allocate its residual interconnection charge revenues subject to the exemption established in paragraph (c)(1) of this section between the PICC and the per-minute residual interconnection charge in the same proportion as other residual interconnection charge revenues are allocated between these two recovery mechanisms. § 69.156 Marketing expenses. (a) Local exchange carriers shall recover marketing expenses that are allocated to the Common Line and Traffic Sensitive baskets, and the switched services within the Trunking basket pursuant to §§ 32.6610 of this chapter and 69.403. (b) The expenses described in paragraph (a) of this section may be recovered from non-primary residential subscriber lines, by increasing the end user common line charge described in § 69.152(e). The amount of marketing expenses permitted to be recovered in this manner shall be the total marketing expenses described in paragraph (a) of this section divided by the sum of non-primary residential lines and multi-line business lines. In no event shall the end user common line charge for these lines exceed the lower of the ceilings established in § 69.152 (b)(3) and (e) (2)(ii). Primary Residence, Single Line Business, Non-primary Residence and Multi-Line Business subscriber lines, by increasing or decreasing the end user common line charge described in §69.152. The amount of marketing expenses permitted to be recovered in this manner shall be the total marketing expenses described in paragraph (a) of this section divided by the sum of Primary Residence, Single Line Business, Non-primary and Multi-Line business lines. In no event shall the end user common line charge for these lines exceed the ceilings established in §69.152 (d) and (e) and (k). (c) The expenses described in paragraph (a) of this section may be recovered from multi-line business subscriber lines, by increasing the end user common line charge described in § 69.152(b). The amount permitted to be recovered in this manner shall be the total marketing expenses described in paragraph (a) of this section divided by the sum of non-primary residential lines and multi-line business lines. In no event shall the end user common line charge for these lines exceed the ceiling established in § 69.152(b)(3). (c) [Removed and reserved.] (d) In the event that the ceilings set forth in paragraphs (b) and (c) of this section, and § 69.153(d) prevent a local exchange carrier from recovering fully the marketing expenses described in paragraph (a) of this section, the local exchange carrier may recover the remainder through a per-minute assessment on originating access minutes, so long as the charge for originating access does not exceed the amount defined in § 69.155(a)(2) less the maximum permitted to be recovered under § 69.155(a). (e) In the event that the ceilings set forth in paragraphs (b), (c) and (d) of this section, and § 69.153(cd) prevent a local exchange carrier from recovering fully the marketing expenses described in paragraph (a) of this section, the local exchange carrier may recover the remainder through a per-minute assessment on terminating access minutes. (f) The amount of marketing expenses that may be recovered each year shall be adjusted in accordance with the price cap rules set forth in part 61 of this chapter. § 69.157 Line port costs in excess of basic, analog service. To the extent that the costs of ISDN line ports, and line ports associated with other services, exceed the costs of a line port used for basic, analog service, local exchange carriers may recover the difference through a separate monthly end user charge. § 69.158 Universal Service End User Charges To the extent the company makes contribution to the Universal Service Support Mechanisms pursuant to § 54.706 and § 54.709 the ILEC may recover those contributions through a charge to end users. These contributions are not a part of any price cap baskets, and the charge to recover these contributions is not part of any other element established pursuant to Part 69. Such a charge may be assessed on a per line basis or as a percentage of interstate retail revenues, and at the option of the ILEC it may be combined for billing purposes with other end user retail rate elements. An ILEC opting to assess the USF end user rate element on a per line basis may apply that charge using the "equivalency" relationships established for the multiline business PICC for Primary Rate ISDN service, as per § 69.153(d), and for Centrex lines, per § 69.153(e). §§ 69.201-69.205 [Removed] § 69.206 [Deleted] § 69.207 [Deleted] § 69.208 [Deleted] § 69.209 [Deleted] § 69.210 [Added] [Deleted] Appendix C Before the Federal Communications Commission WASHINGTON, D.C. IN THE MATTER OF ))))) Price Cap Performance Review for Local Exchange Carriers CC DOCKET NO. 94-1 Federal State Joint Board on Universal Service ))) CC DOCKET NO. 96-45 Low-Volume Long Distance Users ))) CC DOCKET NO. 99-249 Access Charge Reform CC DOCKET NO. 96-262 Memorandum In Support Of The Coalition For Affordable Local And Long Distance Service Plan Summary The Coalition for Affordable Local and Long Distance Service ("CALLS"), comprised of AT&T, Bell Atlantic, BellSouth, GTE, SBC, and Sprint, submits this explanatory memorandum of its proposed plan for interstate access charge and universal service reform. After debating these issues for close to 20 years, the members of the Coalition have come together to propose a plan for the next five years that will promote comparable and affordable universal service, lower long distance bills, and promote competition in rural and residential markets. Today's universal service system, which relies on implicit support from interstate access charges, is inconsistent both with the development of competition in these markets and with the advent of new technologies such as packet switched networks. The end result of this plan will be to promote job creation and economic growth. The plan has three main, interdependent pillars. First, it establishes a portable universal service fund that will provide explicit support to replace support currently implicit in interstate access charges. Second, the plan simplifies the patchwork of current common line charges into one subscriber line charge ("SLC"), and provides for deaveraging of those charges in a manner that will not undermine comparable and affordable universal service. Third, the plan establishes a "social compact" under which traffic-sensitive switched access rates will fall significantly and then be frozen, on average, at rates that are 50 percent lower than prevail today. CALLS believes the public interest would benefit significantly if the Commission seized this opportunity to reform today's unsustainable system by adopting the plan before its implementation date of January 2000. These reforms will benefit consumers, and bring the Commission a giant step closer to implementing Congress' vision when it passed the Telecommunications Act of 1996. TABLE OF CONTENTS I. INTRODUCTION 2 A. Overview of the Plan 3 B. Summary of CALLS Plan 9 1. Common Line Reform 9 2. Universal Service 10 3. Switched Access 11 II. A SUSTAINABLE, PRO-COMPETITION, AFFORDABLE, AND SIMPLIFIED Common Line Rate Structure 12 A. Common Line Rate Elements are Simplified and Sustained by Explicit Universal Service Support 12 B. Reform of the Common Line Rate Structure is Necessary to Promote Competition and Preserve Universal Service. 13 1. Controlled and capped increases in residential SLCs will promote competition. 13 2. The new SLC caps will ensure that rate levels remain affordable. 16 3. SLC deaveraging will benefit consumers and preserve universal service. 19 C. ILEC Contributions to Universal Service Must Be Removed from Price Caps and Recovered from End Users. 22 III. AN EXPLICIT, PORTABLE UNIVERSAL SERVICE "SAFETY NET" to REPLACE $650 MILLION OF IMPLICIT SUPPORT IN EXISTING INTERSTATE COMMON LINE ACCESS CHARGES. 23 A. $650 Million Will Keep Rural Interstate End User Rates Affordable and Comparable to Urban Rates During This Five Year Period. 25 B. The Interstate Access-Related USF is Distributed to Provide Support for SLC Caps, and is Portable Among Eligible Telecommunications Carriers. 29 C. The Plan's Explicit Support Promotes Competition and Benefits Consumers 32 IV. a simplified price cap plan with dramatically reduced per minute Switched Access Charge Rates 33 A. Target Levels Are Reasonable. 36 B. The Glide Path Is Reasonable 38 C. The Plan Accelerates The Reduction In Per Minute Rates 39 V. Process and Commission Authority 42 A. Process 42 B. Authority 43 VI. Conclusion 44 Before the Federal Communications Commission WASHINGTON, D.C. IN THE MATTER OF ))))) Price Cap Performance Review for Local Exchange Carriers CC DOCKET NO. 94-1 Federal State Joint Board on Universal Service ))) CC DOCKET NO. 96-45 Low-Volume Long Distance Users ))) CC DOCKET NO. 99-249 Access Charge Reform CC DOCKET NO. 96-262 Memorandum In Support Of The Coalition For Affordable Local And Long Distance Service Plan INTRODUCTION The members of the Coalition for Affordable Local and Long Distance Service ("CALLS" or "Coalition"), which includes AT&T, Bell Atlantic, BellSouth, GTE, SBC, and Sprint, by letter to the Chairman and Commissioners dated July 29, 1999,33 submitted an integrated universal service and interstate access reform plan covering price cap incumbent local exchange carriers ("ILECs"). The plan is designed to be implemented in January 2000 and would apply to those carriers electing to participate.34 All signatory price cap LECs commit to participate if the Commission adopts the plan as submitted. Also attached hereto are preliminary draft proposed rules to implement the plan with respect to the signatory price cap LECs.35 Consumers benefit significantly from this plan. First, the plan calls for per minute interstate access charge rates to be slashed in half. These reductions will lead to lower long distance bills. Cutting per minute access prices will also spur innovation and the development of new pricing packages for telecommunications services. Second, through a combination of universal service support and caps on flat-rated charges, rural and urban rates stay within a "fair range" of one another, thereby protecting rural consumers from unaffordable rates. Third, the plan will spur the development of competition in residential and rural markets by creating portable universal service support and allowing for limited deaveraging of rates. Fourth, low income "Lifeline" consumers will see common line charges falling and lower long distance bills. Fifth, urban consumers benefit because the deaveraging provisions of the plan will facilitate lower rates in more populated areas. Finally, consumer bills will be simplified as confusing fees and charges are consolidated. Overview of the Plan The CALLS plan has three main, interdependent pillars. First, it establishes an explicit interstate universal service fund that will provide support to replace $650 million of implicit support currently collected through interstate access charges. This support will be portable to competing LECs. It will also be sustainable as new technologies, such as packet-switching, allow more users to avoid paying long distance rates that reflect the implicit support embedded in per minute access charges.36 The support will ensure that rural Americans continue to enjoy affordable telecommunications service, and will facilitate the development of competitive choices - both packet-switched and circuit-switched - in rural and urban markets. Second, the plan simplifies the patchwork of current common line charges into one subscriber line charge ("SLC"), and provides for deaveraging of those rates without undermining universal service. These changes rationalize and simplify the existing pricing regime for interstate exchange access service, and will promote increased local competition in residential and rural markets. Third, the plan establishes a "social compact" under which traffic-sensitive switched access rates will fall by approximately 50 percent and will then be frozen, on average, at these low levels. The target rate caps are the result of arm's length negotiations between interexchange carrier ("IXC") and ILEC members of the Coalition. In addition, the plan narrows the discrepancy between the interstate access rate structure and the current interstate access charge "exemption" used by Internet Service Providers ("ISPs"). By substantially lowering the traffic-sensitive costs of access, the plan lessens the opportunity for arbitrage and uneconomic bypass that currently threatens universal service. Congress recognized in the Telecommunication Act of 1996 ("the 1996 Act") that universal service reform is a critical component of its "pro-competitive, deregulatory national policy framework."37 The Commission did likewise when it first implemented the 1996 Act, characterizing its interstate Access Charge Reform Order38 and Universal Service Order39 as two parts of its "competition trilogy." Notwithstanding widespread recognition of the need for reform, restitching the "patchwork quilt of implicit and explicit subsidies"40 that had supported universal service before the 1996 Act continues to be a difficult task. In those two critical orders, the Commission outlined, but did not complete, solutions that would identify implicit universal service support embedded in interstate access charges and move that support into competitively-neutral, non-discriminatory, and explicit universal service mechanisms. Today, three and a half years after enactment of the 1996 Act, those two critical parts of the "competition trilogy" await completion. Events since 1996 - and May 1997 when the Commission released its original Access Charge Reform and Universal Service Orders - make it even more imperative that universal service and interstate access charge reform be completed and implemented. In 1997, the Commission identified three basic forms of implicit support for universal service: (1) geographic rate averaging between higher cost and low cost areas; (2) support for residential service through higher charges on business lines; and (3) higher, above-cost usage charges to support costs of serving low usage subscribers.41 All three of these implicit mechanisms are present today in interstate access charges. The Commission, in 1997, correctly recognized that "this system is not sustainable in its current form in a competitive environment."42 Moreover, the Commission predicted that "this incentive to entry by competitors in the lowest cost, highest profit market segments (caused by raising some rates significantly above cost) means that today's pillars of implicit subsidies - high access charges, high prices for business services, and the averaging of rates over broad geographic areas - will be under attack."43 The Commission therefore stated at that time that it would retain its current system only until January 1, 1999. Today, the transition to explicit universal service support and sustainable, pro-competitive access rate structures remains incomplete, while the Commission continues to seek ideal solutions to these complex and critical issues. As the Commission predicted, however, the market-opening reforms created by the 1996 Act have led to the development of growing business market competition, particularly in urban areas. Universal service and interstate access charge reform can no longer wait. If reform is further delayed, solutions that preserve universal service will only become more difficult and more abrupt. The regulatory uncertainty that has characterized telecommunications markets since the 1996 Act will continue to "overhang" all investment decisions, chilling investment and delaying the expansion of competition into residential and rural markets. Moreover, implicit support today is increasingly threatened by technological and competitive changes. For instance, packet-switched network services such as cable modems and xDSL services are continuing to develop at an accelerating rate. As these networks develop and become increasingly capable of providing alternative means of transmitting voice services, particularly long distance services,44 it will become easier for end users to avoid supporting universal service through implicit universal service support mechanisms embedded in interstate access charges. Unless the present "patchwork quilt" of support can be replaced with universal service support mechanisms sewn from a single, cohesive cloth, the system of universal service support and emerging packet networks will be on an unnecessary collision course.45 To maintain both the "unregulation" of the Internet and universal service requires changing existing universal service and interstate access charge mechanisms.46 As the Commission has also recognized, implicit support is not just unsustainable, but it actually impedes the development of choice and competition in residential and rural markets. As the Commission recently observed, "implicit support can also delay or deny the benefits of competition to residential and high-cost consumers if a competitor finds that it is unable to compete against an incumbent's artificially low rates."47 By contrast, "explicit mechanisms may encourage competitors to expand service beyond urban areas and business centers into all areas of the country and to all Americans, as envisioned by the 1996 Act."48 As the Commission correctly noted, "[e]fficient competition in local markets is most likely to occur when rates for services, after factoring in explicit universal service contributions or support, reflect the underlying cost of providing service."49 The CALLS plan addresses today's unsustainable and, in residential and high-cost areas, competition-unfriendly system by directly tackling all three sources of implicit universal service support in interstate access charges. It does so through a combination of $650 million of explicit universal service support targeted to those areas that are the highest cost to serve, continued reform of the common line rate structure to increase economic efficiency and competitive neutrality, and targeted reductions of switched access charges. Universal service and interstate access charge rate structure reform alone will not, however, create the regulatory certainty necessary to facilitate the development of competition, nor would it maximize consumer welfare. It is also not possible, from a practical perspective, fully to resolve universal service support issues without also addressing the level and the structure of interstate access rates. The third pillar of the CALLS plan, therefore, revises and simplifies the Commission's system of price cap rate regulation. This simplification cuts per minute access charges dramatically, and stabilizes a price cap system that has been in almost-continual flux since it was adopted. Rather than the complex rules that have led to three price cap plans in eight years, consumers and industry participants will benefit from a simplified system where average switched access for a telephone tariff filing entity will be capped at low per minute rates. The CALLS plan benefits consumers, fundamentally preserves and enhances universal service, and creates an interstate access charge rate structure that will be more consistent with technological developments. Adoption of this plan will result in a "cease-fire" for at least a critical five year period as telecommunications markets accelerate the transition to greater and more widespread competition. The CALLS plan, taken as a whole and only as a whole,50 accomplishes all these goals in a manner consistent with sound economic principles, paving the way for the marketplace to deliver on the twin promises of the 1996 Act - broad growth of competition and affordable universal service in all telecommunications markets. Summary of CALLS Plan The full text of the CALLS plan is set forth in Appendix A. In summary, the plan incorporates the following elements into an integrated universal service and interstate access reform package: Common Line Reform a) As required by the Fifth Circuit,51 local telephone companies recover universal service contributions explicitly from end users, not through carrier-paid interstate access charges. b) Residential SLCs for price cap carriers are capped at $5.50 initially, with caps gradually increasing to $7.00 by July 2003. Deaveraged, multiline business SLCs are capped at $9.20 per month. $650 million in universal service funding explicitly and transparently supports these caps without creating additional implicit support. c) All residential PICC-related charges - flat-rate charges from local companies to long distance companies that are today billed by long distance companies to subscribers - are folded into SLCs. Residential consumers will not see a federal common line charge on their bill other than the SLC. The transition of common line rates away from above cost per minute (carrier common line) and multiline business PICC charges continues, and, after the CCLC and multiline business PICC are eliminated, companies will be permitted geographically to deaverage SLCs as they geographically deaverage rates for unbundled loops. Universal Service a) $650 million per year in explicit universal service support replaces $650 million of implicit support in interstate access charges. This universal service support is portable to all competing LECs, and targeted to high cost areas. b) Lifeline support is increased to protect low-income consumers from all effects of these changes, including the consolidation of PICCs with SLCs. This consolidation eliminates PICC-related charges for Lifeline customers with no offsetting increases in fixed monthly service rates. Switched Access a) Per minute interstate access charges are cut in half, from an average of over 1.1 cents per access minute to just over 0.55 cents per access minute, dropping significantly faster than they would under the Commission's existing rules. These reductions are accomplished by continuing an X-factor of 6.5% and targeting "X-factor" adjustments to switched access elements until switched access charges other than carrier common line charges reach 0.55 cents per minute for the Bell Companies and GTE, and 0.65 cents per minute for other price cap incumbent LECs. Thereafter, average switched access rates for a filing entity are capped at these levels until at least January 1, 2005. Per minute access charge reductions will result in lower long distance bills. Set forth below are further, more detailed descriptions of each of the "three pillars" of the CALLS plan. A SUSTAINABLE, PRO-COMPETITION, AFFORDABLE, AND SIMPLIFIED COMMON LINE RATE STRUCTURE Common Line Rate Elements are Simplified and Sustained by Explicit Universal Service Support As the Commission has recognized in its Access Charge Reform orders, reform of common line pricing is a critical step in meeting section 254's command to establish mechanisms to preserve universal service and to create such explicit support as is necessary to provide sufficient support.52 The CALLS plan would permit the Commission to continue, and simultaneously to simplify, this reform process. Consistent with this mandate of the 1996 Act, these reforms will encourage more competitive entry into local markets, and preserve and enhance universal service by substituting explicit support for existing implicit support inherent in geographically-averaged rates and inefficient rate structures. To accomplish these important goals, the plan would immediately eliminate all residential and single-line business PICCs, and reduce the multiline business PICC to no more than $4.00 per month.53 The primary residential SLC cap (but not necessarily the rate charged to customers) becomes $5.50, effective January 2000, increasing over three years to $7.00.54 Similarly, the non-primary residential SLC cap (but not necessarily the rate charged to customers) increases to $7.00 in January 2000, with no further increases.55 As with the Commission's existing SLC caps, the actual rate in most cases will be less. Ultimately, primary and non-primary residential line rates are unified, and distinguishing between these lines is no longer required. Toll rates can thus decrease as this implicit support from per minute access charges is eliminated. Multiline business SLCs remain capped at $9.20, although as is the case today, actual rates will be in most cases, substantially below the cap.56 All SLC caps are sustained through explicit universal service support, as discussed in Section III, infra. Accordingly, unlike today's system of SLC caps, this new system will not generally rely on implicit interstate access charge-based support. These caps are set at levels that will be affordable, and Lifeline support will be increased so that total service cost will be reduced for low-income consumers. Reform of the Common Line Rate Structure is Necessary to Promote Competition and Preserve Universal Service. Controlled and capped increases in residential SLCs will promote competition. As the Commission and the Fifth Circuit have recognized, moving from implicit usage-based and business charge-based universal service support to explicit support is an essential step in the development of increased competition for all classes of customers.57 Indeed, as the Commission has repeatedly observed, implicit universal service support through artificial regulatory pricing conventions is not sustainable in the face of competition.58 There is widespread consensus among economists that when costs are fixed, as loop costs are, markets tend to push prices toward flat-rated, rather than usage-based, price structures.59 The current rate structure does not do that. By inflating usage and business charges above market-based levels, it instead promotes competition for high-volume, typically high-revenue, low-cost business users. The regulatory structure encourages new entrants to show considerably less interest in serving residential customers, in part because the current rate structure keeps incumbent LEC rates for these customers artificially low.60 The plan's SLC reforms represent a better way for the Commission to bring to the residential customer the increased innovation, improved service, and expanded choice the 1996 Act promised. SLCs that more closely reflect the common line costs of each individual line promote increased competition for all classes of customers, particularly residential and single- line business customers. Correspondingly, by eliminating the recovery of additional non-traffic sensitive common line costs through per minute or indirect charges, the plan increases the economic rationality of the common line rate structure. This increased economic efficiency and corresponding gains in consumer welfare will redound to the benefit of all Americans. The plan's reforms also will relieve growing pressure on the Commission to regulate the Internet. For instance, packet-switched services, including Internet Protocol ("IP") services, increasingly will be able to provide substitutes for circuit-switched services. As these packet-switched services emerge, they will make usage-based per minute implicit universal service support unsustainable. Typically, providers of packet services charge on a flat-rated basis, rather than by the minute. In fact, flat-rated pricing is one of the potential efficiencies of a packet-based network, which early packet-based retail offerings such as cable modems and xDSL services reflect. A support system that relies on per minute access charges cannot, therefore, survive the emergence of packet services without imposing a time-metered rate structure on them - a pricing model the consumer market for IP services has already rejected. By significantly reducing the traffic-sensitive prices of switched access services, the CALLS plan substantially resolves these issues, reduces opportunities for arbitrage, and permits the development of rational pricing structures for all services. The plan, by unifying SLCs, PICCs, and minute-based carrier common line charges into a single SLC, also facilitates competition by simplifying the common line rate structure. Line charges that are consolidated and paid by the end user customer selecting the service provider are more likely to be subject to head-to-head price competition than charges that are passed only indirectly to end users through averaged toll rates. Under this approach, residential and rural line charges will be structured to face competitive pressure. Moreover, simplifying a bewildering rate structure is itself a consumer benefit. Thousands of calls and letters to carriers, Congress, and the Commission confirm that ratepayers are confused by these charges, particularly PICC-related charges, and do not understand their basis. As the Commission has recognized in its Truth in Billing proceeding, competition functions best when customers understand what they are paying for and can make informed comparisons among service providers.61 By facilitating such comparisons, the plan's reforms will assist consumers as they choose among competing services and providers. 62 The new SLC caps will ensure that rate levels remain affordable. The CALLS plan establishes SLC caps for both primary residential and single line business lines that start at $5.50 and rise to a maximum of $7.00 monthly. Like current SLCs, this amount represents a cap. Most residential SLCs will never reach $7.00 per month.63 These caps are supported by a $650 million explicit interstate safety net. The plan also expands Lifeline support to ensure that those most at risk from small increases remain connected to the network. Lifeline consumers - who are most vulnerable to rates becoming "unaffordable" - would pay no monthly SLCs, pay no PICC-related charges (which many pay today), and see lower long distance bills. This combined result will strengthen subscribership among low-income consumers.64 For non-Lifeline consumers, the $5.50 initial cap for the consolidated SLC will not affect affordability. Today, non-Lifeline residential end users who pre-subscribe to calling plans pay approximately $5.00 per month in combined SLC and IXC-billed PICC-related charges. Furthermore, the caps under existing rules on primary residential PICCs will increase by another $0.50 on July 1, 2000, making it likely that, even under current rules, most residential customers would pay combined SLC and IXC-billed PICC charges of approximately $5.50 as of July 1, 2000. Therefore, the initial fixed common line charges under the plan will be approximately the same as under current rules, subject only to a 6-month timing shift. There is no basis for classifying the plan's $5.50 consolidated SLC as "unaffordable" for non-Lifeline customers on January 1, 2000, when the $5.50 combination of SLCs and PICCs that will result under existing rules is considered "affordable" on July 1 of the same year.65 In subsequent years, the plan increases the primary residential and single line business SLC cap to $7.00 in three phases. The primary residential and single line business SLC cap rises to $6.25 on January 1, 2001, to $6.75 on July 1, 2002, and to $7.00 on July 1, 2003.66 There is no empirical evidence that these new common line rate structures will cause subscribers to drop off the network. In fact, the historical evidence suggests that subscribership will improve. Past experience shows that the shift away from per minute access charges to flat charges has had an overall positive effect on telephone subscribership. In 1984, when the first SLCs were adopted, telephone subscribership was 91.8 percent. Due in part to the creation of the SLC and later the PICC, usage sensitive interstate access rates - and, in turn, long distance rates - have fallen, and subscribership has increased. By 1989, when residential SLCs first reached $3.50, telephone subscribership had risen to 93.3 percent. Today, with SLC and PICC-related charges totaling approximately $5.00 per month, and with additional charges for the Telecommunications Relay Service ("TRS") and number portability, telephone subscribership is over 94 percent.67 Moreover, as a series of studies has indicated, overall toll charges have a more substantial impact on whether telephone service is affordable than do fixed monthly charges.68 By dramatically reducing switched access charges, which can thus lower long distance bills, it is likely that the plan would, in fact, make telephone service more affordable. Based on all of this experience, with full protection for Lifeline customers, and with further dramatic reductions in switched access charges as an integral part of this plan, there is no reason to believe that the gradual transition of caps on flat-rated charges from $5.50 to $7.00 over the next four years will undermine subscribership. Indeed, the marketplace has now provided factual evidence to satisfy the Commission's concern that caused it to create PICCs in 1997 rather than simply raise SLC caps. At that time, the Commission stated that it was concerned that SLC increases could affect affordability.69 Since they were implemented in 1998, however, the PICCs have been passed on to end users at even higher unit rates than the Commission had contemplated, without leading to lower subscribership levels. Moreover, the CALLS plan secures affordability by setting an ultimate cap of $7.00 for residential and single-line business customers in the most rural areas. Carriers will receive explicit universal service support to support these caps.70 The CALLS plan also narrows interstate regulatory distinctions between multiline business and other lines by substantially narrowing, and in many cases eliminating, the gap between the multiline business SLCs and other SLCs. The plan retains the current $9.20 multiline business SLC cap, and it lowers the multiline business PICC cap to $4.00. In combination with the changes to the residential and single-line business common line rate structure, these facets of the plan immediately reduce the implicit support currently running from multiline business to other lines, accelerating a process set in motion by the Commission in the 1997 Access Charge Reform Order. In addition, the plan facilitates and accelerates the elimination of the Transport Interconnection Charge ("TIC"), a Commission priority under both competitive and economic principles, and a necessary response to the D.C. Circuit's CompTel remand.71 The Commission's prior decisions establishing the SLC and PICC already have brought per minute toll charges to their lowest levels in history, spurring demand for these services, making telecommunications services more affordable, and benefiting users of the interstate telecommunications network. The plan's additional simplified flat-rated recovery of common line costs, together with other changes in the plan, will pave the way for further innovation in long distance pricing, potentially enabling long distance providers to offer rate plans that resemble Internet flat-rates and wireless blocks of minutes. SLC deaveraging will benefit consumers and preserve universal service. In addition to dramatically reducing implicit support by multiline business customers of the residential and single-line business rates,72 the CALLS plan also substantially reduces the implicit support of rural rates by urban ratepayers through geographically averaged SLC charges. However, by integrating SLC deaveraging with explicit universal service support and deaveraged UNE loop rates, the plan strengthens both rural and urban competition, and ensures affordable rural rates. This action is another critical step in the development of increased competition and the preservation of universal service This plan's approach to geographic deaveraging allows prices partially to reflect actual variations in the costs of providing service in varying geographic areas. Under the CALLS plan, deaveraging of SLCs may only be done after a state commission establishes deaveraged UNE rates by zone, and eliminates the CCL and PICC charges.73 Deaveraged SLCs, thereafter, will reflect underlying variations in forward-looking loop and port costs within these zones. The plan protects high-cost customers by providing that no SLC, whether averaged or deaveraged, may exceed the overall SLC caps the plan establishes. Deaveraged SLCs may not generate more revenue than geographically averaged SLCs would have. Although prices will begin to reflect geographic variations in the forward-looking cost of providing service, newly explicit universal service support will protect rural consumers against substantial rate increases and will support the capping of residential SLCs at $7.00 per month. Without these SLC reforms, the regulatory system will continue to provide undue incentives to carriers to compete primarily for business and the most high-volume residential subscribers. Preserving the status quo makes it less likely that rural and most residential consumers will see a real choice of telecommunications providers. This incentive structure itself threatens to erode current implicit support systems. If it were to continue, current regulation would channel competition to urban business centers, and the ILECs would lose urban business customers that they would otherwise retain. As a result, the ILECs' revenue stream from multiline business users that supports service to other subscribers would diminish.74 The plan has built-in safeguards with respect to geographic deaveraging. First, deaveraging is not permitted except where an ILEC has also established state-approved UNE zone prices.75 This safeguard ensures that deaveraging of SLCs will be pro-competitive, and will not inadvertently hamper UNE-based entry or ILEC competitive response. Second, an ILEC may not reduce multiline business SLCs below residential SLC prices in a given UNE pricing zone.76 This ensures that all consumers in low cost areas share the benefits of SLC deaveraging. Third, SLCs of a given customer class - such as multiline business - cannot have a lower price in a higher cost zone than in a lower cost zone.77 Fourth, price cap permitted revenues from deaveraged SLCs cannot exceed the revenues that would be permitted under price cap regulation for averaged SLCs.78 Fifth, except with respect to voluntary reductions, an ILEC may not deaverage prior to eliminating multiline business PICCs and CCL.79 This ensures that deaveraging does not increase implicit support. Sixth, except with respect to voluntary reductions, the plan establishes a minimum charge within the lowest cost zone, which allows consumers outside the lowest cost zone to share the benefits of SLC deaveraging.80 By capping SLCs at affordable levels and limiting SLC deaveraging to a maximum of four zones (unless the Commission authorizes the use of additional zones), the plan also satisfies the statutory requirement that rates in rural, insular, and high cost areas remain "reasonably comparable" to those in urban areas. The Commission, in agreement with the Universal Service Joint Board, has interpreted reasonable comparability to mean "a fair range of urban/rural rates both within a state's borders and among states nationwide," not identical rates in all areas.81 Because these rates will vary by less than the current multiline business SLCs vary among study areas, these rates meet any reasonable interpretation of the "fair range" standard.82 ILEC Contributions to Universal Service Must Be Removed from Price Caps and Recovered from End Users. Currently, price cap LECs recover contributions to universal service through implicit fees in access charges they impose on IXCs. This system is economically inefficient, and now also is in conflict with the decision of the Fifth Circuit in Texas Office of Public Utilities Counsel, which reversed the Commission's requirement that price cap ILECs recover universal service contributions through interstate access charges. The Fifth Circuit specifically held that "[b]ecause the Commission continues to require implicit subsidies for ILECs in violation of a plain, direct statutory command, we reverse its decision to require ILECs to recover universal service contributions from their interstate access charges."83 To implement the Fifth Circuit decision, the Commission should simply give price cap ILECs the freedom to recover universal service contributions in the same manner as all carriers not subject to price regulation. CLECs, CMRS carriers, IXCs, and other carriers whose recovery is not strictly regulated by the Commission have chosen to charge end users on a per line or percentage of revenue basis. The plan will permit ILECs to develop similar mechanisms. In permitting ILECs to recover their universal service assessment as a per line charge on end users, the proposal allows the use of a 9 to 1 equivalency ratio for determining the number of lines for Centrex customers.84 This is consistent with the Commission's prior decision to apply such a ratio for assessment of the PICC on Centrex customers.85 Like the PICC, the universal service assessment is "not a cost-based charge, but a contribution."86 Not imposing a full universal service assessment on every Centrix line reduces the burden on the business, government, education, and health care facilities that are current Centrex customers.87 AN EXPLICIT, PORTABLE UNIVERSAL SERVICE "SAFETY NET" TO REPLACE $650 MILLION OF IMPLICIT SUPPORT IN EXISTING INTERSTATE COMMON LINE ACCESS CHARGES. The plan creates an explicit universal service support of $650 million to replace implicit support currently embedded in interstate access charge rates and rate structures of price cap LECs. In order to distinguish this universal service funding from existing high cost support and support to maintain comparable intrastate prices, we refer to this additional universal service support as "Interstate Access-related USF." This universal service "safety net" is a necessary counterpart to the common line restructuring proposed in Section II, supra. The members of CALLS believe that this $650 million "safety net," when combined with the common line and switched access reforms also proposed under the plan as an integrated whole, will ensure that interstate end user rates remain affordable and comparable between rural and urban areas, during this five-year transitional period.88 By establishing a set amount of $650 million, the CALLS plan sets a "specific" and "predictable" amount of explicit support that will be fully portable among eligible telecommunications carriers, and be offset dollar for dollar by appropriate reductions in interstate access charges. The plan also provides a methodology for distributing $650 million in Interstate Access-related USF to the areas served by each of the participating price cap LECs. This methodology again is predictable and specific. It also ensures that virtually all areas receive enough support to eliminate the multiline business PICC and carrier common line charges, and that most areas also receive support to permit geographic deaveraging of SLCs. In this area, as in others, this plan reflects a balancing of public interests defined by the 1996 Act. Estimates of the amount of implicit support in interstate access charges have varied widely. However, Commission efforts to develop estimates of the implicit support in interstate access charges have already taken over two years. The common line rate structures proposed as part of this plan substantially reduce reliance on implicit mechanisms to maintain affordable and comparable rates, and $650 million in explicit support further safeguards affordable and comparable interstate end user rates during this five year period on a competitively neutral basis. These combined actions, together with the switched access reforms also proposed, will allow the marketplace to move forward in a more stable and certain regulatory environment, to the benefit of both industry participants and rural and urban consumers. The Commission can reasonably conclude that, given the public interest and pro-competitive benefits of immediately establishing a support mechanism that will allow competition to develop, the universal service mechanisms proposed by the CALLS plan, taken in its entirety including $650 million in explicit support and proposed common line and switched access reform, meet the requirements and goals of Section 254. Delaying implementation serves neither the 1996 Act's pro-competitive, deregulatory goals, nor its goals of ensuring universal service for all Americans. $650 Million Will Keep Rural Interstate End User Rates Affordable and Comparable to Urban Rates During This Five Year Period. The CALLS plan establishes a $650 million Interstate Access-related USF, which would replace $650 million of implicit support currently in interstate access charges. The members of CALLS agree that $650 million in explicit support will keep interstate end user rates affordable and comparable, given other aspects of the plan, including the plan's specific common line and switched access reforms. It is significant that the price cap LECs that are signatories to the plan agree that $650 million in explicit, interstate access-related support, in combination with the proposed common line and switched access reforms, will ensure affordable and comparable service in high cost zones during the five year term of the plan. If the total combination of all these changes, including $650 million in explicit support, were not adequate, it is primarily these price cap LECs that would lack the resources to support quality universal service.89 Importantly, however, the assent of the price cap LEC signatories is premised upon the adoption of all parts of the CALLS plan, including all common line and switched access reforms. The $650 million falls well within the range of estimates of existing implicit support in interstate access charges already in the record of the Universal Service proceeding especially when considered in light of the common line reforms.90 The United States Telephone Association ("USTA"), for example, estimated that, based on historic costs, current interstate common line rates contained $3.9 billion in implicit universal support.91 In another estimate based on historic costs, then-FCC Chief Economist William Rogerson and OPP Senior Economist Evan Kwerel estimated $1.9 billion in implicit universal service support, assuming that residential SLCs were capped at $6.50 per month.92 On the other hand, the HAI model projects a forward-looking estimate of implicit support in interstate common line elements at approximately $250 million.93 In addition, AT&T estimates that $650 million of interstate access-related universal service support is consistent with the Commission's model-based estimates to date of the forward-looking costs of providing universal service.94 Using the FCC's Synthesis Model with the FCC's common inputs as of June 2, 1999, AT&T concludes that $650 million is a reasonable estimate of the interstate portion of forward-looking loop and port costs exceeding a maximum residential and single-line business SLC of $7.00 and multiline business SLC of $9.20.95 Although the Commission could endeavor further to estimate implicit support in interstate access, there is no reason to believe that doing so would better ensure affordable and comparable interstate end user rates during this five-year period, when all other factors are considered. Absent adoption of the CALLS plan, uncertainty about the regulatory treatment of such implicit support is likely to persist for some time. As has been observed in the record of the Universal Service proceeding, there can be substantial variations in model-produced estimates of forward-looking costs, and therefore estimates of implicit interstate access-based support, due to variations in model inputs.96 Estimates vary due to, inter alia, the cost of capital, depreciation rates, the number of entities sharing telephone poles, and the actual location of customers. Moreover, the amount of explicit support necessary, even in the nearer term, to ensure affordable and comparable end user rates varies substantially with the rate structure, caps and other limits placed on common line rates, and with the overall plan for interstate price regulation of incumbent LECs. Given Congress' clear and oft-repeated desire to establish an explicit universal service support mechanism to replace implicit support in interstate access charges, it would be perverse to delay implementation of a specific, predictable, and explicit universal service support mechanism, which for this five year period and in the context of all reforms proposed by the plan taken as a whole will ensure that interstate end user rates in rural areas remain comparable to urban rates and affordable. This proposal, taken as a whole, achieves statutory universal service goals for this five year period. Moreover, there would be substantial harm to the public interest if implementation of Interstate Access-related USF were delayed in order to continue to debate the amount of implicit support in interstate access rates. Because estimates have varied so widely, the lack of resolution adds substantial regulatory uncertainty to the business environment. No participant - whether incumbent or entrant - can currently calculate how much universal service support it will receive in the future for serving high cost areas. This lack of certainty undermines the development of competitive choice in these areas. What is needed now to promote competition and entry is a specific and predictable transitional amount for the Interstate Access-related USF. The plan as a whole, including $650 million Interstate Access-related USF, can reasonably be expected to be sufficient to keep rural rates affordable, and within a "fair range" of urban rates. In five years, there will have been an opportunity for competition to develop and for the Commission and the parties to obtain experience dealing with a portable and explicit fund. At that point, if the Commission believes that $650 million was either more or less than sufficient, it can make appropriate, tailored adjustments. It is also possible, however, that nothing more may need to be done, depending on the state of competition and market-based pricing. The Interstate Access-Related USF is Distributed to Provide Support for SLC Caps, and is Portable Among Eligible Telecommunications Carriers. As discussed in Section II, supra, the plan establishes absolute caps on the consolidated end user common line charges. In order to provide explicit rather than implicit support in conjunction with these caps, it is necessary to distribute universal service support to areas served by price cap ILECs. Within each ILEC service area, universal service support to that area becomes a per line support amount that will be portable among competing eligible telecommunications carriers. To distribute the $650 million in Interstate Access-related USF among service areas served by ILECs, the plan would calculate a specific amount of Interstate Access-related USF for each price cap ILEC study area. Because price cap ILECs would be permitted to deaverage SLC rates geographically according to UNE pricing zones once UNE-zones are created, support levels are also calculated on a geographically zoned basis, using UNE loop pricing zones where such zones exist.97 To calculate this explicit support, a deaveraged price cap common line revenue per line is calculated for each zone using the same geographic zones used for SLC deaveraging. The relative price cap revenue per line in each zone reflects the relative UNE rates in that zone, and the level of revenue per line in each zone is such that the ILEC can recover total permitted price cap common line revenues.98 Each ILEC study area would receive a portion of the revenues within its high cost zones in excess of $7.00 per line per month for residential and single-line business lines and $9.20 per line per month for multiline business lines. In states where the ILEC has not established UNE loop pricing zones, however, the amount of support an ILEC may actually receive from the Interstate Access-related USF is limited to support determined on a study area, rather than a zone deaveraged, basis. In some price cap ILEC study areas, however, the portion of UNE-pricing zone deaveraged revenues in excess of the $7.00 and $9.20 SLC caps that is supported by Interstate Access-related USF may not alone be sufficient to eliminate two implicit mechanisms, the multiline business PICC and carrier common line charges. Accordingly, for these study areas, the plan would calculate the amount of Interstate Access-related USF for each price cap ILEC study area necessary to ensure that, at a study area averaged level, multiline business PICCs and carrier common line charges are eliminated when all business and residential lines reach applicable SLC caps. This minimum support level in excess of geographically zoned USF support is phased in over three years, as common line rates are also restructured.99 The Interstate Access-related USF support within any participating price cap ILEC's service territory would be fully portable among eligible telecommunications carriers. As such, the plan would, for the first time, permit new entrants to receive the universal service support currently contained in interstate access rates. The portable per line support amount any eligible telecommunications carrier would receive depends upon whether the incumbent LEC has established UNE loop pricing zones. In any study area where the incumbent LEC has not established UNE loop pricing zones, both the ILEC and eligible CLEC would receive the same amount of support per line. In any geographically deaveraged UNE loop pricing zone, the amount of portable universal service support per line would also be the same for both the incumbent LEC and an eligible CLEC. The amount of support, however, would be a per line amount calculated either by distributing all universal service support pro-rata across all lines within the high cost zones of that price cap LEC study area,100 or by targeting universal service support first to the lines in the highest cost zones in the price cap LEC study area.101 Finally, in constructing portable Interstate Access-related USF support amounts, the plan also recognizes that prompt administration and payment of universal service support to the eligible telecommunications carrier actually providing service to the customer is critical to maintaining true competitive-neutrality in a universal service support mechanism. The plan therefore provides that Interstate Access-related USF should commence once appropriate administrative mechanisms are in place so that changes in payment of portable support amounts are subject only to a reasonable administrative lag - with three-months agreed as reasonable - and subject to "true-ups" that ensure that an eligible telecommunications carrier does not receive universal service support for periods during which it did not provide the end user's services. The Plan's Explicit Support Promotes Competition and Benefits Consumers In sum, the second pillar of the CALLS plan - universal service - accomplishes the goals that Congress established in section 254 of the Communications Act. By establishing the $7.00 and $9.20 SLC caps, and a $650 million universal service "safety net" to support those caps in the context of all the proposed changes, the plan provides ironclad assurance that interstate end user charges will remain within a "fair range" between urban and rural areas, and that rates in rural areas will not rise to unaffordable levels during this five year period. For the first time, universal service support currently embedded in interstate access charges will be explicit, and available to any eligible telecommunications carrier. This explicit structure supports greater choice and competition for consumers in rural America. Although the plan applies only to access charge rate structures and universal service support for price cap carriers, the plan would directly benefit customers of rural non-price cap LECs as well. In many cases they will no longer pay retail PICC-related charges passed through to them by IXCs. Three and a half years after the enactment of the 1996 Act, this plan gives the Commission an integrated package of interstate access charge and universal service reforms that can be implemented immediately. Doing so now would end years of uncertainty, ensure comparability and affordability of rates in rural America, and promote the development of real competitive choices for rural consumers. A SIMPLIFIED PRICE CAP PLAN WITH DRAMATICALLY REDUCED PER MINUTE SWITCHED ACCESS CHARGE RATES The third pillar of the CALLS plan is switched access rate level reform. As a practical matter, interstate access charge, universal service, and interstate access charge rate level reforms have been closely linked. The Commission recognized as much when it adopted its Universal Service, interstate Access Charge Reform, and Price Caps orders together in May 1997. This proposal likewise addresses both access charge rate structures and rate levels together with universal service. Severing these elements would not create the five-year regulatory stability necessary to give all participants in the market a more stable investment environment. Under current rules, the FCC regulates interstate access charge rate levels through a price cap mechanism adjusted by inflation and an annual productivity offset. The specific level of the productivity offset has been the subject of extensive regulatory proceedings and litigation, and has created considerable regulatory uncertainty. Since 1991, when price caps for ILECs began, the FCC has had three price cap plans, two permanent and one interim, all with different estimates of the appropriate productivity offset.102 In May, the D.C. Circuit reversed and remanded the most recent permanent plan and its productivity offset factor ("X-factor") of 6.5%.103 The D.C. Circuit stayed its ruling, but only until April 2000, in order to give the Commission time to comply with the court's order.104 In addition, some parties have expressed concern that the current price cap regime allows per minute charges that are above cost, although there is disagreement among parties of the importance of cost data generally, and what the appropriate measure of cost should be. Moreover, even after the recently announced Pricing Flexibility Order,105 the Commission has yet to put in place sufficient rules to allow a transition from price cap regulation to a fully competitive market as contemplated by the 1996 Act. The CALLS plan would address all of these concerns, and create a five-year period of regulatory stability. Rather than attempting to estimate expected annual productivity gains, a process that has resulted in virtually continuous regulatory intervention and litigation, the plan sets a target rate cap for local switching and switched transport in order to reduce rates. This target rate cap would produce a significant reduction in per minute access rates - cutting them in half. These reductions will lower long distance bills. In order to lower local switching and transport rates to the target rate caps, the plan uses the current 6.5 % X-factor as a transitional mechanism. Because it is already in place, the 6.5 % X-factor allows the implementation of the target rate cap to occur with greater stability for the rate making process and without disrupting existing expectations. Once local switching and transport rates reach the target rate cap, the average switched access price levels are frozen until at least January 2005.106 Unlike prior regulatory models, which were crafted by regulators and imposed on both suppliers and purchasers of access services, the current plan was crafted by both buyers and sellers. If adopted by the Commission, it would be a form of social compact between the regulators and all market participants that once the target levels are reached, so long as prices remain regulated, maximum average switched access price levels will be frozen for the life of the plan. Because the target cap levels were set through a negotiation, the price setting process resembles a contractual negotiation, where sophisticated buyers and sellers with opposing interests settle on a mutually acceptable price. As such, the prices are a reasonable temporary estimate of prices that might be set through the market dynamics of full competition. Target Levels Are Reasonable. The plan sets two target price ceiling levels for local switching and switched transport access charges - $.0055 per minute for the largest carriers (the RBOCs and GTE) and $.0065 for other price cap carriers. 107 As stated above, these prices are the result of an arms-length negotiation and are reasonable in the absence of true market-determined rates. The Commission has long sought a reasonable way to estimate the prices that would prevail in a competitive market. While the Commission has recognized that access charges should recover costs plus a reasonable return, the correct measure of cost has been a matter of debate. To the extent the Commission seeks to set rates based on some measure of forward looking cost ? itself a matter of debate appropriate cost measures have been particularly difficult to determine. In addition to its origin as a negotiated level, the target rates are within a range of projections that have been suggested as a potential estimate of the economic cost of switched access.108 Regardless, the targets are clearly closer to forward looking costs than current rates. In addition, this plan simplifies rate regulation of price cap LECs. As a result, it creates only two categories of carriers with separate rate targets. Because this plan is both transitional and voluntary, it is not necessary for the targets to reflect differences among the costs of individual companies. The higher target for the smaller carriers is consistent with the Commission's own recognition of a distinction between the largest LECs and the rest of the price cap regulated LECs.109 This latter group of LECs generally serves more dispersed markets with different cost and pricing characteristics. Indeed, the original price cap rules were mandatory for the largest LECs and voluntary for the smaller and mid-sized LECs. These LECs have argued that the Commission must put in place a distinction in price levels that recognizes their differences.110 Finally, the signatories agree that this proposal, without modification, is a fair and reasonable compromise plan to resolve issues relating to access and universal service for price cap LECs. Accordingly, the signatories agree on behalf of themselves and their current affiliates as of August 1, 1999, to participate in the plan if it is approved by the Commission. The signatories also acknowledge that non-signatory price cap LECs are not bound by the terms of this plan and that the access rules that will apply to non-signatory price cap LECs will be determined by the Commission. All companies, whether signatories or not, would remain free to advocate whatever changes, if any, are appropriate for the current price cap rules that would apply only to non-signatory price cap LECs. At their option, price cap LECs that are non-signatories to the plan at the time of its submission may choose to become signatories to the plan prior to its implementation following an Commission order. Additionally, if a non-signatory price cap LEC experiences a change of control during the first six months of 2000, that LEC may become a signatory to the proposal before the July 1, 2000 annual filing becomes effective, provided that such LEC incorporates all provisions of the proposal scheduled to be implemented during the first six months of 2000 no later than the July 1, 2000 annual filing effective date. The Glide Path Is Reasonable As discussed above, the plan continues the current 6.5% annual reduction factor until the target rate is reached. While it is the same factor as the current regime, it is no longer tied to a specific measure of productivity. Using 6.5% as the annual reduction factor, however, all signatory ILECs will reach the target rates within the life of the plan. After the target is reached, the annual reduction factor is reduced to the level of the GDP-PI increase so that effectively there is a "freeze" of allowable price caps for the services comprising switched access services.111 By linking the X-factor to inflation, the Commission assures buyers of a price cap freeze on average nominal switching rates, which in turn means a reduction in real rates, every year during the life of the plan. At the same time, because the plan retains the price cap structure, sellers will continue to be motivated to operate efficiently to "beat" the capped level. The plan eliminates much of the uncertainty that results from government rate setting. Because participation in the plan is voluntary, parties may (and if the Commission adopts the plan as presented, hereby do) waive any claim, including constitutional claims, arising from the elimination of a lower formula adjustment, in order to obtain the certainty and reduced regulation associated with the plan. 112 The Plan Accelerates The Reduction In Per Minute Rates The intent of the plan is to create a negotiated proxy for market rates. One way it accomplishes this goal is to target the annual price reduction to eliminate certain rate elements and then to reduce the per minute access charges. First, the plan continues the Commission's policy of eliminating the TICs.113 The TIC recovers non-traffic sensitive costs but was charged on a per minute basis. This anomaly produced uneconomic results and disrupted the efficiency in the access market. The Commission has already concluded that these charges suppress usage and support non-economic bypass, which can increase the costs to end-user customers.114 Once the TIC is eliminated, the plan next targets the information surcharge. Some access buyers have argued that the information surcharge is an uneconomic recovery of a non-traffic sensitive cost through a usage charge.115 Regardless, it is a charge that is only allowed through a waiver of the current rules and its elimination would simplify the access rate structure. Finally, once the TIC and information surcharge are eliminated, as part of the overall plan, annual reductions are targeted to per minute access charges. By lowering variable charges, the reductions will stimulate usage. After the first year, the X-factor reductions associated with special access services are not required to be targeted to reduced switched access charges, but an incumbent LEC may choose to do so. LECs have argued that special access is already subject to significant competition. Without deciding that point, it is clear that special access is subject to more competitive pressure than switched access services generally. As a result, special access prices may better represent a market consensus. To the extent any special access prices were to be set too high, market experience demonstrates that competitors will take advantage of that fact and target customers of these services. Additional reductions to the per minute access charges are also accomplished by moving 25% of the per minute local switching charges over to an end-user per line charge. Those charges will be incorporated within and subject to the $7.00 and $9.20 SLC caps described in Section II, supra. This transfer makes sense for several reasons. First, as competition emerges, it is the end user rather than the IXC that will choose the provider of local switching; in other words, by choosing to access the network using switched access rather than, for example, through xDSL or some form of special access, and by choosing a particular provider of that local switching service, the end-user can be considered, at least in part, the "cost-causer" with respect to switching. Therefore, it is reasonable for the end user, at least in part, to compensate the provider of that service directly. Second, signatory price cap LECs believe that they should be permitted to structure a portion of local switching recovery on a flat-rate basis when they decide that doing so is consistent with market place needs and does not raise competitive policy concerns. This flexibility would allow them to structure switched access prices more in line with Internet-based services. Moving these switching costs to an end-user charge will have numerous benefits. It will encourage the growth of local competition, particularly the deployment of facilities-based alternatives to ILEC loops. It will lead to lower long distance bills. Because long distance minutes are substantially more price elastic than subscriber lines, incorporating the cost into the SLC will stimulate growth in the telecommunications market and hasten the introduction of new services. As discussed in Section II, supra, the increase in the SLC will not lead to a reduction in subscribership. It will also facilitate the development of flat-rated pricing and other service and marketing innovations. AT&T and Sprint also believe that the transfer eliminates certain effects of past uniform application of productivity adjustments.116 AT&T and Sprint believe that during the life of the price cap system, switching has experienced far greater productivity gains than the loop. They believe that the past application of the X-factor has not produced uniform results across all interstate access baskets, and that current interstate local switching rates are not as close to UNE switching rates as current common line rates are to loop and port UNE prices. Therefore, AT&T and Sprint believe that in addition to its cost-causational benefits, this reallocation brings these price ratios closer together and thereby reduces opportunities for arbitrage across all network elements, without requiring the Commission to conduct lengthy, contentious, and resource-intensive cost-disallowance proceedings. PROCESS AND COMMISSION AUTHORITY Process As the caption above indicates, the CALLS plan has been filed in the Commission's relevant interstate access charge, universal service and price cap dockets, all "notice and comment" proceedings under the Administrative Procedure Act ("APA"). The Commission has clear authority to adopt this plan in the public interest, after giving interested parties notice and an opportunity to comment.117 CALLS urges the Commission to seek comment expeditiously, and to adopt this plan in time for January 2000 implementation. The facts and circumstances surrounding the plan present compelling reasons supporting an expedited comment cycle. The plan's reforms can return immediate benefits to consumers. Competition will be facilitated if these changes are adopted quickly, and completing these proceedings quickly will improve regulatory certainty and increase investment incentives, particularly in residential and rural markets. Delaying implementation until mid to late 2000 would slow competition, miss an opportunity to end the regulatory warfare, and deny consumers the overwhelming gains in consumer welfare this plan would produce. In seeking comment, the Commission should specifically obtain comment especially with respect to those portions of the plan in which the parties proposed multiple alternatives.118 The signatories to the CALLS plan will themselves provide additional comment on these points. The Commission need not and should not formally refer the CALLS plan to the Federal-State Joint Board on Universal Service ("Joint Board") before adopting it. While access charge reform and universal service issues are clearly related, the Joint Board itself was specifically aware and has recognized that "it is within the Commission's jurisdiction to determine" whether and how much universal service high cost support is implicit in interstate access charges and "what action the Commission should take to make that support explicit."119 While the Joint Board requested that the Commission "consult with" it before taking final action in this area, meaningful consultation can occur without the procedural delays associated with a formal referral. Authority The Commission has authority to, and should, adopt the CALLS plan as a whole based upon a finding that the plan serves the public interest, convenience and necessity. The Commission may adopt the product of a settlement negotiation based on its own public interest finding that the agreement establishes a useful and reasonable mechanism pending more permanent resolution of the underlying issues.120 In this case, the permanent resolution is the development of further competition in local telecommunications. The Commission has been upheld in fashioning interim solutions to complex policy issues, giving the Commission time to observe marketplace reaction to its plan and to make subsequent adjustments if necessary.121 If, in five years, competition has not developed sufficiently in some access markets, the Commission can craft an appropriately tailored solution at that time. Courts have found that "the best must not become the enemy of the good, as it does when the [Commission] delays making any determination while pursuing the perfect tariff."122 Rather than leave these critical statutory goals unfulfilled while the Commission engages in a prolonged analysis of these issues followed by an extended period of appellate review, the Commission may adopt this settlement agreement to provide a reasonable interim solution to otherwise formidable regulatory challenges. CONCLUSION This CALLS plan presents an opportunity. ILECs and IXCs have spent close to twenty years debating how local providers should charge for interstate access and how and how much access-related universal service support should be collected and distributed. Now they have come to an agreement, and have presented this integrated plan to the Commission. Among other things, the plan will safeguard universal service, promote competition, and facilitate innovation and expansion in telecommunications markets. For these and all of the other foregoing reasons, CALLS strongly encourages the Commission to adopt the plan before the scheduled implementation date of January 2000. The public - and all segments of the telecommunications industry - should be given the opportunity to enjoy the benefits of these reforms as soon as possible. Respectfully submitted, By: John T. Nakahata Evan R. Grayer HARRIS, WILTSHIRE & GRANNIS LLP 1200 EIGHTEENTH STREET, N.W. WASHINGTON, D.C. 20036 (202) 730-1300 Attorneys for the Coalition for Affordable Local and Long Distance Service (CALLS) August 20, 1999 Mark C. Rosenblum Judy Sello AT&T CORP. Room 1135L2 295 North Maple Avenue Basking Ridge, New Jersey 07920 (908) 221-8984 Gene C. Schaerr James P. Young SIDLEY & AUSTIN 1722 Eye Street, N.W. Washington, DC 20006 (202) 736-8000 COUNSEL FOR AT&T CORP. Edward Shakin 1320 North Court House Road Eighth Floor Arlington, VA 22201 (703) 974-4864 Of counsel: Edward D. Young, III Michael E. Glover COUNSEL FOR THE BELL ATLANTIC TELEPHONE COMPANIES M. Robert Sutherland Richard M. Sbaratta BELLSOUTH Suite 1700 1155 Peachtree Street, N. E. Atlanta, Georgia 30309-3610 (404) 249-3386 Gary M. Epstein Richard Cameron LATHAM & WATKINS 1001 Pennsylvania Avenue, N.W. Washington, D.C 20554 (202) 637-2200 COUNSEL FOR BELLSOUTH CORP. Gregory J. Vogt WILEY, REIN & FIELDING 1776 K Street, N.W. Washington, D.C. 20006 (202) 719-3240 John F. Raposa GTE Service Corporation 600 Hidden Ridge, HQE03J27 P.O. Box 152092 Irving, TX 75015-2092 (972) 718-6969 Gail L. Polivy GTE Service Corporation 1850 M Street, N.W. Washington, DC 20036 (202) 463-5214 COUNSEL FOR GTE SERVICE CORP. Alfred G. Richter, Jr. Roger K. Toppins Michael J. Zpevak Thomas A. Pajda SBC Telecommunications, Inc. One Bell Plaza, Room 3003 Dallas, Texas 75202 (214) 464-5307 COUNSEL FOR SBC CORP. Jay C. Keithley Leon M. Kestenbaum Peter N. Sywenki Richard Juhnke SPRINT CORPORATION 1850 M St., N.W., 11th Floor Washington, D.C. 20036 (202) 857-1030 COUNSEL FOR SPRINT CORP. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 FEDERAL-STATE JOINT BOARD on Universal Service CC Docket No. 96-45 Access Charge Reform CC Docket No. 96-262 Price Cap Performance Review for Local Exchange Carriers CC Docket No. 94-1 DECLARATION OF JOEL E. LUBIN Pursuant to 28 U.S.C. ( 1746, Joel E. Lubin deposes and states as follows: 1. My name is Joel E. Lubin. I am Public Policy Vice President for AT&T Corp. The purpose of this declaration is to explain AT&T's estimation of the amount of universal service support implicit in interstate common line rates based on the FCC's forward-looking cost methodology. 2. The Commission has previously determined that high-cost support should be based on the forward-looking costs of providing universal service. The estimate of $650 million of explicit universal service support necessary to replace implicit support in interstate access rates is consistent with that methodology. In our calculation, we used the forward-looking costs of the interstate subscriber line, including the port, as the cost standard for identifying the amount of support inherent in interstate access charges. We aggregated the serving wire centers in each study area into three cost zones: low, medium and high, such that the number of lines in each cost zone were roughly equal. Then, using the Commission's Synthesis Model, which measures the forward-looking costs of the loop and port, we compared the interstate portion (i.e., 25%) of the average forward-looking cost within each cost zone against a maximum affordable subscriber line charge (SLC) cap of $7.00 per primary residential, non-primary residential and single-line business line, and $9.20 per multiline business line. To the extent that the forward-looking costs in a high-cost zone exceed the SLC cap, the difference represents an amount that should be funded by an explicit federal universal mechanism. 3. We estimated the aggregate increment to the explicit federal universal service mechanism across all price cap LEC study areas by using the Commission's Synthesis Model with the FCC-published inputs as of June 2, 1999. Our calculations also assume that the CALLS plan's pre-condition for the full $650 million in funding are implemented: i.e., unbundled network element loop rates are deaveraged across the nation. The amount of funding based on forward-looking cost, using a projected line count for 2003, produces a funding requirement of $613 million in that year. Therefore, erring on the conservative side, $650 million per year represents a reasonable estimate of the necessary support. AUGUST 18, 1999 /S/_____________________________ Joel E. Lubin 1 CALLS members are AT&T, Bell Atlantic, BellSouth, GTE, Sprint, and SBC. 2 Letter from John Nakahata to Magalie Roman Salas, dated July 29, 1999. Subsequently CALLS submitted a memorandum in support of its July 29, 1999 (the "CALLS Proposal") presentation. See Letter from John Nakahata to Magalie Roman Salas, dated August 20, 1999 (CALLS Aug. 20, 1999 ex parte). 3 CALLS Aug. 20, 1999 ex parte at 10-21. 4 Id. at 21-32. 5 Id. at 32-40. 6 Id. at 1. 7 Id. 8 Federal-State Joint Board on Universal Service, Seventh Report and Order and Thirteenth Order on Reconsideration in CC Docket No. 96-45, and Access Charge Reform, Fourth Report and Order in CC Docket No. 96-262 and Further Notice of Proposed Rulemaking, FCC No. 99-119, ¶¶ 123-35 (rel. May 28, 1999) (High Cost Universal Service FNPRM). 9 State Members Comments on High Cost Universal Service FNPRM. 10 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 151 et seq. (1996 Act). See 47 U.S.C. § 254(k). 11 Low-Volume Long-Distance Users, CC Docket No. 99-249, Notice of Inquiry, FCC 99-168 (rel. July 20, 1999). 12 Access Charge Reform, CC Docket No. 96-262, Fifth Report and Order and Further Notice of Proposed Rulemaking, FCC 99-206, ¶¶ 207-225 (rel. Aug. 27, 1999). 13 See generally 47 C.F.R. §§ 1.1201, 1.1203, 1.1206. 14 See 5 U.S.C. § 603. The RFA, see 5 U.S.C. § 601 et seq., has been amended by the Contract with America Advancement Act of 1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAA). Title II of the CWAA is the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). 15 See 5 U.S.C. § 603(a). 16 See 5 U.S.C. § 601 (3) (incorporating by reference the definition of "small business concern" in 15 U.S.C. § 632). 17 13 C.F.R. § 121.201. 18 We have used January 1, 2000 for discussion purposes. The actual date will have to be adjusted to account for Y2K issues. 19 See May 7, 1997 Access Reform Order at ¶379 (stating that price cap ILECs may treat their universal service contributions as exogenous changes to price cap indices, that recovery may only be in baskets that generate end user revenue, and that the baskets generating end user revenue are common line, interexchange and trunking). 20 As stated in paragraph 5, nothing in this proposal supercedes, prejudices or otherwise implies a result of the UNE Remand proceeding. 21 $5.50 is equivalent to the current primary residential SLC, PICC-related account fees charged to the vast majority of presubscribed residential long distance subscribers, and the 50 cent increase in the PICC cap for primary residential and single line business subscribers scheduled to go into effect on July 1, 2000. 22 As stated in paragraph 5, nothing in this proposal supercedes, prejudices or otherwise implies a result of the UNE Remand proceeding. 23 New federal universal service support to replace implicit support in interstate access charges by price cap LECs does not include support calculated under FCC Rules 54.301 (DEM Weighting), 54.303 (Long Term Support), or 36.601 et seq. (Part 36 Universal Service Fund), or support expressly designated by the FCC to offset costs allocated to the intrastate jurisdiction. 24 See paragraph 2.2.2. 25 As stated in paragraph 5, nothing in this proposal supercedes, prejudices or otherwise implies a result of the UNE Remand proceeding. 26 The "current rules" in the Part 61 section are those rules as they stood prior to the 1998 Biennial Regulatory Review Report and Order, released August 3, 1999. In addition, in § 61.45(c), we have restated the formulas for readers' clarity, and then made changes necessary for the implementation of this plan. It should be noted that changes to § 61.47, as requested in a Waiver filed by USTA in October 1997, would need to continue to implement the targeting proposed under this plan. 27 The parties disagree as whether the models or UNE prices should be used for this calculation, and will agree their respective positions to the Commission. Appendix A at 2.2.3.1.1(a). 28 Parties do not agree in the methods in establishing the portable per line amount. Alternative 1 proposes that the Interstate Access-related USF should be distributed proportionately among all "above EUCL-Cap" lines. 29 Parties do not agree in the methods in establishing the portable per line amount. Alternative 2 proposes the Interstate Access-related USF be distributed first to the highest cost lines. 30 Parties do not agree as to the method for the safeguard against revenues from deaveraged End User Common Line charges exceeding the revenues that would be permitted for averaged End User Common Line charge. Alternative 1 would implement a requirement to be applied only at the filing entity level. Appendix A at 2.1.5.5. 31 Parties do not agree as to the method for the safeguard against revenues from deaveraged End User Common Line charges exceeding the revenues that would be permitted for averaged End User Common Line charges. Alternative 2 would implement a requirement to be applied at both the filing and study area levels. Appendix A at 2.1.5.5. 32 The parties do not agree as to whether the Minimum Charge should also be adjusted to reflect a portion of those Study Area Above Cap Revenues not offset by Study Area Universal Service Support. Appendix A at 2.1.5.6.3. 33 Letter from John T. Nakahata, Counsel to CALLS, to Magalie Roman Salas, CC Docket Nos. 96-45, 96-262, 94-1, and 99-249 (filed July 29, 1999). A copy of the proposal, with technical corrections, is attached as Appendix A. 34 The specific implementation date may need to accommodate Y2K implementation, but this need not create a substantial delay. 35 See, Appendix B. 36 This universal service support mechanism makes explicit support that currently is implicit in interstate access charges of price cap companies. This mechanism is separate and distinct from the new federal high cost mechanism the Commission currently is developing that will provide federal support for intrastate rates of non-rural carriers. The Commission is in the process of identifying the amount and type of support that is implicit in interstate access charges of price cap companies, and recently sought comment on how interstate access charges should be adjusted once this support has been made explicit. Except with respect to explicit support to replace implicit support in interstate access charges of signatory rural price-cap companies, this mechanism is also separate and distinct from any new support for rural carriers, upon which the FCC has not yet acted. See, Federal-State Joint Board on Universal Service, CC Docket No. 96-45, and Access Charge Reform, CC Docket No. 96-262. See, Seventh Report and Order and Thirteenth Order on Reconsideration, CC Docket No. 96-45 ("USF Seventh R&O"), Fourth Report and Order, CC Docket No. 96-262, and Further Notice of Proposed Rulemaking ("High Cost Methodology Further Notice"), FCC 99-119, at ¶¶ 123-35 (rel. May 28, 1999). 37 H.R. Rep. No. 104-458, at 1 (1996). 38 Access Charge Reform, First Report and Order, 12 FCC Rcd 15982, 15985 (1997) ("Access Charge Reform Order"). 39 Federal-State Joint Board on Universal Service, Report and Order, 12 FCC Rcd 8776, 8781 (1997) ("Universal Service Order"), aff'd in part, rev'd in part, and remanded sub nom. Texas Office of Pub. Util. Counsel v. FCC, No. 97-60421, 1999 U.S. App. LEXIS 17941 (5th Cir. July 30, 1999). 40 Implementation of the Local Competition Provisions of the Telecommunications Act of 1996; Interconnection between Local Exchange Providers and Commercial Mobile Radio Service Providers, First Report and Order, 11 FCC Rcd 15499, at ¶ 5 (1996). 41 See, Universal Service Order, at ¶ 11; see also, USF Seventh R&O, at ¶ 6. 42 Universal Service Order, at ¶ 17. 43 Id. 44 See, Communications Daily, at 9 (July 22, 1999); "Covad Announces First Alliance to Deliver Voice Over DSL Services to Small Business," Covad Press Release, at www.covad.com (July 21, 1999); Seth Schiesel, "Hello Operator? Get me the Internet," N.Y. Times (March 24, 1999). 45 To address universal service issues fully could require a combination of state and federal action. See note 36, infra. 46 See generally, Jason Oxman, The FCC and the Unregulation of the Internet, OPP Working Paper No. 31 (Office of Plans and Policy rel. July 19, 1999). 47 USF Seventh R&O, at ¶ 7. 48 Id. at ¶ 9. 49 Id. at ¶ 8. 50 Although the members of CALLS have all made hard concessions in reaching agreement on these reforms, each has recognized the predominant importance of a rational and integrated plan for the future. The CALLS plan as developed, therefore, represents a delicate balancing of competing policies that the members of CALLS urge the Commission not to disturb. Specifically, while all members support and endorse the plan as presented to the Commission, any changes may cause some or all members to withdraw their support. 51 Texas Office of Pub. Util. Counsel, 1999 U.S. App. Lexis 17941, at 64-66. 52 E.g., Access Charge Reform Order, at ¶ 75. Section 254(e) directs that universal service support "should be explicit." 47 U.S.C. § 254(e); see also, USF Seventh R&O, at ¶¶ 8, 43. 53 Appendix A at 2.1.2.1, 2.1.3.1, and 2.1.4.1. 54 Id. at 2.1.2.2.1 and 2.1.2.2.2.1. 55 Id. at 2.1.3.2.1 and 2.1.3.2.2.1. 56 Id. at 2.1.4.2.1 and 2.1.4.2.2.1. 57 USF Seventh R&O, at ¶¶ 8, 43; Texas Office of Pub. Util. Counsel, 1999 U.S. App. Lexis 17941, at 64-66. 58 USF Seventh R&O, at ¶ 7. 59 Alfred E. Kahn and William B. Shew, Current Issues in Telecommunications Regulation: Pricing, 4 Yale J. on Reg. 191, 203-04 (1987); David L. Kasserman and John W. Mayo, Cross-Subsidies in Telecommunications: Roadblocks on the Road to More Intelligent Telephone Pricing, 11 Yale J. on Reg. 119, 125 (1994); Steve G. Parsons, The Economic Necessity of an Increased Subscriber Line Charge (SLC) in Telecommunications, 48 Admin. L. Rev. 227, 235-36 (1996). 60 Other approaches to common line reform, such as continued reliance on substantial carrier charges, whether flat or per minute, do not provide a reasonable mechanism for reducing implicit support, consistent with Section 254(e). See, Texas Office of Pub. Util. Counsel, 1999 U.S. App. Lexis 17941, at 66. 61 See generally, Truth-in Billing and Billing Format, CC Docket No. 98-170, First Report and Order and Further Notice of Proposed Rulemaking, FCC 99-72 (rel. May 11, 1999). 62 The plan also eliminates the distinction between primary and non-primary lines over a three year period, ending another source of consumer confusion. 63 As of July 2003, we estimate that the average residential SLC across all price cap LECs will be $6.15. 64 By eliminating residential PICCs and relying on low income support mechanisms to assist those for whom affordability is of greatest concern, this plan also will address many of the Commission's concerns raised in its recent Low Volume NOI. See, Low Volume Long Distance Users, CC Docket No. 99-249, Notice of Inquiry, FCC 99-168 (rel. July 20, 1999) (e.g., Statement of Michael K. Powell, concurring, questioning the correlation between long distance calling patterns and income). 65 Furthermore, the initial proposed SLC cap of $5.50 is the equivalent, in inflation adjusted terms, of a $3.50 SLC in 1984 dollars, the year the SLC was instituted. 66 See, note 54, supra. 67 Alexander Belinfante, Telephone Subscribership in the United States, (Com. Car. Bur., Ind. Anal. Div. rel. May 1999), at Table 1; see also, USF Seventh Report and Order, at ¶ 38. 68 Chesapeake and Potomac Telephone Company's Submission of Telephone Penetration Studies, Formal Case No. 850 (filed October 4, 1993); Field Research Corporation, Affordability of Telephone Service - A Survey of Customers and Noncustomers, 1993 (study funded by GTE-California and Pacific Bell, mandated by the California Public Utilities Commission); Milton Mueller & Jorge R. Schement, Universal Service from the Bottom Up: A Profile of Telecommunications Access in Camden, New Jersey, 12 Information Society 3 (April 1996); John Horrigan & Lodis Rhodes, The Evolution of Universal Service in Texas (September 1995) (working paper, LBJ School of Public Affairs). See also, Milton Mueller, Jr.,Universal Service at 172 (1997). 69 Access Charge Reform Order, at ¶ 73. 70 Non-primary residential SLCs also will remain reasonable. Currently, non-primary residential lines are charged a SLC capped at $6.07 and, where the end user does not pre-subscribe his or her second line, an additional PICC capped at $2.53. Under the plan, non-primary lines will be subject only to the residential SLC of $7.00. 71 Competitive Telecommunications Ass'n v. FCC, 87 F.3d 522, 536 (D.C. Cir. 1996). 72 In most areas, the CCL and multiline business PICC will be eliminated entirely. 73 A carrier need not eliminate CCL and PICC charges prior to deaveraging by voluntary reductions. Appendix A at 2.1.5.6.1. 74 See, USF Seventh R&O, at ¶ 7. 75 Appendix A at 2.1.5.1. 76 Id. at 2.1.5.3. 77 Id. at 2.1.5.4. 78 Id. at 2.1.5.5. See, note 118, infra. 79 Appendix A at 2.1.5.6.1. A "voluntary reduction" is one in which the incumbent LEC reduces prices other than by offsetting those reductions against increases in other SLC charges or Interstate Access-related USF support. Appendix A at 2.1.5.6.3. 80 Appendix A at 2.1.5.6.2. See, note 118, infra. 81 USF Seventh R&O, at ¶ 30. 82 Multiline business SLCs currently range from $3.78 in the District of Columbia to a cap of $9.20. 83 Texas Office of Pub. Util. Counsel, 1999 U.S. App. LEXIS 17941, at 66. 84 Appendix A at 1.4. 85 See, Access Charge Reform, Second Order on Reconsideration, 12 FCC Rcd 16606, ¶ 31 (1997). 86 Id. 87 See, id. at ¶¶ 32-34. Similarly, primary rate ISDN pays a multiple of 5 times the per line charge for each service arrangement just as it does for PICC charges under current rules. See, Appendix A at 1.4; 47 C.F.R. § 60.153(g)(1). 88 To address universal service issues fully could require a combination of state and federal action. See note 36, supra. 89 These price cap LECs would nevertheless remain obligated to provide service to otherwise unserved areas. 47 U.S.C. §§ 214(3) and (4). 90 Of course, no member of CALLS necessarily endorses all of these estimates. 91 Comments of the United States Telephone Association on the Further Notice of Proposed Rulemaking, CC Docket No. 96-45 and CC Docket No. 96-262 (filed July 23, 1999). The level of implicit support estimated using USTA's methodology would be lower using the subscriber line charge rates proposed under this plan. 92 Rogerson and Kwerel estimated implicit support to be $3.2 billion at a residential SLC cap of $4.50 per month. "A Proposal for Universal Service and Access Reform" by Bill Rogerson and Evan Kwerel, CC Docket Nos. 96-45, 96-262 (filed May 27, 1999). 93 HAI Model Version 5.0a, Docket No. CC-96-45. This estimate used SLC caps of $7.00 for residential and single line business lines and $9.20 for multiline business lines. It also used FCC Common Inputs as of March 10, 1999. 94 Bell Atlantic, BellSouth, GTE, and SBC do not support use of a model to calculate universal service support, and together with Sprint do not join in the citation of AT&T's model-based calculations. 95 As indicated in the attached Declaration of Joel E. Lubin, in making its estimation, AT&T aggregated the serving wire centers in each price cap LEC study area into three cost zones: low, medium and high, such that the number of lines in each cost zone were roughly equal. Then, AT&T used the FCC's Synthesis Model with FCC inputs as of June 2, 1999, to calculate the unseparated forward-looking costs of the loop and port in all zones. AT&T then applied a 25% separations factor against the unseparated forward-looking costs of the loop and port, and compared 25% of the average forward-looking cost within each cost zone against a maximum affordable SLC of $7 per residence and single line business line, and $9.20 per multiline business. To the extent that the forward-looking costs in a high cost zone exceeded the SLC cap, the difference between 25% of the projected loop and port cost and the applicable SLC cap represents the amount to be funded by the Interstate Access-Related High Cost Fund. When summed across all zones in all price cap LEC study areas, the total forward looking cost-based estimate of implicit support to be funded through the Interstate Access-related USF is $613 million. On the basis of this analysis, Mr. Lubin concluded that $650 million would be a reasonably conservative estimate. See, Declaration of Joel E. Lubin, Appendix C, attached. 96 Federal-State Joint Board on Universal Service, and Forward-Looking Mechanism for High-Cost Support for Non-Rural LECs, Fifth Report and Order, 13 FCC Rcd 21323, ¶ 12 (1998); see also, Dennis Weller, "Auctions for Universal Service Obligations," Presented at the Twelfth Biennial Conference of the ITS, at 13 (Stockholm June 1998); Letter from Richard N. Clarke (of AT&T) to Magalie Roman Salas, CC Docket No. 96-45 and CC Docket No. 97-160 (filed March 30, 1999). 97 Where a state has not yet established geographically deaveraged UNE loop pricing zones, the Universal Service Administrator would preliminarily calculate the potential universal service support for price cap ILEC study areas within that state using a model or other appropriate tool, and roughly apportion lines by wire center into three zones with relatively equal numbers of lines. Those zones are used as a "placeholder" to size, but not actually distribute, the relative share of universal service support going to a given state. See, Appendix A at paragraph 2.2.3.1.1(b). 98 Appendix A at 2.2.3.2. See, note 118, infra. 99 The plan caps the adjustment for minimum USF in excess of the geographically zoned USF support at a maximum of $75 million nationwide. This balances the need to eliminate expeditiously mechanisms such as the multiline business PICC and CCL against the need to provide sufficient support to lower cost study areas to allow those areas to deaverage SLC rates geographically as competition emerges. 100 Appendix A at 2.2.4.2 Alternative 1. See, note 118, infra. 101 Appendix A at 2.2.4.2 Alternative 2. See, note 118, infra. 102 Under the initial price cap plan, price cap LECs had productivity factors that ranged from 3.3 to 4.3 depending on the extent to which a LEC would "share" earnings above a specified rate of return. Policy and Rules Concerning Rates for Dominant Carriers, Second Report and Order, 5 FCC Rcd 6786, ¶ 5 (1990). In the interim price cap plan, the Commission allowed price cap LECs to elect productivity factors ranging from 4.0 to 5.3, depending on the level of associated "sharing" obligations. Price Cap Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Rcd 8961, ¶ 19 (1995). In the most recent price cap plan, the Commission established a single X-factor of 6.5% with no sharing options. Price Cap Performance Review for Local Exchange Carriers; Access Charge Reform, Fourth Report and Order in CC Docket No. 94-1 and Second Report and Order in CC Docket No. 96-262, 12 FCC Rcd 16642, ¶ 8 (1997). 103 United States Telephone Ass'n v. FCC, 1999 U.S. App. Lexis 9768, No. 99-1469, (D.C. Cir. May 21, 1999). 104 United States Telephone Ass'n v. FCC, No. 97-1469 (D.C. Cir. June 21, 1999) (Order granting FCCs motion to stay the mandate). 105 Commission Adopts Pricing Flexibility and Other Access Charge Reforms, Report No 99-33 (rel. August 5, 1999) ("Pricing Flexibility Press Release"). 106 Once the target cap is reached, the applicable target rate cap could vary slightly from year-to-year based on changes in base period demand and inclusion of new services. Appendix A at 3.3.5. Exogenous adjustments, however, could only be recovered from services other than switched access charges. Appendix A at 3.3.4. 107 The plan does not directly apply to other LECs, which would continue under rate of return regulation. 108 Compare, Joint Comments of Bell Atlantic and NYNEX at 22, CC Docket No. 96-262 (filed Jan. 29, 1997) (cost study supporting traffic sensitive switching costs of approximately one cent a minute) with Letter of Joel Lubin to Magalie Roman Salas, CC Docket No. 96-262, (February 25, 1999) (estimating the economic cost of a switched access minute at $.00255 for RBOCs and $.00305 for all price cap LECs, and citing reciprocal compensation rates of $.00373 to $.00544 as a potential proxy for interstate switched access costs); see also, Comments of GTE Corp., CC Docket Nos. 96-262, 94-1, 97-250 at 7 (filed October 26, 1998) (estimating universal support using a switched access rate of $.008/minute). 109 See generally, Rules Concerning Rates for Competitive Common Carrier Services and Facilities Authorizations Therefore, Fifth Report and Order, 98 F.C.C.2d 1191 (1984). 110 See, e.g., Final Brief of Intervenor Independent Telephone & Telecommunications Alliances on Behalf of Small and Midsized Carriers, USTA v. FCC, D.C. Cir. Case No. 97-1469 (filed Aug. 5, 1998). 111 See, note 106, supra. Because the signatory parties view the changes in the plan as a just, reasonable and fair means of moving usage sensitive interstate access rates to the levels contemplated by the plan, the parties also believe that, if the plan as a whole is adopted, other adjustments, such as changes in the interstate X-factor, changes in interstate access rates for price cap ILECs based on results of present or future Continuing Property Records audits, changes in interstate access rates for price cap ILECs based on changes in the Prescribed Rate of Return, and changes in the rate structure for common line, switched access (i.e., local switching, local switching trunk ports, signaling transfer point port termination, switched direct trunk transport, signaling for switched direct trunk transport, entrance facilities for switched access traffic, tandem switched transport, the residual and service-related transport interconnection charges, information surcharge, and signaling for tandem switching) and all other interstate access not included in common line or switched access, charges by price cap ILECs, are unnecessary. Appendix A at 4.2. The signatory companies also agree, as part of the plan as a whole, not to initiate legal or regulatory action to adjust price cap determined rates for interstate access charges billed for access minutes prior to January 1, 2000, although a payee would not be precluded from accepting any refund the FCC ordered to be made and a payor will not object to or resist such a refund on the basis of this agreement. Appendix A at 4.3. 112 In its recent press release announcing the adoption of a Pricing Flexibility Order, the Commission announced that it would require price cap LECs to give up the low-end adjustment or lower formula adjustment as a condition of pricing flexibility. Pricing Flexibility Press Release. 113 See, Access Charge Reform Order, 12 FCC Rcd 15982, ¶ 212 (1997). 114 See, id. at ¶ 213. 115 See, AT&T Petition for Revocation of Information Surcharge Waivers, CCB/CPD No. 98-61 (filed October 6, 1998). 116 Bell Atlantic, BellSouth, GTE, and SBC do not support this analysis. 117 5 U.S.C. § 553. See also, Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 216 (1988) (Scalia, J., concurring) (finding rulemaking required when agency action prescribes future conduct); 5 U.S.C. § 551(4) (defining rule to include approving or prescribing future rates). 118 The plan proposes alternatives for Commission resolution with respect to the following points: (1) whether, in multistate filing entities, the safeguard against revenues from deaveraged SLC exceeding the revenues that would be permitted for averaged SLC should be applied only at the filing entity level (Alternative 1), or at both the filing entity and study area levels (Alternative 2), see, Appendix A at 2.1.5.5 and discussion supra at note 78; (2) whether, in establishing the minimum deaveraged SLC for the lowest cost SLC zone, the minimum deaveraged SLC should be increased to reflect a portion of revenues assigned to high cost zones but not offset by Interstate Access-related universal service support, see, Appendix A at 2.1.5.6.2 and discussion supra, at note 80; (3) whether limits on deaveraging through voluntary reductions are necessary, see, Appendix A at 2.1.5.6.2 and discussion supra at note 80; (4) whether Interstate Access-related universal service support should be distributed according to relative loop and port costs projected by an FCC-approved cost model, or according to relative state-approved UNE loop and port prices within each UNE loop pricing zone, see, Appendix A at 2.2.3.1.1 and discussion supra at note 98; (5) whether, in establishing the portable per line support amount, the Interstate Access-related USF should be distributed proportionately among all "above SLC-cap" lines, or whether it should be distributed first to the highest cost lines, see, Appendix A at 2.2.4.2. and discussion supra at notes 100 and 101, supra. 119 Federal-State Joint Board on Universal Service, Second Recommended Decision, 13 FCC Rcd 24744, 24755 (1998). While the Joint Board requested that the Commission "consult with" it before taking final action in this area, it did not request any formal referral of additional issues. Id. No further Joint Board Action is necessary in these circumstances. See, Texas Office of Pub. Util. Counsel, 1999 U.S. App. LEXIS 17941, at 32-36; USF Seventh R&O, at ¶ 42. 120 The Commission has often considered and adopted joint industry proposals based on public interest findings. See, e.g., Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, Fourth Report and Order, 11 FCC Rcd 17771 (1996); Revision of the Commissions Rules to Ensure Compatibility with Enhanced 911 Emergency Calling Systems, Memorandum Report and Order, 12 FCC Rcd 22665 (1997). The Commission has been upheld in the context of a rate adjudication adopting a consensus settlement proposal. MCI Telecommunications Corp. v. FCC, 712 F.2d 517, 532-33 (D.C. Cir. 1983) ("ENFIA"). 121 E.g., Texas Office of Pub. Util. Counsel, 1999 U.S. App. LEXIS 17941; Southwestern Bell Tel. Co., 153 F.3d at 550. 122 ENFIA, 712 F.2d at 535 (quoting MCI Telecommunications Corp. v. FCC, 627 F.2d 322, 340 (D.C. Cir. 1980)). ?? Federal Communications Commission FCC 99-xxx Federal Communications Commission FCC 99-xxx 23 ii Federal Communications Commission FCC 99-xxx