FCC 94-325 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Transport Rate Structure and Pricing ) CC Docket No. 91-213 ) THIRD MEMORANDUM OPINION AND ORDER ON RECONSIDERATION AND SUPPLEMENTAL NOTICE OF PROPOSED RULEMAKING Adopted: December 15, 1994 Released: December 22, 1994 Comment Date: February 1, 1995 Reply Comment Date: February 16, 1995 By the Commission: Table of Contents Paragraph No. I. INTRODUCTION 1 II. BACKGROUND 4 A. Overview 4 B. LEC Provision of Transport Service 5 C. Interim Transport Rate Structure Rules 8 D. Initial Rate Levels for Restructured Transport Services 12 E. Price Cap Safeguards 16 F. Impact of the Transport Rate Restructure on Different Categories of IXCs 21 III. THIRD MEMORANDUM OPINION AND ORDER ON RECONSIDERATION 25 A. The Interim Rate Structure 25 B. Initial Benchmark Level and Permanent Rate Relationships 33 C. Price Cap Service Categories and Price Bands 65 1. Tandem Switching 67 2. Price Cap Service Categories 74 3. Price Cap Bands 78 D. The Interconnection Charge 81 1. Mid-Course Adjustment to the Interconnection Charge 81 2. Burden of Proof for the Mid-Course Adjustment 91 3. Waiver of Non-Recurring Charges 97 E. Miscellaneous 105 1. Pricing Flexibility 105 2. Intermediate Hubbing and Tandem-Switched Transport 116 3. Meet Point Billing 121 4. Prohibition on Ratcheting 123 F. Conclusion 126 IV. SUPPLEMENTAL NOTICE OF PROPOSED RULEMAKING 127 A. Resale, Shared Use and Split Billing 127 1. Introduction 127 2. Background 130 3. Discussion 141 4. Conclusion 147 B. Procedural Matters 148 1. Ex Parte 148 2. Regulatory Flexibility Act 149 3. Notice and Comment Provision 150 V. ORDERING CLAUSES 151 I. INTRODUCTION 1. Our transport rate structure and pricing policies are designed to encourage more efficient usage and deployment of telecommunications networks. These policies are also intended to facilitate full and fair competition in the provision of long-distance service, and to create conditions conducive to competition in the provision of local access service. Greater efficiency in deploying telecommunications networks should lead to reduced access charges and make it possible for long-distance companies to lower their long-distance rates. These measures, in turn, should benefit consumers, make resources available for productive investment elsewhere in the economy, and stimulate economic growth. Competition in the long-distance market has already produced a greater range of service options for customers, more rapid deployment of innovative technologies, and lower rates. Greater competition in the local access market should yield similar benefits. Such competition is likely to create greater opportunities for new service providers, and more importantly, for consumers. 2. We continue to believe that these objectives are advanced by the interim transport rate structure and pricing rules we have adopted in this proceeding. These rules govern the transport component of interstate switched access service provided by local telephone companies. Accordingly, in this Order, we affirm the interim transport rate structure, the method we used to establish initial transport rates, and the price cap rules we adopted to regulate future changes in transport rates. We also clarify certain implementation procedures. In doing so, we resolve all the remaining issues raised on reconsideration in this proceeding. We do not address the long-term transport rate structure and pricing rules due to take effect after October 1995, which are the subject of a pending Notice of Proposed Rulemaking. Finally, in the supplemental notice of proposed rulemaking included herein, we seek comment on the implementation of "split billing" of certain local exchange carrier (LEC) facilities that are shared by multiple access customers. 3. Twenty-one parties, including most of the major LECs and interexchange carriers (IXCs), requested reconsideration or clarification of almost every issue in the First Transport Order. We addressed issues raised by those requests that required guidance before the filing of initial restructured transport rates in the First Reconsideration Order and the Second Reconsideration Order. Several issues, however, remained unresolved. We decided certain price cap matters in the Second Transport Order, based on the record compiled in response to the further notice included in the First Transport Order. SW Bell and Sprint sought reconsideration of the First Reconsideration Order, and CompTel, WilTel, and Sprint have requested reconsideration of the Second Transport Order. For the reasons stated below, we deny the three sets of petitions, except to the limited extent indicated herein. II. BACKGROUND A. Overview 4. In this background section, we first define "transport" and explain how LECs provide transport services. Next, we discuss the earlier transport rate structure rules, and explain the interim transport rate structure adopted in this proceeding. We address the pricing rules governing the initial rate levels for restructured LEC transport services when the rate structure change was implemented, and we elaborate on the rules governing subsequent changes in rate levels. Finally, we discuss the impact of the transport rate structure and pricing changes on various classes of IXCs. B. LEC Provision of Transport Service 5. Interstate switched access is a service that LECs provide to enable IXCs and other customers to originate and terminate interstate telecommunications traffic. "Transport" is the component of interstate switched access consisting of transmission between the access customer's point of presence (POP) and LEC end offices. At the end offices, local switching occurs and the traffic is routed to and from residential and business end-users' premises. To place transport services in perspective with the other LEC interstate access services, transport revenues, based on projected Bell Operating Company (BOC) revenues under the interim rate structure, comprise roughly 19% of all BOC interstate access revenues. Under our expanded interconnection policies, competitive access providers (CAPs) and the IXCs themselves may compete with the LECs to provide all or portions of transport service. Figure 1 below illustrates the LECs' switched transport networks. 6. LECs provide some transport services using "dedicated" circuits -- circuits that are dedicated to the use of a particular IXC. Dedicated circuits come in varying degrees of capacity: (1) voice-grade circuits, with sufficient bandwidth to carry a single voice conversation; (2) DS1 circuits, with 24 times the capacity of a voice-grade circuit; or (3) DS3 circuits, with 28 times the capacity of a DS1 circuit. Other transport services are provided using a combination of dedicated circuits and circuits that are "shared" or "common" -- that is, the access traffic of several IXCs, as well as other types of traffic in the LEC network, pass over the shared circuits. "Entrance facilities" are dedicated circuits that connect an access customer's POP with the LEC central office serving that POP. The LEC central office serving a particular POP is referred to as a serving wire center (SWC). Except when traffic is coming from, or going to, end users served directly by the SWC central office, IXCs must have their traffic carried between the SWC and other LEC offices. This traffic between LEC offices is [ Figure 1: Omitted in this electronic version ] referred to as "interoffice transport." In some cases, IXCs use dedicated interoffice trunks from a SWC directly to end offices. In addition, IXCs that use LEC access tandem switches -- intermediate switches used to concentrate and route transport traffic -- may purchase dedicated circuits between a SWC and a tandem office. Tandem-switched traffic, which is switched at an access tandem, is carried between tandem offices and end offices over shared circuits. 7. In our 1983 Access Charge Order, we adopted rules requiring LECs to allocate transport costs between dedicated transport and common transport. The Access Charge Order required the LECs to charge for dedicated transport on a flat-rated, per-line basis to reflect its non-traffic sensitive cost characteristics. Common transport was to be charged on a usage- sensitive basis. Subsequently, the U.S. District Court for the District of Columbia entered the Modification of Final Judgment (MFJ) implementing the divestiture of the Bell System. The MFJ included a requirement known as the "equal charge" rule, stating that from January 1, 1984 through September 1, 1991, the BOCs were required to charge an equal amount per minute for all IXCs' transport traffic. We waived the rules adopted in the Access Charge Order for all LECs to enable the BOCs to comply with the equal charge rule. Upon expiration of the MFJ's equal charge rule, we initiated this proceeding to revisit the structure of transport rates. C. Interim Transport Rate Structure Rules 8. Three goals guided our efforts to reform the transport rate structure: (1) encouraging efficient use of transport facilities by allowing pricing that reflects the way costs are incurred; (2) facilitating full and fair interexchange competition; and (3) avoiding interference with the development of interstate access competition. The equal charge rule required the LECs to charge usage-sensitive rates even to access customers using dedicated facilities, the costs of which are not affected by the amount of traffic carried over them. Thus, the charges paid by these customers did not reflect the manner in which LECs incurred transport costs. The equal charge rule also interfered with the development of efficient competition for interstate access service, because LECs were forced to charge per-minute rates for services that their competitors (e.g., competitive access providers (CAPs)) would be able to price on a flat- rated basis. Thus, we decided that continuing the equal charge rule was no longer in the public interest. 9. In the September 1992 First Transport Order, we decided that an interim transport rate structure was the best way to achieve our public interest goals in the near term. This rate structure, illustrated in Figure 2 below, includes flat-rated elements for: (1) entrance facilities; and (2) direct-trunked transport, the service carrying traffic over dedicated interoffice facilities not used with tandem switching. The interim rate structure also includes usage- sensitive charges for: (1) tandem-switched transport, the service carrying traffic that is switched at an access tandem switch between the SWC (or tandem office) and end offices; and (2) the interconnection charge, created consistent with existing price cap rules for rate restructures, to enable the LECs initially to receive approximately the same revenues under the interim rate structure as they would have received under the old equal charge rate structure. In other words, the interconnection charge was designed so that, initially, the rate restructure per se did not change the amount of revenues obtained by the LECs from their transport services. 10. Although the LECs always provide tandem-switched transport using the same basic network configuration (see Figure 1 above), under the interim rate structure, they must make tandem-switched transport available in two pricing options (both illustrated in Figure 2 below). First, an IXC may purchase tandem-switched transport with the mileage component measured directly between the SWC and the end office, regardless of the actual physical routing (Pricing Option 1 in Figure 2). Second, an IXC may purchase a dedicated facility between the SWC and the tandem office and then tandem-switched transport between the tandem office and the end office, with the mileage component measured between the tandem office and the end office (Pricing Option 2 in Figure 2). [ Figure 2: Omitted in this electronic version ] 11. In the 1992 First Transport Order, we concluded that the interim rate structure should remain in effect through October 31, 1995. We also issued a further notice seeking comment on the appropriate long-term transport rate structure and pricing once the interim rate structure expires. In the 1993 First Reconsideration Order, we exempted smaller LECs (LECs not considered "Tier 1 LECs") from implementing the interim rate structure, but retained the requirement that all LECs providing entrance facilities do so on a flat-rated basis. We also required non-Tier 1 LECs to offer flat-rated direct-trunked transport upon receipt of a bona fide request. D. Initial Rate Levels for Restructured Transport Services 12. In the First Transport Order, we concluded that the special access rate structure and the associated pricing provide a rational framework for establishing initial transport rates. (Special access services are LEC interstate access services, such as private line, that do not use local switching.) First, the LECs offer special access and transport services using similar -- and in some cases, the same -- network facilities. For example, LECs provide switched transport entrance facilities using the same circuits that they use to provide special access facilities between IXC POPs and LEC SWCs. Second, before the price cap system was implemented in 1991, LEC special access rate levels had been cost-supported by the LECs under the Commission's rate-of-return rules and subjected to the tariff review process. In adopting LEC price caps, we specifically concluded that special access rate levels were a reasonable basis from which to launch a system of price cap regulation. Special access rate changes between 1991 and the transport restructure complied with the requirements of the LEC price cap rules. Thus, in the First Transport Order, we determined that the initial rates for the new switched transport rate elements, for the most part, should be presumed reasonable if they were based on the LECs' existing rates for comparable special access services. For example, the rates for DS1 transport entrance facilities were to be based on the pre-existing rates for DS1 special access circuits between POPs and SWCs. Consistent with price cap regulation, we required that the rate restructure be revenue neutral to the LECs, and therefore did not require the LECs to provide detailed cost support for their initial transport rates. 13. Instead, we imposed a limited benchmark requirement on the setting of the initial transport rates to protect against possible adverse effects on smaller IXCs. To establish the appropriate benchmark, we compared the LECs' rates for existing DS3 special access services with their rates for existing DS1 special access services. We found that most LECs' rates for such DS3 services, which have 28 times the capacity of DS1 services, were at least 9.6 times their rates for DS1 special access services. Thus, we imposed a 9.6-to-1 benchmark requirement to ensure that those LECs with special access DS3-to-DS1 rate ratios that fell below most other LECs' rate ratios either provided cost justification for basing their initial restructured transport rates on their special access rates, or filed transport rates that complied with the benchmark ratio and certain other requirements. 14. In the July 1993 First Reconsideration Order, we addressed the application of the interim rate structure to network configurations not considered in the First Transport Order. We also addressed the method by which the LECs were to establish initial transport rates, including the interconnection charge, and resolved certain implementation issues. Specifically, we modified the calculation of the interconnection charge to require the LECs to use historical facility demand and configurations, rather than projected demand after IXCs reconfigure their networks in response to the restructure. We did this because of the LECs' incentive to under-estimate the projected demand for transport facilities and thereby inflate the interconnection charge, and because there was no method for the Commission or other parties to measure the accuracy of the LEC projections. We stressed, however, that the initial interconnection charge was to be calculated on a residual basis to further the goal of a revenue- neutral rate restructure. We did not intend that the LECs lose substantial amounts of revenue during the first year of the interim rate structure as a result of transport reconfigurations. Therefore, to achieve an interconnection charge that was neither too high nor too low, we stated that we would permit a mid-course adjustment to the interconnection charge. In the 1993 Second Reconsideration Order, we adopted a technical correction to our rules that required price cap LECs to base their initial calculation of the interconnection charge on historical usage demand, instead of projected usage demand. To date, no LEC has requested a mid-course adjustment. 15. On September 1, 1993, the LECs filed tariffs offering transport services pursuant to the interim rate structure and pricing rules. These tariffs became effective on December 30, 1993. E. Price Cap Safeguards 16. In the First Transport Order, we concluded that, after the initial rates were set under the interim rules, subsequent changes to the transport rates of price cap LECs would be governed by our price cap rules, just as most other LEC access offerings are regulated. Our LEC price cap rules create incentives for efficient operation and give price cap LECs a limited degree of pricing flexibility to adjust their rates according to market conditions, while at the same time guarding against anti-competitive pricing behavior. 17. Under LEC price cap regulation, we have broadly grouped LEC services into baskets, each of which is subject to an aggregate price cap or ceiling. Specific LEC services within each basket are grouped into narrower service categories and subcategories, each of which is subject to upper and lower pricing bands (i.e., somewhat more disaggregated price ceilings and floors). The price cap rules permit LECs to adjust their rates within these limits with minimal Commission review. The price cap for each basket and the pricing bands for each service category and subcategory are adjusted annually based on pre-defined formulas. The LECs may adjust their rates with minimal justification, as long as the aggregate rates for each basket do not exceed the specified cap, and the aggregate rates for each service category and subcategory remain between the upper and lower pricing bands. Substantial cost justification is required if rates exceed the price cap for a basket or fall above or below the applicable pricing bands for a service category or subcategory. The LEC price cap rules limit the potential for anti-competitive pricing by placing services subject to different competitive pressures into different baskets, service categories, and service subcategories, thus limiting the LECs' ability to offset lower prices for one class of services or customers with higher prices for another class of services or customers. 18. For purposes of price cap regulation, in the First Transport Order, we placed flat-rated transport, tandem-switched transport, and the interconnection charge into separate service categories of the traffic sensitive basket, which at that time contained the local switching charge and the bundled transport rates under the equal charge rule. (The alignment of the price cap baskets and service categories adopted in the First Transport Order is illustrated in Figure 3 below.) We set the upper and lower pricing bands at the normal +/-5% for the flat-rated [ Figures 3 & 4: Omitted in this electronic version ] transport service category. For the tandem-switched transport and the interconnection charge service categories, we adopted special narrower pricing bands. We set the pricing bands at +2% and -5% for the tandem-switched transport service category, and set a +0% price ceiling (with no lower limit) for the interconnection charge service category. These provisions limit the LECs' ability to offset price increases and decreases among these service categories, protect tandem-switched transport customers from significant annual rate increases, and link future changes in the interconnection charge to the LECs' overall price levels. 19. In the January 1994 Second Transport Order, we modified the price cap baskets and service categories based on the record developed in response to the further notice. Specifically, we moved transport and special access services into a newly created trunking basket. There already had been separate service categories and subcategories for DS3, DS1, and voice-grade special access services. We placed DS3, DS1, and voice-grade flat-rated transport services into the same service categories and service subcategories as comparable special access services. Thus, for example, DS3 special access services and DS3 direct-trunked transport services were placed into a single subcategory. We kept tandem-switched transport and the interconnection charge in separate service categories. (The alignment of the price cap baskets, service categories, and service subcategories adopted in the Second Transport Order is illustrated in Figure 4 above.) This price cap structure further limited price cap LECs' ability to offset lower rates for more competitive services with higher rates for less competitive services. For example, this structure prohibits price cap LECs from precipitously raising the rates for DS1 direct-trunked transport, which may be subject to less competition than DS3 services, while reducing the rates for DS3 direct-trunked transport. 20. We also made important changes in our rules governing transport in the closely related expanded interconnection proceeding. In that proceeding, we adopted policies to create new opportunities for the competitive provision of access services, including transport, that the LECs traditionally have provided on a monopoly basis. In conjunction with opening the switched transport market to competitive entry, we permitted LECs that are providing switched expanded interconnection to engage in density zone pricing of transport services. Density zone pricing is a system that permits LECs gradually to reduce rates in dense geographic areas that are less costly to serve, and to increase rates, relatively speaking, in less dense areas that are more costly to serve. (Density zone pricing is implemented through special price cap service subcategories for each zone, as illustrated above in Figure 4.) We also allowed LECs to implement cost-justified volume and term discounts for transport in a state once a certain degree of competitive entry has occurred in that state. We concluded that this would ensure that the LECs' switched transport expanded interconnection offerings provide a viable competitive opportunity before permitting discounted transport offerings. F. Impact of the Transport Rate Restructure on Different Categories of IXCs 21. In general, we seek to safeguard the public interest and competition, not to shield competitors from fair competition or to minimize the rate changes experienced by particular industry groups. We adopted the new transport rate structure and pricing rules based on the public interest considerations discussed in the 1992 First Transport Order. As we noted in that order, we also examined BOC and GTE estimates of the impact of the new rate structure on the total switched access costs of different classes of IXCs, but the specific results reflected by those estimates did not form the basis of our decisions. As a result of the modifications made in the 1993 First Reconsideration Order, we required the BOCs and GTE to submit updated impact estimates, initially in September 1993. After staff review uncovered errors in those estimates, the Common Carrier Bureau required the LECs to file corrected estimates in November 1993. To help customers plan for rate changes under the rate restructure, we also required these LECs to provide each of their switched access customers with sample bills indicating what that customer would have paid for transport in a recent month had the interim rate structure been in place. On December 29, 1993, the Common Carrier Bureau directed the BOCs and GTE to provide quarterly monitoring reports during 1994 that contained information to assist the Commission in monitoring the effect of the interim transport restructure on IXCs. After discussions with all interested parties, the Bureau accepted a revised data set and filing format proposed by the LECs. The predicted impacts and the reported actual impact data are set forth in Table 1 below. Table 1: CHANGES IN INTERSTATE SWITCHED ACCESS RATES PAID BEFORE AND AFTER TRANSPORT RATE RESTRUCTURE AT&T MCI and Sprint Small IXCs Difference Between AT&T and Small IXCs (C minus A) 1992 Predicted Impact (excluding Pacific) A1 -0.6% B1 +0.9% C1 +1.8% D1 2.4 November 1993 Predicted Impact (excluding Pacific) A2 -0.9% B2 -1.3% C2 +1.8% D2 2.7 November 1993 Predicted Impact (including Pacific) A3 -0.8% B3 -1.3% C3 +2.9% D3 3.7 First Quarter 1994 Adjusted Actual Impacts A4 +1.2% B4 +2.3% C4 +4.8% D4 3.6 Second Quarter 1994 Adjusted Actual Impacts A5 +0.3% B5 +1.3% C5 +2.2% D5 1.9 Third Quarter 1994 Adjusted Actual Impacts A6 -1.6% B6 -1.5% C6 -0.2% D6 1.4 First Three Quarters 1994 Adjusted Actual Impacts A7 -0.0% B7 +0.7% C7 +2.2% D7 2.2 22. The empirical data filed by the BOCs and GTE indicate that the impact of the rate restructure on small and medium IXCs as groups during the first three quarters of 1994 (the bottom four rows of Table 1) has been minor. Moreover, the actual impact generally has been consistent with the BOC and GTE estimates made before the transport rate structure took effect (top three rows of Table 1). For instance, the BOCs and GTE report that small IXCs paid 2.2% more in switched access rates, as a result of the transport restructure (controlling for traffic growth and for unrelated rate changes), during the first three quarters of 1994 as compared with the first three quarters of 1993 (see cell C7 in Table 1). This compares with 1993 BOC/GTE projections that small IXCs would pay 2.9% more in switched access rates as a result of the restructure (cell C3). Moreover, the difference between the actual impact on small IXCs and the actual impact on AT&T was 2.2 percentage points in the first three quarters of 1994 (cell D7), compared with 3.7 percentage points projected in 1993 (cell D3). Based on these data, it appears that earlier concerns that the interim rate structure would place small IXCs at a significant competitive disadvantage proved to be unfounded. 23. Notwithstanding the change in interstate switched access rates paid by the different categories of IXCs, the small IXCs experienced significantly larger traffic growth, measured in minutes of use, than the three largest IXCs during the first three quarters of 1994, according to the empirical data reported by the LECs. The small IXCs experienced traffic growth of 17.9% over the first three quarters of 1994. For the same three quarters, AT&T experienced traffic growth of 3.5%, and MCI and Sprint, collectively, experienced traffic growth of 3.9%. The annual traffic growth experienced by the IXCs, as measured from the third quarter of 1993 to the third quarter of 1994, was 23.2% for the small IXCs, 7.5% for MCI and Sprint, collectively, and 3.2% for AT&T. This significant traffic increase indicates that, following the transport restructure, smaller IXCs as a group continue to be strong and growing compe titors in the interexchange market. 24. In addition, the reported data, as well as other data collected by the Commission regarding the number of IXCs operating in the United States and each state, indicate that the number of small IXCs doing business nationally did not change significantly. Indeed, the number of small IXCs operating in such relatively rural states as North Dakota, South Dakota, Wyoming, and others appears to have increased somewhat. These data do not indicate that the transport restructure has caused any significant reduction in consumer choices in rural states or elsewhere, nor forced IXCs to abandon markets they traditionally served. III. THIRD MEMORANDUM OPINION AND ORDER ON RECONSIDERATION A. The Interim Rate Structure 25. Background. The interim transport rate structure was established to align transport rates more closely with the manner in which LECs incur the costs of providing transport services (i.e., either over dedicated facilities or over a combination of dedicated and shared facilities), as described supra in paragraph 6 and as illustrated supra in Figures 1 and 2. Under the interim rate structure, dedicated facilities, such as entrance facilities and direct- trunked transport, are charged on a flat-rated basis and may be distance sensitive, while tandem-switched transport is charged on a per-minute basis and may be distance sensitive, with the mileage measured from the SWC to the end office. The interconnection charge is charged on a per-minute basis to all interstate access customers. 26. Positions of the Parties. Pacific and AT&T argue that the entire interim rate structure is flawed because it is designed to protect smaller suppliers in the interexchange market rather than to serve the Commission's three original goals, and they advocate immediate implementation of a long-term rate structure that fully reflects these three goals. AT&T argues that postponing the adoption of fully cost-based transport rates for another two-year period (after the eight-year period from divestiture through 1991) conflicts with the Commission's findings that the equal charge rule is inefficient and is at odds with promoting access competition through expanded interconnection. AT&T also argues that the interim rate structure precludes competition at the tandem and is inconsistent with the Commission's repeated efforts to unbundle rate structures, because the interim rate structure bundles the charge for routing traffic from the SWC to the tandem switch and from the tandem switch to end offices into one rate element. Pacific contends that the rate structure is costly and unnecessary, given the steady increase in traffic carried by Tier 3 IXCs and CAPs. BellSouth argues that the Commission should discard interexchange competition as a primary goal in this proceeding and address such concerns in other arenas. 27. In comments filed before the adoption of our 1993 Switched Transport Expanded Interconnection Order, several LECs assert that the interim rate structure fails to account for the advent of expanded interconnection for switched transport, and they argue that a long-term rate structure, removing constraints on the LECs' ability to compete, should be made effective concurrent with switched expanded interconnection. SW Bell, U S West, and AT&T assert that the new rate structure is inconsistent with switched transport expanded inter- connection and tandem switching competition because it bundles the provision of the dedicated link between the SWC and the tandem switch with the provision of tandem switching and the common transport link between the tandem switch and the end office. 28. In support of the interim rate structure, Rochester argues that to adopt a permanent transport rate structure immediately is inappropriate because the Commission needs additional information on the issues and because it would substantially harm interexchange competition. CompTel, WilTel, and Sprint defend the rate structure as: (1) consistent with the traditional LEC practice of offering end-to-end services, rather than piece-part facilities, to customers; (2) properly reflective of how LECs design their interoffice networks and the lack of customer control over tandem deployment; (3) avoiding imposing uneconomic, extra fixed charges on users of tandem-switched transport; and (4) conducive to local access competition. MCI supports the adoption of an interim plan pending resolution of the complex issues related to a long-term plan. 29. Sprint argues that the Commission should hold open the record of this proceeding to make changes to the interim rate structure in the event the filed interim rates have rate impacts substantially different from those discussed in the First Transport Order. BellSouth and USTA oppose Sprint's position, arguing that such an approach might create an extended proceeding that would endlessly consume valuable resources when such effort might be better spent towards adopting a long-term framework. The Ad Hoc Telecommunications Users Committee (Ad Hoc) and Allnet argue for focusing attention on the long-term plan, rather than altering the interim plan. 30. Discussion. The interim rate structure is a significant improvement over the "equal charge" rate structure. We believe that the interim rate structure is consistent with all three of our goals in this proceeding. First, the interim rate structure permits LECs to offer unbundled elements of transport service at rates more reflective of the manner in which costs are incurred in providing those elements. Second, the rate structure is consistent with full and fair interexchange competition because it permits IXCs to serve their customers using more efficient transport services priced under an economically more rational rate structure, and enables them to obtain transport services from sources other than the LECs. Third, the rate structure is consistent with local access competition and expanded interconnection because it enables the LECs to offer flat-rated entrance facilities and direct-trunked transport, like their acces s competitors using expanded interconnection. 31. We have weighed the costs associated with an interim approach -- namely, the effect on tandem competition and the delay in implementing a fully cost-based rate structure -- against the benefits associated with its balancing of our three public interest goals. We conclude that our cautious approach of adopting an interim rate structure and seeking comment on a long-term rate structure was a reasonable step towards a more cost-based transport rate structure. Given the broad scope of the transport restructure, we concluded that a cautious, interim transport rate structure could mitigate possible adverse effects on the pluralistic supply of interexchange service on terms that facilitate full and fair interexchange competition. The interim transport structure allows IXCs time to prepare for a fully cost-based rate structure by reconfiguring their networks and taking other steps to eliminate network inefficiencies developed under the equal charge rule. While we recognize that maintaining the interim structure, and, along with it, the continued availability of bundled tandem-switched transport, might impede the development of tandem competition to some degree, we have adopted other measures to promote such competition. 32. We decline to hold open this proceeding, as Sprint suggests. We conclude that we have had sufficient time to evaluate the interim restructure. Moreover, in the notice portion of the First Transport Order, we sought comment on permanent transport rate structure issues, and if future events demonstrate that further rate structure adjustments are needed, we can address them in that phase of this proceeding. We conclude, however, that continued monitoring of the effects of the interim transport rate structure would be in the public interest, and we delegate authority to the Chief, Common Carrier Bureau, to continue and refine the Bureau's transport monitoring program. With our affirmation of the interim transport rate structure, we retain our conclusions that: (1) non-Tier 1 LECs are exempt from implementing the interim transport rate structure; (2) if such LECs provide entrance facilities, they must provide them on a flat-rated basis; and (3) such LECs must offer flat-rated direct-trunked transport upon receipt of a bona fide request. B. Initial Benchmark Level and Permanent Rate Relationships 33. Background. To facilitate the implementation of the initial transport rates under the new structure, we accorded a presumption of reasonableness to the LECs' initial restructured transport rates if they were based on the rates for comparable special access services in effect on September 1, 1992. This presumption of reasonableness applied only if the ratio between a LEC's special access DS3 and DS1 rates was at or above the benchmark ratio of 9.6 to 1. Thus, the LECs could have set their initial DS3 transport rates greater than or equal to 9.6 times their DS1 rates without providing substantial cost justification. We determined the level of the benchmark by requiring the LECs to calculate the ratio between: (1) the total charge for a one-mile channel termination, ten miles of interoffice transmission, and one DS3 multiplexer using the LEC's DS3 special access rates, and (2) the total charge for a one-mile channel termination plus ten miles of interoffice transmission using the LEC's DS1 special access rates. Most of the LECs' special access DS3/DS1 rate ratios exceeded 9.6 to 1. Thus, we established 9.6 to 1 as a benchmark ratio, and decided that if a LEC's special access DS3/DS1 rate ratio exceeded that benchmark, transport rates based upon the LEC's special access rates would be presumptively lawful. 34. We required those LECs whose special access rate ratios fell below the benchmark to make a "substantial cause" showing that their rates were reasonable, or in the alternative, that they file new transport rates that satisfied the 9.6 to 1 benchmark, but that would not increase the proportion of transport revenue recovered through the interconnection charge. To take a hypothetical example, a LEC with a special access DS3/DS1 rate ratio of 8 to 1 might have recovered 65% of its transport revenues through the interconnection charge if its initial transport rates were based on its then-existing special access rates, without regard to our benchmark requirement. If that LEC, however, filed transport rates satisfying the 9.6 to 1 benchmark, it was permitted to recover only 65% of its transport revenues through the interconnection charge. The LECs with special access rates below the benchmark uniformly chose to file new transport rates consistent with the benchmark, rather than file cost justifications. The 9.6 to 1 benchmark was developed only to establish initial transport rates, not to govern the rate relationships between different transport services after the initial rates became effective. Subsequent transport rate changes initiated by price cap LECs have been governed by the price cap rules. 35. While there is no special access rate element that directly corresponds to tandem-switched transport, we found that the underlying facilities used to provide tandem- switched transport are essentially the same as special access facilities, except for the tandem switch. Therefore, we permitted the LECs a presumption of reasonableness if they set their initial rates for the transmission portion of tandem-switched transport on the per-minute equivalent of their direct-trunked transport DS1 and DS3 rates: (1) weighted based on the mixture of fiber and copper facilities used by the LEC in providing interoffice services; and (2) calculated using a loading factor of 9000 minutes of use per month per voice-grade circuit. We required that the tandem switching charge, a subelement of the tandem-switched transport rate, recover 20% of the fully allocated costs of the tandem switch. 36. In the Second Transport Order, we explicitly declined to adopt permanent rate relationships between different transport services -- for example, to require the LECs to maintain a 24 to 1 ratio between their DS3 and DS1 services on a continuing basis. We observed that: (1) fixed rate relationships would discourage the LECs from lowering DS3 and possibly DS1 rates, which would retard long-distance price reductions and ultimately could restrict economic growth; and (2) applying ongoing rate relationship requirements to the LECs and not their competitors could inhibit the full development of access competition. To address concerns raised regarding potentially anti-competitive LEC pricing, we placed DS3, DS1, and voice-grade flat-rated transport services into separate service categories and subcategories, limiting the LECs' ability to offset rate reductions for one service with rate increases for another service. We also retained our placement of tandem-switched transport and the interconnection charge in separate price cap service categories with particularly narrow upper pricing bands -- +2% for tandem-switched transport and +0% for the interconnection charge -- to further restrict the LECs' ability to raise rates for these services. 37. Positions of the Parties. Some of the parties ask us to consider: (1) adjusting the benchmark used to establish initial transport rates and applying it to subsequent transport rate changes, (2) applying it separately to different transport segments, and (3) modifying the methodology used to establish initial transport rates by LECs that have special acces s rates below the benchmark. 38. Adjusting the Benchmark or Applying it to Subsequent Rate Changes. CompTel, Sprint, and WilTel argue that the Commission should significantly adjust the benchmark upwards and require LECs to comply with such a benchmark on an ongoing basis. CompTel, Sprint, and WilTel assert that the 9.6 to 1 benchmark is too low because it is based on special access rates that reflect non-cost-based rate differences, and that it unjustly discriminates against smaller volume customers. Further, they argue that price cap regulation is insufficient to protect smaller IXCs from ongoing price discrimination as the LECs subsequently change their transport rates. They argue that the non-cost-based differences between the rates for higher and lower volume transport services award AT&T an unfair advantage over smaller volume IXCs. They also contend that these rate differences provide incentives for all IXCs to purchase excess capacity and under-utilize facilities: they argue that BOC DS3/DS1 ratios create incentives for IXCs to purchase DS3 facilities and use only, on average, 54% of the facility, based on a two mile circuit, or 26%, based on a twenty-five mile circuit. Instead, they argue for rate ratios that would create incentives for IXCs to use 85% of the capacity of a DS3 circuit. Consequently, CompTel, WilTel, and Sprint advocate benchmark ratios somewhere in the range of 20 to 1 and 24 to 1. They base these benchmark ratios on cost assumptions relying primarily on the capacity difference between DS3 and DS1 circuits, taking into account some allowance for multiplexing and fill factors of 85%. 39. The LECs' initial tandem-switched transport rates were set based on the direct-trunked transport rates using the mix of fiber and copper facilities in the LECs' interoffice networks to weight the DS3 and DS1 direct-trunked transport rates, respectively. WilTel and CompTel argue that this circuit mix, based on updated fiber/copper ratios, should be used annually to adjust a permanent rate relationship for tandem-switched rates. As an alternative to using a revised benchmark to govern transport rates on an ongoing basis, Sprint urges the Commission to set the per-month equivalent of the tandem-switched transport rate as the ceiling for DS1 direct trunks. Sprint asserts that because the Commission requires that the charge for tandem-switched transport be based on the actual DS3 and DS1 circuit mix of a LEC's interoffice network, and because almost all tandem-routed traffic will likely be carried at DS3 speed, it is possible that tandem-switched transport rates could be less than DS1 direct-trunked transport rates. Sprint asserts that this situation is illogical since it is more efficient to route traffic via dedicated DS1 circuits than through a tandem switch. Similarly, Allnet argues that direct-trunked and tandem-switched rates within a density zone should be linked, so that if direct-trunked transport rates are lowered within a zone, tandem-switched transport rates must be lowered by the same percentage. 40. To support the claim that price cap regulation is insufficient to prevent discriminatory LEC pricing, CompTel, in ex parte submissions, submits data from the 1994 annual access tariff filings indicating that four of the BOCs have reduced their direct-trunked transport rates while not reducing at all, or as much, their tandem-switched transport rates. CompTel asserts that these price trends demonstrate that the LECs are placing higher overhead loadings on their smaller volume services, thus discriminating against their smaller volume customers (assuming that the direct costs of providing DS3, DS1, and tandem-switched transport services have not changed). Sprint supports CompTel's data and notes that, in U S West's 1994 annual access tariff filing, U S West's transport rates fell below a DS3/DS1 ratio of 9.6 to 1. Sprint further argues that, under the price cap regime, over a three year period LECs will be able to lower DS3 rates by 27% and raise DS1 rates by 16%, thereby reducing the already low ratio of 9.6 to 1 to 6.04 to 1. 41. To further support its argument that LEC transport rates are not cost-based, CompTel cites decisions of two state commissions declining to allow LEC intrastate transport rates that mirrored interstate transport rates to take effect. CompTel also cites statements of other state commission officials arguing that such rates be rejected. In addition, CompTel provides a copy of its application for enforcement of the MFJ against BellSouth, in which CompTel alleges that BellSouth's transport rates violate the MFJ's requirements that access rates be cost-justified and nondiscriminatory. BellSouth opposes CompTel's arguments, and specifically disputes CompTel's calculations relating to BellSouth's rate relationships as flawed. CompTel also submits an impact analysis apparently based on data from the LEC monitoring reports, and asserts that the difference in the impact of the rate restructure on small IXCs, as compared with AT&T, has been, and likely will continue to be, significant. 42. The LECs generally oppose raising the benchmark and using it to establish permanent rate relationships, while some attack the use of any benchmark. The LECs argue that permanent rate relationships would impose inordinate restrictions on the LEC pricing flexibility permitted under price caps, and that in an increasingly competitive environment, the market should be permitted to drive pricing. Further, they argue that LECs will have incentives to maintain economically rational rate relationships. Moreover, the LECs assert that the method advocated by the IXCs other than AT&T for determining a benchmark -- based on the capacity difference between DS3 and DS1 services -- is flawed because it fails to account for important cost characteristics, such as the proportion of fiber and copper deployed, management and systems operations, and average lengths of circuits. The LECs contend that these costs vary among LECs and over time. They also note that some CAPs and IXCs offer DS3 services priced at a multiple of DS1 rates that is at or below the 9.6 to 1 ratio. 43. Some LECs argue that a higher benchmark and permanent rate relationships would prevent customers from taking advantage of the increased efficiency and flexibility of greater bandwidth services that are justified by cost differences. GTE argues that a higher benchmark would injure smaller IXCs in the long-term by driving larger IXCs to their own bypass facilities or to CAP services, leaving the other IXCs to support the LEC networks. NYNEX submits that substantially raising the benchmark would require either lowering DS1 rates, creating a revenue shortfall that would have to be recovered from the interconnection charge (or the "contribution charge" in the special access context), or raising DS3 rates to price LECs out of the market. Several LECs also argue that their special access rates have been scrutinized in the past and have been determined to be reasonable. Finally, Pacific opposes annual recalculation of tandem-switched transport rates based on updated fiber/copper ratios as contrary to price cap principles. 44. Pacific opposes Sprint's alternative recommendation to establish a ceiling for direct-trunked transport rates based on tandem-switched transport rates, arguing that it would constitute a disincentive to use the network efficiently and ignores the extent to which special access rates have been scrutinized for reasonableness. SW Bell characterizes Sprint's proposal as another unjustified attempt to price DS1 at 1/28 of the DS3 direct-trunked transport rate and as an arbitrary tying of one rate element to another, contrary to the price cap rules. USTA asserts that such pricing constraints would result in artificial rate relationships that have no relevance to either economic costs or the market. GTE opposes Sprint's proposal, arguing that IXC service choices should be based on well-managed LEC rates and that the Commission need not try to predetermine service choices through complex and overlapping rules. 45. AT&T opposes a higher benchmark, arguing that direct-trunked transport and special access are provided over similar facilities and have similar cost characteristics, that existing special access rates are reasonable, and that there are cost differentials between DS1 and DS3 facilities. AT&T contends that the small and medium IXCs have not shown that their proposals are justified by service cost relationships, and further contends that the proposals would be contrary to policies of price cap regulation. Moreover, AT&T opposes permanent rate relationships, arguing that price cap restrictions are more than adequate and that subsequent linkage or other restrictions on LEC pricing flexibility are unwarranted and would exacerbate the extent to which tandem-switched transport is priced below cost, particularly as those costs change. 46. Applying the Benchmark Separately to Different Transport Segments. WilTel, CompTel, and MCI contend that the LEC interoffice network serves all carriers and involves shared costs, while entrance facilities reflect IXC-specific requirements. Accordingly, MCI, in conjunction with arguing that a significantly adjusted benchmark should govern ongoing rate changes, asserts that LECs should be required to satisfy such a benchmark requirement separately for entrance facilities and for direct-trunked transport. WilTel and CompTel contend that the LECs should be required to satisfy that benchmark requirement ratio separately for the separate components of interoffice transport. For example, they advocate applying benchmark ratios separately for the non-distance-sensitive fixed rate elements and for each of the distance sensitive elements. They also contend that entrance facilities should be removed from the calculation of the benchmark ratio. Sprint states that, even if the Commission declines to increase the benchmark ratio substantially, the other IXCs' suggestions regarding separate application of the benchmark should be adopted. 47. A number of LECs and AT&T oppose the proposal to apply the benchmark to separate rate elements on the same grounds that they oppose use of a higher benchmark. Ameritech and Rochester contend that requiring LECs to satisfy the benchmark separately for the fixed and interoffice mileage components, or removing entrance facilities from the benchmark analysis, would serve no purpose and would only further distort LEC pricing because transport services consist of all these components and the analysis assumes purchase of end-to- end transport from the LECs. While asserting that the Commission should not impose any benchmark requirement on entrance facilities because such a requirement is already overly restrictive and arbitrary, GTE argues that if a benchmark requirement is maintained it should be determined based on the total circuit configuration and not on an element-by-element basis. Pacific opposes separate benchmarks for entrance facilities and different mileage segments, arguing that the small IXCs are simply seeking uneconomic rates to enable them to compete against AT&T. 48. Methodology for LECs with Rate Ratios Below the Benchmark. U S West asserts that the Commission's methodology for computing interconnection charges for LECs with special access rate ratios below the benchmark (described supra in paragraph 34) is inconsistent with computing the interconnection charge to yield revenue neutrality. U S West argues that a better approach would calculate the interconnection charge based on the new transport rates, without regard for whether the adjusted rates increase the proportion of revenue recovered through the interconnection charge. Rochester argues that use of the 9.6 to 1 ratio could harm LECs whose special access rates fall below the benchmark, for example, by causing flat-rated transport rates to diverge significantly from the costs of service and from the LECs' special access rates. 49. WilTel agrees with the LECs that the Commission should permit the LECs to raise their DS3/DS1 ratio voluntarily or reduce dedicated transport rates to bring them more closely in line with costs, without the requirement that the proportion of revenues recovered through the interconnection charge remain unchanged. Nevertheless, contrary to U S West's and Rochester's arguments, WilTel asserts that the LECs' existing special access rate relationships are discriminatory and do not accurately reflect differences in the cost of providing DS3 and DS1 services. Further, WilTel argues that divergence between special access and switched transport rates would be reasonable in order to achieve the higher benchmark WilTel proposes. Sprint also opposes U S West's arguments, asserting that the Commission has often used industry averages or the results of the most efficient carrier as a basis for setting or investigating rates. 50. Discussion. For the reasons set forth below, we affirm the benchmark used in setting the initial transport rates and our use of price cap rules, rather than permanent rate relationships, to govern subsequent changes in the price cap LECs' transport rates. 51. Adjusting the Benchmark or Applying It to Subsequent Rate Changes. We decline to revise the benchmark used to establish initial transport rates or establish rigid rate relationships based on such a benchmark. We conclude that the small and medium IXCs' suggested level of the benchmark lacks adequate cost justification. Further, fixed rate relationships are not consistent with LEC price cap regulation. To raise the benchmark to the levels suggested by CompTel, WilTel, and Sprint (in the range of 20-to-1 to 24-to-1) would not properly and completely account for several relevant cost factors, explained below. 52. Providing DS1 circuits over a DS3 fiber facility imposes costs that are not incurred when a customer leases a full DS3 facility. First, in order to carry DS1 level traffic over a DS3 facility in the interoffice network, the DS1 circuit must be multiplexed up to a DS3 at the SWC so that the traffic can be carried at DS3 speed, and back down to a DS1 at the end office. Due to these additional multiplexing costs, the non-distance-sensitive element of the DS1 interoffice rate should be relatively higher than that component of the DS3 rates. Second, if DS1 direct-trunked traffic is routed through an intermediate office where some of the traffic being carried on the DS3 circuit is dropped off or routed over a different outgoing facility, LECs have to multiplex the circuits down to the DS1 level in order to remove that traffic from the circuit, and then up again to the DS3 level to carry the remaining traffic through the interoffice network. To accomplish this multiplexing, the LEC must convert an optical signal to an electrical signal and then back to an optical signal by using the appropriate optical line terminating circuit equipment. These multiplexing and optical circuit equipment costs would be expected to make the mileage component of DS1 interoffice rates somewhat higher, proportionally, than that of DS3 rates. Third, DS1 circuits composing a DS3 facility generally will not fill the DS3 facility completely. For several reasons (i.e., LEC anticipation of demand growth, LEC decisions to maintain backup circuits, and the random likelihood that access customers do not order DS1 facilities in multiples of 28), there often will be fewer than 28 DS1s in use on each DS3 facility. IXCs that purchase a DS3 facility bear the burden of utilizing the full capacity of the DS3. On the other hand, when an IXC leases DS1 circuits from a particular LEC, the burden of completely using the DS3 facility on which those DS1 circuits are carried is borne by the LEC, and the LEC can only spread the cost of the DS3 facility among those DS1s that are purchased. Fourth, some of the costs of providing DS3 services are not 28 times the costs of providing DS1 services because, for example, the costs of engineering the network to accommodate DS1s on a DS3 facility, administrative and customer relations costs, and the cost of billing and collecting for the different services, are not necessarily proportionally highe r for DS3 services. 53. For all of these reasons, we reject the small and medium IXCs' arguments that DS1 rates should be based on their suggested benchmark ratios. Ignoring these cost factors would erect a non-cost-based price umbrella, similar to the equal charge rule, and hamper access competition. Moreover, any single industry-wide ratio for DS1 and DS3 rates is unlikely to be an accurate reflection of cost differences for all LECs, and would probably have to be changed over time as technology changes the relevant cost factors. 54. We are not persuaded by CompTel's arguments based on selected state commission decisions and statements of their officials. We note that five of the states in BellSouth's region have permitted intrastate transport rates mirroring interstate transport rates to go into effect. Of course, state commissions apply state statutory and regulatory standards, rather than the standards of the Communications Act of 1934 and the Commission's rules. Moreover, CompTel appears to have overstated the pertinence of some of the state commission decisions it cites. For example, the Louisiana Public Service Commission did not reject BellSouth's intrastate transport rates because those rates were not cost-based, but because BellSouth had simply proposed interstate transport rates for intrastate transport without attempting to satisfy relevant state requirements. In addition, the MFJ's requirements are independent obligations of the BOCs and are not binding on the Commission. The precise meaning of the MFJ requirements cited by CompTel have not been settled by any Department of Justice or court interpretation, and, in adopting the MFJ, the Court stated that regulators retained authority over ratemaking issues. 55. We continue to believe that special access rates provide a rational framework for establishing the initial transport rates. First, the special access rate structure includes elements that are closely analogous to the transport portion of the switched access network. For example, the special access channel termination from the IXC POP to the SWC parallels the entrance facilities of the switched access network between the IXC POP and the SWC. The special access interoffice links are comparable to direct-trunked transport between SWCs and end offices. The LECs often provide special access and transport services over the same facilities. 56. Second, special access rates provided a generally reasonable framework for the initial restructured transport rate levels. LEC special access rates have been subject to the discipline of both a certain degree of competition and the tariff review process. In adopting LEC price caps, we specifically concluded that pre-existing special access rate levels were a reasonable basis from which to launch a system of price cap regulation. We stated: The July 1, 1990 rates . . . represent the culmination of years of developing, refining, and overseeing the Commission's access charge system. The rates resulting from this process, while perhaps not perfect, in general represent the best that rate of return regulation can produce. We cited a number of factors in support of this conclusion: the revised Uniform System of Accounts; the newly-instituted cost allocation procedures used to separate non-regulated costs from regulated costs; the refined methodology for selecting the allowed rate of return; our ability to track costs through an automated reporting system; and increasingly sophisticated tariff review procedures, including the use of Tariff Review Plans with standardized cost support. Most significantly, we noted that we had paid particularly close attention to the LECs' special access rates, and had conducted special proceedings to ensure that special access rates and rate relationships were reasonable. Special access rate changes between July 1991 and September 1992 -- the effective date of the special access rates on which the initial restructured transport rates were based -- complied with the requirements of the LEC price cap rules. 57. Our approach of presuming LECs' initial restructured transport rates to be reasonable if based on special access rates, subject to a limited benchmark requirement, enabled us to implement the new transport rate structure expeditiously and without extensive and prolonged cost studies. Such cost studies could have delayed the development of access competition and prolonged the inefficiencies resulting from the equal charge rule. 58. The recommendations of CompTel, WilTel, and Sprint to establish permanent rate relationships using a revised benchmark would require the LECs to move their DS3 and DS1 rates, and in some cases their tandem-switched transport rates, essentially in lock step. These plans, as well as Sprint's and Allnet's alternative recommendations, would require equivalent reductions or increases in one set of rates for each reduction or increase in another rate. We believe that requiring permanent rate relationships between DS3, DS1, and tandem- switched transport rates would interfere with the efficient functioning of the market, and could retard long-distance price reductions, depress telecommunications usage, and inhibit economic growth. Moreover, permanent rate relationships interfere with the market by hampering the LECs' ability to adjust their rates to reflect changes in the underlying costs of their services, contr ary to the goals of this proceeding and price cap regulation. 59. We reject the related recommendation to require the LECs to reset their tandem-switched transport rates annually based on DS3 and DS1 direct-trunked transport rates, weighted based on updated fiber/copper ratios. We continue to believe that price cap rules, rather than required annual adjustments guided by cost factors, are the most appropriate means, in an increasingly competitive access market, to govern ongoing changes in rates for LEC servi ces, including tandem-switched transport. 60. We also decline to require the LECs to place uniform overhead loadings on their transport rates as a means of constraining changes to the price relationships between DS3 and DS1 rates. Overhead loadings may reasonably differ for higher and lower capacity access services. Thus, in response to some IXCs' allegations that, as a general matter, the LECs' restructured transport rates are unreasonably discriminatory, we conclude that even if it were demonstrated that different transport services are "like services," differences between the levels of overhead loadings recovered in those rates would not necessarily constitute unreasonable discrimination. (We note that allegations that specific rates of individual carriers are discriminatory are not before us in this proceeding.) Moreover, one of the primary benefits to consumers of price cap regulation is that it encourages efficient pricing. By placing similar services into the same basket, service category, or service subcategory, and subjecting them to aggregate pricing bands, our price cap rules allow a carrier a limited measure of pricing flexibility. Where marginal costs are below average costs, this pricing flexibility permits LECs to recover their total costs while minimizing adverse impacts on consumer surplus -- the difference between the price of a service and what consumers would be willing to pay for that service. 61. While we continue to believe that a certain level of pricing flexibility is needed to enable the LECs to meet increasing competition in the local access market, we also recognize that without sufficient regulatory constraints the LECs could price their transport services anti-competitively. We have addressed this concern through special safeguards in the price cap system: placing DS3 flat-rated transport, DS1 flat-rated transport, and tandem- switched transport in separate service categories and subcategories, and retaining the +2% upper pricing band for tandem-switched transport services. This +2% pricing band requirement is significantly more narrow than the typical +5% band for other service categories in the trunking and other baskets. We continue to believe that this approach best balances our concerns about potential anti-competitive LEC pricing and the LECs' need for some pricing flexibility in the face of increased competition, and thus, best promotes our public interest goals. We note, however, that this decision does not limit our discretion in addressing the separate record developed in the LEC Price Cap Review proceeding. 62. Applying the Benchmark Separately to Different Transport Segments. We decline to require the LECs to satisfy separate benchmark requirements for entrance facilities and for direct-trunked transport. The method we used to create the benchmark was based on a typical configuration of LEC transport offerings, using rates from analogous special access offerings. This configuration is one IXCs would likely use to purchase transport services, and CAPs are likely to offer services that could be substituted for both entrance facilities and interoffice facilities. Given that the 9.6 to 1 benchmark was derived from examining rates for typical special access service configurations, applying the 9.6 to 1 benchmark to a comparable transport configuration on a bundled basis was reasonable. The benchmark approach was a reasonable method of ensuring that outlier special access rates did not form the basis for the initi al transport rates under the interim plan. 63. Methodology for LECs with Rate Ratios Below the Benchmark. We decline to revise the method by which those LECs with September 1992 special access rates below the 9.6 to 1 benchmark established initial transport rates. Permitting such LECs to establish new transport rates without any check on the manner in which it was to be done would have provided such LECs with the opportunity to shift costs from facilities-based rate elements to the interconnection charge. Such a shift could harm access competition because LECs could price their transport services by offsetting lower rates for facilities-based services, with which CAPs compete, with a higher interconnection charge, paid by the customers of both CAPs and LECs. We conclude that the risk of any significant divergence between special access and transport rates is minimal, because over time, given the pricing flexibility afforded LECs under price cap regulation, LECs have the ability and market incentives to align those rates. In these circumstances, we are reluctant to permit the interconnection charge to increase without a clear indic ation that such an increase is in the public interest. 64. Finally, while we base our decision here on the public interest considerations stated above and in the First Transport Order, and not on the impact data, we note that the impact data from the quarterly reports indicate that the total costs for interstate switched access service for the smaller IXCs are consistent with the previous LEC estimates. Therefore, the impact data do not indicate that we need to modify our benchmark requirement or establish permanent rate relationships to preserve full and fair interexchange competition. The impact analysis submitted by CompTel shows results that are generally consistent with the data in the LECs' monitoring reports. Consistent with our past practice, we examine changes in total switched access rates, rather than examining transport rate changes in isolation. A measure of the effect on total switched access more accurately reflects the effect of the restructure on the IXCs, because it considers the entire bill they pay for LEC switched access rather than focusing only on one segment of the IXCs' access costs. CompTel's transport numbers, showing an industry average increase of approximately 10% in the transport costs of smaller IXCs compared to those of AT&T for the third quarter of 1994, are generally consistent with the data reported by the LECs. Transport rates represent approximately 22% of total interstate switched access rates. Thus, a 10% transport impact differential is roughly equivalent to a 2.2% switched access differential, which is consistent with the LECs' estimates before the transport restructure took effect, and is in the same general range as the amounts reported by the LECs. C. Price Cap Service Categories and Price Bands 65. Background. In our 1992 First Transport Order, we created three new service categories in the traffic sensitive basket in place of the formerly bundled transport service category: (1) a combined category including entrance facilities, direct-trunked transport and dedicated signalling transport (collectively referred to as "flat-rated transport"); (2) tandem- switched transport; and (3) the interconnection charge. In our 1994 Second Transport Order, we modified the price cap baskets and service categories to reflect the new rate structure and pricing. Specifically, we modified our price cap rules to place flat-rated transport and special access into the same service category of the newly created trunking basket. DS1, DS3, and voice grade flat-rated services were grouped together into separate categories or subcategories. Tandem-switched transport and the interconnection charge were also placed into separate service categories. Placing services in different baskets prevents LECs from shifting revenue recovery from a service in one basket to a service in a different basket. Separate service categories, on the other hand, limit, but do not completely foreclose, price cap LECs' ability to offset lower rates for more competitive services with higher rates for less competitive services. 66. We also retained the pricing bands established in our 1992 First Transport Order. We placed a typical upper and lower pricing band of +/-5% on the flat-rated transport and special access service category. We placed DS3 and DS1 flat-rated services into separate subcategories in order to limit the LECs' ability to offset rate reductions for higher-volume customers with rate increases for lower-volume customers. We placed an upper band of +2% and a lower band of 5% on the tandem-switched transport service category. The +2% upper band permits some pricing flexibility, while preventing precipitous rate increases that might adversely impact smaller IXCs that more commonly rely on tandem-switched transport services. We placed an upper band of +0% (with no lower band) on the interconnection charge service category. 1. Tandem Switching 67. Positions of the Parties. In comments filed prior to our 1994 Second Transport Order, Pacific, SW Bell, and Rochester advocate putting tandem switching, together with local switching, into the traffic sensitive price cap basket, or in a new "switching" basket. Rochester supports its recommendation by arguing that as the architecture of LEC networks becomes more de-centralized and network functions are distributed more broadly among end offices (rather than being focused in specialized switching locations), tandem switches increasingly resemble end office switches, rather than switches that are distinctly higher in the traditional switching hierarchy. Rochester also argues that tandem switches perform switching, not transport, functions. SW Bell contends that, although integrated switches perform both class 4 (tandem) and class 5 (end office) functions, separately and discretely, tandem and local switches are functionally the same; they simply operate on different types of traffic. Thus, SW Bell argues that all switched access customers benefit from, and should contribute to the cost recovery of, tandem switching. SW Bell also proposes putting the interconnection charge into a "public policy" basket. 68. CompTel and WilTel also support placing the tandem switching charge into the traffic sensitive basket with local switching, subject to the Commission's unbundling and setting rates for tandem switching pursuant to Open Network Architecture (ONA) policies. CompTel argues that the Commission's decision to keep tandem and local switching separate is premised on the mistaken understanding that end office switching and tandem switching are performed at separate locations. CompTel asserts that the tandem switching function is typically performed in integrated switches where end office switching and tandem switching are separate functions in the same switch. In addition, CompTel and WilTel urge the Commission to implement its ONA policies to separate discrete switching functions and establish direct-cost based rates for the tandem switching element by means of the ONA Switching Cost Information System (SCIS) model. According to CompTel, this process will align tandem-switched transport rates more closely with costs and reduce the interconnection charge. CompTel asserts that non- cost-based tandem switching rates have anti-competitive effects on third-tier IXCs and provide all IXCs incentive to employ excessive capacity of direct-trunked transport. The chief executive officers of five of CompTel's member companies urge that the Commission "replace the tandem switching charge with a single switching charge applicable to all transport options." 69. Ameritech, BellSouth, and AT&T oppose eliminating the tandem switching element and incorporating it into the local switching charge. They assert that, while tandem and local switching may be combined into a single switch, their functions remain separate and the competitive pressures on the two services differ. In addition, AT&T, BellSouth, and Minnesota Equal Access Network Services (MEANS, a centralized equal access provider) view a single switching charge (local and tandem) as akin to the equal charge rule, arguing that all customers of switching services will be required to pay for tandem-switched transport whether or not such customers use tandem switching. MEANS argues that a unitary switching charge will permit LECs to cross-subsidize their tandem switching with local switching, thereby undercutting competition in providing tandem switching. Bell Atlantic argues that a single switching charge is inconsistent with the Commission's cost allocation rules: Sections 69.306(c) and (d) require the costs of local (Category 3) and tandem (Category 2) switching equipment to be separately accounted for based upon relative use. 70. Several parties oppose applying ONA policies to setting rates for tandem and local switching services. Ameritech and USTA argue that ONA policies apply to local switching services used by enhanced service providers and not IXCs, and that ONA policies presume a local bottleneck, which they suggest is not the case here. USTA, Rochester, GTE, and MEANS argue that applying an ONA methodology to switching charges is beyond the scope of, and too involved for, this proceeding. SW Bell argues that price management of all switching cost recovery, including tandem switching, should be performed through use of a new switching basket, but that the price regulations should not dictate either a single rate element or any specific number of discrete (codified) rate elements, since this would be contrary to the price cap policies. 71. Discussion. We decline to place tandem switching and local switching into the same price cap basket, whether that basket is the traffic sensitive basket or a new "switching" basket. We note also that this decision does not limit our discretion in addressing the separate record developed in the LEC Price Cap Review proceeding. The record in this proceeding has not persuaded us that local and tandem switching are similar services so likely to face similar competitive pressures in the near future as to warrant placing them together in the same price cap basket. In most parts of the country, local switching is provided currently by the LECs essentially on a monopoly basis. We have recently taken steps, in our expanded interconnection proceeding, to open direct competition for LEC tandem switching, by requiring LECs to provide the signalling functions that enable competitors to offer tandem switching. Even without this tandem signalling, under the transport restructure, direct-trunked transport can sometimes be substituted for tandem-switched transport. Placing tandem and local switching in the same price cap basket would then permit LECs to offset lower rates for tandem switching with higher rates for local switching, while keeping them in separate baskets prevents this from happening. A basket and service category structure that permitted cross-subsidization of tandem switching would not be in the public interest because it would permit the LECs to undercut tandem competition unfairly. Therefore, we see no reason to treat tandem switching differently from tandem-switched transport transmission elements, and we retain the tandem switch element in the tandem-switched transport service category. 72. We also reject SW Bell's proposal to place the interconnection charge into a separate "public policy" basket. As we stated earlier, until we have completed our evaluation of what underlying costs are recovered in the interconnection charge and how the interconnection charge revenues should be reallocated or otherwise disposed of, we conclude that the interconnection charge service category should be included in the trunking basket. The present record has not identified any public interest reason for placing the interconnection charge into a new public policy basket. 73. Finally, we decline to price the tandem switching element incrementally, or to eliminate that element. Under our Open Network Architecture (ONA) policy, we required the LECs to unbundle special switching features and functions useful for enhanced service providers (ESPs), known as basic service elements (BSEs), from their underlying local switching services. This enabled ESPs to purchase only those BSEs that they needed. We required the LECs to set prices for BSEs based on the incremental costs of providing those services; all residual costs remained in the local switching element. Tandem switching, however, is not a BSE. Because tandem switching is used to provide basic network services, not enhanced services, tandem switching does not constitute a BSE within the ONA framework. In addition, while pricing the tandem switching element based on incremental costs, as if it were a BSE, might lower rates for tandem switching, such a change could raise rates for local switching by shifting any residual costs from tandem switching to local switching. This would impose costs of tandem switching on local switching customers whether or not they use tandem switching. It could also undercut competition in the provision of tandem switching by permitting LECs to reset rates for tandem switching with unreasonably low (or no) overhead allocation. Eliminating the tandem switching element, as suggested by the chief executive officers of the CompTel member companies, would have similar results, but would more seriously undermine competition in the provision of tandem switching and impose tandem switching costs on customers, regardless of the extent of their use of tandem switching. We conclude that such measures would not be in the public interest. 2. Price Cap Service Categories 74. Positions of the Parties. Some parties objected to our arrangement of price cap service categories in our 1992 First Transport Order in pleadings filed prior to our rearrangement of those service categories in our 1994 Second Transport Order. Several LECs object to the separate service categories established for direct-trunked transport, tandem-switched transport, and the interconnection charge, asserting that they result in decreased pricing flexibility for the LECs and arguing for either expansion of the bands to allow additional flexibility, or greater flexibility in pricing local switching. SW Bell argues that there is no need for separate service categories for tandem-switched and direct-trunked transport because tandem-switched transport price increases will be constrained by the availability of less-expensive direct-trunked transport alternatives (offered by both LECs and others) and tandem-switched transport alternatives (offered by others under the Commission's Phase II Expanded Interconnection proposal). MCI opposes SW Bell's proposal to eliminate price cap service categories and pricing bands, arguing that the Commission correctly created these restrictions to prevent anti-competitive LEC behavior. 75. WilTel contends that, if ongoing benchmark requirements are imposed, there is no need to put direct-trunked and entrance facilities together in a single price cap service category and tandem-switched transport in a separate category. Instead, WilTel recommends that the Commission put entrance facilities in a separate category, and direct-trunked and tandem-switched transport together (subject to ongoing benchmark requirements), with +5% and -10% bands. Sprint states that entrance facilities should be treated separately from interoffice facilities for price cap purposes, but argues that tandem-switched and direct-trunked transport rates should be linked separately in each zone. 76. Discussion. In our 1994 Second Transport Order, we specifically placed tandem-switched transport, DS1, and DS3 flat-rated services into separate service categories and service subcategories in order to prevent the LECs from offsetting lower rates for services subject to more competition with higher rates for less competitive services. We concluded in that order, and continue to believe, that separate price cap service categories and pricing bands are sufficient to protect against potential anti-competitive behavior. Accordingly, we decline to eliminate the separate service categories and subcategories that apply to transport services. 77. We also decline to put entrance facilities and interoffice facilities into separate service categories. IXCs take entrance facilities and interoffice facilities together, except when the traffic originates or terminates with end users directly served by the SWC, or when one segment is provided by an interconnector. Entrance facilities and direct-trunked transport are charged on a flat-rate basis, and they are provided over facilities dedicated to specific IXCs. Because interconnectors are likely to provide service between POPs and many end offices, their services are likely to substitute for both entrance facilities and interoffice facilities, thereby subjecting both services to substantially similar competitive pressure. Therefore, no sufficient reason exists to place entrance facilities and interoffice facilities in separate service categories and to restrict the LECs' pricing flexibility between these services. 3. Price Cap Bands 78. Positions of the Parties. CompTel and WilTel, in petitions filed prior to the Second Transport Order, argue that the LECs should not have any upward pricing flexibility for tandem-switched transport because the costs of newly installed tandem-switched transport facilities is declining and there is substantial risk of LEC manipulation of transport rates in an anti-competitive manner. Several of the LECs oppose these requests, characterizing them as abandoning price cap regulation for transport services and unduly restricting LEC pricing flexibility. Rochester responds that tandem-switched transport pricing is already subject to substantial constraints and that additional restrictions would hinder LECs' ability to compete, and they provide no offsetting benefit. BellSouth contends that the IXCs' proposal would aggravate the mismatch between the competitive impact of switched access expanded inter- connection and the interim rate structure. 79. MFS argues that price cap LECs already have freedom to reduce their rates subject to the average variable cost standard, but that the price cap bands exist primarily to restrict the LECs' ability to increase rates for captive customers. 80. Discussion. We decline to eliminate the limited upward pricing flexibility permitted for tandem-switched transport. We believe this would unduly restrict the LECs' ability to price tandem-switched transport and would be inconsistent with the flexibility price cap regulation was intended to give them. The +2% band is a significantly narrower banding requirement than the +5% typically allowed for service categories, and we believe it is suffi cient to prevent significant price manipulation. D. The Interconnection Charge 1. Mid-Course Adjustment to the Interconnection Charge 81. Background. In our 1992 First Transport Order, we concluded that the initial interconnection charge should be set in a way that would satisfy the general requirement, under the LEC price cap rules, that rate restructures be revenue-neutral to the LECs. Therefore, we originally directed the LECs to calculate the initial interconnection charge under our interim transport rate structure by: (1) computing the revenue they would receive from facilities-based transport charges (projecting the total amount of demand of facilities-based transport elements under the new rate structure and multiplying by the rates for those elements); (2) subtracting this revenue amount from (in the case of price cap LECs) their total revenue from transport under pre-existing rate and demand levels, or (in the case of rate-of-return LECs) their total transport revenue requirement established under the Part 69 rules, to obtain the interconnection charge revenue requirement; and (3) dividing the interconnection charge revenue requirement by the projected total number of minutes of use of the LEC interstate switched access network. Thus, the initial interconnection charge was to be calculated on a residual basis in order to make transport rates as a whole, under the new rate structure, revenue-neutral to the LECs. 82. In our 1993 First Reconsideration Order, we modified the calculation of the interconnection charge to require the LECs to use historical facility demand and configurations, rather than projected demand after IXCs reconfigure their networks in response to the restructure. We did this to counter-balance the LECs' incentive to under-estimate the projected demand for transport facilities and thereby inflate the interconnection charge, and because there was no method for the Commission or other parties to measure the accuracy of the LEC projections. We stressed, however, that the initial interconnection charge was to be calculated on a residual basis to further the goal of a revenue-neutral rate restructure. We did not intend that the LECs lose substantial amounts of revenue during the first year of the interim rate structure as a result of transport reconfigurations. Therefore, to achieve an interconnection charge that was neither too high nor too low, we stated that we would permit a mid-course adjustment to the interconnection charge. In our 1993 Second Reconsideration Order, we adopted a technical correction to our rules that required price cap LECs to base their initial calculation of the interconnection charge on historical usage demand, instead of projected usage demand. To date, no LEC has requested a mid-course adjustment. 83. Positions of the Parties. SW Bell seeks clarification that the mid-course adjustment to the interconnection charge permits LECs to recoup their under-recovered revenues for the period between the tariff's effective date and the mid-course adjustment effective date, as well as prospectively after the mid-course adjustment. SW Bell argues that such an adjustment would simply constitute the correction of a prior rate order based on incorrect demand data, and would not be retroactive ratemaking. SW Bell asserts that, if LECs cannot implement the transport rate restructure on a revenue-neutral basis and recover their legitimate costs, the restructure would be confiscatory. 84. The IXCs oppose SW Bell's petition. They argue that any recoupment of past revenue shortfalls would constitute impermissible retroactive ratemaking. They also argue that such changes would be contrary to the Commission's objective of encouraging LECs to reuse facilities freed by reconfiguration in an efficient manner, by guaranteeing recovery for such facilities even if they can be reused. They oppose SW Bell's argument regarding confiscation, arguing that neither price cap nor rate of return regulation insulates carriers from the risk of demand shifts, and pointing out that the low-end adjustment mechanism in the price cap rules protects the LECs from substantial earnings erosion. 85. Discussion. We clarify that the period to be used in calculating the amount of any mid-course adjustment to the interconnection charge is from the effective date of the initial transport tariffs (December 30, 1993) through December 31, 1994. This calculation will define the amount that will prospectively establish the appropriate level for the interconnection charge. We further clarify that the mid-course adjustment to the interconnection charge permits recoupment of under-recovered interconnection charge revenues from December 30, 1993 to the effective date of the tariff implementing the mid-course adjustment. 86. Before the restructure was implemented, we concluded that the restructure should be revenue-neutral, and specified that we would permit a mid-course adjustment, or "true-up", to the interconnection charge to attain more fully the goal of revenue neutrality to the LECs. Without a mid-course adjustment to the interconnection charge, which initially was based on 1992 facilities demand, the rate restructure might fall significantly short of this goal if IX Cs reconfigure their networks with lower-priced facilities. 87. The mid-course adjustment to the interconnection charge, should any LEC choose to avail itself of the adjustment, does not constitute retroactive ratemaking. The adjustment will affect only rates in effect after the date of the adjustment. It will not retroactively change the interconnection charge rates that customers already paid before the adjustment date. Nor will the adjustment require recoupment of revenues from customers or refunds to customers without suspension and an accounting order pursuant to Section 204(a) of the Communications Act. 88. That the mid-course adjustment will take into account revenues the LECs under-recovered before the date of the adjustment does not convert the adjustment into retroactive ratemaking. All interested parties were on notice prior to the effective date of the transport tariffs that the interconnection charge was subject to adjustment and that the purpose of that adjustment was to achieve more fully our objective of revenue neutrality during the transition from the old to the new rate structure. Therefore, any adjustment at a later date merely constitutes the implementation of a prospectively established obligation affecting the LECs and all access customers. The prior notice that the interconnection charge would be subject to adjustment, and the unique nature of the interconnection charge mid-course adjustment in the context of the major, Commission-required transport rate restructure, distinguish this case from cases in which a carrier generally seeks to adjust its rates prospectively to recoup costs from an earlier period. We do not address whether or not such cases would constitute retroactive ratemaking. 89. The rule against retroactive ratemaking does not foreclose agency enforcement of pre-existing obligations, even if that action requires setting rates for a future period that are based in part on the costs of an earlier period. In New England Telephone, the court upheld a Commission order requiring carriers to make "a prospective rate adjustment to compensate for past surpluses." The court held that the Commission had authority under Section 4(i) of the Communications Act to require a corrective rate adjustment as a reasonable remedy to enforce its rate of return prescription, ancillary to the Commission's authority to regulate carriers' rates through a rate of return method. Moreover, in Lincoln Telephone, the court affirmed the Commission's requirement that Lincoln Telephone charge an interconnecting IXC the rates set forth in a third party agreement, subject to later adjustment once the appropriate rate for Lincoln Telephone to charge was determined. Similarly, in the instant case, Section 4(i) permits a mid-course adjustment to the interconnection charge, ancillary to our underlying authority to require the transport rate restructure. 90. We clarify that the period from December 30, 1993 through December 31, 1994 is the period to be used in calculating the amount of any mid-course adjustments to the interconnection charge. An expiration date approximately one year after the transport restructure tariffs first became effective enables the LECs to evaluate the actual demand for their transport services over the entire first year of the new transport rate structure. An expiration date is necessary because we did not intend the interconnection charge to ensure that, for all time, the LECs would never recover less revenues than they did prior to the rate restructure. Rather, we intended that the interconnection charge yield only an initial rate restructure that was revenue- neutral. We interpret "initial" to apply to the first year after the implementation of the new rates. Subsequent changes to the interconnection charge will be governed by the price cap rules. LECs must file requests for mid-course adjustments to the interconnection charge no later than March 31, 1995. We delegate authority to the Chief, Common Carrier Bureau, to specif y the format and content of such filings. 2. Burden of Proof for the Mid-Course Adjustment 91. Background. We required a LEC seeking a mid-course adjustment to demonstrate that: (1) because of IXC network reconfigurations resulting from the transport rate restructure, actual demand for its interstate transport facilities is significantly less than the historical demand used to set the interconnection charge ; and (2) the LEC has not been able to find alternative uses for these facilities. We determined that the LECs should recover the cost of facilities they are able to reuse through charges for those new uses, not through the interconnection charge, both to avoid double recovery and to provide incentive to reuse such facilities. Furthermore, we determined that the LECs must show that any loss of demand is not due to competition from other access providers. We determined that the interconnection charge should not reimburse the LECs for revenues lost to competing providers. To do so would unreasonably enrich the LECs and would undermine our polices to foster efficient access competition in the expanded interconnection proceeding. 92. Positions of the Parties. SW Bell takes issue with the burden of proof imposed on the LECs seeking a mid-course adjustment. SW Bell argues that the showing required is unfairly difficult, making it unlikely that the LECs will achieve revenue neutrality, and submits that losses due to reconfiguration should be assumed to be due to the transport restructure, rather than competition. SW Bell asserts that a significant level of reconfiguration is likely to occur in the earlier part of the restructure, especially in light of the waiver of non- recurring charges. A number of LECs support SW Bell's petition, arguing that the burden of proof required by the Commission imposes an extremely expensive and time-consuming burden of tracking trunk reuse. 93. The IXCs assert that placing the burden of proof on the LECs is appropriate because carriers filing tariffs generally have the burden of proof, and because the LECs are in the best position to supply the necessary information on demand shortfalls and on competitors' use of switched expanded interconnection. They argue that SW Bell's petition, in effect, seeks recovery of revenues even if the demand shortfalls were caused by competition from CAPs, which would suppress competition for switched transport. MCI asserts that substantial losses due to reconfiguration are unlikely, given the time needed for IXCs to adapt their networks to the interim transport structure. Moreover, MCI argues that the Commission need not, and should not, define how much revenue loss is "significant", that the mid-course adjustment permits LECs to recover revenues associated with traffic growth, and that the Commission should not revisit the issue of whether the initial interconnection charge is set based on historical or projected demand. 94. Discussion. We decline to modify the burden of proof associated with the mid-course adjustment. The LECs have the burden of demonstrating a significant under- recovery of revenues that justifies an adjustment to the interconnection charge. We affirm our determination that the LECs must prove the extent to which they have not been able to reuse facilities no longer needed after IXC reconfigurations. We imposed this burden after analyzing the likely difficulty of enforcing our earlier requirement that LECs take into account other demand for the same facilities in order to prevent double recovery. Only the LECs have the information necessary to analyze reuse, and the asserted difficulty of producing this information only lends further support to our conclusion that the LECs, not the Commission staff or other parties, should have the burden of coming forward with it. 95. We clarify, however, that the burden of proving that facilities could not be reused does not apply to facilities that are reused as a result of the transport restructure itself. For example, if a customer reconfigures its LEC entrance facility from 25 DS1 circuits to a lower-priced DS3 circuit running over the same physical facility, the "reuse" of that facility in providing DS3 service instead of DS1 service is not excluded from the computation of the inter- connection charge. In such a case, the interconnection charge may reasonably include recovery of the difference between the price of the 25 DS1 circuits and the price of the DS3 circuit. The requirement that LECs show that they have been unable to reuse facilities applies to situations in which facilities are no longer used for interstate switched transport, and the LECs have not been able to put the facilities to any alternative uses. For example, if the customer terminates its use of the 25 DS1 circuits because, due to the transport restructure, it has decided to consolidate its POPs, and the LEC is unable to put the entrance facility to any alternative uses in its network, then the LEC may reasonably include recovery of the lost DS1 revenues in the inter connection charge. 96. We also affirm our determination that the LECs should have the burden of proving that demand losses result from the transport rate restructure rather than competition. While we intend that the transport rate restructure be revenue-neutral to the LECs, competition in the provision of switched transport is likely to result in revenue losses to the LECs. The interconnection charge should not be used to shield LECs from the risks of revenue loss associated with growing competition. 3. Waiver of Non-Recurring Charges 97. Background. In order to encourage IXCs to reconfigure their networks to make them more efficient and to reduce non-recurring expenses induced by the new transport rate structure on IXCs that reconfigure their networks, we required the LECs to waive certain non-recurring charges (NRCs) that apply when IXCs convert trunks from tandem-switched transport to direct-trunked transport or from direct-trunked transport to tandem-switched transport, or when an IXC orders the disconnection of trunks that were inefficiently used due to the skewed incentives created by the equal charge rule. This waiver remained in effect until the end of June 1994, although some LECs voluntarily extended the waiver. During that period it appears that several IXCs reconfigured their networks to some degree. 98. Positions of the Parties. Sprint suggests extending the period of time for the NRC waiver in light of the uncertainties related to Commission action on switched transport expanded interconnection and reconsiderations in this proceeding. CompTel recommends expanding the waiver of NRCs to include all termination penalties in contracts for entrance facilities, arguing that significant regulatory changes have made such liabilities unreasonable and that, if termination penalties are not waived, IXCs could be forced to continue using outmoded copper facilities into the next century. BellSouth opposes this recommendation, arguing that, unlike general termination penalties, termination charge liabilities under special construction tariffs are related to capital expenditures and are based on the extent to which the costs of facilities constructed for a single customer are non-recoverable. In such circumstances, according to BellSouth, waiver of termination liability for such facilities would deny LECs recovery of the remaining capital investment. 99. AT&T argues that the waiver of NRCs should be clarified to cover other rearrangements that will occur as a result of the transport rate structure change, such as the consolidation of separate trunks into higher capacity facilities. USTA requests clarification that the NRC waiver applies only once per trunk -- in other words, the LECs should not be required to waive NRCs due to moving trunks from tandem-switched transport to direct-trunked transport and back again. 100. SNET argues that the Commission has provided no opportunity for LECs to recover the costs associated with waived NRCs, and urges that a cost recovery mechanism (such as an exogenous change to price caps) be permitted. SW Bell, U S West, and USTA generally oppose proposals to broaden the NRC waiver. 101. Discussion. We decline to modify the scope of the NRC waiver. As a general matter, we conclude that to broaden the scope of the NRC waiver to include network reconfigurations not related to the rate restructure would be unfair to the LECs and beyond the scope of this proceeding. Specifically, we conclude that six months was ample time for the mandated waiver to be held open, especially since IXCs had more than one year to plan any network reconfigurations before the new rate structure became effective. We reject CompTel's recommendation that we require waiver of termination penalties in contracts for entrance facilities because we conclude that such a waiver would deny the LECs recovery of capital expen ditures made specifically for a particular IXC. 102. We also decline to adopt AT&T's proposal to require LECs to waive NRCs for all IXC consolidations because it is moot and beyond the scope of this proceeding. It is moot because the LECs have already waived the application of NRCs to consolidations of DS1 to DS3 circuits and voice-grade to DS1 circuits. To the extent that AT&T sought a waiver for consolidations to advanced facilities with capacities greater than that of DS3 service, such consolidations would not be triggered by the rate restructure. Moreover, we decline to restrict the NRC waiver to once per trunk, as USTA suggests, because, in light of the limited time period for which the waiver was available, we have no reason to believe that the significant churn envisioned by USTA occurred. 103. Finally, we conclude that, in their mid-course adjustment of the interconnection charge, the LECs are entitled, upon a proper showing, to take into account NRCs waived pursuant to the Commission's requirement. As part of the implementation process for the restructured rates, the initial interconnection charge was calculated employing the previous year's NRC demand. While this procedure was appropriate for purposes of implementing the initial tariffs, given that a true-up procedure was contemplated, it does not follow that a LEC should be precluded from seeking a true-up of the interconnection charge to bring the transport rate restructure closer to revenue neutrality. Therefore, if a LEC can demonstrate that, as a result of the Commission-mandated waiver of NRCs, the transport restructure yielded revenues significantly less than the amount it realized previously, in part, because the number of NRCs charged during the year fell short of the demand level used in calculating the initial interconnection charge, the LEC may seek a mid-course adjustment on this basis. Without some mechanism for recovering a significant shortfall in the level of NRC revenues recovered by the LECs, our goal of revenue neutrality would be jeopardized. At the same time, permitting such recovery is not inconsistent with our other goal of providing IXCs incentive to reconfigure their networks. Recovery through the interconnection charge does, however, spread the burden of the reconfigurations over all access customers. 104. For the same reasons discussed above in paragraphs 87-89, we conclude that the Commission has statutory authority to allow this type of recovery through the interconnection charge because it is necessary to maintain revenue neutrality and because carrying out such an adjustment does not constitute retroactive ratemaking. Given that NRCs may recover significant LEC costs, failure to permit recovery for significant shortfalls in NRC revenues could jeopardize our goal of revenue neutrality. Therefore, recovery is necessary to further our objectives with respect to the new transport rate structure. Moreover, all access customers and LECs were on notice prior to the effective date of the new transport tariffs that revenue neutrality was our goal and that the interconnection charge was subject to adjustment based on actual experience under the restructured rates. Therefore, adjusting the interconnection charge to account for the effect of the Commission-mandated waiver of NRCs is not retroactive ratemaking and is not incon sistent with the Act. E. Miscellaneous 1. Pricing Flexibility 105. Background. In the Special Access Expanded Interconnection Order, adopted concurrently with the First Transport Order, we found that volume discounts (e.g., lower per-unit rates for service with the capacity of multiple DS3s) and term discounts (e.g., lower per-unit rates when a customer commits to continue using the service over a multi-year period) are generally legitimate means of pricing special access services to recognize the efficiencies associated with larger traffic volumes and the certainty of longer-term arrangements. In the First Transport Order, however, we prohibited term and volume discounts for switched transport services in order to ensure that the short-term impact on small IXCs was manageable and to allow IXCs time to adjust to rate changes under the interim rate structure. We sought comment in the expanded interconnection proceeding on whether term and volume discounts should be permitted when switched transport expanded interconnection became operational. 106. Based on those comments, in the Switched Transport Expanded Inter- connection Order, we allowed LECs to offer reasonable volume and term discounts on transport facilities, subject to specified threshold requirements. We found that permitting volume and term discounts for switched transport represented a measured step toward giving the LECs the ability to respond to competition, striking a reasonable balance between giving the LECS too little or too much pricing flexibility. We determined that too much flexibility could stifle competitive entry and harm customers of less competitive services, while too little flexibility could deprive customers of the benefits of competition and send false economic signals to new entrants. We made transport volume and term discounts, however, subject to the threshold conditions that parties using expanded interconnection have taken: (1) 100 DS1-equivalent switched cross-connects in the Zone 1 offices in the study area; or (2) an average of 25 DS1- equivalent switched cross-connects per Zone 1 office in the study area. We recently reaffirmed this threshold, although we adopted a modified definition of "operational" in light of the new mandatory virtual collocation policy. Under that new definition, an offering will be considered "operational" if an interconnector has taken a cross-connect pursuant to a generally tariffed virtual collocation or physical collocation offering pursuant to the new rules adopted in the Expanded Interconnection Remand Order. 107. In the Special Access Expanded Interconnection Order, adopted concurrently with the First Transport Order, we permitted the LECs to introduce density zone pricing of interstate high-capacity special access in a study area once their expanded interconnection offerings are operational in that study area. Density zone pricing enables the LECs gradually to reduce their transport rates in areas of high traffic density, where the cost of providing service is typically lower than average, and to increase their transport rates in less dense areas, where costs are higher. In the Switched Transport Expanded Interconnection Order, we permitted the LECs to introduce density zone pricing of interstate switched transport in a study area once their switched transport expanded interconnection offerings are operational in that study area. As with volume and term discounts, we concluded that density zone pricing for switched transport represented a balanced step to enable LECs to respond to increased competition. 108. Positions of the Parties -- Volume and Term Discounts. In petitions filed prior to the Switched Transport Expanded Interconnection Order, CompTel, Sprint, and WilTel oppose volume discounts for interoffice transport between the end office and the SWC because they contend that, unlike entrance facilities, the interoffice transport network is a shared network and all customers should share in cost savings LECs realize based on the total volume of traffic carried over the network. The LECs generally support lifting the prohibition on term and volume discounts because: (1) with the advent of expanded interconnection for switched transport, unless they can offer switched transport services with discounts like those the CAPs offer, they will lose the opportunity to compete for IXCs' business; (2) the prohibition is designed merely to protect small IXCs with a vested interest in status quo pricing; (3) without volume discounts, LECs, unlike CAPs, must maintain radically different rate structures for switched transport and special access; and (4) such discounts are cost-justified and prohibiting them is inconsistent with the principle that rates be cost-based. The LECs generally support volume discounts for interoffice facilities. 109. The LECs, as well as CompTel, MCI, and Sprint, generally support term discounts, which could benefit both small and large IXCs. These parties also support the removal of the prohibition on volume discounts for entrance facilities because: (1) such facilities are dedicated to a particular IXC; (2) such facilities are shared between switched transport and special access services; and (3) the prohibition impedes an IXC's ability to obtain the benefits of ratcheting (i.e., using the same LEC facilities for both special access and switched transport services). MCI recommends that any volume discounts on entrance facilities be subject to rigorous cost justification and that the Commission ensure that such discounts are not anti-competitive or discriminatory. WilTel also supports permitting volume discounts (as well as term discounts) on entrance facilities, provided that a high benchmark standard is in place to ensure non-discriminatory relationships among interoffice rates. 110. MFS argues that the LECs continue to have substantial market power in the interstate access market, given their control of bottleneck facilities and their economies of scale and scope conferred by state policies, and consequently they should not be given additional pricing flexibility. MFS further argues that, before permitting volume and term discounts for switched transport, the Commission should require LECs to eliminate excessive special access volume and term discounts, set prices for all capacity so that volume and term options are consistently proportionate to underlying costs and realign rates for different capacity levels to eliminate uneconomic crossover incentives and discrimination. Ad Hoc argues that, without detailed, reliable studies on the impact of such discounts on smaller IXCs, the Commission should not alter the policy in the First Transport Order. 111. Positions of the Parties -- Density Zone Pricing. In response to the First Transport Order and prior to our expanded interconnection orders, several parties advocate permitting density zone pricing of transport services. Only MFS opposes geographic de-averaging, arguing that price cap LECs already can reduce prices for high capacity services, which are used primarily in dense urban zones anyway, using below-band filings, but that density zone pricing merely enables LECs to increase rates for lower capacity services in less dense zones. 112. Sprint, in response to the Second Transport Order, argues that a better way of allowing the LECS to compete fairly with CAPs would be to remove the requirement that the initial price subindexes in each density zone be the same, and instead allow the LECs to propose nondiscriminatory, cost-based prices in the high density zones. Sprint asserts that this will allow all IXCs (not just the largest) to share the inherently lower costs of providing access in such areas. 113. Discussion. We once again reaffirm that the LECs may offer term and volume discounts for switched transport services and may implement density zone pricing of switched transport, as set forth in the Switched Transport Expanded Interconnection Order and as reaffirmed and slightly modified by the Expanded Interconnection Remand Order. We decided these issues in the expanded interconnection proceeding, based on a separate and complete record. The present record, however, does not refute the need for this additional pricing flexibility in an increasingly competitive access market. Volume and term discounts and density zone pricing of switched transport, subject to the rules adopted in the expanded inter- connection orders, ensure that LEC rates are not unduly constrained and that customers fully enjoy the benefits of increasing competition. 114. With respect to volume and term discounts, we clarify that the rules we adopted in the expanded interconnection proceeding regarding discounted transport offerings contemplate only volume discounts (reduced per-unit prices for a particular number of units of service) and term discounts (reduced per-unit prices for a specified service for a particular period of time). These rules do not provide for percentage or growth discounts -- reduced per-unit prices for customers that commit to purchase a certain percentage of their past usage from a LEC, or reduced prices based on growth in traffic placed over a LEC's network. 115. Finally, with respect to density zone pricing, we reaffirm our requirement that the price subindexes (i.e., the upper and lower pricing bands -- not the rate levels) be the same in each zone when a LEC introduces density zone pricing in a study area. The requirement initially limits the magnitude of the rate differentials among zones and introduces those differentials gradually to avoid sudden rate changes that could harm customers in higher cost areas. 2. Intermediate Hubbing and Tandem-Switched Transport 116. Background. In the First Reconsideration Order, we revised the definition of direct-trunked transport to permit hubbed configurations, which we concluded permit customers to use the network efficiently and facilitate interexchange competition. As a corollary to that decision, we also modified our rules to enable customers to purchase tandem- switched transport in either of two configurations: (1) a per-minute charge for tandem-switched transport between the SWC and end offices, rated on the distance between the SWC and the end offices, without regard to the actual location of the intervening access tandem office, as required in the First Transport Order, or (2) a flat-rate charge for direct-trunked transport between the SWC and the access tandem office, and a per-minute charge for tandem-switched transport between the tandem office and the end offices, rated on actual distances. 117. Positions of the Parties. Sprint requests a further modification to the definition of "tandem-switched transport" to include service between any customer-designated telephone company office and an end office. According to Sprint, this clarification would permit IXCs to purchase (1) dedicated facilities to an intermediate hub that is not collocated at the SWC or at the tandem office; and (2) tandem-switched transport from that intermediate hub to an end office, rated based on the distance between the hub and the end offices without regard for the actual location of the intervening tandem office. Several IXCs argue that Sprint's petition would permit users of tandem-switched transport the same flexibility available to users of direct-trunked transport. 118. No party opposes Sprint's proposal in theory, although several LECs generally assert that a certain amount of time would be necessary to implement the billing systems for such services. Sprint responds that it would not oppose delaying the effective date for the rule changes it seeks until June 1, 1994, as long as the LECs waive the nonrecurring charges associated with establishing intermediate hubs until six months after that date. MCI, however, argues that such rule changes should be effective immediately; SW Bell replies that MCI's argument fails to account for the implementation difficulties. 119. Discussion. We established an interim rate structure under which access customers could pay for tandem-switched transport between a SWC and end offices on a per-minute basis, with mileage measured directly between the SWC and the end office. This rate structure does not reflect the actual facilities used to provide tandem-switched transport: "[t]andem-switched transport between a serving wire center and an end office consists of circuits dedicated to the use of a single interexchange carrier or other person from the serving wire center to the tandem . . . and circuits used in common by multiple interexchange carriers or other persons from the tandem to the end office." We adopted this rate structure "as a reasonable first step toward a cost-based, more rational rate structure," despite arguments by some parties that "a bundled tandem-switched transport rate precludes tandem interconnection and competition." 120. We decline to adopt Sprint's proposal. We have already adopted rules that enable tandem-switched transport users to obtain efficiencies through intermediate hubbing. Both customers using tandem-switched transport and customers using direct-trunked transport are now able to use hubbed network configurations to reduce the cost of their dedicated transport circuits. For example, consider a customer using dedicated facilities from the SWC through an intermediate hub to a tandem office, and using common facilities from the tandem office to end offices. Under the current rules, the customer could purchase direct-trunked transport from the SWC to the hub and from the hub to the tandem, and purchase tandem-switched transport from the tandem to end offices. This rate structure, which reflects the way costs are incurred, gives tandem-switched transport customers the same opportunities as direct-trunked transport users to use hubbing to configure their dedicated transport circuits efficiently. By contrast, under Sprint's proposal, the tandem-switched customer could pay flat-rate direct-trunked transport from the SWC to a hub and usage-sensitive tandem-switched transport from the hub to end offices, even though the customer's traffic would use dedicated circuits from the hub to the tandem switch. Sprint's rate structure would not reflect the way costs are incurred, and would give tandem-switched transport customers an ability to determine the end points for flat-rated recovery not enjoyed by direct-trunked transport customers, who have to pay flat-rated recovery to the LEC's end office location. Sprint's proposal would substantially change the transport rate structure, and would lead to the pricing of more services in a manner that does not reflect the way facilities are deployed. Given our doubts about the efficiency benefits of Sprint's request and the fact that the existing rules already provide reasonable opportunities for tandem-switched transport users to compete with direct-trunked transport users, we decline to amend our prior decisions. 3. Meet Point Billing 121. Positions of the Parties. When transport services are provided by two or more LECs, such as a BOC and an independent LEC, meet point billing arrangements enable each of the LECs to issue a bill to the IXC. MEANS seeks clarification with respect to how the interim rate structure applies to its meet point billing arrangements with U S West and others. Specifically, MEANS contends that, in cases where a BOC, a centralized equal access provider, and an independent LEC jointly provide transport under meet point billing arrangements, if the BOC only provides a dedicated link, it should not be allowed to levy the tandem charge. In such a situation, MEANS contends that the BOC should not be able to levy the interconnection charge either, because, as MEANS argues, the interconnection charge primarily recovers tandem-related costs. MEANS argues that, to the extent the interconnection charge constitutes a residual charge or subsidy, it should be levied only upon minutes of use originating and terminating at the BOC's exchanges where corresponding portions of the BOC's rate structure will be applied. U S West seeks clarification that LECs only meet-point bill for those rate elements that are jointly provided, such as direct-trunked transport and tandem transmission, and not for entrance facilities or the tandem charge. U S West agrees with MEANS that LECs should not apply the tandem sub-element charge if no tandem switching is provided, but argues that the interconnection charge should be applied by the LEC originating or terminating the traffic. 122. Discussion. We conclude that specific methods for assessing, and avoiding double billing for, the tandem charge and the interconnection charge under meet point billing arrangements are better left to the individual parties involved, given the wide variety and diversity of such arrangements. If such issues cannot be settled among the parties, we can address them in the future in the tariff process or pursuant to specific complaints filed with the Commi ssion. 4. Prohibition on Ratcheting 123. Background. In the Special Access Expanded Interconnection Order, we prohibited ratcheting -- the practice by interconnectors of using interstate special access expanded interconnection offerings to connect their transmission facilities with the LECs' interstate switched services. In the Switched Transport Expanded Interconnection Order, we eliminated this prohibition once a LEC's tariff offering of expanded interconnection for switched transport has become effective. 124. Positions of the Parties. In petitions filed prior to our Switched Transport Expanded Interconnection Order, Bell Atlantic and Rochester argue that the Commission should prohibit interconnector ratcheting. MCI and Sprint argue that the ratcheting prohibition, once switched interconnection is implemented, would simply create wasteful duplicate connection facilities. 125. Discussion. In the Switched Transport Expanded Interconnection Order, we concluded that interconnector ratcheting was beneficial to access customers and that retaining the prohibition on ratcheting once switched transport expanded interconnection has become effective is inefficient, artificially increasing the cost of interconnected services without any accompanying benefits. We continue to believe that ratcheting by interconnectors benefits access customers and competition, and therefore, decline to modify our rules with respect to ratcheting. F. Conclusion 126. The interim transport rate structure and pricing rules significantly improve upon the previous equal charge structure. The new structure permits LECs to offer transport services in a manner more consistent with how the LECs incur transport costs. More cost-based transport rates permit the LECs to offer the various transport services in substantially the same manner as CAPs, thus promoting competition. The full benefits of this competition, however, cannot reach consumers if the LECs' provision and pricing of their transport services are overly constrained. We conclude that relying upon our price cap rules to govern transport rates best balances the need for some pricing flexibility against the need for pricing constraints. IV. SUPPLEMENTAL NOTICE OF PROPOSED RULEMAKING A. Resale, Shared Use and Split Billing 1. Introduction 127. Transport Rulemaking. The interim transport rate structure was implemented with the aim of achieving the three main public interest goals discussed supra in paragraph 8. From the start, the restructure aimed at encouraging the efficient use of transport facilities. In the First Transport Order, we noted that "smaller IXCs can reduce their access costs by reselling the services of other IXCs or by utilizing network sharing arrangements with other carriers to terminate interstate calls." 128. Further, the First Transport Order expressly contemplated that "smaller IXCs may choose to aggregate their traffic together and share transmission facilities," and observed that "IXCs may be able to share a DS3 facility to transport either their originating or terminating traffic, allocating the individual circuits among themselves." For example, while individual circuits on an entrance facility are always dedicated to a single access customer, several customers that share a POP may be able to share entrance facilities over which their dedicated circuits are carried. For such arrangements to be practical, it is necessary to develop procedures for LECs (and possibly also IXCs) to provide "split billing," that is, separate bills to different customers for use of shared entrance facilities. 129. The Transport Orders, however, did not mandate the means by which the LECs could implement such resale and sharing arrangements through either their tariffed transport offerings or their access billing systems. By this Supplemental Notice of Proposed Rulemaking, we propose requirements and seek comments on proposals for network sharing and resale arrangements aimed at ensuring the ability of the smaller IXCs and access customers to reali ze the maximum benefits from the local transport restructure. 2. Background 130. Prior to the implementation of the local transport restructure, all switched access was billed on a per minute of use basis. In general, LECs measured the usage for each access customer of record and rendered bills accordingly. Under the restructure, LECs had to assess flat-rated charges for transport facilities, thus requiring them to identify for the first time a customer of record for the billing of the entrance facilities and direct-trunked transport rate elements. In those cases where multiple customers receive transport service from a single LEC provider over flat-rated transport facilities that they share, there are no established access billing arrangements to provide separate bills for fractionalized portions of such flat-rated facilities. This contrasts with meet point billing, discussed supra in paragraphs 121-122, which is a billing arrangement used where transport services are provided to a single customer by two or more LECs, so that each LEC may issue a single bill to the customer for its usage-based charges. 131. Transport Tariff Review. In their petitions to suspend or reject the local transport restructure tariffs filed on September 1, 1993, several petitioners raised issues relating to the resale, shared use and split billing of transport facilities. Several petitioners sought tariff provisions that would allow "split billing" so that multiple customers of record could be billed by the LEC for fractionalized shares of a high-capacity facility. This billing option would allow an access customer to share or resell portions of such facilities and thereby maximize efficiency gains from the transport restructure. For example, split billing could enable several small IXCs that share a POP to share entrance facilities and/or direct-trunked transport at a higher capacity than any of them could justify acting alone. 132. Two LECs, SW Bell and NYNEX, acknowledged the need for split billing of entrance facilities and direct-trunked transport and included in their transport restructure tariffs provisions implementing split or shared billing arrangements. SW Bell's "Interim Split Billing Option" requires that a "primary customer" of record be responsible for payment of the tariffed rates by all other customers sharing the facility. This requirement drew objections from both AT&T and CompTel on the ground that one IXC should not be forced to bear the risk of non-payment by other IXCs sharing the same facility. 133. NYNEX's "Shared Billing Arrangement" allows for the billing of multiplexed DS1 or DS3 facilities to be split from the multiplexer between two or more customers. CompTel also objected to the NYNEX arrangement as narrowly limited to situations where higher capacity switched access service is multiplexed onto a lower capacity service (or when a special access service is provided over DS1 or DS3 facilities). CompTel argued that the arrangement does not permit split billing of the higher-capacity service, and because of the limited situations in which it can be used, does not satisfy the needs of IXC customers for a meaningful split billing offering. 134. AT&T raised another reason for split billing, triggered by anticipated Feature Group A billing changes. AT&T claimed that, as a result of the transport restructure, various LECs had indicated their intent to bill the IXC at whose POP the entrance facility terminates rather than the customer of record for Feature Group A entrance facilities and direct-trunked transport. AT&T requested that the Commission clarify that the Transport Orders did not contemplate or permit any changes to the identity of the customer of record for Feature Group A service. 135. Various LECs opposed a split billing requirement. Unlike SW Bell and NYNEX, many LECs have no plans to provide a billing option that would apportion the charges for entrance facilities and direct-trunked transport among several customers, and generally oppose such an approach. Pacific explained that, prior to the restructure, it did not provide split billing for trunking facilities; rather, it measured minutes of use for each customer and billed those customers accordingly. With the imposition of flat-rated charges for entrance facilities and direct-trunked transport, it could not determine which carriers are using what proportions of a particular shared facility, and therefore could not provide them with separate bills. BellSouth maintained that the customer who orders the particular interface and the associated facility should be billed for the interface at the customer premises at a higher capacity facility. SNET explained that Feature Group A is a line side connection into an end office switch and therefore requires voice grade capacity for direct-trunked transport. Because AT&T requests a DS1 interface at its POP for all of its Feature Group A lines, SNET stated that it intended to bill AT&T for the DS1 facilities between AT&T's POP and the Feature Group A dial tone office, and to bill the end-user for the voice-grade facilities between the dial tone office and the end- user premises. 136. In the Tariff Order, the Common Carrier Bureau agreed that split billing by the LECs is crucial to assuring that customers can obtain the maximum benefits from the restructured transport rates. The Bureau further observed that, although the Transport Orders prohibited restrictions upon resale and sharing, they did not specify how the LECs were to facilitate such arrangements. The Bureau urged all LECs to follow the examples of NYNEX and SW Bell by accommodating customers who desire split billing services so that they could establish the most efficient and cost-effective service arrangement. The Bureau directed the LECs to refer the split billing problems described in the order to the industry's Ordering and Billing Forum (OBF) for resolution, and requested that the LECs report to the Bureau within three months on their progress in resolving these issues. The Bureau suggested that, if the carriers failed to make substantial progress toward a successful resolution, the Commission might consider prescribing a method for providing split billing. 137. On March 29, 1994 several LECs reported to the Common Carrier Bureau that the OBF had under consideration proposals for resolving ordering and billing procedures for split billing arrangements and the associated responsibilities including "percent of interstate use" (PIU) reporting. The OBF apparently has not yet reached consensus on the resolution to these issues. 138. AT&T Transmittal No. 6788. Prior to the restructure, end-users that purchased AT&T private line service used LEC Feature Group A and B transport service to obtain access to AT&T POPs. Under the equal charge rate structure, the LECs billed such end- users per-minute charges for the Feature Group A and B services. Since the transport restructure tariffs took effect, many LECs have billed AT&T for the flat-rated portions of Feature Group A and B transport service, and have billed the Feature Group A and B end-users only for usage sensitive transport rate elements. In response to this practice, AT&T filed Transmittal No. 6788, by which AT&T proposed to amend its private line Tariff F.C.C. Nos. 9 and 11 to bill end-users for "Feature Group A (FG A) and Feature Group B (FG B) Connections which provide the physical connection between a Local Exchange Company End Office Switch and the AT&T Central Office, for connection to AT&T Private Line Services." In Transmittal 6788, in conjunction with the interexchange private line portion of Feature Group A and B service that AT&T already provides, AT&T proposed to resell the trunking facilities linking the AT&T POP to the dial tone office that contains the LEC switch at which a Fea ture Group A or B customer's private line terminates. 139. On August 12, 1994, the Common Carrier Bureau suspended Transmittal 6788 for five months, imposed an accounting order, and instituted an investigation into the reasonableness of the tariff revisions. The Suspension Order noted that, since the transport restructure tariffs took effect, the LECs have continued billing the end-user customer for the usage-rated transport elements of Feature Group A and B. Further, many LECs have not offered to split the charges for the flat-rated facilities between AT&T's POP and the LEC dial tone office among these customers so that an end-user customer would pay only a pro rata share of the entrance facility rate for its use of a high-capacity facility. 140. The LECs have asserted that billing the IXC at whose POP the facilities terminate is consistent with the First Transport Order and with principles of cost-causation. According to the LECs, AT&T should be considered the ordering customer for the dedicated facilities because AT&T specified the interface level and because the facilities are dedicated to its use. They are reluctant to bill end-users for the high-capacity entrance facilities running to AT&T POPs as if they were stand-alone voice-grade facilities. Such LECs fear that a LEC offering stand-alone voice-grade facilities would have to absorb the costs of any shared channels on the high-capacity facilities that are not sold to end-users or other customers. If the LEC bills a single IXC for the full cost of the facilities, however, the IXC, not the LEC, absorbs the cost of the channels not in use. 3. Discussion 141. Proposed rule. The Tariff Order correctly observed that, through LEC split billing and shared network arrangements, customers can reap the maximum benefit from the restructured transport rates. LEC split billing would help smaller IXCs reduce their access costs by enabling them to resell the services of other IXCs or by utilizing network sharing arrangements with other carriers to transmit and terminate interstate calls. It could also solve the practical billing problems that have arisen regarding Feature Group A and B access services. Finally, split billing could permit more efficient deployment and use of transport facilities, a primary goal of the transport restructure. We therefore tentatively conclude that split billing for transport service is in the public interest. We further tentatively conclude that we should require the LECs to include in their tariffs procedures for offering transport split billing. We seek c omment on these conclusions. 142. Implementation. As the record on this issue indicates, the parties strongly disagree on how best to implement split billing. We note that, although the OBF has made progress, it has not yet been able to reach final closure on an access charge split billing prototype after 11 months of consideration. We therefore seek comment on how best to imple ment the proposed split billing requirement. 143. First, we seek comment on a proposal offered by CompTel in the transport tariff review proceeding. CompTel urges the Commission to adopt the following affirmative steps to make resale and sharing feasible: (1) require the LECS to permit switched and special access facilities to be combined at the customer POP, LEC serving wire centers, or any other designated hubbing locations; (2) require the LECs to permit multiple carriers of record for DS3 and DS1 entrance and interoffice facilities; (3) require the LECs to offer "split billing" for multiplexing equipment located at a hub; and (4) require the LECs to permit the IXC to specify (i) the type and grade of switched access service as well as the code at the terminating hub, and (ii) the customer premises location associated with special access channels. We seek comment on whether we should adopt any of these proposed requirements. 144. Second, we seek comment on whether a split billing charge levied on multiple customers of record using a single high-capacity facility should be set to recover the cost of unused as well as used capacity. For example, should a LEC be allowed to charge an end-user customer for its use of a high-capacity facility at a rate computed by dividing total flat charges for the entrance and interoffice facilities by the number of end-users whose traffic is carried over that facility, with a pro rata allocation of the costs of unused capacity in that rate? Commenters should address the issue of which entity would be responsible for determining the allocation, the service design and capability and the circuit facility assignment under such an arrangement. In addition, commenters should discuss whether this form of split billing should be available to resellers of access service, or should be limited to customers seeking to share dedicated facilities for their own use. Commenters should also address methods to ensure that Feature Group A and B users are not double-billed for their use of the same facilities. 145. In addition, we seek comment on whether the type of split billing and shared network arrangements offered by NYNEX and SW Bell adequately address customer needs for such arrangements. We also invite parties to comment on whether similar or modified arrangements should be offered by all LECs. Commenters should specifically address whether the "host/secondary customer of record" arrangement, under which a single IXC serves as the "host" customer of record, and is responsible for service arrangement and control, would satisfy the access customers' needs for sharing and resale of dedicated transport facilities? Commenters should also discuss how such offerings could be expanded or improved to meet customer needs. Commenters advocating that there be a single, host customer of record for the access service should specifically discuss how this split billing arrangement would apply to voice-grade access for Feature Group A and B services. 146. Finally, we seek comment on any other form of split billing that commenters believe would achieve the goals we have identified. Of particular interest would be any split billing prototype under consideration by the industry's OBF. Commenters who do not support a requirement that the LECs include in their tariffs procedures for offering split billing and shared network configurations should discuss alternative ways to satisfy LEC provi sion of these arrangements. 4. Conclusion 147. For the reasons stated above, we tentatively conclude that a requirement that LECs offer split billing for transport service is in the public interest. We further tentatively conclude that we should require the LECs to include in their tariffs procedures for offering transport split billing. We seek comment on these conclusions, and on the options for implementation of the proposed requirement described in paragraphs 142-146. B. Procedural Matters 1. Ex Parte 148. This is a non-restricted notice and comment rulemaking. Ex parte presentations are permitted, except during the Sunshine period, provided they are disclosed as provided in the Commission's rules. See generally, 47 C.F.R.  1.1202, 1.1203, and 1.120 6(a). 2. Regulatory Flexibility Act 149. We certify that the Regulatory Flexibility Act of 1980 does not apply to this rulemaking proceeding because the proposed rule amendments, if promulgated, would not have a significant economic impact on a substantial number of small business entities, as defined by Section 601(3) of the Regulatory Flexibility Act. Carriers providing interstate transport services directly subject to the proposed rule amendment do not qualify as small businesses since they are dominant in their field of operation. The Commission will, however, take appropriate steps to ensure that the special circumstances of the smaller LECs are carefully considered in resolving those issues. The Secretary shall send a copy of this Supplemental Notice of Proposed Rulemaking, including the certification, to the Chief Counsel for Advocacy of the Small Business Administration in accordance with paragraph 603(a) of the Regulatory Flexibility Act. Pub.L. No. 96-354, 94 Stat. 1164, 5 U.S.C. Section 601 et seq. (1981). 3. Notice and Comment Provision 150. Pursuant to applicable procedures set forth in Sections 1.415 and 1.419 of the Commission's Rules, 47 C.F.R.  1.415 and 1.419, interested parties may file comments on or before February 1, 1995 and reply comments on or before February 16, 1995. To file formally in this proceeding, parties must file an original and five copies of all comments, reply comments, and supporting comments. Parties wanting each Commissioner to receive a personal copy of their comments must file an original plus nine copies. Comments and reply comments should be sent to the Office of the Secretary, Federal Communications Commission, Washington, D.C. 20554. In addition, parties should file two copies of any such pleadings with the Tariff Division, Common Carrier Bureau, Room 518, 1919 M Street, N.W., Washington, D.C. 20554. Parties should also file one copy of any documents filed in this docket with the Commission's copy contractor, International Transcription Services, Inc. (ITS, Inc.), 2100 M Street, N.W., Suite 140, Washington, D.C. 20037 (202/857-3800). Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. For further information regarding this Supplemental Notice of Proposed Rulemaking, contact Barbara Esbin, (202) 418- 1520 of the Common Carrier Bureau, Tariff Division. V. ORDERING CLAUSES 151. ACCORDINGLY, IT IS ORDERED, pursuant to Sections 1, 4(i) and (j), 201-205, 218, 220, 403, and 405 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i) and (j), 201-205, 218, 220, 403, and 405, that the petitions for reconsideration and clarification concerning the rate structure and pricing of local transport ARE DENIED, except to the extent indicated herein. 152. IT IS FURTHER ORDERED that the decisions and policies adopted herein SHALL BE EFFECTIVE thirty days after the date of publication in the Federal Register. 153. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i) and (j), 201-205, 218, and 403 of the Communications Act as amended, 47 U.S.C.  151, 154(i) and (j), 201-205, 218, and 403, that NOTICE IS HEREBY GIVEN of the proposed changes in our policies regarding split billing, and COMMENT IS INVITED on these proposals. 154. IT IS FURTHER ORDERED that WilTel's Motion for Acceptance of Late- Filed Opposition to Petition for Reconsideration IS GRANTED. 155. IT IS FURTHER ORDERED that authority is delegated to the Chief, Common Carrier Bureau, as set forth supra in  32, 90. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Appendix A: List of Parties I. Reconsideration of the First Transport Order Parties filing Petitions for Reconsideration of the First Transport Order, December 21, 1992 (First Order Petitions): American Telephone and Telegraph Company (AT&T) Ameritech Operating Companies (Ameritech) Bell Atlantic telephone companies (Bell Atlantic) BellSouth Telecommunications, Inc. (BellSouth) Cincinnati Bell Telephone Company (Cincinnati Bell) Competitive Telecommunications Association (CompTel) GTE Service Corporation and its affiliated domestic telephone operating companies (GTE) Great Plains Communications, Inc. (Great Plains) MCI Telecommunications Corporation (MCI) Minnesota Equal Access Network Services, Inc. (MEANS) New York Telephone Company and New England Telephone and Telegraph Company (NYNEX) Organization for the Protection and Advancement of Small Telephone Companies (OPASTCO) Pacific Bell (Pacific) Rochester Telephone Corporation (Rochester) Southern New England Telephone Company (SNET) Southwestern Bell Telephone Company (SW Bell) Sprint Communications Company (Sprint) US West Communications, Inc. (US West) United States Telephone Association (USTA) United Telephone Companies (United) WilTel, Inc. (WilTel) Parties filing Comments on, or Oppositions to, First Order Petitions, February 12, 1993 (First Order Oppositions): Ad Hoc Telecommunications Users Committee (Ad Hoc) (filed February 16, 1993) Allnet Communication Services, Inc. (Allnet) Ameritech AT&T Bell Atlantic BellSouth CompTel GTE MCI MFS Communications Company, Inc. (MFS) NYNEX Pacific Bell and Nevada Bell (Pacific) Rochester (filed February 1, 1993) Sprint SW Bell United US West USTA WilTel Parties Filing Replies to First Order Oppositions, February 25, 1993 (First Order Replies): Ameritech AT&T Bell Atlantic BellSouth CompTel GTE MCI MFS MEANS NYNEX Pacific (filed Feb. 22, 1993) Rochester Sprint SW Bell United US West USTA WilTel II. Reconsideration of the First Reconsideration Order Parties filing Petitions for Reconsideration of the First Reconsideration Order, September 2, 1993 (First Recon. Petitions): Sprint SW Bell Parties filing Comments on, or Oppositions to, First Recon. Petitions, October 22, 1993 (First Recon. Comments): Ameritech AT&T Bell Atlantic CompTel GTE NYNEX MCI (separate filings for SW Bell and Sprint) SW Bell (filed September 17, 1993) USTA U S West WilTel (filed October 26, 1993) Parties filing Responses to First Recon. Oppositions, November 4, 1993 (First Recon. Replies): MCI NYNEX Sprint SW Bell U S West III. Reconsideration of the Second Transport Order Parties filing Petitions for Reconsideration of the Second Transport Order, April 4, 1994 (Second Order Petitions): CompTel Sprint WilTel Parties filing Comments on, or Oppositions to, Second Order Petitions, May 3, 1994 (Second Order Oppositions): Ameritech AT&T Bell Atlantic BellSouth GTE MEANS NYNEX Rochester SW Bell USTA U S West Parties filing Replies to Second Order Oppositions, May 18, 1994 (Second Order Replies): CompTel SW Bell Sprint WilTel Appendix B: Impact Data During the course of this proceeding, the Commission has collected from the Bell Operating Companies (BOCs) and GTE estimates and actual data on the impact of the transport restructure on large, medium, and small IXCs. This appendix describes the derivation of those impact data. BOC and GTE Estimates Prior to the Commission's adoption of the First Transport Order, the BOCs and GTE submitted model results that estimated the impact of the transport restructure on large, medium, and small IXCs under a variety of assumed transport rate structures and pricing options. These models were designed to compare, for each category of IXC, the level of interstate switched access costs under the equal charge rule with the level of such costs under alternative rate structure and pricing plans. Estimates of the percentage change in total interstate switched access costs, as well as the percentage change in transport costs, were calculated and placed in the record. The LEC models addressed facility demand both based on existing facility demand, and based on projected facility demand taking into account IXC reconfigurations in response to the restructure. The LECs used two different modelling approaches to project reconfigurations in response to the restructure -- one based on engineering principles and the other based on least- cost routing assumptions. The Commission determined that the LEC models using existing facility demand, other than that of Pacific, provided a reasonable estimate of the impact of the adopted rate structure and pricing plan on IXCs, at least when those estimates were based on existing network configurations. The Pacific model was deemed to be inadequate because it did not account for the entire geographic region, or for all the IXCs, served by Pacific. None of the models based on projected demand after reconfigurations was deemed sufficiently reliable. The BOCs and GTE submitted updated estimates in the fall of 1993 after the Commission's adoption of the First Reconsideration Order. These estimates accounted for the modifications made in the First Reconsideration Order. They were based on the same modelling methodology and assumptions that were used to derive the earlier impact estimates, except that they were updated to reflect: (1) customers' existing network configurations; (2) the decisions in the First Reconsideration Order; (3) the decision on general support facilities cost reallocation; and (4) the effects of the adjustment of the price cap index for 1993. Quarterly Monitoring Reports On December 29, 1993, the Common Carrier Bureau directed the BOCs and GTE to provide quarterly reports for 1994 containing information to assist the Commission in monitoring the effect of the transport restructure on IXCs. After discussions with all interested parties, the Bureau accepted a revised data set and filing format proposed by the LECs. The quarterly reports provided the percentage changes in transport revenues from recurring charges and total interstate switched access revenues from recurring charges, broken down by large, medium, and small IXCs. These percentage changes were measured in two ways: (1) comparing present quarterly revenues with the revenues of the preceding quarter (i.e., the first quarter of 1994 compared with the last quarter of 1993); and (2) comparing present quarterly revenues with the revenues of the same quarter of 1993 (i.e., the second quarter of 1994 compared with the second quarter of 1993). The percentage changes in both the switched access costs and switched transport costs were presented based on actual revenues, as well as adjusted to remove the effects of demand variations and any rate changes between the compared quarters. The report for the first quarter of 1994 was slightly modified to avoid use of January revenues that reflected December 1993 usage. Therefore, the 1994 first quarter revenue totals were comprised of revenues from flat-rated facilities during January through March 1994 and usage revenues during February through April 1994. When comparing first quarter 1994 revenues with first quarter 1993 revenues, February through April 1993 billed data were used. The reports also contained growth in minutes by category of IXC, as well as the total number of local switching minutes of use for each LEC per quarter. These switched minutes were used to weight the impacts reported by each LEC in calculating an industry average impact, which is set forth in Table 1 of the attached order. Finally, the reports included other information tracking the course of the restructure. Quarterly Monitoring Reports - LEC Filings First Quarter: Letters from Donna Hermerding and Cronan O'Connell, Ameritech, to William Caton, Acting Secretary, FCC, filed June 2 and June 23, June 30, 1994. Letters from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed May 31 and June 7, 1994. Letters from Whit Jordan, BellSouth, to William Caton, Acting Secretary, FCC, filed May 31 and June 10, 1994. Letters from Everett Williams and F. Gordon Maxson, GTE, to William Caton, Acting Secretary, FCC, filed May 31, June 9, and June 17, June 28, 1994. Letters from Kenneth Rust and Alan Cort, NYNEX, to William Caton, Acting Secretary, FCC, filed May 31 and June 15, 1994. Letters from Jo Ann Goddard, Pacific Telesis, to William Caton, Acting Secretary, FCC, filed May 31, June 2, June 7, and June 14, 1994. Letter from William Blase, Southwestern Bell, to William Caton, Acting Secretary, FCC, filed May 31, 1994. Letters from Cyndie Eby, U S West, to William Caton, Acting Secretary, FCC, filed May 31 and June 14, 1994. Second Quarter: Letter from Cronan O'Connell, Ameritech, to William Caton, Acting Secretary, FCC, filed July 29, 1994. Letter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed August 5, 1994. Letter from Whit Jordan, BellSouth to William Caton, Acting Secretary, FCC, filed July 29, 1994. Letters from Jack Isbell, GTE, to William Caton, Acting Secretary, FCC, filed July 29 and August 11, 1994. Letter from Kenneth Rust, NYNEX, to William Caton, Acting Secretary, FCC, filed August 1, 1994. Letter from Jo Ann Goddard, Pacific Telesis, to William Caton, Acting Secretary, FCC, filed July 29, 1994. Letter from Sandra Wagner, Southwestern Bell, to William Caton, Acting Secretary, FCC, filed July 29, 1994. Letter from Cyndie Eby, U S West, to William Caton, Acting Secretary, FCC, filed August 1, 1994. Industry Roll-up: Letter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed October 18, 1994. Letter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed November 14, 1994. Third Quarter: Letter from Cronan O'Connell, Ameritech, to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letter from Whit Jordan, BellSouth to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letters from F. Gordon Maxson, GTE, to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letter from Kenneth Rust, NYNEX, to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letter from Jo Ann Goddard, Pacific Telesis, to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letter from Sandra Wagner, Southwestern Bell, to William Caton, Acting Secretary, FCC, filed October 31, 1994. Letter from Cyndie Eby, U S West, to Richard Metzger, Jr., Deputy Chief of Operations, Common Carrier Bureau, filed October 31, 1994.