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INTRODUCTION `"(#QI1׃  Y-XxPII.xBACKGROUND `"(#Q IIA4 ׃  Yh-XxX` ` xA.` ` Overview ` `"(#Q IIA4 ׃  YQ-XX` ` B.` ` LEC Provision of Transport Service ` `"(#{ IIB5 ׃  Y:-XxX` ` xC.` ` Interim Transport Rate Structure Rules ` `"(#Q IIC8 ׃  Y#-XxX` ` xD.` ` Initial Rate Levels for Restructured Transport Services ` ``"(#J IID12 ׃  Y -XxX` ` xE.` ` Price Cap Safeguards ` ``"(#J IIE16 ׃  Y- ` pbXxX` ` xF.` ` Impact of the Transport Rate Restructure on Different Categories of IXCs ` ``"(#t IIF21 ׃  Y!- XxPIII.xTHIRD MEMORANDUM OPINION AND ORDER ON RECONSIDERATION ``"(#J IIIA25 ׃  Y#-XxX` ` xA.` ` The Interim Rate Structure ` ``"(#J IIIA25 ׃  Yk$-XX` ` B.` ` Initial Benchmark Level and Permanent Rate Relationships ` ``"(#t IIIB33 ׃  YT%-XxX` ` xC.` ` Price Cap Service Categories and Price Bands ` ``"(#J IIIC65 ׃  Y=&-XxX` ` X ` ` 1. Tandem Switching ``"(#J IIIC167 ׃  Y&'-XxX` ` X ` ` 2. Price Cap Service Categories ``"(#J IIIC274 ׃  Y(-XX` ` X ` ` 3. Price Cap Bands ``"(#t IIIC378 ׃"(\+\+\+@)"Ԍ Y-XxX` ` xD.` ` The Interconnection Charge ` ``"(#J IIID181 ׃  Y-XxX` ` X ` ` 1. MidCourse Adjustment to the Interconnection Charge ``"(#J IIID181 ׃  Y-XxX` ` X ` ` 2. Burden of Proof for the MidCourse Adjustment ``"(#J IIID291 ׃  Y-XxX` ` X ` ` 3. Waiver of NonRecurring Charges ``"(#J IIID397 ׃  Y-XX` ` E.` ` Miscellaneous ` `!(#mIIIE1105׃  Y-XxX` ` X ` ` 1. Pricing Flexibility `!(#CIIIE1105׃  Yv-XxX` ` X ` ` 2. Intermediate Hubbing and TandemSwitched Transport `!(#CIIIE2116׃  Y_-XxX` ` X ` ` 3. Meet Point Billing `!(#CIIIE3121׃  YH-XxX` ` X ` ` 4. Prohibition on Ratcheting `!(#CIIIE4123׃  Y1-XF.X` ` Conclusion(#` `!(#m IV126 ׃  Y -XxPIV.xSUPPLEMENTAL NOTICE OF PROPOSED RULEMAKING `!(#C VA1127 ׃  Y -XxX` ` xA.` ` Resale, Shared Use and Split Billing ` `!(#C VA1127 ׃  Y -XxX` ` X ` ` 1. Introduction `!(#C VA1127 ׃  Y -XX` ` X ` ` 2. Background `!(#m VA2130 ׃  Y -XX` ` X ` ` 3. Discussion `!(#m VA3141 ׃  Y-XX` ` X ` ` 4. Conclusion `!(#m VA4147 ׃  Yy-XX` ` B.` ` Procedural Matters ` `!(#m VB1148 ׃  Yb-XX` ` X ` ` 1. Ex Parte `!(#m VB1148 ׃  YK-XX` ` X ` ` 2. Regulatory Flexibility Act `!(#m VB2149 ׃  Y4-XX` ` X ` ` 3. Notice and Comment Provision `!(#m VB3150 ׃ XUV. ORDERING CLAUSES `!(#m VI151 ׃  X- &I. INTRODUCTION ă  Y-  ` ` 1.  INTRO IOur 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 longdistance 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 longdistance companies to lower their longdistance 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 longdistance 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.  Y#-  Yi$-  #` ` 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"<&\+))`'"  Y-  companies.# Ty-ԍ"Transport" and "interstate switched access" are defined in paragraph  TRANS5 , infra.ĕ 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   hfuture changes in transport rates. We also clarify certain implementation procedures. In doing  d(#so, we resolve all the remaining issues raised on reconsideration in this proceeding. We do not  d(#Maddress the longterm transport rate structure and pricing rules due to take effect after  Y- d(#October1995, which are the subject of a pending Notice of Proposed Rulemaking.Bj T- v ԍTransport Rate Structure and Pricing, Report and Order and Further Notice of Proposed  T - d(#Rulemaking, 7 FCCRcd 7006, 705368, 10345 (1992) (First Transport Order), recon., First  T\ - d(#u!Memorandum Opinion and Order on Reconsideration, 8 FCCRcd 5370 (1993) (First Reconsideration  T6 - d(#!Order), further recon., Second Memorandum Opinion and Order on Reconsideration, 8 FCCRcd 6233  T -(1993) (Second Reconsideration Order)( collectively, Transport Orders). Finally, in  d(#the supplemental notice of proposed rulemaking included herein, we seek comment on the  d(#implementation of "split billing" of certain local exchange carrier (LEC) facilities that are shared by multiple access customers.  Y - }` ` 3. Twentyone parties, including most of the major LECs and interexchange  Y - d(#carriers (IXCs), requested reconsideration or clarification of almost every issue in the First  Y - d(#Transport Order. We addressed issues raised by those requests that required guidance before  Y - d(#the filing of initial restructured transport rates in the First Reconsideration Order and the Second  Y - d(#ZReconsideration Order. Several issues, however, remained unresolved. We decided certain  Y - d(#price cap matters in the Second Transport Order, based on the record compiled in response to  Y- d(#the further notice included in the First Transport Order.t T- v ԍTransport Rate Structure and Pricing, Second Report and Order, 9 FCC Rcd 615 (1994) (Second  T-Transport Order). SW Bell and Sprint sought  Y- d(#reconsideration of the First Reconsideration Order, and CompTel, WilTel, and Sprint have  Yq- d(#requested reconsideration of the Second Transport Order. q  T- v ԍAppendix A, infra, includes a complete list of the parties filing petitions for reconsideration, comments, and replies, as well as a list of the abbreviations used in this order to refer to the parties.  For the reasons stated below, we deny the three sets of petitions, except to the limited extent indicated herein. "Ej \+))"Ԍ X- II.XBACKGROUND(#  Y-  X- A.` ` Overview (#`  Y- ` ` 4. IIAIn this background section, we first define "transport" and explain how LECs  d(#provide transport services. Next, we discuss the earlier transport rate structure rules, and  d(#;explain the interim transport rate structure adopted in this proceeding. We address the pricing  d(#rules governing the initial rate levels for restructured LEC transport services when the rate  d(#structure change was implemented, and we elaborate on the rules governing subsequent changes  d(#in rate levels. Finally, we discuss the impact of the transport rate structure and pricing changes on various classes of IXCs.  X -  B.` ` LEC Provision of Transport Service (#`  Y -  1` ` 5.  TRANS IIBInterstate switched access is a service that LECs provide to enable IXCs and  d(#other customers to originate and terminate interstate telecommunications traffic. "Transport"  d(#Kis the component of interstate switched access consisting of transmission between the access  d(#customer's point of presence (POP) and LEC end offices. At the end offices, local switching  d(#Zoccurs and the traffic is routed to and from residential and business endusers' premises. To  d(#place transport services in perspective with the other LEC interstate access services, transport  d(#revenues, based on projected Bell Operating Company (BOC) revenues under the interim rate  d(#structure, comprise roughly 19% of all BOC interstate access revenues. Under our expanded  d(#interconnection policies, competitive access providers (CAPs) and the IXCs themselves may  d(# compete with the LECs to provide all or portions of transport service. Figure1 below illustrates the LECs' switched transport networks.  Y- ` ` 6.  ELEM  LECs provide some transport services using "dedicated" circuits-- circuits that  d(#are dedicated to the use of a particular IXC. Dedicated circuits come in varying degrees of  d(#capacity: (1)voicegrade circuits, with sufficient bandwidth to carry a single voice  Yh- d(#conversation;h T- v ԍDS0 circuits have a capacity similar to that of voicegrade circuits. The terms "DS0" and "voicegrade" are often used interchangeably. (2)DS1 circuits, with 24 times the capacity of a voicegrade circuit; or (3)DS3  YQ- d(#<circuits, with 28 times the capacity of a DS1 circuit.Q@ TB - v ԍCircuits that can transmit bits of data more rapidly have a greater transmission capacity; thus, the term "speed" is frequently used synonymously with capacity in this context. Other transport services are provided  d(#using a combination of dedicated circuits and circuits that are "shared" or "common"-- that is,  d(#<the access traffic of several IXCs, as well as other types of traffic in the LEC network, pass  d(#over the shared circuits. "Entrance facilities" are dedicated circuits that connect an access  d(#Jcustomer's POP with the LEC central office serving that POP. The LEC central office serving  Y- d(#;a particular POP is referred to as a serving wire center (SWC). Except when traffic is coming  d(#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 "!\+))""  Y- nF   [ Figure 1: Omitted in this electronic version ]  nF ԃ"\+))"  d(#referred to as "interoffice transport." In some cases, IXCs use dedicated interoffice trunks from  d(#=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  d(#circuits between a SWC and a tandem office. Tandemswitched traffic, which is switched at an access tandem, is carried between tandem offices and end offices over shared circuits.  Yv-  l` ` 7. In our 1983 Access Charge Order, we adopted rules requiring LECs to allocate  Ya- d(#transport costs between dedicated transport and common transport.Ba T- v ԍMTS and WATS Market Structure, Third Report and Order, 93 F.C.C.2d 241, 309, 230 (1983)  T - d(#!(Access Charge Order), modified on recon., 97 F.C.C.2d 682 (1983), modified on further recon., 97  T - d(#!F.C.C.2d 834 (1984), aff'd in principal part and remanded in part, National Association of Regulatory  Th - d(#"Utility Commissioners v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), modified on further recon., 99 F.C.C.2d  TB -708 (1984), 101 F.C.C.2d 1222 (1985), aff'd on further recon., 102 F.C.C.2d 849 (1985). The Access Charge Order  d(#required the LECs to charge for dedicated transport on a flatrated, perline basis to reflect its  d(#nontraffic sensitive cost characteristics. Common transport was to be charged on a usage d(#sensitive basis. Subsequently, the U.S. District Court for the District of Columbia entered the  d(#iModification of Final Judgment (MFJ) implementing the divestiture of the Bell System. The  d(#MFJ included a requirement known as the "equal charge" rule, stating that from January1, 1984  d(#Jthrough September1, 1991, the BOCs were required to charge an equal amount per minute for  Y - d(#all IXCs' transport traffic.  TE- v ԍUnited States v. American Tel.& Tel. Co., 552 F. Supp. 131, 233, AppendixB, B(3) (D.D.C.  T-1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). We waived the rules adopted in the Access Charge Order for all  Y - d(#wLECs to enable the BOCs to comply with the equal charge rule.  N T- v ԍSee American Tel.& Tel. Co., Petition for Waiver of Sections 69.1(b), 69.3(e), 69.4(b)(7) and  T- d(# "(8), 69.101, 69.111 and 69.112 of the Commission's Rules and Regulations, 94 F.C.C.2d 545, 547, 4  T`- d(#*!(1983)(setting waiver to expire on December 31, 1984), recon., 97 F.C.C.2d at 862, 88 (extending  T:- d(#!waiver through May 31, 1985); MTS and WATS Market Structure, Memorandum Opinion and Order,  d(# CC Docket No. 78-72, Phase I, FCC 85-87, 50 Fed. Reg. 9633, 7 (1985) (extending waiver until  T- d(#"further notice); Transport Rate Structure and Pricing, Order and Further Notice of Proposed Rulemaking, 6 FCC Rcd 5341 (1991)(retaining equal charge rule pending further Commission action). Upon expiration of the MFJ's equal charge rule, we initiated this proceeding to revisit the structure of transport rates.  Xh- C.` ` Interim Transport Rate Structure Rules (#`  Y:- ` ` 8. IIC GOAL Three goals guided our efforts to reform the transport rate structure:  d(#+ (1)encouraging efficient use of transport facilities by allowing pricing that reflects the way costs  d(# are incurred; (2)facilitating full and fair interexchange competition; and (3)avoiding  Y- d(#interference with the development of interstate access competition.  T%- v ԍFirst Transport Order, 7 FCC Rcd at 7009, 5; First Reconsideration Order, 8 FCCRcd at  T&-5372, 2 (1993). See supra  INTRO1 . The equal charge rule  d(#required the LECs to charge usagesensitive rates even to access customers using dedicated  d(#hfacilities, the costs of which are not affected by the amount of traffic carried over them. Thus," \+))"  d(#the charges paid by these customers did not reflect the manner in which LECs incurred transport  d(#costs. The equal charge rule also interfered with the development of efficient competition for  d(#;interstate access service, because LECs were forced to charge perminute rates for services that  Y- d(#their competitors (e.g., competitive access providers (CAPs)) would be able to price on a flat d(#rated basis. Thus, we decided that continuing the equal charge rule was no longer in the public  Y-interest.   T- v ԍTransport Rate Structure and Pricing, Order and Further Notice of Proposed Rulemaking, 6FCC  T-Rcd 5341, 5344, 13 (1992); First Transport Order, 7FCC Rcd at 7016, 20.   Ya- 2` ` 9. In the September 1992 First Transport Order, we decided that an interim  d(#transport rate structure was the best way to achieve our public interest goals in the near term.  Y5- d(#,This rate structure, illustrated in Figure2 below, includes flatrated elements for: (1)entrance  Y - d(#facilities; and (2)directtrunked transport, the service carrying traffic over dedicated interoffice  d(#jfacilities not used with tandem switching. The interim rate structure also includes usage Y - d(#sensitive charges for: (1)tandemswitched transport, the service carrying traffic that is switched  d(#iat an access tandem switch between the SWC (or tandem office) and end offices; and (2)the  Y - d(#;interconnection charge, created consistent with existing price cap rules for rate restructures, to  d(#enable the LECs initially to receive approximately the same revenues under the interim rate  d(#structure as they would have received under the old equal charge rate structure. In other words,  Y}- d(#<the interconnection charge was designed so that, initially, the rate restructure per se did not  Yh-change the amount of revenues obtained by the LECs from their transport services.a <hD T]- v ԍThe Commission originally directed the LECs to calculate the interconnection charge by  d(#)"subtracting the revenues from facilitiesbased transport elements (projecting the total amount of demand  d(#!of facilities-based transport elements under the new rate structure) from the revenues the LECs would  T- d(#H!have received under the equal charge regime. First Transport Order, 7 FCC Rcd at 7038, 61; First  T-Reconsideration Order, 8 FCC Rcd at 5378, n.68.a  Y:- ?` `  10. Although the LECs always provide tandemswitched transport using the same  d(#basic network configuration (see Figure1 above), under the interim rate structure, they must  d(#make tandemswitched transport available in two pricing options (both illustrated in Figure2  d(#xbelow). First, an IXC may purchase tandemswitched transport with the mileage component  d(#measured directly between the SWC and the end office, regardless of the actual physical routing  d(#;(Pricing Option1 in Figure2). Second, an IXC may purchase a dedicated facility between the  d(#wSWC and the tandem office and then tandemswitched transport between the tandem office and  d(#the end office, with the mileage component measured between the tandem office and the end  Y-office (Pricing Option2 in Figure2).n H T|#-ԍFirst Reconsideration Order, 8 FCC Rcd at 5372, 9.n "U \+))M"  Y-  [ Figure 2: Omitted in this electronic version ] ă" \+))"  Y- ` `  11. In the 1992 First Transport Order, we concluded that the interim rate  Y- d(#structure should remain in effect through October31, 1995.k Td-ԍFirst Transport Order, 7 FCC Rcd at 701011, 9.k We also issued a further notice  d(#seeking comment on the appropriate longterm transport rate structure and pricing once the  Y- d(#;interim rate structure expires.Xj T-ԍId. at 705368, 103145.X In the 1993 First Reconsideration Order, we exempted smaller  d(#LECs (LECs not considered "Tier1 LECs") from implementing the interim rate structure, but  d(#retained the requirement that all LECs providing entrance facilities do so on a flatrated basis.  d(#;We also required nonTier1 LECs to offer flatrated directtrunked transport upon receipt of a  Yc-bona fide request.xc  T - v ԍFirst Reconsideration Order, 8FCC Rcd at 538081, 60. Tier1 LECs are LECs having annual  d(#!revenues from regulated telecommunications operations of $100 million or more for a sustained period  T - d(# of time. Commission Requirements for Cost Support Material to be Filed with 1990 Annual Access  T- d(#!Tariffs, 5FCC Rcd 1364, 1364 (Com. Car. Bur. 1990) (defining Tier1 LECs using the criteria used to  T- d(#"define ClassA companies in 47C.F.R. 32.11(a), (e)); Expanded Interconnection with Local Telephone  T`- d(#8"Company Facilities, Report and Order and Notice of Proposed Rulemaking, 7FCCRcd 7369, 7372 n.1  T:- d(#)"(1992) SPACC (Special Access Expanded Interconnection Order), recon., 8FCCRcd 127 (1992), vacated in part  T- d(#"and remanded sub nom. Bell Atlanticv. FCC, 24 F.3d 1441 (D.C. Cir. 1994), further recon., 8FCCRcd 7341 (1993).x  X7- D.` ` Initial Rate Levels for Restructured Transport Services (#`  Y - ` `  12. IIDIn the First Transport Order, we concluded that the special access rate  d(#: structure and the associated pricing provide a rational framework for establishing initial transport  Y - d(#rates.i z  T-ԍFirst Transport Order, 7 FCC Rcd at 7028, 42.i (Special access services are LEC interstate access services, such as private line, that do  d(#ynot use local switching.) First, the LECs offer special access and transport services using  d(#similar-- and in some cases, the same-- network facilities. For example, LECs provide  d(#Kswitched transport entrance facilities using the same circuits that they use to provide special  d(#access facilities between IXC POPs and LEC SWCs. Second, before the price cap system was  d(#implemented in 1991, LEC special access rate levels had been costsupported by the LECs under  d(#the Commission's rateofreturn rules and subjected to the tariff review process. In adopting  d(#LEC price caps, we specifically concluded that special access rate levels were a reasonable basis  Y%- d(#from which to launch a system of price cap regulation.B% T"- v ԍ LPCO Policy and Rules Governing Rates for Dominant Carriers, Second Report and Order, 5 FCC Rcd  T#- d(#!6786, 681416, 23044 (1990)(LEC Price Cap Order), modified on recon., 6 FCC Rcd 2637 (1991),  T$- d(# aff'd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), petitions for  T%- d(#)"further recon. dismissed, 6 FCC Rcd 7482 (1991), further modified on recon., 6 FCC Rcd 4524 (1991),  TZ&-further recon., 7 FCC Rcd 5235 (1992). Special access rate changes between  d(#1991 and the transport restructure complied with the requirements of the LEC price cap rules.  Y- d(#xThus, in the First Transport Order, we determined that the initial rates for the new switched" &\+))"  d(#wtransport rate elements, for the most part, should be presumed reasonable if they were based on  d(#hthe LECs' existing rates for comparable special access services. For example, the rates for DS1  d(#xtransport entrance facilities were to be based on the preexisting rates for DS1 special access  d(#circuits between POPs and SWCs. Consistent with price cap regulation, we required that the  d(#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.  Y_- O` `  13. Instead, we imposed a limited benchmark requirement on the setting of the  d(#initial transport rates to protect against possible adverse effects on smaller IXCs. To establish  d(#=the appropriate benchmark, we compared the LECs' rates for existing DS3 special access  d(#services with their rates for existing DS1 special access services. We found that most LECs'  d(#rates for such DS3 services, which have 28 times the capacity of DS1 services, were at least 9.6  d(#ytimes their rates for DS1 special access services. Thus, we imposed a 9.6to1 benchmark  d(#requirement to ensure that those LECs with special access DS3toDS1 rate ratios that fell below  d(#most other LECs' rate ratios either provided cost justification for basing their initial restructured  d(#ytransport rates on their special access rates, or filed transport rates that complied with the benchmark ratio and certain other requirements.  Yc- ` `  14. In the July 1993 First Reconsideration Order, we addressed the application  YN- d(#<of the interim rate structure to network configurations not considered in the First Transport  Y9- d(#KOrder. We also addressed the method by which the LECs were to establish initial transport  d(#rates, including the interconnection charge, and resolved certain implementation issues.  d(#Specifically, we modified the calculation of the interconnection charge to require the LECs to  d(#use historical facility demand and configurations, rather than projected demand after IXCs  d(#Zreconfigure their networks in response to the restructure. We did this because of the LECs'  d(#;incentive to underestimate the projected demand for transport facilities and thereby inflate the  d(#interconnection charge, and because there was no method for the Commission or other parties  d(#to measure the accuracy of the LEC projections. We stressed, however, that the initial  d(#interconnection charge was to be calculated on a residual basis to further the goal of a revenue d(#neutral rate restructure. We did not intend that the LECs lose substantial amounts of revenue  d(#jduring the first year of the interim rate structure as a result of transport reconfigurations.  d(#Therefore, to achieve an interconnection charge that was neither too high nor too low, we stated  Y'- d(#that we would permit a mid-course adjustment to the interconnection charge.o' T-ԍFirst Reconsideration Order, 8 FCC Rcd at 5378, 46.o In the 1993  Y- d(#Second Reconsideration Order, we adopted a technical correction to our rules that required price  d(#cap LECs to base their initial calculation of the interconnection charge on historical usage  Y- d(#demand, instead of projected usage demand.{j T#-ԍSecond Reconsideration Order, 8 FCCRcd at 6233, 36.{ To date, no LEC has requested a midcourse adjustment. "! \+))""Ԍ Y- ` ` 15. On September1, 1993, the LECs filed tariffs offering transport services  d(#ypursuant to the interim rate structure and pricing rules. These tariffs became effective on  Y-December30, 1993. TL- v ԍLocal Exchange Carrier Switched Local Transport Restructure Tariffs, Order, 9 FCC Rcd 400  T&-(Com. Car. Bur. 1993)(Tariff Order).  X- E.` ` Price Cap Safeguards (#`  Yw-  m` ` 16. IIEIn the First Transport Order, we concluded that, after the initial rates were  d(#set under the interim rules, subsequent changes to the transport rates of price cap LECs would  d(#Ybe governed by our price cap rules, just as most other LEC access offerings are regulated. Our  d(#LEC price cap rules create incentives for efficient operation and give price cap LECs a limited  d(#degree of pricing flexibility to adjust their rates according to market conditions, while at the  Y -same time guarding against anticompetitive pricing behavior.q D T-ԍLEC Price Cap Order, 5 FCC Rcd at 678991, 2137.q  Y - ` ` 17. Under LEC price cap regulation, we have broadly grouped LEC services  d(#=into baskets, each of which is subject to an aggregate price cap or ceiling. Specific LEC  d(#services within each basket are grouped into narrower service categories and subcategories, each  Y- d(#Jof which is subject to upper and lower pricing bands (i.e., somewhat more disaggregated price  d(#ceilings and floors). The price cap rules permit LECs to adjust their rates within these limits  d(#with minimal Commission review. The price cap for each basket and the pricing bands for each  YQ- d(#service category and subcategory are adjusted annually based on predefined formulas.WQ T-ԍ 47 C.F.R. 61.45, 61.47.W The  d(#LECs may adjust their rates with minimal justification, as long as the aggregate rates for each  d(#basket do not exceed the specified cap, and the aggregate rates for each service category and  d(#subcategory remain between the upper and lower pricing bands. Substantial cost justification  d(# is required if rates exceed the price cap for a basket or fall above or below the applicable pricing  Y- d(#bands for a service category or subcategory.~ T-ԍ LEC Price Cap Order, 5 FCC Rcd at 682324, 30011.~ The LEC price cap rules limit the potential for  d(#anticompetitive pricing by placing services subject to different competitive pressures into  d(#different baskets, service categories, and service subcategories, thus limiting the LECs' ability  d(#to offset lower prices for one class of services or customers with higher prices for another class of services or customers.  YT-  N` ` 18. For purposes of price cap regulation, in the First Transport Order, we placed  d(#Kflatrated transport, tandemswitched transport, and the interconnection charge into separate  d(#service categories of the traffic sensitive basket, which at that time contained the local switching  d(#charge and the bundled transport rates under the equal charge rule. (The alignment of the price  Y- d(#cap baskets and service categories adopted in the First Transport Order is illustrated in Figure3 below.) We set the upper and lower pricing bands at the normal +/5% for the flatrated " (\+)) !"  Y-  [ Figures 3 & 4 nF1 : Omitted in this electronic version ] ă" \+))"  xtransport service category. For the tandemswitched transport and the interconnection charge  x<service categories, we adopted special narrower pricing bands. We set the pricing bands at  xw+2% and 5% for the tandemswitched transport service category, and set a +0% price ceiling  x(with no lower limit) for the interconnection charge service category. These provisions limit the  xLECs' ability to offset price increases and decreases among these service categories, protect  xtandemswitched transport customers from significant annual rate increases, and link future changes in the interconnection charge to the LECs' overall price levels.  YH- ` x` ` 19. In the January 1994 Second Transport Order, we modified the price cap  xbaskets and service categories based on the record developed in response to the further notice.  xSpecifically, we moved transport and special access services into a newly created trunking  Y - xbasket.s  T~ -ԍxSecond Transport Order, 9 FCC Rcd at 62327, 1625.s There already had been separate service categories and subcategories for DS3, DS1,  x[and voicegrade special access services. We placed DS3, DS1, and voicegrade flatrated  xtransport services into the same service categories and service subcategories as comparable  Y - x;special access services. Thus, for example, DS3 special access services and DS3 directtrunked  xtransport services were placed into a single subcategory. We kept tandemswitched transport  xand the interconnection charge in separate service categories. (The alignment of the price cap  Y{- x;baskets, service categories, and service subcategories adopted in the Second Transport Order is  xillustrated in Figure4 above.) This price cap structure further limited price cap LECs' ability  x.to offset lower rates for more competitive services with higher rates for less competitive  xservices. For example, this structure prohibits price cap LECs from precipitously raising the  xrates for DS1 directtrunked transport, which may be subject to less competition than DS3 services, while reducing the rates for DS3 directtrunked transport.  Y- ` x` ` 20. We also made important changes in our rules governing transport in the  xclosely related expanded interconnection proceeding. In that proceeding, we adopted policies  xto create new opportunities for the competitive provision of access services, including transport,  Y- x,that the LECs traditionally have provided on a monopoly basis.j T-  : ԍxSpecial Access Expanded Interconnection Order; Expanded Interconnection with Local Telephone  T- xCompany Facilities, Transport Phase I, Second Report & Order and Third Notice of Proposed  Tg- x!Rulemaking, 8 FCCRcd 7374 (1993)(Switched Transport Expanded Interconnection Order), pet. for  TA- x8"review pending sub nom. Bell Atlantic v. FCC, No. 931743 (D.C. Cir., filed Nov. 12, 1993). See also  T - x!Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion & Order,  T -9 FCCRcd 5154 (1994)(Expanded Interconnection Remand Order). In conjunction with opening  xthe switched transport market to competitive entry, we permitted LECs that are providing  Yj- xiswitched expanded interconnection to engage in density zone pricing of transport services.jN Ti$-ԍxSwitched Transport Expanded Interconnection Order, 8 FCC Rcd at 742532, 95112.  xDensity zone pricing is a system that permits LECs gradually to reduce rates in dense geographic  xareas that are less costly to serve, and to increase rates, relatively speaking, in less dense areas  xthat are more costly to serve. (Density zone pricing is implemented through special price cap  xservice subcategories for each zone, as illustrated above in Figure4.) We also allowed LECs" \+))"  xto implement costjustified volume and term discounts for transport in a state once a certain  Y- xdegree of competitive entry has occurred in that state.W Tb-ԍxId. at 743236, 11320.W We concluded that this would ensure  d(#zthat the LECs' switched transport expanded interconnection offerings provide a viable  Y-competitive opportunity before permitting discounted transport offerings.zj T-ԍExpanded Interconnection Remand Order, 9 FCC Rcd at 5204, 182.z  X- F.` ` Impact of the Transport Rate Restructure on Different Categories of IXCs (#`  Y_-  ` ` 21. IIFIn general, we seek to safeguard the public interest and competition, not to  d(#shield competitors from fair competition or to minimize the rate changes experienced by  d(#particular industry groups. We adopted the new transport rate structure and pricing rules based  Y - d(#Yon the public interest considerations discussed in the 1992 First Transport Order. As we noted  d(#in that order, we also examined BOC and GTE estimates of the impact of the new rate structure  d(#,on the total switched access costs of different classes of IXCs, but the specific results reflected  Y - d(#iby those estimates did not form the basis of our decisions.s  T-ԍFirst Transport Order, 7 FCC Rcd at 704042, 6569.s As a result of the modifications  Y - d(#[made in the 1993 First Reconsideration Order, we required the BOCs and GTE to submit  d(#updated impact estimates, initially in September 1993. After staff review uncovered errors in  d(#Zthose estimates, the Common Carrier Bureau required the LECs to file corrected estimates in  d(#November 1993. To help customers plan for rate changes under the rate restructure, we also  d(#[required these LECs to provide each of their switched access customers with sample bills  d(#indicating what that customer would have paid for transport in a recent month had the interim  Y9- d(#Zrate structure been in place.v9 T-ԍFirst Reconsideration Order, 8 FCC Rcd at 5381, 6566.v On December29, 1993, the Common Carrier Bureau directed  d(#the BOCs and GTE to provide quarterly monitoring reports during 1994 that contained  d(#information to assist the Commission in monitoring the effect of the interim transport restructure  Y- d(#on IXCs. P T- v JԍSee, e.g., Letter from Kathleen B. Levitz, Acting Chief, Common Carrier Bureau, to Donna M. Hermerding, Ameritech Services, dated December29, 1993. After discussions with all interested parties, the Bureau accepted a revised data set  Y- d(#and filing format proposed by the LECs.!d  TX!- v ԍSee Memorandum from Joseph Mulieri, Bell Atlantic, on behalf of BOCs/GTE, to Policy and  T2"- d(#!Program Planning Division, Common Carrier Bureau, dated April 13, 1994. See, e.g., Letter from A.  d(#!Richard Metzger, Jr., Acting Chief, Common Carrier Bureau, to William Blase, Jr., Southwestern Bell, dated May16, 1994. The predicted impacts and the reported actual  Y-impact data are set forth in Table1 below."  Tm&-ԍFor further explanation of the LEC estimates and the reported impact data, see AppendixB infra. ""\+))"Ԍ X- z " Table1:  DATA CHANGES IN INTERSTATE SWITCHED ACCESS RATES PAID  Y-BEFORE AND AFTER TRANSPORT RATE RESTRUCTURE # Tb- v ԍThe bottom four rows of Table1 (cells A4 through D7) set forth the percentage change in the  d(#v amounts paid by each category of IXC to the eight largest LECs (the BOCs and GTE) for interstate  d(#"switched access during the first, second, and third quarters of 1994, relative to the corresponding quarter  d(#"of 1993. This comparison removes any seasonal effects on switched access revenues. The impact figures  d(#!set forth in the bottom four rows of Table1 have been adjusted to remove the effects of traffic growth  d(#t"and any independent rate changes between the compared quarters, and were calculated by weighting the  d(#!switched access revenue impact of each BOC and GTE by the total number of local switching minutes of use for each such LEC per quarter.(# ^ ddx!ddx((( ^  5  U  M  4+AT&Te  \MCI and \Sprint e  T|Small |IXCse  NDifference b WBetween  QAT&T and  LSmall IXCs  L(C minus A)"5 C " UW  1992 Predicted Impact (excluding Pacific)4 W  WByA1 44+0.6%4 W  WByB1 %\+0.9%4 W  WByC1 E|+1.8%4 W  WByD1  k2.4"C C " WW  November 1993 Predicted Impact (excluding Pacific)wW  WB A2 44+0.9%wW  WB B2 \\1.3%wW  WB C2 E|+1.8%wW  WB D2  k2.7"C C 4 " November 1993 Predicted Impact (including Pacific)W  WBA3 44+0.8%W  WBB3 \\1.3%W  WBC3 E|+2.9%W  WBD3  k3.7"C c w" Wu  First Quarter 1994 Adjusted Actual Impactsu  WBbA4 4'+1.2%u  WBbB4 %\+2.3%u  WBbC4 E|+4.8%u  WBbD4  k3.6"c C " uW  Second Quarter 1994 Adjusted Actual Impacts `W  WBA5 4'+0.3%`W  WBB5 %\+1.3%`W  WBC5 E|+2.2%`W  WBD5  k1.9"C s  " W  Third Quarter 1994 Adjusted Actual Impacts  WBA6 44+1.6%  WBB6 \\1.5%  WBC6 ||0.2%  WBD6  k1.4"Ń"s  L `" e  First Three Quarters 1994 Adjusted Actual Impacts e  WBKA7 44+0.0% e  WBKB7 %\+0.7% e  WBKC7 E|+2.2% e  WBKD7  k2.2L e Y -" P#\+)) "Ԍ Y-  ԙ` ` 22. The empirical data filed by the BOCs and GTE indicate that the impact of  d(#hthe rate restructure on small and medium IXCs as groups during the first three quarters of 1994  d(#(the bottom four rows of Table 1) has been minor. Moreover, the actual impact generally has  d(#been consistent with the BOC and GTE estimates made before the transport rate structure took  d(#effect (top three rows of Table 1). For instance, the BOCs and GTE report that small IXCs paid  d(#2.2% more in switched access rates, as a result of the transport restructure (controlling for  d(#traffic growth and for unrelated rate changes), during the first three quarters of 1994 as  d(#Kcompared with the first three quarters of 1993 (see cell C7 in Table1). This compares with  d(#1993 BOC/GTE projections that small IXCs would pay 2.9% more in switched access rates as  Y2- d(#a result of the restructure (cell C3).$`24 T - v ԍTo put these figures in context, interstate switched access represents roughly 40% of a facilities d(#"based IXC's total costs. Since Table1 reflects the impact of the interim transport rate structure on IXCs'  d(# "switched access costs, the impact of the interim transport rate structure on such IXCs' total costs would be slightly less than onehalf that reflected in Table1. Moreover, the difference between the actual impact on  d(#hsmall IXCs and the actual impact on AT&T was 2.2 percentage points in the first three quarters  d(#of 1994 (cell D7), compared with 3.7 percentage points projected in 1993 (cell D3). Based on  d(#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.  Y - @` ` 23. Notwithstanding the change in interstate switched access rates paid by the  d(#Kdifferent categories of IXCs, the small IXCs experienced significantly larger traffic growth,  d(#,measured in minutes of use, than the three largest IXCs during the first three quarters of 1994,  d(#according to the empirical data reported by the LECs. The small IXCs experienced traffic  d(#growth of 17.9% over the first three quarters of 1994. For the same three quarters, AT&T  d(#X experienced traffic growth of 3.5%, and MCI and Sprint, collectively, experienced traffic growth  d(#of 3.9%. The annual traffic growth experienced by the IXCs, as measured from the third  d(#wquarter of 1993 to the third quarter of 1994, was 23.2% for the small IXCs, 7.5% for MCI and  d(#=Sprint, collectively, and 3.2% for AT&T. This significant traffic increase indicates that,  d(#hfollowing the transport restructure, smaller IXCs as a group continue to be strong and growing competitors in the interexchange market.  Y-  ` ` 24. In addition, the reported data, as well as other data collected by the  d(#.Commission regarding the number of IXCs operating in the United States and each state,  Yh- d(#hindicate that the number of small IXCs doing business nationally did not change significantly.%bh4 T !- v ;ԍSee Long Distance Carriers and Their Code Assignments, Report for the Second Quarter 1994,  d(#9!Industry Analysis Division, Common Carrier Bureau, September 1994, at 10; Long Distance Carriers  d(#*!and Their Code Assignments, Report for the Fourth Quarter 1993, Industry Analysis Division, April 1994, at 11.  d(#Indeed, the number of small IXCs operating in such relatively rural states as North Dakota,  d(#South Dakota, Wyoming, and others appears to have increased somewhat. These data do not  d(#,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."  %\+))"Ԍ X-`ř III.XTHIRD MEMORANDUM OPINION AND ORDER ON RECONSIDERATION (#  X- A.` ` The Interim Rate Structure (#`  Y- ` ` 25.  IIIA  Background. The interim transport rate structure was established to align  d(#=transport rates more closely with the manner in which LECs incur the costs of providing  Yw- d(#transport services (i.e., either over dedicated facilities or over a combination of dedicated `and  Yb- d(#,shared facilities), as described supra in paragraph  ELEM6  and as illustrated supra in Figures1 and2.  d(#Under the interim rate structure, dedicated facilities, such as entrance facilities and direct d(#trunked transport, are charged on a flatrated basis and may be distance sensitive, while  d(#Ytandem-switched transport is charged on a perminute basis and may be distance sensitive, with  d(#the mileage measured from the SWC to the end office. The interconnection charge is charged on a perminute basis to all interstate access customers.  Y -  ` ` 26. Positions of the Parties. Pacific and AT&T argue that the entire interim rate  d(#structure is flawed because it is designed to protect smaller suppliers in the interexchange  d(#hmarketrather than to serve the Commission's three original goals, and they advocate immediate  Y- d(#implementation of a longterm rate structure that fully reflects these three goals.&4 T- v ԍPacific First Order Petition at 14, 7, 1617; AT&T First Order Petition at 29; AT&T First  T-Order Reply at 24. See also USTA First Order Petition at 3. AT&T argues  d(# that postponing the adoption of fully costbased transport rates for another twoyear period (after  d(#the eightyear period from divestiture through 1991) conflicts with the Commission's findings  d(# that the equal charge rule is inefficient and is at odds with promoting access competition through  Y#- d(#expanded interconnection.q'#B4 T-ԍAT&T First Order Petition at 29; AT&T First Order Reply at 24.q AT&T also argues that the interim rate structure precludes  d(# competition at the tandem and is inconsistent with the Commission's repeated efforts to unbundle  d(#rate structures, because the interim rate structure bundles the charge for routing traffic from the  Y- d(#SWC to the tandem switch and from the tandem switch to end offices into one rate element.(4 Tq- v ԍAT&T First Order Petition at 6 & nn.6, 8 (citing Hawaiian Telephone Co. v. FCC, 498 F.2d 771, 776 (D.C. Cir. 1974).  d(#Pacific contends that the rate structure is costly and unnecessary, given the steady increase in  Y- d(#traffic carried by Tier3 IXCs and CAPs.V)\4 T -ԍPacific First Order Petition at 911.V BellSouth argues that the Commission should discard  d(#xinterexchange competition as a primary goal in this proceeding and address such concerns in  Y-other arenas.R*4 T/$-ԍBellSouth First Order Reply at 6.R  YT- 2` ` 27. In comments filed before the adoption of our 1993 Switched Transport  Y?- d(#Expanded Interconnection Order, several LECs assert that the interim rate structure fails to  d(#Yaccount for the advent of expanded interconnection for switched transport, and they argue that  d(#a longterm rate structure, removing constraints on the LECs' ability to compete, should be" *\+));"  Y- d(#Ymade effective concurrent with switched expanded interconnection.+4 Ty- v ԍFirst Order Petitions of: USTA at 27; BellSouth at 68; Pacific at 1112; US West at 47; Cincinnati Bell at 3, 9; BellSouth First Order Reply at 35. SWBell, USWest, and  d(#YAT&T assert that the new rate structure is inconsistent with switched transport expanded inter d(#hconnection and tandem switching competition because it bundles the provision of the dedicated  d(#link between the SWC and the tandem switch with the provision of tandem switching and the  Y-common transport link between the tandem switch and the end office.y,@4 T-ԍFirst Order Petitions of: USWest at 67; SWBell at 56; AT&T at n.6.y  Yv-  }` ` 28. In support of the interim rate structure, Rochester argues that to adopt a  d(#permanent transport rate structure immediately is inappropriate because the Commission needs  d(#additional information on the issues and because it would substantially harm interexchange  Y2- d(#competition.Y-24 T-ԍRochester First Order Opposition at 46.Y CompTel, WilTel, and Sprint defend the rate structure as: (1) consistent with  d(#,the traditional LEC practice of offering endtoend services, rather than piecepart facilities, to  d(#customers; (2) properly reflective of how LECs design their interoffice networks and the lack  d(#of customer control over tandem deployment; (3) avoiding imposing uneconomic, extra fixed  Y - d(#Jcharges on users of tandemswitched transport; and (4) conducive to local access competition.|. 4 T-ԍFirst Order Oppositions of: CompTel at 23; WilTel at 511; Sprint at 34.|  d(#MCI supports the adoption of an interim plan pending resolution of the complex issues related  Y -to a longterm plan.Z/ 4 Ty-ԍMCI First Order Opposition at 36, 1718.Z  Yz- ` ` 29. Sprint argues that the Commission should hold open the record of this  d(#proceeding to make changes to the interim rate structure in the event the filed interim rates have  YM- d(#rate impacts substantially different from those discussed in the First Transport Order.x0M 4 T-ԍSprint First Order Petition at 1920; Sprint First Order Reply at 910.x  d(#BellSouth and USTA oppose Sprint's position, arguing that such an approach might create an  d(#extended proceeding that would endlessly consume valuable resources when such effort might  Y - d(#be better spent towards adopting a longterm framework.|1 ` 4 T!-ԍUSTA First Order Opposition at 17; BellSouth First Order Opposition at 67.| The Ad Hoc Telecommunications  d(#Users Committee (Ad Hoc) and Allnet argue for focusing attention on the longterm plan, rather  Y-than altering the interim plan.k2 4 T$-ԍFirst Order Oppositions of: Ad Hoc at 13; Allnet at 14.k  Y- ` ` 30. Discussion. The interim rate structure is a significant improvement over the  d(#"equal charge" rate structure. We believe that the interim rate structure is consistent with all  d(#<three of our goals in this proceeding. First, the interim rate structure permits LECs to offer"2\+))"  d(#unbundled elements of transport service at rates more reflective of the manner in which costs  d(#,are incurred in providing those elements. Second, the rate structure is consistent with full and  d(#fair interexchange competition because it permits IXCs to serve their customers using more  d(#efficient transport services priced under an economically more rational rate structure, and  d(#enables them to obtain transport services from sources other than the LECs. Third, the rate  d(#structure is consistent with local access competition and expanded interconnection because it  d(#enables the LECs to offer flatrated entrance facilities and directtrunked transport, like their access competitors using expanded interconnection.  Y1- m` ` 31. We have weighed the costs associated with an interim approach namely,  d(#zthe effect on tandem competition and the delay in implementing a fully costbased rate  d(#structure-- against the benefits associated with its balancing of our three public interest goals.  d(#We conclude that our cautious approach of adopting an interim rate structure and seeking  d(#comment on a longterm rate structure was a reasonable step towards a more costbased transport  d(#rate structure. Given the broad scope of the transport restructure, we concluded that a cautious,  d(#,interim transport rate structure could mitigate possible adverse effects on the pluralistic supply  d(#of interexchange service on terms that facilitate full and fair interexchange competition. The  d(#interim transport structure allows IXCs time to prepare for a fully costbased rate structure by  d(#I reconfiguring their networks and taking other steps to eliminate network inefficiencies developed  d(#under the equal charge rule. While we recognize that maintaining the interim structure, and,  d(#along with it, the continued availability of bundled tandemswitched transport, might impede the  d(#development of tandem competition to some degree, we have adopted other measures to promote  Y-such competition.34 T- v ԍSee Expanded Interconnection with Local Telephone Company Facilities, Transport Phase II,  d(#!Third Report and Order, 9 FCC Rcd 2718 (1994)(facilitating competition in the provision of tandem switching).  Y-  ` ` 32. We decline to hold open this proceeding, as Sprint suggests. We conclude  d(#xthat we have had sufficient time to evaluate the interim restructure. Moreover, in the notice  Y- d(#Yportion of the First Transport Order, we sought comment on permanent transport rate structure  d(#issues, and if future events demonstrate that further rate structure adjustments are needed, we  d(#can address them in that phase of this proceeding. We conclude, however, that continued  d(#Jmonitoring of the effects of the interim transport rate structure would be in the public interest,  d(#-and we delegate DELEG  authority to the Chief, Common Carrier Bureau, to continue and refine the  d(#Bureau's transport monitoring program. With our affirmation of the interim transport rate  d(#structure, we retain our conclusions that: (1)nonTier1 LECs are exempt from implementing  d(#the interim transport rate structure; (2)if such LECs provide entrance facilities, they must  d(#.provide them on a flatrated basis; and (3) such LECs must offer flatrated directtrunked  Y-transport upon receipt of a bona fide request.r44 T%-ԍFirst Reconsideration Order, 8FCC Rcd at 538081, 60.r " 4\+))!"Ԍ X- wB.` ` Initial Benchmark Level and Permanent Rate Relationships (#`  Y- 1` `  33. IIIB  Background. To facilitate the implementation of the initial transport rates  d(#under the new structure, we accorded a presumption of reasonableness to the LECs' initial  d(#restructured transport rates if they were based on the rates for comparable special access services  Y- d(#win effect on September1, 1992.|54 T-ԍFirst Transport Order, 7 FCC Rcd at 7010, 702734, 8, 4052.| This presumption of reasonableness applied only if the ratio  d(#,between a LEC's special access DS3 and DS1 rates was at or above the benchmark ratio of 9.6  d(#ito1. Thus, the LECs could have set their initial DS3 transport rates greater than or equal to  d(#9.6 times their DS1 rates without providing substantial cost justification. We determined the  d(#level of the benchmark by requiring the LECs to calculate the ratio between: (1) the total charge  d(#\for a onemile channel termination, ten miles of interoffice transmission, and one DS3  d(#<multiplexer using the LEC's DS3 special access rates, and (2) the total charge for a onemile  d(#channel termination plus ten miles of interoffice transmission using the LEC's DS1 special  Y - d(#access rates.|6 j4 T-ԍId. at 7033,51. See also 47 C.F.R.69.108(a).| Most of the LECs' special access DS3/DS1 rate ratios exceeded 9.6 to1. Thus,  d(#we established 9.6 to1 as a benchmark ratio, and decided that if a LEC's special access  d(#DS3/DS1 rate ratio exceeded that benchmark, transport rates based upon the LEC's special  Y-access rates would be presumptively lawful.i7 4 TN-ԍFirst Transport Order, 7 FCC Rcd at 7034, 52.i  Yc- P` ` !34.  USWEST We required those LECs whose special access rate ratios fell below the  d(#<benchmark to make a "substantial cause" showing that their rates were reasonable, or in the  d(#alternative, that they file new transport rates that satisfied the 9.6 to1 benchmark, but that  d(#would not increase the proportion of transport revenue recovered through the interconnection  Y- d(#charge.:84 Tg-ԍId.: To take a hypothetical example, a LEC with a special access DS3/DS1 rate ratio of  d(#8 to1 might have recovered 65% of its transport revenues through the interconnection charge  d(#if its initial transport rates were based on its thenexisting special access rates, without regard  d(#to our benchmark requirement. If that LEC, however, filed transport rates satisfying the 9.6  d(#-to1 benchmark, it was permitted to recover only 65% of its transport revenues through the  d(#xinterconnection charge. The LECs with special access rates below the benchmark uniformly  d(#chose to file new transport rates consistent with the benchmark, rather than file cost  d(#justifications. The 9.6 to1 benchmark was developed only to establish initial transport rates,  d(#not to govern the rate relationships between different transport services after the initial rates  d(#became effective. Subsequent transport rate changes initiated by price cap LECs have been  Y"-governed by the price cap rules.L9"P4 T#&-ԍId. at 7043, 73.L " 9\+));"Ԍ Y- ` ` "35. While there is no special access rate element that directly corresponds to  d(#tandemswitched transport, we found that the underlying facilities used to provide tandem d(#<switched transport are essentially the same as special access facilities, except for the tandem  Y- d(#switch.:4 T5- v ԍFirst Transport Order, 7 FCC Rcd at 7036, 55; First Reconsideration Order, 8 FCC Rcd at 537677, 3439. Therefore, we permitted the LECs a presumption of reasonableness if they set their  d(#initial rates for the transmission portion of tandemswitched transport on the perminute  d(#equivalent of their directtrunked transport DS1 and DS3 rates: (1) weighted based on the  d(#wmixture of fiber and copper facilities used by the LEC in providing interoffice services; and (2)  Y`- d(#xcalculated using a loading factor of 9000 minutes of use per month per voicegrade circuit.;`B4 TS - v ԍFirst Transport Order, 7 FCC Rcd at 703637, 56; First Reconsideration Order, 8 FCC Rcd at 5377, 42.  d(#We required that the tandem switching charge, a subelement of the tandemswitched transport  Y2-rate, recover 20% of the fully allocated costs of the tandem switch.<24 T-ԍFirst Transport Order, 7 FCC Rcd at 703738, 59; First Reconsideration Order, at 5378, 45.  Y - 1` ` #36. In the Second Transport Order, we explicitly declined to adopt permanent  d(#Zrate relationships between different transport services for example, to require the LECs to  d(#maintain a 24 to1 ratio between their DS3 and DS1 services on a continuing basis. We  d(#,observed that: (1)fixed rate relationships would discourage the LECs from lowering DS3 and  d(#-possibly DS1 rates, which would retard longdistance price reductions and ultimately could  d(#,restrict economic growth; and (2)applying ongoing rate relationship requirements to the LECs  Y|- d(#and not their competitors could inhibit the full development of access competition.i=|^4 T-ԍSecond Transport Order, 9 FCC Rcd at 623, 15.i To address  d(#concerns raised regarding potentially anticompetitive LEC pricing, we placed DS3, DS1, and  d(#voicegrade flatrated transport services into separate service categories and subcategories,  d(#limiting the LECs' ability to offset rate reductions for one service with rate increases for another  d(#;service. We also retained our placement of tandemswitched transport and the interconnection  d(#Ycharge in separate price cap service categories with particularly narrow upper pricing bands  d(#+2% for tandemswitched transport and +0% for the interconnection charge to further restrict the LECs' ability to raise rates for these services.  Y-  ` ` $37. Positions of the Parties. Some of the parties ask us to consider:  d(#(1)adjusting the benchmark used to establish initial transport rates and applying it to subsequent  d(#transport rate changes, (2)applying it separately to different transport segments, and  d(#(3)modifying the methodology used to establish initial transport rates by LECs that have special access rates below the benchmark. "; =\+))L"Ԍ Y- m ` ` %38. Adjusting the Benchmark or Applying it to Subsequent Rate Changes.  d(#CompTel, Sprint, and WilTel argue that the Commission should significantly adjust the  Y- d(#wbenchmark upwards and require LECs to comply with such a benchmark on an ongoing basis.A>84 TL- v ԍFirst Order Petitions of: CompTel at 1718; WilTel at 1921; Sprint at 1516; Second Order  d(#Petitions of: CompTel at1218; WilTel at713; Sprint at4, 711. CompTel also argues that the  d(# Commission should modify the language of its rules so that transport tariffs not complying with the  d(#wbenchmark ratio or rates not based on special access rates on a perelement basis will always be suspended and investigated. CompTel First Order Petition at 11, 14.A  d(#m CompTel, Sprint, and WilTel assert that the 9.6 to1 benchmark is too low because it is based  d(# on special access rates that reflect noncostbased rate differences, and that it unjustly  Y- d(#Jdiscriminates against smaller volume customers.?4 T - v ԍCompTel First Order Petition at 59; WilTel First Order Petition at 89; CompTel First Order Reply at 4, 67 (adding that compliance with the price cap rules does not ensure costbased rates). Further, they argue that price cap regulation  d(#is insufficient to protect smaller IXCs from ongoing price discrimination as the LECs  Y`- d(#subsequently change their transport rates.}@`@4 TQ-ԍSecond Order Petitions of: CompTel at 1214; WilTel at 78; Sprint at 711.} They argue that the noncostbased differences  d(#[between the rates for higher and lower volume transport services award AT&T an unfair  d(#advantage over smaller volume IXCs. They also contend that these rate differences provide  d(#incentives for all IXCs to purchase excess capacity and underutilize facilities: they argue that  d(#BOC DS3/DS1 ratios create incentives for IXCs to purchase DS3 facilities and use only, on  d(#;average, 54% of the facility, based on a two mile circuit, or 26%, based on a twentyfive mile  Y - d(#circuit.A 4 Tg- v ԍWilTel Second Order Petition at 1518; CompTel Second Order Petition at17; ex parte submission of CompTel at 4, filed April22, 1994. Instead, they argue for rate ratios that would create incentives for IXCs to use 85%  d(#of the capacity of a DS3 circuit. Consequently, CompTel, WilTel, and Sprint advocate  Y - d(#Ybenchmark ratios somewhere in the range of 20 to1 and 24 to1.B Z 4 T- v hԍWilTel First Order Petition at 10; Second Order Petitions of: CompTel at 1415; Sprint at 34.  T-Accord, MCI First Order Opposition at12; WilTel Second Order Petition at 13. They base these benchmark  d(#ratios on cost assumptions relying primarily on the capacity difference between DS3 and DS1  Yz-circuits, taking into account some allowance for multiplexing and fill factors of 85%.4Cz4 T- v ԍWhen a LEC leases an entire DS3 circuit to an IXC, the IXC bears the burden of putting that  d(#v circuit to use. When a LEC leases individual DS1 circuits to an IXC, the LEC bears the burden of  d(#!putting to use the DS3 facility that carries the individual DS1 circuits. Thus, when an IXC orders DS1  d(# !circuits, the cost of the DS3 circuit cannot be spread among all 28 DS1 circuits comprising that DS3  d(#"circuit, but only among the DS1 circuits actually used. In addition, LECs often leave a few DS1 circuits  d(#G"on a DS3 facility empty in order to anticipate growing facilities demand and for purposes of emergency  d(#"backup. As used in this order, the term "fill factor" refers to the difference between the costs associated  d(#!with utilization of a DS3 circuit when it is leased in its entirety and the costs associated with the same facility when it is leased in portions as DS1 circuits.4 "c4C\+)):"Ԍ Y- n` ` &39. The LECs' initial tandemswitched transport rates were set based on the  d(#directtrunked transport rates using the mix of fiber and copper facilities in the LECs' interoffice  d(#networks to weight the DS3 and DS1 directtrunked transport rates, respectively. WilTel and  d(#CompTel argue that this circuit mix, based on updated fiber/copper ratios, should be used  Y- d(#Yannually to adjust a permanent rate relationship for tandemswitched rates.kD4 T-ԍFirst Order Petitions of: CompTel at 1819; WilTel at 21.k As an alternative  d(#ito using a revised benchmark to govern transport rates on an ongoing basis, Sprint urges the  d(#Commission to set the permonth equivalent of the tandemswitched transport rate as the ceiling  Y`- d(#hfor DS1 direct trunks.E`h4 Ty - v ԍSprint First Order Petition at 1315. Accord, CompTel Second Order Petition at1819 (arguing  d(#!use of the 28 to1 rate relationship to establish (1) a DS1 ceiling based upon the DS3 rate level, and (2)  d(#"in conjunction with updated copperfiber data, a tandemswitched transport rate ceiling based on DS3 and  d(#"DS1 rate levels). Presumably, CompTel recommends that the ceiling for tandemswitched transport rates  d(#"(exclusive of the tandem charge) would be derived by: (a) multiplying the voicegrade capacity of a DS1  d(#!circuit (24) times the average loading of a DS1 circuit (9000 minutes); and (b) multiplying that product  d(#!by the updated copperfiber mix (which is intended as a surrogate for the ratio of DS3 to DS1 circuits  Tc-used by a particular LEC to provide tandemswitched transport services). Id. Sprint asserts that because the Commission requires that the charge for  d(#ktandemswitched transport be based on the actual DS3 and DS1 circuit mix of a LEC's  d(#interoffice network, and because almost all tandemrouted traffic will likely be carried at DS3  d(#speed, it is possible that tandemswitched transport rates could be less than DS1 directtrunked  d(#Ztransport rates. Sprint asserts that this situation is illogical since it is more efficient to route  d(#traffic via dedicated DS1 circuits than through a tandem switch. Similarly, Allnet argues that  d(#directtrunked and tandemswitched rates within a density zone should be linked, so that if  d(#directtrunked transport rates are lowered within a zone, tandemswitched transport rates must  Y -be lowered by the same percentage.Fb 4 TM- v hԍComments of Allnet Communication Services, Expanded Interconnection with Local Telephone  d(#: Company Facilities, CCDocket No.91141 (filed Dec. 4, 1992) at 67. We noted that we would  T- d(#!consider Allnet's argument in this proceeding. Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7427, 101.  Yz- #` ` '40. To support the claim that price cap regulation is insufficient to prevent  Yd- d(#discriminatory LEC pricing, CompTel, in ex parte submissions, submits data from the 1994  d(#annual access tariff filings indicating that four of the BOCs have reduced their directtrunked  Y8- d(#xtransport rates while not reducing at all, or as much, their tandemswitched transport rates.oG84 T"-ԍEx parte submission of CompTel at 4, filed May31, 1994.o  d(#CompTel asserts that these price trends demonstrate that the LECs are placing higher overhead  d(#loadings on their smaller volume services, thus discriminating against their smaller volume  d(#customers (assuming that the direct costs of providing DS3, DS1, and tandemswitched transport  Y- d(#Zservices have not changed).H4 TM'-ԍCompTel Second Order Reply at 3; ex parte submission of CompTel at 23, filed May 31, 1994. Sprint supports CompTel's data and notes that, in USWest's  d(#1994 annual access tariff filing, USWest's transport rates fell below a DS3/DS1 ratio of 9.6"bH\+))"  Y- d(#ito1.PI4 Ty-ԍSprint Second Order Reply at7.P Sprint further argues that, under the price cap regime, over a three year period LECs  d(#will be able to lower DS3 rates by 27% and raise DS1 rates by 16%, thereby reducing the  Y-already low ratio of 9.6 to1 to 6.04 to1.Jbh4 T- v ԍSprint Second Order Petition at10. See also WilTel Second Order Petition at 12 (predicting that  d(#!tandemswitched transport users could see the spread between the rates they pay, and the rates charged  d(#"competitors using flatrated transport, increase by 7% a year, or 14% over the two years that the interim plan is in effect and a spread of over 20% in certain zones).  Y- |` ` (41. To further support its argument that LEC transport rates are not costbased,  d(#CompTel cites decisions of two state commissions declining to allow LEC intrastate transport  d(#<rates that mirrored interstate transport rates to take effect. CompTel also cites statements of  Y`- d(#other state commission officials arguing that such rates be rejected.V K `4 T- v : ԍLetter from Genevieve Morelli, VicePresident General Counsel, CompTel, to Kathleen Wallman,  T{- d(#"Chief, Common Carrier Bureau, dated November 21, 1994 (attaching Oral Presentation by Staff Attorney  TU- d(#YKellner, Docket No. U20800, Louisiana Public Service Comm. (Nov. 9, 1994); Application of  d(#"Southwestern Bell Telephone Co., Contel of Texas, and GTE Southwest to Restructure Rates and Pricing  T- d(# of the Local Transport and Directory Transport Categories of their Switched Access Service Tariff,  T- d(#!Proposal for Decision, Docket No.12784, Public Utility Comm. of Texas (October25, 1994); ICC v.  T- d(#!Illinois Consolidated Telephone Co., et al., Testimony of Elizabeth Ann Wisniewski, Telecom. Dept.,  d(#"Public Utilities Div., Illinois Commerce Comm., Docket Nos. 940042, 940043, 940045, and 940046  Tm- d(#d#(June 1994); Request of Southern Bell for Approval of Revisions to its Access Service Tariff to Restructure  TG- d(#!Switched Access Local Transport, Order Approving Revisions to Access Service Tariff to Restructure  d(#g Switched Access Local Transport, Docket No. 93756C, Public Service Comm. of South Carolina  T- d(#F#(June30, 1994); and Tariff Filing by South Central Bell Telephone Company to Redesign Switched Access  T- d(#t"Local Transport Rates, Order, Docket No. 9308865, Tenn. Public Service Comm. (November3, 1994));  d(#"Letter from Genevieve Morelli, VicePresident General Counsel, CompTel, to Kathleen Wallman, Chief,  T- d(#.Common Carrier Bureau, dated December 6, 1994 (attaching Memorandum from Div. of  d(#"Communications and Div. of Legal Services, Florida Public Service Comm., to Director, Div. of Records  T7- d(#e"and Reporting, re Docket No.921074-TP, Petition for Expanded Interconnection for Alternative Access  d(# "Vendors within Local Exchange Co. Central Offices by Intermedia Communications of Florida, Inc., et  T-al., (Nov.18, 1994).V InMFJ addition, CompTel  d(#provides a copy of its application for enforcement of the MFJ against BellSouth, in which  d(#CompTel alleges that BellSouth's transport rates violate the MFJ's requirements that access rates  Y - d(#be costjustified and nondiscriminatory.L z4 TF"- v zԍApplication for Enforcement of Appendix B, Section (B)(2), and SectionII(B)(3) of the  T#- d(#!Modification of Final Judgment and Request for Expedited Treatment, United Statesv. Western Elec.  T#- d(#Co., Civil Action No.82-0192(HHG), filed Sept.29, 1994 (inter alia, citing BellSouth officials'  d(#t"statements that rates are "market based" rather than costbased, and alleging that the differences between  d(#"BellSouth's rates for different transport services are out of proportion to the cost differences between the  T&-costs of the services). BellSouth opposes CompTel's arguments, and" VL\+)) "  Y- d(#specifically disputes CompTel's calculations relating to BellSouth's rate relationships as flawed.NM<4 Ty- v I ԍLetter from W.W. (Whit) Jordan, Executive Director Federal Regulatory, BellSouth, to William  TQ- d(#!F. Caton, Acting Secretary, dated December2, 1994 (attaching BellSouth Response to Application for  T+- d(#u!Enforcement Filed by the Competitive Telecommunications Association). See also Letter from W.W.  d(#(Whit) Jordan, Executive Director Federal Regulatory, BellSouth, to Kathleen Wallman, Chief, Common Carrier Bureau, dated December7, 1994.N %Y   d(#iCompTel also submits an impact analysis apparently based on data from the LEC monitoring  d(#ireports, and asserts that the difference in the impact of the rate restructure on small IXCs, as  Y-compared with AT&T, has been, and likely will continue to be, significant.N4 T8 - v -ԍLetter from JamesM. Smith, President, CompTel, to ReedE. Hundt, Chairman, FCC, dated December7, 1994, at 6.  Y- ^` ` )42. The LECs generally oppose raising the benchmark and using it to establish  Yw- d(#permanent rate relationships, while some attack the use of any benchmark.O`wD4 Tl- v ԍPacific First Order Petition at 67 (arguing that the benchmark is unsupported by the record,  d(#!designed to protect CAPs and smaller IXCs, and inconsistent with the Commission's goals); USWest  d(#!First Order Petition at 1012 (arguing that the benchmark is arbitrary given the wide variation in LEC DS3 and DS1 rates). The LECs argue  d(#that permanent rate relationships would impose inordinate restrictions on the LEC pricing  d(#Jflexibility permitted under price caps, and that in an increasingly competitive environment, the  Y2- d(#market should be permitted to drive pricing.P2l 4 TO- v ԍFirst Order Oppositions of: Ameritech at 7; NYNEX at 7; USTA at 1213; Second Order Oppositions of: BellSouth at 7; USTA at2; Bell Atlantic at3; SWBell at2. Further, they argue that LECs will have  Y - d(#incentives to maintain economically rational rate relationships.Q 4 T- v ԍFirst Order Oppositions of: Rochester at 11; GTE at 2021; Rochester First Order Reply at 45; BellSouth Second Order Opposition at5; NYNEX Second Order Opposition at 4. Moreover, the LECs assert that  d(#the method advocated by the IXCs other than AT&T for determining a benchmark based on  d(#the capacity difference between DS3 and DS1 services is flawed because it fails to account  d(#for important cost characteristics, such as the proportion of fiber and copper deployed,  d(#management and systems operations, and average lengths of circuits. The LECs contend that  Y - d(#these costs vary among LECs and over time.xR \4 T - v ԍFirst Order Oppositions of: Pacific at 811; GTE at 1819; Rochester at 68, 11; USTA at 1213;  d(#!Pacific First Order Reply at 13; Rochester First Order Reply at 2; GTE Second Order Opposition at 3 (arguing that CompTel, WilTel, and Sprint ignore the costs related to provisioning each service).x They also note that some CAPs and IXCs offer  Y-DS3 services priced at a multiple of DS1 rates that is at or below the 9.6 to1 ratio.S4 T$- v YԍGTE First Order Opposition at 4, 8; First Order Replies of: Bell Atlantic at 4; NYNEX at n.7; USWest at 67.  Yc- ` ` *43. Some LECs argue that a higher benchmark and permanent rate relationships  d(#would prevent customers from taking advantage of the increased efficiency and flexibility of"M$S\+))9"  Y- d(#Zgreater bandwidth services that are justified by cost differences.T4 Ty-ԍBell Atlantic Second Order Opposition at3. Accord, NYNEX First Order Opposition at 5. GTE argues that a higher  d(#benchmark would injure smaller IXCs in the longterm by driving larger IXCs to their own  Y- d(#bypass facilities or to CAP services, leaving the other IXCs to support the LEC networks.TUj4 T-ԍGTE First Order Opposition at 711.T  d(#NYNEX submits that substantially raising the benchmark would require either lowering DS1  d(#Krates, creating a revenue shortfall that would have to be recovered from the interconnection  d(#hcharge (or the "contribution charge" in the special access context), or raising DS3 rates to price  Yv- d(#LECs out of the market.UVv 4 T1 -ԍNYNEX First Order Opposition at 56.U Several LECs also argue that their special access rates have been  Y_- d(#scrutinized in the past and have been determined to be reasonable.W_4 T - v ԍFirst Order Oppositions of: Pacific at 68; BellSouth at 78; NYNEX at 45; SWBell at 67; US  d(#!West at 6; USTA at 1314; GTE at 9; Pacific First Order Reply at 56; GTE Second Order Opposition at 45. Finally, Pacific opposes  d(#Yannual recalculation of tandemswitched transport rates based on updated fiber/copper ratios as  Y1-contrary to price cap principles.PX14 T-ԍPacific First Order Reply at 8.P  Y - 0` ` +44. Pacific opposes Sprint's alternative recommendation to establish a ceiling for  d(#directtrunked transport rates based on tandemswitched transport rates, arguing that it would  d(#constitute a disincentive to use the network efficiently and ignores the extent to which special  Y - d(#access rates have been scrutinized for reasonableness.VY 4 T -ԍPacific First Order Opposition at 14.V SWBell characterizes Sprint's proposal  d(#Yas another unjustified attempt to price DS1 at 1/28 of the DS3 directtrunked transport rate and  Y- d(#ias an arbitrary tying of one rate element to another, contrary to the price cap rules.UZ: 4 T|-ԍSWBell First Order Opposition at 8.U USTA  d(#asserts that such pricing constraints would result in artificial rate relationships that have no  Yc- d(#relevance to either economic costs or the market.S[c 4 T-ԍUSTA First Order Opposition at 11.S GTE opposes Sprint's proposal, arguing that  d(#YIXC service choices should be based on wellmanaged LEC rates and that the Commission need  Y5-not try to predetermine service choices through complex and overlapping rules.U\5z4 T`#-ԍGTE First Order Opposition at 1516.U  Y- ]` ` ,45. AT&T opposes a higher benchmark, arguing that directtrunked transport and  d(#special access are provided over similar facilities and have similar cost characteristics, that  d(#existing special access rates are reasonable, and that there are cost differentials between DS1 and  d(#DS3 facilities. AT&T contends that the small and medium IXCs have not shown that their"\\+))"  d(#proposals are justified by service cost relationships, and further contends that the proposals  Y- d(#would be contrary to policies of price cap regulation.U]4 Tb-ԍAT&T First Order Opposition at 713.U Moreover, AT&T opposes permanent  xrate relationships, arguing that price cap restrictions are more than adequate and that subsequent  xlinkage or other restrictions on LEC pricing flexibility are unwarranted and would exacerbate  xthe extent to which tandemswitched transport is priced below cost, particularly as those costs  Y_-change.k^_h Tx -ԍxId. at 1316; AT&T Second Order Opposition at 1118.k  Y1- ` x` ` -46. Applying the Benchmark Separately to Different Transport Segments.  xiWilTel, CompTel, and MCI contend that the LEC interoffice network serves all carriers and  Y - xinvolves shared costs, while entrance facilities reflect IXCspecific requirements._  T-  ԍxFirst Order Petitions of: WilTel at 78; CompTel at 911; MCI at 69; MCI First Order Reply at 56. Accordingly,  x+ MCI, in conjunction with arguing that a significantly adjusted benchmark should govern ongoing  xrate changes, asserts that LECs should be required to satisfy such a benchmark requirement  xseparately for entrance facilities and for directtrunked transport. WilTel and CompTel contend  x;that the LECs should be required to satisfy that benchmark requirement ratio separately for the  x;separate components of interoffice transport. For example, they advocate applying benchmark  xratios separately for the nondistancesensitive fixed rate elements and for each of the distance  Yc- xsensitive elements.``c T-  iԍxFirst Order Petitions of: WilTel at 1011, 13; CompTel at 911. Under the rate restructure,  x "LECs are required to charge a fixed rate per circuit, regardless of mileage, for directtrunked transport.  x LECs in their discretion may impose an additional charge based on the mileage of the directtrunked transport circuit in question. They also contend that entrance facilities should be removed from the  xjcalculation of the benchmark ratio. Sprint states that, even if the Commission declines to  xincrease the benchmark ratio substantially, the other IXCs' suggestions regarding separate  Y-application of the benchmark should be adopted.Xa  Ty-ԍxSprint First Order Opposition at 1415.X  Y- ` x` ` .47. A number of LECs and AT&T oppose the proposal to apply the benchmark  Y- xKto separate rate elements on the same grounds that they oppose use of a higher benchmark.ybJ  T#-ԍxFirst Order Oppositions of: BellSouth at 4; SWBell at7; AT&T at 713.y  xAmeritech and Rochester contend that requiring LECs to satisfy the benchmark separately for  xzthe fixed and interoffice mileage components, or removing entrance facilities from the  x benchmark analysis, would serve no purpose and would only further distort LEC pricing because  xtransport services consist of all these components and the analysis assumes purchase of endto"~ b\+))"ԫ Y- x<end transport from the LECs.rc Ty-ԍxFirst Order Oppositions of: Ameritech at 67; Rochester at 910.r While asserting that the Commission should not impose any  xbenchmark requirement on entrance facilities because such a requirement is already overly  xrestrictive and arbitrary, GTE argues that if a benchmark requirement is maintained it should  Y- xbe determined based on the total circuit configuration and not on an elementbyelement basis.Udh T-ԍxGTE First Order Opposition at 1011.U  xPacific opposes separate benchmarks for entrance facilities and different mileage segments,  xarguing that the small IXCs are simply seeking uneconomic rates to enable them to compete  Yv-against AT&T.Yev T/ -ԍxPacific First Order Opposition at 1113.Y  YH- ` |x` ` /48. Methodology for LECs with Rate Ratios Below the Benchmark. US West  xasserts that the Commission's methodology for computing interconnection charges for LECs with  Y - xhspecial access rate ratios below the benchmark (described supra in paragraphUSWEST34) is inconsistent  xhwith computing the interconnection charge to yield revenue neutrality. USWest argues that a  xbetter approach would calculate the interconnection charge based on the new transport rates,  xwithout regard for whether the adjusted rates increase the proportion of revenue recovered  Y - xthrough the interconnection charge._f  T-ԍxUS West First Order Petition at 1213 & n.25._ Rochester argues that use of the 9.6 to 1 ratio could harm  xLECs whose special access rates fall below the benchmark, for example, by causing flatrated  xtransport rates to diverge significantly from the costs of service and from the LECs' special  Y|-access rates.Xg|H Tu-ԍxRochester First Order Petition at514.X  YN- ` Ox` ` 049. WilTel agrees with the LECs that the Commission should permit the LECs  x;to raise their DS3/DS1 ratio voluntarily or reduce dedicated transport rates to bring them more  xclosely in line with costs, without the requirement that the proportion of revenues recovered  Y - xthrough the interconnection charge remain unchanged.Vh  T-ԍxWilTel First Order Petition at 1518.V Nevertheless, contrary to US West's  xand Rochester's arguments, WilTel asserts that the LECs' existing special access rate  xrelationships are discriminatory and do not accurately reflect differences in the cost of providing  Y- xDS3 and DS1 services.Ui  T"-ԍxWilTel First Order Opposition at 13.U Further, WilTel argues that divergence between special access and  xJswitched transport rates would be reasonable in order to achieve the higher benchmark WilTel  Y- xproposes.Dj(  Tp&-ԍxId. at 1315.D Sprint also opposes US West's arguments, asserting that the Commission has often" j\+))"  xused industry averages or the results of the most efficient carrier as a basis for setting or  Y-investigating rates.kh Tb-  ;ԍxSprint First Order Opposition at 14 (citing Annual 1985 Access Tariff Filings, CCDocket No.  T<- x+ 86125, PhaseI, Order Designating Issues For Investigation (released April 14, 1983); ITT World  T- x"Communications Inc., 85F.C.C.2d 561, 567 (1981); Western Union Telegraph Co., 25F.C.C. 535, 580 T-81 (1958); Charges for Communications Service, 12F.C.C. 29, 62 (1947)).  Y- ` x` ` 150. Discussion. For the reasons set forth below, we affirm the benchmark used  xin 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.  Y`- ` |x` ` 251.  COST  Adjusting the Benchmark or Applying It to Subsequent Rate Changes. We  xidecline to revise the benchmark used to establish initial transport rates or establish rigid rate  x[relationships based on such a benchmark. We conclude that the small and medium IXCs'  xksuggested level of the benchmark lacks adequate cost justification. Further, fixed rate  Y - xrelationships are not consistent with LEC price cap regulation.l`  T-  I ԍxWe dismiss as moot CompTel's request that we make mandatory the setting of the initial transport  x"rates based on individual special access rate elements and on the DS3/DS1 benchmark ratio. All the LEC  x"tariffs implementing the interim rate structure complied with these guidelines, mooting any need to make them mandatory. To raise the benchmark to the  xwlevels suggested by CompTel, WilTel, and Sprint (in the range of 20to1 to 24to1) would not properly and completely account for several relevant cost factors, explained below.  Y - ` Ox` ` 352. Providing DS1 circuits over a DS3 fiber facility imposes costs that are not  xincurred when a customer leases a full DS3 facility. First, in order to carry DS1 level traffic  xover a DS3 facility in the interoffice network, the DS1 circuit must be multiplexed up to a DS3  x,at the SWC so that the traffic can be carried at DS3 speed, and back down to a DS1 at the end  xoffice. Due to these additional multiplexing costs, the non-distancesensitive element of the DS1  xinteroffice rate should be relatively higher than that component of the DS3 rates. Second, if  xDS1 directtrunked traffic is routed through an intermediate office where some of the traffic  x+ being carried on the DS3 circuit is dropped off or routed over a different outgoing facility, LECs  xxhave to multiplex the circuits down to the DS1 level in order to remove that traffic from the  xcircuit, and then up again to the DS3 level to carry the remaining traffic through the interoffice  xnetwork. To accomplish this multiplexing, the LEC must convert an optical signal to an  xelectrical signal and then back to an optical signal by using the appropriate optical line  xterminating circuit equipment. These multiplexing and optical circuit equipment costs would be  xexpected to make the mileage component of DS1 interoffice rates somewhat higher,  xJproportionally, than that of DS3 rates. Third, DS1 circuits composing a DS3 facility generally  YQ- xhwill not fill the DS3 facility completely. For several reasons (i.e., LEC anticipation of demand  xgrowth, LEC decisions to maintain backup circuits, and the random likelihood that access  xcustomers do not order DS1 facilities in multiples of 28), there often will be fewer than 28 DS1s  x,in use on each DS3 facility. IXCs that purchase a DS3 facility bear the burden of utilizing the  xfull capacity of the DS3. On the other hand, when an IXC leases DS1 circuits from a particular" l\+))"  xLEC, the burden of completely using the DS3 facility on which those DS1 circuits are carried  xis borne by the LEC, and the LEC can only spread the cost of the DS3 facility among those  Y- xDS1s that are purchased.cm TK-ԍ First Transport Order, 7 FCC Rcd at 7031, 48.c Fourth, some of the costs of providing DS3 services are not 28  xKtimes the costs of providing DS1 services because, for example, the costs of engineering the  xnetwork to accommodate DS1s on a DS3 facility, administrative and customer relations costs,  x and the cost of billing and collecting for the different services, are not necessarily proportionally higher for DS3 services.  YH- ` x` ` 453. For all of these reasons, we reject the small and medium IXCs' arguments  xthat DS1 rates should be based on their suggested benchmark ratios. Ignoring these cost factors  xwould erect a noncostbased price umbrella, similar to the equal charge rule, and hamper access  xhcompetition. Moreover, any single industrywide ratio for DS1 and DS3 rates is unlikely to be  xhan accurate reflection of cost differences for all LECs, and would probably have to be changed over time as technology changes the relevant cost factors.  Y - ` x` ` 554. We are not persuaded by CompTel's arguments based on selected state  x.commission decisions and statements of their officials. We note that five of the states in  xBellSouth's region have permitted intrastate transport rates mirroring interstate transport rates  Yd- xto go into effect.ndj T-  ԍxSee Letter from W.W. (Whit) Jordon, Executive Director Federal Regulatory, BellSouth, to Kathleen Wallman, Chief, Common Carrier Bureau, dated December7, 1994, at1. Of course, state commissions apply state statutory and regulatory standards,  xrather than the standards of the Communications Act of 1934 and the Commission's rules.  x,Moreover, CompTel appears to have overstated the pertinence of some of the state commission  xdecisions it cites. For example, the Louisiana Public Service Commission did not reject  xLBellSouth's intrastate transport rates because those rates were not costbased, but because  xBellSouth had simply proposed interstate transport rates for intrastate transport without  Y- xattempting to satisfy relevant state requirements.Mo To-  ԍxSee Oral Presentation by Staff Attorney Kellner, Louisiana Public Service Commission, U-20800  TI- x(Nov.9, 1994) at 3 (attached to Letter from Genevieve Morelli, VicePresident General Counsel,  T#- x!CompTel, to Kathleen Wallman, Chief, Common Carrier Bureau, dated November 21, 1994). See also  T- xV"Memorandum from Div. of Communications and Div. of Legal Services, Florida Public Service Comm.,  T- xto Director, Div. of Records and Reporting, re Docket No.921074-TP, Petition for Expanded  x"Interconnection for Alternative Access Vendors within Local Exchange Co. Central Offices by Intermedia  T!- x!Communications of Florida, Inc., et al., (Nov.18, 1994) at 12945 (attached to Letter from Genevieve  x Morelli, VicePresident General Counsel, CompTel, to Kathleen Wallman, Chief, Common Carrier Bureau, dated December 6, 1994).M  In addition, the MFJ's requirements are  xindependent obligations of the BOCs and are not binding on the Commission. The precise  xmeaning of the MFJ requirements cited by CompTel have not been settled by any Department"N o\+))"  xof Justice or court interpretation, and, in adopting the MFJ, the Court stated that regulators  Y-retained authority over ratemaking issues.p Tb-  ZԍxUnited Statesv. American Tel.& Tel. Co., 552F.Supp. 131, 169 n.161, 196 n.271 (D.D.C.  T<- x 1982), aff'd sub nom. Marylandv. United States, 460U.S. 1001 (1983). The MFJ characterized its  T-"equal charge rule" as an exception to the general requirements cited by CompTel. See supra  MFJ41 .  Y- ` ]x` ` 655. We continue to believe that special access rates provide a rational framework  xLfor establishing the initial transport rates. First, the special access rate structure includes  xelements that are closely analogous to the transport portion of the switched access network. For  xKexample, the special access channel termination from the IXC POP to the SWC parallels the  xxentrance facilities of the switched access network between the IXC POP and the SWC. The  x+ special access interoffice links are comparable to directtrunked transport between SWCs and end  Y2-offices. The LECs often provide special access and transport services over the same facilities.iq2 T-ԍxFirst Transport Order, 7 FCC Rcd at 7012, 13.i  Y - ` x` ` 756. Second, special access rates provided a generally reasonable framework for  xthe initial restructured transport rate levels. LEC special access rates have been subject to the  xxdiscipline of both a certain degree of competition and the tariff review process. In adopting  xKLEC price caps, we specifically concluded that preexisting special access rate levels were a reasonable basis from which to launch a system of price cap regulation. We stated:  2XxThe July1, 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  Y6-best that rate of return regulation can produce.hr6 T-ԍxLEC Price Cap Order, 5 FCC Rcd at 6814, 232.h   Y- x LPCO We cited a number of factors in support of this conclusion: the revised Uniform System of  xAccounts; the newlyinstituted cost allocation procedures used to separate non-regulated costs  x: from regulated costs; the refined methodology for selecting the allowed rate of return; our ability  x+ to track costs through an automated reporting system; and increasingly sophisticated tariff review  Y- xprocedures, including the use of Tariff Review Plans with standardized cost support.Tsb T -ԍxId. at 6815, 23336.T Most  xhsignificantly, we noted that we had paid particularly close attention to the LECs' special access  xrates, and had conducted special proceedings to ensure that special access rates and rate  Yg- xwrelationships were reasonable.Wtg  T%-ԍxId. at 681516, 23740.W Special access rate changes between July 1991 and September  x1992-- the effective date of the special access rates on which the initial restructured transport  Y9-rates were basedvu9  T(-ԍxFirst Reconsideration Order, 8FCC Rcd at 5374, 2325.v֠-- complied with the requirements of the LEC price cap rules."9H u\+))["Ԍ Y- ` @ԙx` ` 857. Our approach of presuming LECs' initial restructured transport rates to be  xwreasonable if based on special access rates, subject to a limited benchmark requirement, enabled  x[us to implement the new transport rate structure expeditiously and without extensive and  xprolonged cost studies. Such cost studies could have delayed the development of access competition and prolonged the inefficiencies resulting from the equal charge rule.  Yw- ` ]x` ` 958. The recommendations of CompTel, WilTel, and Sprint to establish permanent  xirate relationships using a revised benchmark would require the LECs to move their DS3 and  xDS1 rates, and in some cases their tandemswitched transport rates, essentially in lock step.  x=These plans, as well as Sprint's and Allnet's alternative recommendations, would require  xequivalent reductions or increases in one set of rates for each reduction or increase in another  xrate. We believe that requiring permanent rate relationships between DS3, DS1, and tandem xswitched transport rates would interfere with the efficient functioning of the market, and could  xretard longdistance price reductions, depress telecommunications usage, and inhibit economic  xgrowth. Moreover, permanent rate relationships interfere with the market by hampering the  xiLECs' ability to adjust their rates to reflect changes in the underlying costs of their services, contrary to the goals of this proceeding and price cap regulation.  Yd- ` nx` ` :59. We reject the related recommendation to require the LECs to reset their  xJtandemswitched transport rates annually based on DS3 and DS1 directtrunked transport rates,  xiweighted based on updated fiber/copper ratios. We continue to believe that price cap rules,  xhrather than required annual adjustments guided by cost factors, are the most appropriate means,  xin an increasingly competitive access market, to govern ongoing changes in rates for LEC services, including tandemswitched transport.  Y- ` x` ` ;60. We also decline to require the LECs to place uniform overhead loadings on  x,their transport rates as a means of constraining changes to the price relationships between DS3  x,and DS1 rates. Overhead loadings may reasonably differ for higher and lower capacity access  xjservices. Thus, in response to some IXCs' allegations that, as a general matter, the LECs'  xrestructured transport rates are unreasonably discriminatory, we conclude that even if it were  xdemonstrated that different transport services are "like services," differences between the levels  xKof overhead loadings recovered in those rates would not necessarily constitute unreasonable  xdiscrimination. (We note that allegations that specific rates of individual carriers are  x,discriminatory are not before us in this proceeding.) Moreover, one of the primary benefits to  x-consumers of price cap regulation is that it encourages efficient pricing. By placing similar  xservices into the same basket, service category, or service subcategory, and subjecting them to  xaggregate pricing bands, our price cap rules allow a carrier a limited measure of pricing  xflexibility. Where marginal costs are below average costs, this pricing flexibility permits LECs  xto recover their total costs while minimizing adverse impacts on consumer surplus the  xYdifference between the price of a service and what consumers would be willing to pay for that  Yl$-service.vl$ T&-  ԍxSee Expanded Interconnection Remand Order, 9 FCC Rcd at 5199, 163 (citing National Rural  T'-Telecom Ass'n, 988F.2d at 18283 (D.C. Cir. 1993)). "U% Dv\+))&"Ԍ Y- ` x` ` <61.  FIXED  While we continue to believe that a certain level of pricing flexibility is  xneeded to enable the LECs to meet increasing competition in the local access market, we also  x<recognize that without sufficient regulatory constraints the LECs could price their transport  xservices anticompetitively. We have addressed this concern through special safeguards in the  x=price cap system: placing DS3 flatrated transport, DS1 flatrated transport, and tandem x switched transport in separate service categories and subcategories, and retaining the +2% upper  xpricing band for tandemswitched transport services. This +2% pricing band requirement is  x+ significantly more narrow than the typical +5% band for other service categories in the trunking  x,and other baskets. We continue to believe that this approach best balances our concerns about  xpotential anticompetitive LEC pricing and the LECs' need for some pricing flexibility in the  xface of increased competition, and thus, best promotes our public interest goals. We note,  xyhowever, that this decision does not limit our discretion in addressing the separate record  Y -developed in the LEC Price Cap Review proceeding.w  Tf -  ,ԍxPrice Cap Performance Review for Local Exchange Carriers, Notice of Proposed Rulemaking,  T@-9 FCC Rcd 1687 (1994) (LEC Price Cap Review).  Y - ` ^x` ` =62. Applying the Benchmark Separately to Different Transport Segments. We  xdecline to require the LECs to satisfy separate benchmark requirements for entrance facilities  xand for directtrunked transport. The method we used to create the benchmark was based on  xa typical configuration of LEC transport offerings, using rates from analogous special access  x,offerings. This configuration is one IXCs would likely use to purchase transport services, and  xjCAPs are likely to offer services that could be substituted for both entrance facilities and  x,interoffice facilities. Given that the 9.6 to1 benchmark was derived from examining rates for  xtypical special access service configurations, applying the 9.6 to1 benchmark to a comparable  x<transport configuration on a bundled basis was reasonable. The benchmark approach was a  xKreasonable method of ensuring that outlier special access rates did not form the basis for the initial transport rates under the interim plan.  Y- ` x` ` >63. Methodology for LECs with Rate Ratios Below the Benchmark. We decline  x,to revise the method by which those LECs with September 1992 special access rates below the  x9.6 to1 benchmark established initial transport rates. Permitting such LECs to establish new  xI transport rates without any check on the manner in which it was to be done would have provided  xzsuch LECs with the opportunity to shift costs from facilitiesbased rate elements to the  xinterconnection charge. Such a shift could harm access competition because LECs could price  xhtheir transport services by offsetting lower rates for facilitiesbased services, with which CAPs  xcompete, with a higher interconnection charge, paid by the customers of both CAPs and LECs.  xWe conclude that the risk of any significant divergence between special access and transport  xwrates is minimal, because over time, given the pricing flexibility afforded LECs under price cap  xregulation, LECs have the ability and market incentives to align those rates. In these  xwcircumstances, we are reluctant to permit the interconnection charge to increase without a clear indication that such an increase is in the public interest. "#!Dw\+))$"Ԍ Y- ` lx` ` ?64. Finally, while we base our decision here on the public interest considerations  Y- xstated above and in the First Transport Order, and not on the impact data, we note that the  xhimpact data from the quarterly reports indicate that the total costs for interstate switched access  Y- xservice for the smaller IXCs are consistent with the previous LEC estimates.Px T7-ԍxSee Table1, supra.P Therefore, the  ximpact data do not indicate that we need to modify our benchmark requirement or establish  xpermanent rate relationships to preserve full and fair interexchange competition. The impact  xanalysis submitted by CompTel shows results that are generally consistent with the data in the  Yb- xiLECs' monitoring reports.ybj T} -  -ԍxLetter from JamesM. Smith, President, CompTel, to ReedE. Hundt, Chairman, FCC, dated December7, 1994, at 6. Consistent with our past practice, we examine changes in total  xswitched access rates, rather than examining transport rate changes in isolation. A measure of  xthe effect on total switched access more accurately reflects the effect of the restructure on the  xIXCs, because it considers the entire bill they pay for LEC switched access rather than focusing  xonly on one segment of the IXCs' access costs. CompTel's transport numbers, showing an  xindustry average increase of approximately 10% in the transport costs of smaller IXCs compared  xJto those of AT&T for the third quarter of 1994, are generally consistent with the data reported  xby the LECs. Transport rates represent approximately 22% of total interstate switched access  xrates. Thus, a 10% transport impact differential is roughly equivalent to a 2.2% switched access  xdifferential, 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.  XN- xC.` ` Price Cap Service Categories and Price Bands (#`  Y - ` 2x` ` @65.  IIIC  Background. In our 1992 First Transport Order, we created three new  x+ service categories in the traffic sensitive basket in place of the formerly bundled transport service  xxcategory: (1) a combined category including entrance facilities, directtrunked transport and  xdedicated signalling transport (collectively referred to as "flatrated transport"); (2) tandem Y- xwswitched transport; and (3) the interconnection charge.sz TY-ԍxFirst Transport Order, 7 FCC Rcd at 704243, 7076.s In our 1994 Second Transport Order,  xwe modified the price cap baskets and service categories to reflect the new rate structure and  xpricing. Specifically, we modified our price cap rules to place flatrated transport and special  Y- xaccess into the same service category of the newly created trunking basket.s{ T!-ԍxSecond Transport Order, 9 FCC Rcd at 62327, 1625.s DS1, DS3, and  xJvoice grade flatrated services were grouped together into separate categories or subcategories.  xTandemswitched transport and the interconnection charge were also placed into separate service  xJcategories. Placing services in different baskets prevents LECs from shifting revenue recovery  xfrom a service in one basket to a service in a different basket. Separate service categories, on  xthe 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. ""&{\+)) !"Ԍ Y- ` ^x` ` A66. We also retained the pricing bands established in our 1992 First Transport  Y- xhOrder. We placed a typical upper and lower pricing band of +/5% on the flatrated transport  xand special access service category. We placed DS3 and DS1 flatrated services into separate  xsubcategories in order to limit the LECs' ability to offset rate reductions for highervolume  x;customers with rate increases for lowervolume customers. We placed an upper band of +2%  xand a lower band of 5% on the tandemswitched transport service category. The +2% upper  xZband permits some pricing flexibility, while preventing precipitous rate increases that might  xwadversely impact smaller IXCs that more commonly rely on tandemswitched transport services.  x;We placed an upper band of +0% (with no lower band) on the interconnection charge service  Y5-category.U|5 T -ԍxId. at 62732, 2636.U  X -x ` ` 1. Tandem Switching  Y - ` x` ` B67.  IIIC1  Positions of the Parties. In comments filed prior to our 1994 Second  Y - xJTransport Order, Pacific, SWBell, and Rochester advocate putting tandem switching, together  Y - xI with local switching, into the traffic sensitive price cap basket, or in a new "switching" basket.} j T-  LԍxPacific First Order Reply at 8; Rochester First Order Petition at 16; SWBell First Order Opposition at 1113.  x<Rochester supports its recommendation by arguing that as the architecture of LEC networks  xbecomes more decentralized and network functions are distributed more broadly among end  xzoffices (rather than being focused in specialized switching locations), tandem switches  x;increasingly resemble end office switches, rather than switches that are distinctly higher in the  Y<- xtraditional switching hierarchy.Y~< T-ԍxRochester First Order Petition at 1617.Y Rochester also argues that tandem switches perform  x: switching, not transport, functions. SWBell contends that, although integrated switches perform  xboth class4 (tandem) and class5 (end office) functions, separately and discretely, tandem and  xlocal switches are functionally the same; they simply operate on different types of traffic. Thus,  x SWBell argues that all switched access customers benefit from, and should contribute to the cost  Y- xrecovery of, tandem switching.S T-ԍxSWBell Second Order Reply at14.S SWBell also proposes putting the interconnection charge into  Y-a "public policy" basket.Y" T!-ԍxSW Bell First Order Opposition at 1112.Y  Y- ` x` ` C68. CompTel and WilTel also support placing the tandem switching charge into  xthe traffic sensitive basket with local switching, subject to the Commission's unbundling and  YW- xsetting rates for tandem switching pursuant to Open Network Architecture (ONA) policies.W  T&-  ԍxCompTel Second Order Petition at411; CompTel Second Order Reply at 57; WilTel Second Order Petition at2021; WilTel Second Order Reply at 78.  x;CompTel argues that the Commission's decision to keep tandem and local switching separate is"@#: \+))j"  xZpremised on the mistaken understanding that end office switching and tandem switching are  Y- xyperformed at separate locations.T Tb-ԍxCompTel Second Order Petition at 5.T CompTel asserts that the tandem switching function is  xtypically performed in integrated switches where end office switching and tandem switching are  Y- xseparate functions in the same switch.3h T-  ԍxCompTel Second Order Petition at5. CompTel cites evidence that in four of the states served  x "by BellSouth 24 of the 29 BellSouth switches which provide tandem switching are integrated switches.  R-Id.3 In addition, CompTel and WilTel urge the Commission  xYto implement its ONA policies to separate discrete switching functions and establish directcost  xbased rates for the tandem switching element by means of the ONA Switching Cost Information  xSystem (SCIS) model. According to CompTel, this process will align tandemswitched transport  xwrates more closely with costs and reduce the interconnection charge. CompTel asserts that non xcostbased tandem switching rates have anticompetitive effects on thirdtier IXCs and provide  Y1- xall IXCs incentive to employ excessive capacity of directtrunked transport.U1 T-ԍxCompTel Second Order Petition at10.U The chief  xexecutive officers of five of CompTel's member companies urge that the Commission "replace  xzthe tandem switching charge with a single switching charge applicable to all transport  Y -options."}` X T-  ,ԍxLetter to Reed Hundt, Chairman, FCC, from Bernard J. Ebbers, CEO, LDDS Communications,  x!C. Alan Peyser, CEO, Cable& Wireless, Roy Wilkens, CEO, WilTel, H. Brian Thompson, CEO, LCI  x!International Telecom Corp., and Larry James, CEO, U.S. Long Distance, dated December7, 1994, at 3.}  Y - ` x` ` D69. Ameritech, BellSouth, and AT&T oppose eliminating the tandem switching  xelement and incorporating it into the local switching charge. They assert that, while tandem and  xlocal switching may be combined into a single switch, their functions remain separate and the  Yz- xcompetitive pressures on the two services differ.}z  T-ԍxSecond Order Oppositions of: Ameritech at4; AT&T at7; BellSouth at1617.} In addition, AT&T, BellSouth, and  xJMinnesota Equal Access Network Services (MEANS, a centralized equal access provider) view  xa single switching charge (local and tandem) as akin to the equal charge rule, arguing that all  xYcustomers of switching services will be required to pay for tandemswitched transport whether  Y- xwor not such customers use tandem switching.y  T!-ԍxSecond Order Oppositions of: AT&T at 9; MEANS at 89; BellSouth at 17.y MEANS argues that a unitary switching charge  xjwill permit LECs to crosssubsidize their tandem switching with local switching, thereby  Y- xundercutting competition in providing tandem switching.W Ta%-ԍxMEANS Second Order Opposition at 710.W Bell Atlantic argues that a single  xswitching charge is inconsistent with the Commission's cost allocation rules: Sections69.306(c)"$`\+))"  xJand (d) require the costs of local (Category3) and tandem (Category2) switching equipment to  Y-be separately accounted for based upon relative use.\ Tb-ԍxBell Atlantic Second Order Opposition at4.\  Y- ` ?x` ` E70. Several parties oppose applying ONA policies to setting rates for tandem and  x local switching services. Ameritech and USTA argue that ONA policies apply to local switching  xiservices used by enhanced service providers and not IXCs, and that ONA policies presume a  Yw- xLlocal bottleneck, which they suggest is not the case here.bwh T -  -ԍxAmeritech Second Order Opposition at5; USTA Second Order Comments at34. CompTel  x"counters by (1) noting that no distinction exists for purposes of ONA between enhanced service providers  x*!and IXCs; and (2) stating that tandemswitched transport is no less a bottleneck than local switching.  T -CompTel Second Order Reply at6. Accord, WilTel Second Order Reply at8. USTA, Rochester, GTE, and  xMEANS argue that applying an ONA methodology to switching charges is beyond the scope of,  YI- xand too involved for, this proceeding.XI T-  yԍxSecond Order Oppositions of: USTA at34; MEANS at14; GTE at78; Rochester atn.4  x!(arguing that CompTel's recommendation is nothing more than a collateral attack on the Commission's decision to use existing rates as a starting point for transport restructure).X SWBell argues that price management of all switching  xcost recovery, including tandem switching, should be performed through use of a new switching  xbasket, but that the price regulations should not dictate either a single rate element or any  xspecific number of discrete (codified) rate elements, since this would be contrary to the price  Y -cap policies.X  T-ԍxSWBell Second Order Opposition at 34.X  Y - ` x` ` F71. Discussion. We decline to place tandem switching and local switching into  xthe same price cap basket, whether that basket is the traffic sensitive basket or a new  x,"switching" basket. We note also that this decision does not limit our discretion in addressing  Y{- x<the separate record developed in the LEC Price Cap Review proceeding. The record in this  xproceeding has not persuaded us that local and tandem switching are similar services so likely  xto face similar competitive pressures in the near future as to warrant placing them together in  xthe same price cap basket. In most parts of the country, local switching is provided currently  xby the LECs essentially on a monopoly basis. We have recently taken steps, in our expanded  xinterconnection proceeding, to open direct competition for LEC tandem switching, by requiring  Y- xLECs to provide the signalling functions that enable competitors to offer tandem switching.  T&"-  JԍxExpanded Interconnection with Local Telephone Company Facilities, Transport Phase II, Third Report and Order, 9 FCC Rcd 2718 (1994).  xEven without this tandem signalling, under the transport restructure, directtrunked transport can  xsometimes be substituted for tandemswitched transport. Placing tandem and local switching in  xthe same price cap basket would then permit LECs to offset lower rates for tandem switching  xwith higher rates for local switching, while keeping them in separate baskets prevents this from  xhappening. A basket and service category structure that permitted crosssubsidization of tandem  x<switching would not be in the public interest because it would permit the LECs to undercut"i% \+)){"  Y- xtandem competition unfairly.W Ty-ԍxSee infra  BASK76 .W Therefore, we see no reason to treat tandem switching  xZdifferently from tandemswitched transport transmission elements, and we retain the tandem switch element in the tandemswitched transport service category.  Y- ` mx` ` G72. We also reject SWBell's proposal to place the interconnection charge into  xa separate "public policy" basket. As we stated earlier, until we have completed our evaluation  xg of what underlying costs are recovered in the interconnection charge and how the interconnection  x/charge revenues should be reallocated or otherwise disposed of, we conclude that the  YI- x+ interconnection charge service category should be included in the trunking basket.lIj Td -ԍxSecond Transport Order, 9 FCC Rcd at 62223, 14.l The present  xrecord has not identified any public interest reason for placing the interconnection charge into a new public policy basket.  Y - ` x` ` H73. Finally, we decline to price the tandem switching element incrementally, or  xto eliminate that element. Under our Open Network Architecture (ONA) policy, we required  xthe LECs to unbundle special switching features and functions useful for enhanced service  xproviders (ESPs), known as basic service elements (BSEs), from their underlying local switching  Y- xservices.  TO-   ԍxSee 69 C.F.R. 69.2(mm). See also Amendments to Part 69 of the Commission's Rules Relating  T)- xu!to the Creation of Access Charge Subelements for Open Network Architecture, Report and Order on Further Reconsideration and Supplemental Notice of Proposed Rulemaking, 6 FCC Rcd 4524 (1991). This enabled ESPs to purchase only those BSEs that they needed.` T-  ԍxAmendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge  T}-Sub-elements for Open Network Architecture, 6 FCC Rcd 4524, 4528, 19. We required  xthe LECs to set prices for BSEs based on the incremental costs of providing those services; all  Yd- xresidual costs remained in the local switching element.`d  T-ԍxId. 6 FCC Rcd at 453132, 3848.` Tandem switching, however, is not  xa BSE. Because tandem switching is used to provide basic network services, not enhanced  xhservices, tandem switching does not constitute a BSE within the ONA framework. In addition,  xKwhile pricing the tandem switching element based on incremental costs, as if it were a BSE,  x;might lower rates for tandem switching, such a change could raise rates for local switching by  xYshifting any residual costs from tandem switching to local switching. This would impose costs  xof tandem switching on local switching customers whether or not they use tandem switching.  x;It could also undercut competition in the provision of tandem switching by permitting LECs to  x reset rates for tandem switching with unreasonably low (or no) overhead allocation. Eliminating  xthe tandem switching element, as suggested by the chief executive officers of the CompTel  x member companies, would have similar results, but would more seriously undermine competition  xin the provision of tandem switching and impose tandem switching costs on customers,  xregardless of the extent of their use of tandem switching. We conclude that such measures would not be in the public interest. ""&~ \+))<"Ԍ X-x{` `  2. Price Cap Service Categories  Y- ` x` ` I74. IIIC2  Positions of the Parties. Some parties objected to our arrangement of price  Y- xcap service categories in our 1992 First Transport Order in pleadings filed prior to our  Y- xrearrangement of those service categories in our 1994 Second Transport Order. Several LECs  x {object to the separate service categories established for directtrunked transport, tandemswitched  xtransport, and the interconnection charge, asserting that they result in decreased pricing  xflexibility for the LECs and arguing for either expansion of the bands to allow additional  YM- xflexibility, or greater flexibility in pricing local switching.M T -  + ԍxUS West First Order Petition at 89. Accord, SWBell First Order Petition at 1113; SNET First Order Petition at 67; Ameritech First Order Opposition at 46. SWBell argues that there is no  xneed for separate service categories for tandemswitched and directtrunked transport because  xI tandemswitched transport price increases will be constrained by the availability of lessexpensive  xidirecttrunked transport alternatives (offered by both LECs and others) and tandemswitched  xltransport alternatives (offered by others under the Commission's PhaseII Expanded  Y - xxInterconnection proposal).Y B T-ԍxSWBell First Order Opposition at 1011.Y MCI opposes SW Bell's proposal to eliminate price cap service  xcategories and pricing bands, arguing that the Commission correctly created these restrictions  Y -to prevent anticompetitive LEC behavior.  T?-ԍxMCI First Order Opposition at 1819. Accord, MFS First Order Opposition at 11.  Y~- ` 0x` ` J75. WilTel contends that, if ongoing benchmark requirements are imposed, there  xis no need to put directtrunked and entrance facilities together in a single price cap service  xcategory and tandemswitched transport in a separate category. Instead, WilTel recommends  xLthat the Commission put entrance facilities in a separate category, and directtrunked and  x tandemswitched transport together (subject to ongoing benchmark requirements), with +5% and  Y - x-10% bands.V  TA-ԍxWilTel First Order Petition at 2123.V Sprint states that entrance facilities should be treated separately from interoffice  xfacilities for price cap purposes, but argues that tandemswitched and directtrunked transport  Y-rates should be linked separately in each zone.U$ T-ԍxSprint First Order Opposition at 18.U  Y- ` x` ` K76. Discussion.  BASK In our 1994 Second Transport Order, we specifically placed  xtandemswitched transport, DS1, and DS3 flatrated services into separate service categories and  xservice subcategories in order to prevent the LECs from offsetting lower rates for services  xsubject to more competition with higher rates for less competitive services. We concluded in  xJthat order, and continue to believe, that separate price cap service categories and pricing bands  xare sufficient to protect against potential anticompetitive behavior. Accordingly, we decline to eliminate the separate service categories and subcategories that apply to transport services. "' \+));"Ԍ Y- ` x` ` L77. We also decline to put entrance facilities and interoffice facilities into  xseparate service categories. IXCs take entrance facilities and interoffice facilities together,  x;except when the traffic originates or terminates with end users directly served by the SWC, or  xwhen one segment is provided by an interconnector. Entrance facilities and directtrunked  xtransport are charged on a flatrate basis, and they are provided over facilities dedicated to  xspecific IXCs. Because interconnectors are likely to provide service between POPs and many  xend offices, their services are likely to substitute for both entrance facilities and interoffice  xfacilities, thereby subjecting both services to substantially similar competitive pressure.  xTherefore, 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.  X -x ` ` 3. Price Cap Bands  Y - ` x` ` M78.  IIIC3  Positions of the Parties. CompTel and WilTel, in petitions filed prior to the  Y - xSecond Transport Order, argue that the LECs should not have any upward pricing flexibility for  xtandemswitched transport because the costs of newly installed tandemswitched transport  xfacilities is declining and there is substantial risk of LEC manipulation of transport rates in an  Y}- xanticompetitive manner.} T-  ԍxCompTel First Order Petition at 1718; WilTel First Order Petition at 23. CompTel supports similar treatment for directtrunked transport. Several of the LECs oppose these requests, characterizing them as  xabandoning price cap regulation for transport services and unduly restricting LEC pricing  YO- xflexibility.O@ T@-  ԍxFirst Order Oppositions of: Bell Atlantic at 45; NYNEX at 78; SWBell at 11; USTA at 14; United at 6; GTE First Order Reply at 10. Rochester responds that tandemswitched transport pricing is already subject to  xsubstantial constraints and that additional restrictions would hinder LECs' ability to compete,  Y!- xiand they provide no offsetting benefit.V! T-ԍxRochester First Order Petition at 12.V BellSouth contends that the IXCs' proposal would  xaggravate the mismatch between the competitive impact of switched access expanded inter Y-connection and the interim rate structure.WX T-ԍxBellSouth First Order Opposition at 4.W  Y- ` x` ` N79. MFS argues that price cap LECs already have freedom to reduce their rates  xsubject to the average variable cost standard, but that the price cap bands exist primarily to  Y-restrict the LECs' ability to increase rates for captive customers.R TA#-ԍxMFS First Order Opposition at 11.R  Yj- ` |x` ` O80. Discussion. We decline to eliminate the limited upward pricing flexibility  xpermitted for tandemswitched transport. We believe this would unduly restrict the LECs'  xX ability to price tandemswitched transport and would be inconsistent with the flexibility price cap  xregulation was intended to give them. The +2% band is a significantly narrower banding"&( \+))K"  xrequirement than the +5% typically allowed for service categories, and we believe it is sufficient to prevent significant price manipulation.  X-a xD.` ` The Interconnection Charge (#`  X-x ` ` 1. MidCourse Adjustment to the Interconnection Charge (#  Y_- ` lx` ` P81.  IIID1  IC1Background. In our 1992 First Transport Order, we concluded that the initial  xinterconnection charge should be set in a way that would satisfy the general requirement, under  xthe LEC price cap rules, that rate restructures be revenueaneutral to the LECs. Therefore, we  xxoriginally directed the LECs to calculate the initial interconnection charge under our interim  xtransport rate structure by: (1)computing the revenue they would receive from facilitiesbased  xtransport charges (projecting the total amount of demand of facilities-based transport elements  xunder the new rate structure and multiplying by the rates for those elements); (2) subtracting this  xrevenue amount from (in the case of price cap LECs) their total revenue from transport under  xpre-existing rate and demand levels, or (in the case of rate-of-return LECs) their total transport  xrevenue requirement established under the Part 69 rules, to obtain the interconnection charge  xrevenue requirement; and (3) dividing the interconnection charge revenue requirement by the  xYprojected total number of minutes of use of the LEC interstate switched access network. Thus,  xthe initial interconnection charge was to be calculated on a residual basis in order to make  Y6-transport rates as a whole, under the new rate structure, revenueneutral to the LECs.o6 T-ԍxFirst Transport Order, 7 FCC Rcd at 7038, 61.o  Y- ` x` ` Q82. IC2In our 1993 First Reconsideration Order, we modified the calculation of the  xinterconnection charge to require the LECs to use historical facility demand and configurations,  x\rather than projected demand after IXCs reconfigure their networks in response to the  Y- xrestructure.oj T-ԍxFirst Reconsideration Order, 8 FCC Rcd at 5379, 51.o We did this to counterbalance the LECs' incentive to underestimate the  xKprojected demand for transport facilities and thereby inflate the interconnection charge, and  xbecause there was no method for the Commission or other parties to measure the accuracy of  xthe LEC projections. We stressed, however, that the initial interconnection charge was to be  xcalculated on a residual basis to further the goal of a revenueneutral rate restructure. We did  xnot intend that the LECs lose substantial amounts of revenue during the first year of the interim  Y;- xrate structure as a result of transport reconfigurations.@;  T!-ԍxId.@ Therefore, to achieve an  xYinterconnection charge that was neither too high nor too low, we stated that we would permit  Y - xia mid-course adjustment to the interconnection charge. In our 1993 Second Reconsideration  Y- xOrder, we adopted a technical correction to our rules that required price cap LECs to base their  xinitial calculation of the interconnection charge on historical usage demand, instead of projected usage demand. To date, no LEC has requested a midcourse adjustment. "!)\+))""Ԍ Y- ` nx` ` R83. Positions of the Parties. SW Bell seeks clarification that the midcourse  xadjustment to the interconnection charge permits LECs to recoup their underrecovered revenues  xfor the period between the tariff's effective date and the midcourse adjustment effective date,  Y- xas well as prospectively after the midcourse adjustment. T5-  ԍxSW Bell First Recon. Petition at 23. Accord, First Recon. Comments of: NYNEX at 2; USTA at 2. SW Bell argues that such an  xadjustment would simply constitute the correction of a prior rate order based on incorrect  Y- xYdemand data, and would not be retroactive ratemaking.QB T -ԍxSW Bell First Recon. Reply at 3.Q SW Bell asserts that, if LECs cannot  ximplement the transport rate restructure on a revenueneutral basis and recover their legitimate  Y`-costs, the restructure would be confiscatory.@` T -ԍxId. at 6.@  Y2- ` x` ` S84. The IXCs oppose SW Bell's petition. They argue that any recoupment of  Y - x past revenue shortfalls would constitute impermissible retroactive ratemaking.  TQ-  ԍxAT&T First Recon. Comments at 3; CompTel First Recon. Comments at 3 (citing Accounting  T+- xG"for Judgments and Other Costs Associated with Litigation, Notice of Proposed Rulemaking, 8 FCC Rcd  T-6655, 6658, 18 (1993); Nader v. FCC, 520 F.2d 182, 202 (D.C. Cir. 1975)). They also argue  x<that such changes would be contrary to the Commission's objective of encouraging LECs to  xreuse facilities freed by reconfiguration in an efficient manner, by guaranteeing recovery for  Y - xsuch facilities even if they can be reused.S  Tb-ԍxAT&T First Recon. Comments at 45.S They oppose SW Bell's argument regarding  xJconfiscation, arguing that neither price cap nor rate of return regulation insulates carriers from  x;the risk of demand shifts, and pointing out that the lowend adjustment mechanism in the price  Y-cap rules protects the LECs from substantial earnings erosion.z  T-ԍxFirst Recon. Comments of: AT&T at 56; MCI (SW Bell) at 4; MCI First Recon. Reply at 56.  Yd- ` x` ` T85. Discussion. We clarify that the period to be used in calculating the amount  x-of any midcourse adjustment to the interconnection charge is from the effective date of the  xwinitial transport tariffs (December 30, 1993) through December 31, 1994. This calculation will  xwdefine the amount that will prospectively establish the appropriate level for the interconnection  xcharge. We further clarify that the midcourse adjustment to the interconnection charge permits  xrecoupment of underrecovered interconnection charge revenues from December30, 1993 to the effective date of the tariff implementing the midcourse adjustment.  Y- ` ^x` ` U86. Before the restructure was implemented, we concluded that the restructure  xshould be revenueneutral, and specified that we would permit a midcourse adjustment, or  x"trueup", to the interconnection charge to attain more fully the goal of revenue neutrality to the"* \+))"  Y- xLECs. Ty-  ԍxFirst Transport Order, 7 FCC Rcd at 7038, 61; First Reconsideration Order, 8 FCC Rcd at  TS-5379, 51. Without a midcourse adjustment to the interconnection charge, which initially was  xbased on 1992 facilities demand, the rate restructure might fall significantly short of this goal if IXCs reconfigure their networks with lowerpriced facilities.  Y- ` x` ` V87.  AUTH1  The midcourse adjustment to the interconnection charge, should any LEC  xchoose to avail itself of the adjustment, does not constitute retroactive ratemaking. The  x/adjustment will affect only rates in effect after the date of the adjustment. It will not  x-retroactively change the interconnection charge rates that customers already paid before the  YI- x;adjustment date.IB T< -  ԍxFirst Reconsideration Order, at 5379, 51; Second Reconsideration Order, 8 FCC Rcd 6233, 4. Nor will the adjustment require recoupment of revenues from customers or  xYrefunds to customers without suspension and an accounting order pursuant to Section 204(a) of  Y -the Communications Act.  T-ԍxSee 47U.S.C. 204(a); Illinois Bell Tel. Co.v. FCC, 966F.2d 1478 (1992).  Y - ` x` ` W88. That the midcourse adjustment will take into account revenues the LECs  xunderrecovered before the date of the adjustment does not convert the adjustment into  xretroactive ratemaking. All interested parties were on notice prior to the effective date of the  x,transport tariffs that the interconnection charge was subject to adjustment and that the purpose  xof that adjustment was to achieve more fully our objective of revenue neutrality during the  Y{- xxtransition from the old to the new rate structure.o{^ T-ԍxFirst Reconsideration Order, 8 FCC Rcd at 5379, 51.o Therefore, any adjustment at a later date  xZmerely constitutes the implementation of a prospectively established obligation affecting the  xLECs and all access customers. The prior notice that the interconnection charge would be  xsubject to adjustment, and the unique nature of the interconnection charge midcourse adjustment  xin the context of the major, Commissionrequired transport rate restructure, distinguish this case  xifrom cases in which a carrier generally seeks to adjust its rates prospectively to recoup costs  xfrom an earlier period. We do not address whether or not such cases would constitute retroactive ratemaking.  Y- ` px` ` X89.  AUTH2 The rule against retroactive ratemaking does not foreclose agency  xxenforcement of preexisting obligations, even if that action requires setting rates for a future  Y- x,period that are based in part on the costs of an earlier period. In New England Telephone, the  xcourt upheld a Commission order requiring carriers to make "a prospective rate adjustment to  YS- xcompensate for past surpluses."S  T&-  ԍxNew England Tel.& Tel. Co.v. FCC, 826 F.2d 1101, 1107 (D.C. Cir. 1987), cert. denied, 490U.S. 1039 (1989). The court held that the Commission had authority under"S+z \+))\"  Y- xSection 4(i) of the Communications ActG Ty-ԍx47U.S.C. 154(i).G to require a corrective rate adjustment as a reasonable remedy  xKto enforce its rate of return prescription, ancillary to the Commission's authority to regulate  Y- xcarriers' rates through a rate of return method.bh T-ԍxNew England Telephone, 826F.2d at 110709.b Moreover, in Lincoln Telephone, the court  xaffirmed the Commission's requirement that Lincoln Telephone charge an interconnecting IXC  xthe rates set forth in a third party agreement, subject to later adjustment once the appropriate  Yx- xrate for Lincoln Telephone to charge was determined.x  T3 -ԍxLincoln Tel.& Tel. Co. v. FCC, 659 F.2d 1092, 110708 (D.C. Cir. 1981). Similarly, in the instant case, Section  x4(i) permits a midcourse adjustment to the interconnection charge, ancillary to our underlying  YJ-authority to require the transport rate restructure.L:J T-  LԍxSee, e.g., 47 U.S.C. 201(a) (authorizing the Commission to prescribe rules necessary to  x establish charges, practices, classifications in connection with communication services); 203(b)(2)  x!(authorizing the Commission in its discretion to modify tariff requirements); and 205(a) (authorizing  xv the Commission, after full opportunity for hearing, to determine and prescribe what classification, regulation, or practice is just, fair, and reasonable).L  Y - ` mx` ` Y90. We clarify that the period from December 30, 1993 through December31,  xi1994 is the period to be used in calculating the amount of any midcourse adjustments to the  x: interconnection charge. An expiration date approximately one year after the transport restructure  xJtariffs first became effective enables the LECs to evaluate the actual demand for their transport  xservices over the entire first year of the new transport rate structure. An expiration date is  x;necessary because we did not intend the interconnection charge to ensure that, for all time, the  xwLECs would never recover less revenues than they did prior to the rate restructure. Rather, we  x;intended that the interconnection charge yield only an initial rate restructure that was revenue xineutral. We interpret "initial" to apply to the first year after the implementation of the new  xrates. Subsequent changes to the interconnection charge will be governed by the price cap  Y7- xrules.7  T-  ԍxIn the further notice included in the First Transport Order, we sought comment on the nature of  x!the revenues included in the interconnection charge and on the appropriate treatment of these revenues  TH -in the future. First Transport Order, 7 FCC Rcd at 706366, 133141. LECs must file requests for midcourse adjustments to the interconnection charge no  xilater than March 31, 1995. We delegate  DELEG authority to the Chief, Common Carrier Bureau, to specify the format and content of such filings.  X-x ` ` 2. Burden of Proof for the MidCourse Adjustment  Y- ` x` ` Z91. IIID2  Background. We required a LEC seeking a midcourse adjustment to  xdemonstrate that: (1) because of IXC network reconfigurations resulting from the transport rate  xrestructure, actual demand for its interstate transport facilities is significantly less than the  x,historical demand used to set the interconnection charge ; and (2) the LEC has not been able to"i,\+)){"  Y- xfind alternative uses for these facilities. Ty-  ԍxFirst Reconsideration Order, 8 FCC Rcd at 5379, 53; Second Reconsideration Order, 8 FCC Rcd at 6233, 4. We determined that the LECs should recover the cost  xzof facilities they are able to reuse through charges for those new uses, not through the  xinterconnection charge, both to avoid double recovery and to provide incentive to reuse such  xwfacilities. Furthermore, we determined that the LECs must show that any loss of demand is not  Y- xdue to competition from other access providers.kB T-ԍxFirst Reconsideration Order, 8 FCC Rcd at 5379 n.79.k We determined that the interconnection  xcharge should not reimburse the LECs for revenues lost to competing providers. To do so  xwould unreasonably enrich the LECs and would undermine our polices to foster efficient access competition in the expanded interconnection proceeding.  Y1- ` x` ` [92. Positions of the Parties. SWBell takes issue with the burden of proof  x[imposed on the LECs seeking a midcourse adjustment. SW Bell argues that the showing  x;required is unfairly difficult, making it unlikely that the LECs will achieve revenue neutrality,  xand submits that losses due to reconfiguration should be assumed to be due to the transport  Y - xrestructure, rather than competition.y  Tk-ԍxSW Bell First Recon. Petition at 45; SW Bell First Recon. Reply at 78.y SWBell asserts that a significant level of reconfiguration  xis likely to occur in the earlier part of the restructure, especially in light of the waiver of non Y - xrecurring charges.S  T-ԍxSWBell First Recon. Reply at 67.S A number of LECs support SW Bell's petition, arguing that the burden  xof proof required by the Commission imposes an extremely expensive and timeconsuming  Yz-burden of tracking trunk reuse.]z$ TO-  ԍxFirst Recon. Comments of: Bell Atlantic at 13; USTA at 26; NYNEX at 36. See also  x"NYNEX First Recon. Reply at 3 (arguing that lowend adjustment mechanism not designed to ensure that interconnection charge yields revenue neutral transport rate restructure).]  YL- ` x ` ` \93. The IXCs assert that placing the burden of proof on the LECs is appropriate  xbecause carriers filing tariffs generally have the burden of proof, and because the LECs are in  x,the best position to supply the necessary information on demand shortfalls and on competitors'  Y- x use of switched expanded interconnection.v  T/!-  ,ԍxAT&T First Recon. Comments at 78 & n.14; CompTel First Recon. Comments at 4; MCI First Recon. Reply at 5. They argue that SW Bell's petition, in effect, seeks  xKrecovery of revenues even if the demand shortfalls were caused by competition from CAPs,  Y- xwhich would suppress competition for switched transport.  Ty%-ԍxCompTel First Recon. Comments at 45; MCI First Recon. Comments (SW Bell) at 45. MCI asserts that substantial losses  xdue to reconfiguration are unlikely, given the time needed for IXCs to adapt their networks to"-\+))"  Y- xthe interim transport structure.R Ty-ԍxMCI First Recon. Comments at 34.R Moreover, MCI argues that the Commission need not, and  xshould not, define how much revenue loss is "significant", that the midcourse adjustment  xpermits LECs to recover revenues associated with traffic growth, and that the Commission  x should not revisit the issue of whether the initial interconnection charge is set based on historical  Y-or projected demand.Oh T-ԍxMCI First Recon. Reply at 45.O  Yv- ` ^x` ` ]94. Discussion. We decline to modify the burden of proof associated with the  x.midcourse adjustment. The LECs have the burden of demonstrating a significant under xJrecovery of revenues that justifies an adjustment to the interconnection charge. We affirm our  xdetermination that the LECs must prove the extent to which they have not been able to reuse  xfacilities no longer needed after IXC reconfigurations. We imposed this burden after analyzing  xthe likely difficulty of enforcing our earlier requirement that LECs take into account other  Y - xdemand for the same facilities in order to prevent double recovery.  T-  ԍxFirst Transport Order, 7 FCC Rcd at 703940, 63. See First Reconsideration Order, 8 FCC Rcd at 5379, 52. Only the LECs have the  xinformation necessary to analyze reuse, and the asserted difficulty of producing this information  xonly 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.  Yz- ` x` ` ^95. We clarify, however, that the burden of proving that facilities could not be  xreused does not apply to facilities that are reused as a result of the transport restructure itself.  xFor example, if a customer reconfigures its LEC entrance facility from 25 DS1 circuits to a  x;lowerpriced DS3 circuit running over the same physical facility, the "reuse" of that facility in  xproviding DS3 service instead of DS1 service is not excluded from the computation of the inter xwconnection charge. In such a case, the interconnection charge may reasonably include recovery  xof the difference between the price of the 25 DS1 circuits and the price of the DS3 circuit. The  xrequirement that LECs show that they have been unable to reuse facilities applies to situations  xin which facilities are no longer used for interstate switched transport, and the LECs have not  xbeen able to put the facilities to any alternative uses. For example, if the customer terminates  xits use of the 25 DS1 circuits because, due to the transport restructure, it has decided to  xconsolidate its POPs, and the LEC is unable to put the entrance facility to any alternative uses  xin its network, then the LEC may reasonably include recovery of the lost DS1 revenues in the interconnection charge.  Y"- ` Ox` ` _96. We also affirm our determination that the LECs should have the burden of  xproving that demand losses result from the transport rate restructure rather than competition.  xhWhile we intend that the transport rate restructure be revenueneutral to the LECs, competition  xin the provision of switched transport is likely to result in revenue losses to the LECs. The".\+)) "  xinterconnection charge should not be used to shield LECs from the risks of revenue loss  Y-associated with growing competition. Tb-  ԍxSee First Reconsideration Order, 8 FCC Rcd at 5371, 53 & n.79; Special Access Expanded  T<-Interconnection Order, 7FCCRcd at 7430, 7436, 129, 144.  X-wx ` ` 3. Waiver of NonRecurring Charges (#  Y- ` @x` ` `97. IIID3  Background. In order to encourage IXCs to reconfigure their networks to  xmake them more efficient and to reduce nonrecurring expenses induced by the new transport  xrate structure on IXCs that reconfigure their networks, we required the LECs to waive certain  xwnonrecurring charges (NRCs) that apply when IXCs convert trunks from tandem-switched  x=transport to direct-trunked transport or from direct-trunked transport to tandemswitched  xtransport, or when an IXC orders the disconnection of trunks that were inefficiently used due  Y - x+ to the skewed incentives created by the equal charge rule. D T-ԍxFirst Transport Order, 7 FCC Rcd at 7038, 60. See also 47 C.F.R. 69.126. This waiver remained in effect until  xthe end of June 1994, although some LECs voluntarily extended the waiver. During that period  Y -it appears that several IXCs reconfigured their networks to some degree.  Tm-  ԍxSee generally Local Transport Restructure Quarterly Monitoring Reports set forth in AppendixB attached hereto.  Y - ` !x` ` a98. Positions of the Parties. Sprint suggests extending the period of time for the  xNRC waiver in light of the uncertainties related to Commission action on switched transport  Y{- x<expanded interconnection and reconsiderations in this proceeding.s{` T-ԍxSprint First Order Petition at21; Sprint First Order Reply at 10.s CompTel recommends  x-expanding the waiver of NRCs to include all termination penalties in contracts for entrance  xfacilities, arguing that significant regulatory changes have made such liabilities unreasonable and  xYthat, if termination penalties are not waived, IXCs could be forced to continue using outmoded  Y- xwcopper facilities into the next century.W  T-ԍxCompTel First Order Petition at 2425.W BellSouth opposes this recommendation, arguing that,  xunlike general termination penalties, termination charge liabilities under special construction  xtariffs are related to capital expenditures and are based on the extent to which the costs of  xfacilities constructed for a single customer are nonrecoverable. In such circumstances,  xaccording to BellSouth, waiver of termination liability for such facilities would deny LECs  Y-recovery of the remaining capital investment.[  T#-ԍxBellSouth First Order Opposition at 1415.[  Y~- ` x` ` b99. AT&T argues that the waiver of NRCs should be clarified to cover other  xrearrangements that will occur as a result of the transport rate structure change, such as the"h/@ \+))"  Y- xconsolidation of separate trunks into higher capacity facilities.y Ty-ԍxAT&T First Order Petition at n.15; AT&T First Order Opposition at 2122.y USTA requests clarification  xthat the NRC waiver applies only once per trunk in other words, the LECs should not be  xrequired to waive NRCs due to moving trunks from tandemswitched transport to directtrunked  Y-transport and back again.Sh T-ԍxUSTA First Order Opposition at 18.S  Y- ` Ox` ` c100. SNET argues that the Commission has provided no opportunity for LECs  xto recover the costs associated with waived NRCs, and urges that a cost recovery mechanism  Y`- xx(such as an exogenous change to price caps) be permitted.` T -  : ԍxSNET First Order Petition at 78. Accord, Sprint First Order Opposition at 17 (arguing to permit recovery of waived NRCs through the interconnection charge). SW Bell, US West, and USTA  YI-generally oppose proposals to broaden the NRC waiver.zI T|-ԍxFirst Order Oppositions of: SW Bell at 45; US West at 78; USTA at 18.z  Y - ` x` ` d101. Discussion. We decline to modify the scope of the NRC waiver. As a  xgeneral matter, we conclude that to broaden the scope of the NRC waiver to include network  xhreconfigurations not related to the rate restructure would be unfair to the LECs and beyond the  x<scope of this proceeding. Specifically, we conclude that six months was ample time for the  xKmandated waiver to be held open, especially since IXCs had more than one year to plan any  xnetwork reconfigurations before the new rate structure became effective. We reject CompTel's  xyrecommendation that we require waiver of termination penalties in contracts for entrance  xfacilities because we conclude that such a waiver would deny the LECs recovery of capital expenditures made specifically for a particular IXC.  Y6- ` x` ` e102. We also decline to adopt AT&T's proposal to require LECs to waive NRCs  xfor all IXC consolidations because it is moot and beyond the scope of this proceeding. It is  x;moot because the LECs have already waived the application of NRCs to consolidations of DS1  Y- xto DS3 circuits and voicegrade to DS1 circuits.c" T-ԍxBell Atlantic, et al., 8 FCC Rcd 893 (1993).c To the extent that AT&T sought a waiver  xfor consolidations to advanced facilities with capacities greater than that of DS3 service, such  xhconsolidations would not be triggered by the rate restructure. Moreover, we decline to restrict  xthe NRC waiver to once per trunk, as USTA suggests, because, in light of the limited time  xperiod for which the waiver was available, we have no reason to believe that the significant churn envisioned by USTA occurred.  YQ- ` Rx` ` f103. Finally, we conclude that, in their midcourse adjustment of the  xinterconnection charge, the LECs are entitled, upon a proper showing, to take into account  xNRCs waived pursuant to the Commission's requirement. As part of the implementation process  xyfor the restructured rates, the initial interconnection charge was calculated employing the" 0 \+));"  Y- xprevious year's NRC demand. Ty-  <ԍxFor a description of the formula for calculating the initial interconnection charge, see supra  TS- IC181 ש IC282 . While this procedure was appropriate for purposes of  ximplementing the initial tariffs, given that a trueup procedure was contemplated, it does not  xJfollow that a LEC should be precluded from seeking a trueup of the interconnection charge to  x.bring the transport rate restructure closer to revenue neutrality. Therefore, if a LEC can  xdemonstrate that, as a result of the Commissionmandated waiver of NRCs, the transport  xrestructure yielded revenues significantly less than the amount it realized previously, in part,  x-because the number of NRCs charged during the year fell short of the demand level used in  xcalculating the initial interconnection charge, the LEC may seek a midcourse adjustment on this  xbasis. Without some mechanism for recovering a significant shortfall in the level of NRC  xrevenues recovered by the LECs, our goal of revenue neutrality would be jeopardized. At the  xsame time, permitting such recovery is not inconsistent with our other goal of providing IXCs  xxincentive to reconfigure their networks. Recovery through the interconnection charge does, however, spread the burden of the reconfigurations over all access customers.  Y - ` {x` ` g104. For the same reasons discussed above in paragraphs  AUTH187 ש AUTH289 , we conclude that  xI the Commission has statutory authority to allow this type of recovery through the interconnection  xcharge because it is necessary to maintain revenue neutrality and because carrying out such an  xadjustment does not constitute retroactive ratemaking. Given that NRCs may recover significant  xLEC costs, failure to permit recovery for significant shortfalls in NRC revenues could jeopardize  xJour goal of revenue neutrality. Therefore, recovery is necessary to further our objectives with  xrespect to the new transport rate structure. Moreover, all access customers and LECs were on  x notice prior to the effective date of the new transport tariffs that revenue neutrality was our goal  xhand that the interconnection charge was subject to adjustment based on actual experience under  xwthe restructured rates. Therefore, adjusting the interconnection charge to account for the effect  x>of the Commissionmandated waiver of NRCs is not retroactive ratemaking and is not inconsistent with the Act.  X-x E.` ` Miscellaneous (#`  Xf-x` `  1. Pricing Flexibility   Y8- ` x` ` h105.  IIIE1  Background. In the Special Access Expanded Interconnection Order,  Y#- x<adopted concurrently with the First Transport Order, we found that volume discounts (e.g.,  Y- xlower perunit rates for service with the capacity of multiple DS3s) and term discounts (e.g.,  xlower perunit rates when a customer commits to continue using the service over a multiyear  xperiod) are generally legitimate means of pricing special access services to recognize the  x!efficiencies associated with larger traffic volumes and the certainty of longerterm  Y!- xarrangements.!B T&-ԍxSpecial Access Expanded Interconnection Order, 7 FCC Rcd at 7463, 199. In the First Transport Order, however, we prohibited term and volume  x,discounts for switched transport services in order to ensure that the shortterm impact on small  xIXCs was manageable and to allow IXCs time to adjust to rate changes under the interim rate"#1\+))$"  Y- xYstructure.l Ty-ԍxFirst Transport Order, 7 FCC Rcd at 703536, 54.l We sought comment in the expanded interconnection proceeding on whether term  xand volume discounts should be permitted when switched transport expanded interconnection  Y-became operational.j T-  ԍxId. at 7060,125; Expanded Interconnection with Local Telephone Company Facilities, Second Notice of Proposed Rulemaking, 7 FCC Rcd 7740, 7746, 3235.  Y- ` x` ` i106. Based on those comments, in the Switched Transport Expanded Inter Y- xconnection Order, we allowed LECs to offer reasonable volume and term discounts on transport  xfacilities, subject to specified threshold requirements. We found that permitting volume and  xterm discounts for switched transport represented a measured step toward giving the LECs the  xability to respond to competition, striking a reasonable balance between giving the LECS too  xlittle or too much pricing flexibility. We determined that too much flexibility could stifle  xcompetitive entry and harm customers of less competitive services, while too little flexibility  x,could deprive customers of the benefits of competition and send false economic signals to new  Y - xentrants.  T-ԍxSwitched Transport Expanded Interconnection Order, 8 FCC Rcd at 7424, 91. We made transport volume and term discounts, however, subject to the threshold  xconditions that parties using expanded interconnection have taken: (1) 100 DS1equivalent  Y - xJswitched crossconnects in the Zone1 offices in the study area;<  T-  ԍxA crossconnect is the cabling inside the LEC central office that connects the LEC network to  T- x\the collocated equipment dedicated to a CAP using expanded interconnection. See 47  x*!C.F.R.69.121(a). A Zone1 office is a LEC end office located in the zone with the highest traffic  x<density characteristics pursuant to the zone density pricing polices set forth in the expanded  T[-interconnection orders. See infra DZPRC107 for an explanation of density zone pricing. or (2) an average of 25 DS1 Y - xequivalent switched crossconnects per Zone1 office in the study area.  T-  ԍxSwitched Transport Expanded Interconnection Order, 8FCC Rcd at 743334, 115, 118. In  xV"study areas with no Zone 1 offices, the LECs may implement volume and term discounts once five DS1 x equivalent switched crossconnects have become operational in the study area. LECs that have not  x implemented density zone pricing may implement volume and term discounts in a study area after  TH- x"customers have subscribed to 100 DS1equivalent switched crossconnects in the study area. Id. at 743435, 118 & nn.26365. We recently  xreaffirmed this threshold, although we adopted a modified definition of "operational" in light of  Y}- xthe new mandatory virtual collocation policy.}f T"-ԍxExpanded Interconnection Remand Order, 9 FCC Rcd at 5202, 5204, 174, 182. Under that new definition, an offering will be  x,considered "operational" if an interconnector has taken a crossconnect pursuant to a generally  xtariffed virtual collocation or physical collocation offering pursuant to the new rules adopted in  Y8-the Expanded Interconnection Remand Order.\8 T&-ԍxId. at5196, 5204, 155,182.\ "#2\+))"Ԍ Y- ` {x` ` j107.  DZPRC In the Special Access Expanded Interconnection Order, adopted concurrently  Y- x-with the First Transport Order, we permitted the LECs to introduce density zone pricing of  xinterstate highcapacity special access in a study area once their expanded interconnection  Y- xofferings are operational in that study area. T8-ԍxSpecial Access Expanded Interconnection Order, 7FCCRcd at 7475, 179 & n.411 Density zone pricing enables the LECs gradually  x+ to reduce their transport rates in areas of high traffic density, where the cost of providing service  xis typically lower than average, and to increase their transport rates in less dense areas, where  Yz- xhcosts are higher. In the Switched Transport Expanded Interconnection Order, we permitted the  xLECs to introduce density zone pricing of interstate switched transport in a study area once their  YN- xYswitched transport expanded interconnection offerings are operational in that study area.Nj Ti -  ԍxSwitched Transport Expanded Interconnection Order, 8 FCC Rcd at 742627, 99 & n.230. See  TC -also Special Access Expanded Interconnection Order, 7FCCRcd at 7475, 179 & n.411. As  xwith volume and term discounts, we concluded that density zone pricing for switched transport  Y -represented a balanced step to enable LECs to respond to increased competition.  T-  ԍxSwitched Transport Expanded Interconnection Order, 8 FCC Rcd at 7424, 91. See also  T-Expanded Interconnection Remand Order, 9 FCC Rcd at 5194, 146.  Y - ` ^x` ` k108. Positions of the Parties-- Volume and Term Discounts. In petitions filed  Y - xprior to the Switched Transport Expanded Interconnection Order, CompTel, Sprint, and WilTel  xwoppose volume discounts for interoffice transport between the end office and the SWC because  x: they contend that, unlike entrance facilities, the interoffice transport network is a shared network  xYand all customers should share in cost savings LECs realize based on the total volume of traffic  Y- xicarried over the network.b T-  ԍxCompTel First Order Opposition at 56; Sprint First Order Opposition at 1011; WilTel First Order Opposition at 2021. The LECs generally support lifting the prohibition on term and  xjvolume discounts because: (1) with the advent of expanded interconnection for switched  x,transport, unless they can offer switched transport services with discounts like those the CAPs  Y=- xoffer, they will lose the opportunity to compete for IXCs' business;m=  T-  ԍxFirst Order Petitions of: USTA at 811; Bell Atlantic at 25; BellSouth at 89; Cincinnati Bell  x at 47; GTE at 57, 1213; NYNEX at 57; Pacific at 89; Rochester at 1416; SNET at 56; SWBell at 1517. Ameritech First Order Opposition at 34; GTE First Order Opposition at 1315.m (2) the prohibition is  Y&- xdesigned merely to protect small IXCs with a vested interest in status quo pricing;&*  T"-  ԍxPacific First Order Petition at 6; Pacific First Order Reply at 47. Accord, SWBell First Order Petition at 15. (3) without  xvolume discounts, LECs, unlike CAPs, must maintain radically different rate structures for  Y- xswitched transport and special access;T TO&-ԍxNYNEX First Order Petition at 710.T and (4) such discounts are costjustified and prohibiting"3D\+))"  Y- xthem is inconsistent with the principle that rates be costbased.i Ty-ԍxId. at 67, 1213; GTE First Order Petition at 11.i The LECs generally support  Y-volume discounts for interoffice facilities.j T-  ԍxFirst Order Petitions of: USTA at 1415; GTE at 910; Bell Atlantic at 56; NYNEX at 1012; Cincinnati Bell at 7.  Y- ` "x` ` l109. The LECs, as well as CompTel, MCI, and Sprint, generally support term  Y- xdiscounts, which could benefit both small and large IXCs. T8 -  ;ԍxFirst Order Petitions of: Ameritech at 34; Bell Atlantic at 5; Cincinnati Bell at 6; GTE at 78;  xe"NYNEX at 12; SNET at 5; USWest at 15; USTA at 1213. GTE First Order Opposition at 1314; MCI  T - xFirst Order Opposition at13. Accord, CompTel First Order Opposition at 5; Sprint First Order  x Opposition at 10; WilTel First Order Opposition at 20 (supporting term discounts as long as such  xe"discounts are available to all IXCs, for DS1 direct trunks, DS3 direct trunks, tandemswitched transport, or a combination thereof). These parties also support the  x=removal of the prohibition on volume discounts for entrance facilities because: (1) such  xfacilities are dedicated to a particular IXC; (2) such facilities are shared between switched  x;transport and special access services; and (3) the prohibition impedes an IXC's ability to obtain  YI- xthe benefits of ratcheting (i.e., using the same LEC facilities for both special access and  Y4- xswitched transport services).4  T-  ZԍxFirst Order Petitions of: US West at 14; GTE at 810; Ameritech at 23; USTA at 14; First Order Oppositions of: CompTel at 4; MCI at 13; Sprint at 910; GTE at 14. MCI recommends that any volume discounts on entrance  xfacilities be subject to rigorous cost justification and that the Commission ensure that such  Y - xdiscounts are not anticompetitive or discriminatory.U 4  T-ԍxMCI First Order Opposition at 1314.U WilTel also supports permitting volume  xdiscounts (as well as term discounts) on entrance facilities, provided that a high benchmark  Y -standard is in place to ensure nondiscriminatory relationships among interoffice rates.X  T]-ԍxWilTel First Order Opposition at 1920.X  Y - ` 0x` ` m110. MFS argues that the LECs continue to have substantial market power in the  xwinterstate access market, given their control of bottleneck facilities and their economies of scale  x-and scope conferred by state policies, and consequently they should not be given additional  Yf- xpricing flexibility.^ft T"-ԍxMFS First Order Opposition at 47 & nn.1415.^ MFS further argues that, before permitting volume and term discounts for  xswitched transport, the Commission should require LECs to eliminate excessive special access  xvolume and term discounts, set prices for all capacity so that volume and term options are  xconsistently proportionate to underlying costs and realign rates for different capacity levels to  Y - x,eliminate uneconomic crossover incentives and discrimination.f  T'-ԍxId. at iii, 910; MFS First Order Reply at 34.f Ad Hoc argues that, without" 4\+)) "  xdetailed, reliable studies on the impact of such discounts on smaller IXCs, the Commission  Y-should not alter the policy in the First Transport Order.V Tb-ԍxAd Hoc First Order Opposition at 45.V   Y- ` 1x` ` n111. Positions of the Parties-- Density Zone Pricing. In response to the First  Y- xTransport Order and prior to our expanded interconnection orders, several parties advocate  Y- xpermitting density zone pricing of transport services.h T-  ԍxFirst Order Petitions of: SWBell at 1718; Sprint at 57; WilTel at 1415; First Order  xI Oppositions of: GTE at 67; Ameritech at 4; USTA at 67; United at 7; CompTel at 5; MCI at 15; WilTel at 18 & n.22. Only MFS opposes geographic  xYde-averaging, arguing that price cap LECs already can reduce prices for high capacity services,  xwhich are used primarily in dense urban zones anyway, using belowband filings, but that  xdensity zone pricing merely enables LECs to increase rates for lower capacity services in less  Y7-dense zones.R7 T-ԍxMFS First Order Opposition at 11.R  Y -  Y - ` x` ` o112. Sprint, in response to the Second Transport Order, argues that a better way  xof allowing the LECS to compete fairly with CAPs would be to remove the requirement that the  xinitial price subindexes in each density zone be the same, and instead allow the LECs to propose  Y - xnondiscriminatory, costbased prices in the high density zones. X T-  -ԍxSprint Second Order Petition at 910. NYNEX states general support for Sprint's proposal. Second Order Opposition at7. Sprint asserts that this will  xallow all IXCs (not just the largest) to share the inherently lower costs of providing access in such areas.  Yj- ` x` ` p113. VTDIS  Discussion. We once again reaffirm that the LECs may offer term and  xvolume discounts for switched transport services and may implement density zone pricing of  Y=- xYswitched transport, as set forth in the Switched Transport Expanded Interconnection Order and  Y(- xas reaffirmed and slightly modified by the Expanded Interconnection Remand Order. We  x[decided these issues in the expanded interconnection proceeding, based on a separate and  xcomplete record. The present record, however, does not refute the need for this additional  xpricing flexibility in an increasingly competitive access market. Volume and term discounts and  xdensity zone pricing of switched transport, subject to the rules adopted in the expanded inter xconnection orders, ensure that LEC rates are not unduly constrained and that customers fully  Y-enjoy the benefits of increasing competition.  T!$-ԍxSee, e.g., Expanded Interconnection Remand Order, 9FCC Rcd at 5216, 14448. "5r \+))"Ԍ Y- `  x` ` q114. With respect to volume and term discounts, we clarify that the rules we  Y- xwadopted in the expanded interconnection proceeding regarding discounted transport offeringst Tc-ԍx47U.S.C. 69.110(f)(h), 69.111(i)(k), and 69.112(f)(h).t  x,contemplate only volume discounts (reduced perunit prices for a particular number of units of  x service) and term discounts (reduced perunit prices for a specified service for a particular period  x<of time). These rules do not provide for percentage or growth discounts-- reduced perunit  x-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.  YI- ` x` ` r115. Finally, with respect to density zone pricing, we reaffirm our requirement  Y3- xthat the price subindexes (i.e., the upper and lower pricing bands not the rate levels) be the  xsame in each zone when a LEC introduces density zone pricing in a study area. The  xrequirement initially limits the magnitude of the rate differentials among zones and introduces  xthose differentials gradually to avoid sudden rate changes that could harm customers in higher cost areas.  X -x` `  2. Intermediate Hubbing and TandemSwitched Transport (#  Y}- ` x` ` s116.  IIIE2  Background. In the First Reconsideration Order, we revised the definition  x=of directtrunked transport to permit hubbed configurations, which we concluded permit  YQ- xcustomers to use the network efficiently and facilitate interexchange competition.U>Qh Tj-  X ԍxFirst Reconsideration Order, 8 FCC Rcd at 5371, 78. Intermediate hubbing is a configuration  x"of interoffice special access or dedicated transport facilities that permits an access customer to use higher T- x8"capacity facilities (e.g., DS3 circuits) from the SWC to an intermediate hub office, and de-multiplex the  T- x!traffic to lowercapacity facilities (e.g., DS1 circuits) from the intermediate hub office to multiple end offices.U As a  xcorollary to that decision, we also modified our rules to enable customers to purchase tandem xswitched transport in either of two configurations: (1)a perminute charge for tandemswitched  xtransport between the SWC and end offices, rated on the distance between the SWC and the end  xoffices, without regard to the actual location of the intervening access tandem office, as required  Y- xin the First Transport Order, or (2)a flatrate charge for directtrunked transport between the  xSWC and the access tandem office, and a perminute charge for tandemswitched transport  Y-between the tandem office and the end offices, rated on actual distances.nn T -ԍxFirst Reconsideration Order, 8 FCC Rcd at 5372, 9.n  Y- ` x` ` t117. Positions of the Parties. Sprint requests a further modification to the  xdefinition of "tandemswitched transport" to include service between any customerdesignated  YW- xtelephone company office and an end office.SW  T&-ԍxSprint First Recon. Petition at2.S According to Sprint, this clarification would  xpermit IXCs to purchase (1) dedicated facilities to an intermediate hub that is not collocated at  xhthe SWC or at the tandem office; and (2) tandemswitched transport from that intermediate hub  xto an end office, rated based on the distance between the hub and the end offices without regard"6 \+)),"  xjfor the actual location of the intervening tandem office. Several IXCs argue that Sprint's  xhpetition would permit users of tandemswitched transport the same flexibility available to users  Y-of directtrunked transport. TK-  ԍxWilTel First Recon. Comments at n.1; First Recon. Comments of MCI (Sprint) at 13 (MCI filed separate First Recon. Comments for Sprint and SWBell).  Y- ` x` ` u118. No party opposes Sprint's proposal in theory, although several LECs  xgenerally assert that a certain amount of time would be necessary to implement the billing  Yw- xsystems for such services.w@ Th -  YԍxFirst Recon. Comments of: NYNEX at78; Ameritech at1; USWest at2; GTE at2; SWBell at2. Sprint responds that it would not oppose delaying the effective date  xKfor the rule changes it seeks until June1, 1994, as long as the LECs waive the nonrecurring  YI- xJcharges associated with establishing intermediate hubs until six months after that date.PI T-ԍxSprint First Recon. Reply at 2.P MCI,  Y2- xwhowever, argues that such rule changes should be effective immediately;[2X T;-ԍxMCI First Recon. Comments (Sprint) at 23.[ SW Bell replies that  Y -MCI's argument fails to account for the implementation difficulties.Q  T-ԍxSW Bell First Recon. Reply at 8.Q  Y - ` "x` ` v119. Discussion. We established an interim rate structure under which access  xLcustomers could pay for tandemswitched transport between a SWC and end offices on a  xper-minute basis, with mileage measured directly between the SWC and the end office. This  xrate structure does not reflect the actual facilities used to provide tandemswitched transport:  x"[t]andemswitched transport between a serving wire center and an end office consists of circuits  xdedicated to the use of a single interexchange carrier or other person from the serving wire  xcenter to the tandem... and circuits used in common by multiple interexchange carriers or  YM- x=other persons from the tandem to the end office."IM  T-ԍx47C.F.R. 69.2(ss).I We adopted this rate structure "as a  Y6- x,reasonable first step toward a costbased, more rational rate structure,"i68  T -ԍxFirst Transport Order, 7FCC Rcd at 7021, 29.i despite arguments by  xsome parties that "a bundled tandemswitched transport rate precludes tandem interconnection  Y-and competition."L  T#-ԍxId. at 7021, 28.L "7|\+))"Ԍ Y- ` x` ` w120. We decline to adopt Sprint's proposal. We have already adopted rules that  Y- xenable tandemswitched transport users to obtain efficiencies through intermediate hubbing.w Tc-ԍxFirst Reconsideration Order, 8FCC Rcd at 537172, 79.w  xBoth customers using tandemswitched transport and customers using directtrunked transport  xI are now able to use hubbed network configurations to reduce the cost of their dedicated transport  xhcircuits. For example, consider a customer using dedicated facilities from the SWC through an  xwintermediate hub to a tandem office, and using common facilities from the tandem office to end  xwoffices. Under the current rules, the customer could purchase directtrunked transport from the  xhSWC to the hub and from the hub to the tandem, and purchase tandemswitched transport from  x;the tandem to end offices. This rate structure, which reflects the way costs are incurred, gives  xhtandemswitched transport customers the same opportunities as directtrunked transport users to  xuse hubbing to configure their dedicated transport circuits efficiently. By contrast, under  x Sprint's proposal, the tandemswitched customer could pay flatrate directtrunked transport from  xthe SWC to a hub and usagesensitive tandemswitched transport from the hub to end offices,  xeven though the customer's traffic would use dedicated circuits from the hub to the tandem  xxswitch. Sprint's rate structure would not reflect the way costs are incurred, and would give  xtandemswitched transport customers an ability to determine the end points for flatrated  xrecovery not enjoyed by directtrunked transport customers, who have to pay flatrated recovery  xto the LEC's end office location. Sprint's proposal would substantially change the transport rate  xstructure, and would lead to the pricing of more services in a manner that does not reflect the  x;way facilities are deployed. Given our doubts about the efficiency benefits of Sprint's request  xand the fact that the existing rules already provide reasonable opportunities for tandemswitched  xtransport users to compete with directtrunked transport users, we decline to amend our prior decisions.  X-x` `  3. Meet Point Billing (#  Y- ` |x` ` x121. IIIE3   MPB1 Positions of the Parties. When transport services are provided by two or  ximore LECs, such as a BOC and an independent LEC, meet point billing arrangements enable  xeach of the LECs to issue a bill to the IXC. MEANS seeks clarification with respect to how the  xinterim rate structure applies to its meet point billing arrangements with USWest and others.  xwSpecifically, MEANS contends that, in cases where a BOC, a centralized equal access provider,  Y9- xhand an independent LEC jointly provide transport under meet point billing arrangements, if the  xZBOC only provides a dedicated link, it should not be allowed to levy the tandem charge. In  xJsuch a situation, MEANS contends that the BOC should not be able to levy the interconnection  x.charge either, because, as MEANS argues, the interconnection charge primarily recovers  Y- xtandemrelated costs.Tj T#-ԍxMEANS First Order Petition at 914.T MEANS argues that, to the extent the interconnection charge constitutes  xa residual charge or subsidy, it should be levied only upon minutes of use originating and  xterminating at the BOC's exchanges where corresponding portions of the BOC's rate structure  Y"- xwill be applied.P"  TS(-ԍxMEANS First Order Reply at 46.P US West seeks clarification that LECs only meetpoint bill for those rate""8\+))#"  xelements that are jointly provided, such as directtrunked transport and tandem transmission, and  Y- xnot for entrance facilities or the tandem charge.U Tb-ԍxUS West First Order Petition at 21.U US West agrees with MEANS that LECs  xwshould not apply the tandem subelement charge if no tandem switching is provided, but argues  x<that the interconnection charge should be applied by the LEC originating or terminating the  Y-traffic.Vh T-ԍxUS West First Order Opposition at 9.V  Yv- ` !x` ` y122.  MPB2  Discussion. We conclude that specific methods for assessing, and avoiding  xdouble billing for, the tandem charge and the interconnection charge under meet point billing  xarrangements are better left to the individual parties involved, given the wide variety and  xdiversity of such arrangements. If such issues cannot be settled among the parties, we can  xYaddress them in the future in the tariff process or pursuant to specific complaints filed with the Commission.  X -x` `  4. Prohibition on Ratcheting (#  Y - ` @x` ` z123.  IIIE4  Background. In the Special Access Expanded Interconnection Order, we  x+ prohibited ratcheting the practice by interconnectors of using interstate special access expanded  xyinterconnection offerings to connect their transmission facilities with the LECs' interstate  Ye- xswitched services.e T-ԍxSpecial Access Expanded Interconnection Order, 7 FCC Rcd 742021, 109. In the Switched Transport Expanded Interconnection Order, we eliminated  xthis prohibition once a LEC's tariff offering of expanded interconnection for switched transport  Y9-has become effective.9 T-  ԍxSwitched Transport Expanded Interconnection Order, 8 FCC Rcd at 7386 n.53. See, also, 47 C.F.R.69.1402(c).  Y - ` x` ` {124. Positions of the Parties. In petitions filed prior to our Switched Transport  Y- xExpanded Interconnection Order, Bell Atlantic and Rochester argue that the Commission should  Y- xprohibit interconnector ratcheting.u$ T-ԍxFirst Order Petitions of: Rochester at 1516; Bell Atlantic at 89.u MCI and Sprint argue that the ratcheting prohibition, once  xswitched interconnection is implemented, would simply create wasteful duplicate connection  Y-facilities.h  T(#-ԍxFirst Order Oppositions of: Sprint at 1920; MCI at 8.h  Y- ` @x` ` |125. Discussion. In the Switched Transport Expanded Interconnection Order,  x we concluded that interconnector ratcheting was beneficial to access customers and that retaining  x<the prohibition on ratcheting once switched transport expanded interconnection has become  xeffective is inefficient, artificially increasing the cost of interconnected services without any"B9d \+))j"  Y- xaccompanying benefits. Ty-ԍxSwitched Transport Expanded Interconnection Order, 8 FCC Rcd at 7386 n.53. We continue to believe that ratcheting by interconnectors benefits  xiaccess customers and competition, and therefore, decline to modify our rules with respect to ratcheting.  X-x F.` ` Conclusion (#`  Yv- ` x` ` }126. IVThe interim transport rate structure and pricing rules significantly improve  xupon the previous equal charge structure. The new structure permits LECs to offer transport  xservices in a manner more consistent with how the LECs incur transport costs. More costbased  xtransport rates permit the LECs to offer the various transport services in substantially the same  xmanner as CAPs, thus promoting competition. The full benefits of this competition, however,  xcannot reach consumers if the LECs' provision and pricing of their transport services are overly  xconstrained. 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.  X- IV.XxSUPPLEMENTAL NOTICE OF PROPOSED RULEMAKING (#  Xc-x A.` ` Resale, Shared Use and Split Billing   X5-x` `  1. Introduction   Y- ` Cx` ` ~127. VA1 Transport Rulemaking. The interim transport rate structure was  Y- ximplemented with the aim of achieving the three main public interest goals discussed supra in  Y- xYparagraph  GOAL8 . From the start, the restructure aimed at encouraging the efficient use of transport  Y- x<facilities. In the First Transport Order, we noted that "smaller IXCs can reduce their access  xh costs by reselling the services of other IXCs or by utilizing network sharing arrangements with  Y-other carriers to terminate interstate calls."mj T-ԍxFirst Transport Order, 7 FCC Rcd at 7086 (Appendix C).m  Yk- ` x` ` 128. Further, the First Transport Order expressly contemplated that "smaller  xIXCs may choose to aggregate their traffic together and share transmission facilities," and  xobserved that "IXCs may be able to share a DS3 facility to transport either their originating or  Y(- xterminating traffic, allocating the individual circuits among themselves."X(  T"-ԍxId. at 7087 & n.212 (Appendix C).X For example, while  xindividual circuits on an entrance facility are always dedicated to a single access customer,  x<several customers that share a POP may be able to share entrance facilities over which their  xJdedicated circuits are carried. For such arrangements to be practical, it is necessary to develop  xprocedures for LECs (and possibly also IXCs) to provide "split billing," that is, separate bills to different customers for use of shared entrance facilities. "":\+))#"Ԍ Y- ` |x` ` 129. The Transport Orders, however, did not mandate the means by which the  x=LECs could implement such resale and sharing arrangements through either their tariffed  xitransport offerings or their access billing systems. By this Supplemental Notice of Proposed  xRulemaking, we propose requirements and seek comments on proposals for network sharing and  xresale arrangements aimed at ensuring the ability of the smaller IXCs and access customers to realize the maximum benefits from the local transport restructure.  Xa-x` `  2. Background   YJ-  Y3- ` x` ` 130. VA2 Prior to the implementation of the local transport restructure, all switched  xaccess was billed on a per minute of use basis. In general, LECs measured the usage for each  xaccess customer of record and rendered bills accordingly. Under the restructure, LECs had to  xassess flatrated charges for transport facilities, thus requiring them to identify for the first time  xa customer of record for the billing of the entrance facilities and directtrunked transport rate  Y - x-elements.  T:-  ԍxA "customer of record" is an access customer that receives bills and is responsible for paying access charges to a LEC. In those cases where multiple customers receive transport service from a single  xLEC provider over flatrated transport facilities that they share, there are no established access  xbilling arrangements to provide separate bills for fractionalized portions of such flatrated  Y|- xfacilities. This contrasts with meet point billing, discussed supra in paragraphs  MPB1121 ש MPB2122 , which  xis a billing arrangement used where transport services are provided to a single customer by two  xor more LECs, so that each LEC may issue a single bill to the customer for its usagebased charges.  Y - ` @x` ` 131. Transport Tariff Review. In their petitions to suspend or reject the local  xtransport restructure tariffs filed on September 1, 1993, several petitioners raised issues relating  Y- xZto the resale, shared use and split billing of transport facilities.@ T-  xԍxThe parties filed the following petitions and replies in the transport restructure tariff review  T- xV"proceeding, which was resolved by a Common Carrier Bureau order, Local Exchange Carrier Switched  T- x"Local Transport Restructure Tariffs, 9 FCC Rcd 400 (Com. Car. Bur. 1993)(Tariff Order): Petitions filed  x Oct. 7, 1993: CompTel Petition at 3336; MCI Petition AppendixA at 17; Sprint Petition at 3233;  xG"AT&T Petition at 3638 (regarding split billing problem for Feature Group A access); Replies filed Oct.  xf!25, 1993: Pacific Reply at 910; NYNEX Reply, Exhibit 13 at 1; BellSouth Reply at 5557; SWBell  T-Reply at 2229. These petitions and replies are summarized in the Tariff Order, 9 FCC Rcd at 42227. Several petitioners sought  xtariff provisions that would allow "split billing" so that multiple customers of record could be  xbilled by the LEC for fractionalized shares of a highcapacity facility. This billing option would  xallow an access customer to share or resell portions of such facilities and thereby maximize  Y- xefficiency gains from the transport restructure.i  T)%-ԍxSee Tariff Order, 9 FCC Rcd at 422, 60.i For example, split billing could enable several  xsmall IXCs that share a POP to share entrance facilities and/or directtrunked transport at a higher capacity than any of them could justify acting alone. x` ` "=; \+))="Ԍ Y- ` x` ` 132.  TAR1 Two LECs, SWBell and NYNEX, acknowledged the need for split billing  x-of entrance facilities and directtrunked transport and included in their transport restructure  Y- xtariffs provisions implementing split or shared billing arrangements.i TL-ԍxTariff Order, 9 FCC Rcd at 42526, 6770.i SWBell's "Interim Split  xJBilling Option" requires that a "primary customer" of record be responsible for payment of the  xtariffed rates by all other customers sharing the facility. This requirement drew objections from  xboth AT&T and CompTel on the ground that one IXC should not be forced to bear the risk of  Yw-nonpayment by other IXCs sharing the same facility.9wj T -  ;ԍxTariff Order, 9 FCC Rcd at 42324, 63; SWBell Description & Justification filed November  Tl - x*!15, 1993 at 21 to 28. See SWBell Tariff F.C.C. 73, Section 6.8.15; NYNEX Tariff F.C.C. No. 1, Section 6.7.14.9  YI- ` x` ` 133.  TAR2 NYNEX's "Shared Billing Arrangement" allows for the billing of  Y3- xmultiplexed DS1 or DS3 facilities to be split from the multiplexer between two or more  Y - xcustomers.  T-  ;ԍxTariff Order, 9 FCC Rcd at 424, 65; NYNEX Reply, Exhibit 13 at 1; NYNEX Tariff F.C.C. No. 1, Section 6.7.14; NYNEX Description & Justification at Section II. CompTel also objected to the NYNEX arrangement as narrowly limited to  xsituations where higher capacity switched access service is multiplexed onto a lower capacity  xservice (or when a special access service is provided over DS1 or DS3 facilities). CompTel  x-argued that the arrangement does not permit split billing of the highercapacity service, and  xbecause of the limited situations in which it can be used, does not satisfy the needs of IXC  Y -customers for a meaningful split billing offering. 8 T-ԍxTariff Order, 9 FCC Rcd at 424; CompTel Comments filed November 30, 1993 at 7 n. 2. "< \+))<"Ԍ Y- ` 2x` ` 134. AT&T raised another reason for split billing, triggered by anticipated  Y- xFeature Group A billing changes. HZ Tc-  JԍxFollowing divestiture, the LECs' switched access tariffs offered four types or "feature groups"  xf!of switched access service: A, B, C, and D. Feature GroupsA and B are local exchange services that  x"are used to provide interstate access, with service characteristics on the originating end that differ from  xW!Feature GroupD, the equal access connection now used by most IXCs in equal access areas. Feature  x!GroupsA and B were very important services in the initial period after access charges were created,  x!before the significant expansion of equal access offices. Feature GroupA access provides a customer  x"with dedicated transmission facilities from an IXC's POP to an end office, called the dial tone office, and  x"a sevendigit number through which endusers located within the carrier's service area wishing to call the  T# - xG"customer can place such calls. See First Reconsideration Order, 8 FCC Rcd at 537273, 5385, 1518  xt"& AppendixB, Diagram2. Feature GroupB, by contrast, is a trunkside connection; calls are processed  x !through the end office switch or access tandem. The originating caller must use a sevendigit access  x number, but the number is the same nationwide. Carrier access codes are in universal format: 950 xe"XXXX. In the terminating direction, calls terminate at subtending end offices where access tandems are  x: employed and at end offices where connection to an end office is directly made. Because Feature  x"GroupB is a trunkside connection, Feature GroupB offers greater functionality and is more useful for  xH!IXC services. Feature GroupB is also currently used to connect callers to enhanced service provider offerings in lieu of 800 number access because the Feature GroupB number is the same nationwide.H AT&T claimed that, as a result of the transport  xrestructure, various LECs had indicated their intent to bill the IXC at whose POP the entrance  xfacility terminates rather than the customer of record for Feature Group A entrance facilities and  Y- xdirecttrunked transport. AT&T requested that the Commission clarify that the Transport Orders  xhdid not contemplate or permit any changes to the identity of the customer of record for Feature  Yy-Group A service.Yy T-  ԍxTariff Order, 9 FCC Rcd at 423, 6162. Although AT&T only raised the split billing issue  x"with respect to Feature Group A customers in its tariff protest, the issue applies equally to Feature Group B customer billing under the transport restructure.Y  YK- ` x` ` 135. Various LECs opposed a split billing requirement. Unlike SWBell and  xNYNEX, many LECs have no plans to provide a billing option that would apportion the charges  xfor entrance facilities and directtrunked transport among several customers, and generally  xoppose such an approach. Pacific explained that, prior to the restructure, it did not provide split  xbilling for trunking facilities; rather, it measured minutes of use for each customer and billed  x those customers accordingly. With the imposition of flatrated charges for entrance facilities and  x,directtrunked transport, it could not determine which carriers are using what proportions of a  Y - xparticular shared facility, and therefore could not provide them with separate bills. < T"-  ԍxTariff Order, 9 FCC Rcd at 424, 65; Pacific Reply at 910; accord GTE Reply at 2728; BellSouth Reply at 53. BellSouth  xmaintained that the customer who orders the particular interface and the associated facility  Y}- xshould be billed for the interface at the customer premises at a higher capacity facility.} T&-  ԍxTariff Order, 9 FCC Rcd at 42425, 66; BellSouth Reply at 5557; accord Ameritech Reply at 20. SNET  xexplained that Feature Group A is a line side connection into an end office switch and therefore"f=0\+))"  xrequires voice grade capacity for directtrunked transport. Because AT&T requests a DS1  x<interface at its POP for all of its Feature Group A lines, SNET stated that it intended to bill  xAT&T for the DS1 facilities between AT&T's POP and the Feature GroupA dial tone office,  xand to bill the enduser for the voicegrade facilities between the dial tone office and the end Y-user premises._ T-ԍxTariff Order, 9 FCC Rcd at 426, 70._  Yv- ` "x` ` 136. In the Tariff Order, the Common Carrier Bureau agreed that split billing  xby the LECs is crucial to assuring that customers can obtain the maximum benefits from the  YJ- xrestructured transport rates. The Bureau further observed that, although the Transport Orders  Y5- xprohibited restrictions upon resale and sharing, they did not specify how the LECs were to  xfacilitate such arrangements. The Bureau urged all LECs to follow the examples of NYNEX  xand SWBell by accommodating customers who desire split billing services so that they could  x-establish the most efficient and costeffective service arrangement. The Bureau directed the  xLECs to refer the split billing problems described in the order to the industry's Ordering and  xBilling Forum (OBF) for resolution, and requested that the LECs report to the Bureau within  xthree months on their progress in resolving these issues. The Bureau suggested that, if the  xcarriers failed to make substantial progress toward a successful resolution, the Commission  Y}-might consider prescribing a method for providing split billing.i}j T-ԍxTariff Order, 9 FCC Rcd at 42627, 7172.i  YO- ` x` ` 137. On March 29, 1994 several LECs reported to the Common Carrier Bureau  xthat the OBF had under consideration proposals for resolving ordering and billing procedures  xhfor split billing arrangements and the associated responsibilities including "percent of interstate  Y - xuse" (PIU) reporting.t   T-  hԍxSee, e.g., Letter from Kenneth Rust, NYNEX, to Gregory J. Vogt, Chief, Tariff Division, FCC  xg (dated March 29, 1994); Letter from Gordon Maxson, GTE, to A. Richard Metzger, Acting Chief,  xu!Common Carrier Bureau, FCC (dated March 29, 1994); Letter from Michael J. Shortly, Jr., Rochester  x"Telephone, to Gregory J. Vogt, Chief, Tariff Division, FCC (dated March 29, 1994). The IXC customer  x)"of record for a transport facility is responsible for reporting its PIU to the LEC so that appropriate bills  x "may be rendered. IXCs who wish to resell capacity over their highcapacity entrance facilities to other  x!carriers sought split billing for multiple carriers of record so that the IXC reselling the capacity would  T- xnot have to take responsibility for the PIU estimates of its IXC customers. See Ex Parte Letter to  x!Gregory J. Vogt, Chief, Tariff Division from Karis A. Hastings, Counsel for WilTel, dated December 10, 1993. The OBF apparently has not yet reached consensus on the resolution to these issues.  Y- ` x` ` 138. AT&T Transmittal No. 6788.  PROB1 Prior to the restructure, endusers that  xpurchased AT&T private line service used LEC Feature GroupA and B transport service to  xhobtain access to AT&T POPs. Under the equal charge rate structure, the LECs billed such end x/users perminute charges for the Feature GroupA and B services. Since the transport  xrestructure tariffs took effect, many LECs have billed AT&T for the flatrated portions of  xhFeature Group A and B transport service, and have billed the Feature Group A and B endusers"T>H \+))M"  xLonly for usage sensitive transport rate elements. In response to this practice, AT&T filed  xTransmittal No. 6788, by which AT&T proposed to amend its private line Tariff F.C.C. Nos.  x9 and 11 to bill endusers for "Feature Group A (FG A) and Feature Group B (FG B)  xConnections which provide the physical connection between a Local Exchange Company End  xOffice Switch and the AT&T Central Office, for connection to AT&T Private Line Services."  xIn Transmittal 6788, in conjunction with the interexchange private line portion of Feature  xGroupA and B service that AT&T already provides, AT&T proposed to resell the trunking  xfacilities linking the AT&T POP to the dial tone office that contains the LEC switch at which a Feature Group A or B customer's private line terminates.  Y - ` Sx` ` 139.  DBILL1 On August 12, 1994, the Common Carrier Bureau suspended  x;Transmittal6788 for five months, imposed an accounting order, and instituted an investigation  Y - xZinto the reasonableness of the tariff revisions.f  Tf -  ԍxAT&T Communications Tariff F.C.C. Nos. 9 and 11, Transmittal No. 6788, Memorandum  T@- x "Opinion and Order, 9 FCC Rcd 4480 (Com. Car. Bur. 1994)(Suspension Order). See also In the Matter  T- x8"of AT&T Communications Tariff F.C.C. Nos. 9 and 11, Order Designating Issues for Investigation, DA 941118 (Com. Car. Bur. released October 7, 1994). The Suspension Order noted that, since the  x,transport restructure tariffs took effect, the LECs have continued billing the enduser customer  xifor the usagerated transport elements of Feature Group A and B. Further, many LECs have  xnot offered to split the charges for the flatrated facilities between AT&T's POP and the LEC  x,dial tone office among these customers so that an enduser customer would pay only a pro rata share of the entrance facility rate for its use of a highcapacity facility.  YN- ` x` ` 140.  PROB2 The LECs have asserted that billing the IXC at whose POP the facilities  Y8- x-terminate is consistent with the First Transport Order and with principles of costcausation.  xAccording to the LECs, AT&T should be considered the ordering customer for the dedicated  xfacilities because AT&T specified the interface level and because the facilities are dedicated to  Y- xits use._  T-  wԍxSuspension Order, 9 FCC Rcd at 4482, 11. See Letter from Jo Ann Goddard, Pacific Bell, to  xe"Gregory J. Vogt, Chief, Tariff Division, FCC (dated May 4, 1994); Letter from Kenneth Rust, NYNEX, to William F. Caton, Acting Secretary, FCC (dated May 4, 1994)._ They are reluctant to bill endusers for the highcapacity entrance facilities running  xto AT&T POPs as if they were standalone voicegrade facilities. Such LECs fear that a LEC  xoffering standalone voicegrade facilities would have to absorb the costs of any shared channels  xon the highcapacity facilities that are not sold to endusers or other customers. If the LEC bills  x;a single IXC for the full cost of the facilities, however, the IXC, not the LEC, absorbs the cost  Y-of the channels not in use.c H T{#-ԍxSuspension Order, 9 FCC Rcd at 4481, 9.c "k? \+))]"Ԍ X-x` `  3. Discussion   Y- ` Nx` ` 141.VA3 Proposed rule. The Tariff Order correctly observed that, through LEC split  xZbilling and shared network arrangements, customers can reap the maximum benefit from the  xrestructured transport rates. LEC split billing would help smaller IXCs reduce their access costs  xby enabling them to resell the services of other IXCs or by utilizing network sharing  xarrangements with other carriers to transmit and terminate interstate calls. It could also solve  xthe practical billing problems that have arisen regarding Feature Group A and B access  YJ- xservices. J T -ԍxFor a description of the problem, see supra  PROB1138שPROB2140. Finally, split billing could permit more efficient deployment and use of transport  x: facilities, a primary goal of the transport restructure. We therefore tentatively conclude that split  xbilling for transport service is in the public interest. We further tentatively conclude that we  xshould require the LECs to include in their tariffs procedures for offering transport split billing. We seek comment on these conclusions.  Y - ` x` ` 142. Implementation.  NUM1 As the record on this issue indicates, the parties strongly  xdisagree on how best to implement split billing. We note that, although the OBF has made  xprogress, it has not yet been able to reach final closure on an access charge split billing  x.prototype after 11 months of consideration. We therefore seek comment on how best to implement the proposed split billing requirement.  Y7- ` x` ` 143. First, we seek comment on a proposal offered by CompTel in the transport  Y!- xwtariff review proceeding.q !j T<-ԍxTariff Order, 9 FCC Rcd at 422; CompTel Petition at 3536.q CompTel urges the Commission to adopt the following affirmative  xsteps to make resale and sharing feasible: (1) require the LECS to permit switched and special  xaccess facilities to be combined at the customer POP, LEC serving wire centers, or any other  xdesignated hubbing locations; (2) require the LECs to permit multiple carriers of record for DS3  xand DS1 entrance and interoffice facilities; (3) require the LECs to offer "split billing" for  xJmultiplexing equipment located at a hub; and (4) require the LECs to permit the IXC to specify  xw(i) the type and grade of switched access service as well as the code at the terminating hub, and  x(ii) the customer premises location associated with special access channels. We seek comment on whether we should adopt any of these proposed requirements.  Y;- ` 2x` ` 144. Second, we seek comment on whether a split billing charge levied on  xmultiple customers of record using a single highcapacity facility should be set to recover the  xcost of unused as well as used capacity. For example, should a LEC be allowed to charge an  xenduser customer for its use of a highcapacity facility at a rate computed by dividing total flat  xcharges for the entrance and interoffice facilities by the number of endusers whose traffic is  xhcarried over that facility, with a pro rata allocation of the costs of unused capacity in that rate?  xYCommenters should address the issue of which entity would be responsible for determining the  xallocation, the service design and capability and the circuit facility assignment under such an  xarrangement. In addition, commenters should discuss whether this form of split billing should  xZbe available to resellers of access service, or should be limited to customers seeking to share"m$@  \+))%"  xdedicated facilities for their own use. Commenters should also address methods to ensure that  Y-Feature GroupA and B users are not doublebilled for their use of the same facilities.Z  Tb-ԍxSee supra DBILL1139.Z  Y- ` x` ` 145. In addition, we seek comment on whether the type of split billing and shared  xJnetwork arrangements offered by NYNEX and SWBell adequately address customer needs for  Y- x=such arrangements.nj T-ԍxSee supra  TAR1132 ש TAR2133 .n We also invite parties to comment on whether similar or modified  x,arrangements should be offered by all LECs. Commenters should specifically address whether  xthe "host/secondary customer of record" arrangement, under which a single IXC serves as the  x"host" customer of record, and is responsible for service arrangement and control, would satisfy  xthe access customers' needs for sharing and resale of dedicated transport facilities? Commenters  xshould also discuss how such offerings could be expanded or improved to meet customer needs.  xiCommenters advocating that there be a single, host customer of record for the access service  xshould specifically discuss how this split billing arrangement would apply to voicegrade access for Feature Group A and B services.  Y - ` x` ` 146.  NUM2 Finally, we seek comment on any other form of split billing that  xcommenters believe would achieve the goals we have identified. Of particular interest would  xYbe any split billing prototype under consideration by the industry's OBF. Commenters who do  xKnot support a requirement that the LECs include in their tariffs procedures for offering split  x[billing and shared network configurations should discuss alternative ways to satisfy LEC provision of these arrangements.  X-wx` `   4.Conclusion   Y- ` x` ` 147.VA4 For the reasons stated above, we tentatively conclude that a requirement that  xxLECs offer split billing for transport service is in the public interest. We further tentatively  x-conclude that we should require the LECs to include in their tariffs procedures for offering  xktransport split billing. We wseek comment on these conclusions, and on the options for  Y-implementation of the proposed requirement described in paragraphs  NUM1142 ש NUM2146 .  XQ-x B.` ` Procedural Matters   X#-x` `  1. Ex Parte   Y- ` x` ` 148.VB1 This is a non-restricted notice and comment rulemaking. Ex parte  xpresentations are permitted, except during the Sunshine period, provided they are disclosed as  xkprovided in the Commission's rules. See generally, 47 C.F.R. 1.1202, 1.1203, and 1.1206(a). ""A \+))#"Ԍ X-x` `  2. Regulatory Flexibility Act   Y- ` x` ` 149. VB2We certify that the Regulatory Flexibility Act of 1980 does not apply to this  xwrulemaking proceeding because the proposed rule amendments, if promulgated, would not have  xa significant economic impact on a substantial number of small business entities, as defined by  xSection 601(3) of the Regulatory Flexibility Act. Carriers providing interstate transport services  xdirectly subject to the proposed rule amendment do not qualify as small businesses since they  xare dominant in their field of operation. The Commission will, however, take appropriate steps  xto ensure that the special circumstances of the smaller LECs are carefully considered in resolving  xzthose issues. The Secretary shall send a copy of this Supplemental Notice of Proposed  x.Rulemaking, including the certification, to the Chief Counsel for Advocacy of the Small  xBusiness 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).  X -x` `  3. Notice and Comment Provision   Y- ` x` ` 150. VB3Pursuant to applicable procedures set forth in Sections 1.415 and 1.419 of  xthe Commission's Rules, 47 C.F.R. 1.415 and 1.419, interested parties may file comments  Yd- xon or before February 1, 1995 and reply comments on or before  February 16, 1995. To file  xYformally in this proceeding, parties must file an original and five copies of all comments, reply  xcomments, and supporting comments. Parties wanting each Commissioner to receive a personal  xcopy of their comments must file an original plus nine copies. Comments and reply comments  xshould be sent to the Office of the Secretary, Federal Communications Commission,  xWashington, D.C. 20554. In addition, parties should file two copies of any such pleadings with  xthe Tariff Division, Common Carrier Bureau, Room 518, 1919 M Street, N.W., Washington,  xD.C. 20554. Parties should also file one copy of any documents filed in this docket with the  xZCommission's copy contractor, International Transcription Services, Inc. (ITS, Inc.), 2100 M  xLStreet, N.W., Suite 140, Washington, D.C. 20037 (202/8573800). Comments and reply  xcomments will be available for public inspection during regular business hours in the FCC  xReference Center, Room 239, 1919 M Street, N.W., Washington, D.C. For further information  xwregarding this Supplemental Notice of Proposed Rulemaking, contact Barbara Esbin, (202) 4181520 of the Common Carrier Bureau, Tariff Division.  Y-- V. ORDERING CLAUSES ׃  Y - ` x` ` 151. VIACCORDINGLY, IT IS ORDERED, pursuant to Sections1, 4(i) and (j),  x201205, 218, 220, 403, and 405 of the Communications Act of 1934, as amended, 47U.S.C.  x151, 154(i) and (j), 201205, 218, 220, 403, and 405, that the petitions for reconsideration  x-and clarification concerning the rate structure and pricing of local transport ARE DENIED, except to the extent indicated herein.  Y>&- ` x` ` 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. "(B\+))@)"Ԍ Y- pTx` ` 153. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i) and (j),  x201-205, 218, and 403 of the Communications Act as amended, 47 U.S.C. 151, 154(i) and  x(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.  Y- ` x` ` 154. IT IS FURTHER ORDERED that WilTel's Motion for Acceptance of LateFiled Opposition to Petition for Reconsideration IS GRANTED.  YJ- `  x` ` 155. IT IS FURTHER ORDERED that authority is delegated to the Chief,  Y4-Common Carrier Bureau, as set forth supra in DELEG32, 90. x` ` hhFEDERAL COMMUNICATIONS COMMISSION x` ` hhWilliam F. Caton x` ` hhActing Secretary "~C\+))"  Y- X    D @A-@ Appendix A: List of Parties ă  X- I.XxReconsideration of the First Transport Order (# Parties filing Petitions for Reconsideration of [ the First Transport Order, December 21, 1992 4(First Order Petitions): T 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) "$D,**" O Parties filing Comments on, or Oppositions to, Q First Order Petitions, February 12, 1993 n(First Order Oppositions): T 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, C 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" (E,**@)"  X- II.XxReconsideration of the First Reconsideration Order (# x Parties filing Petitions for Reconsideration of the First Reconsideration Order,  September2, 1993 (First Recon. Petitions): Sprint SWBell . Parties filing Comments on, or Oppositions to, O First Recon. Petitions, October22, 1993  (First Recon. Comments): Ameritech AT&T Bell Atlantic CompTel GTE NYNEX MCI (separate filings for SWBell and Sprint) SWBell (filed September 17, 1993) USTA USWest WilTel (filed October 26, 1993) Y Parties filing Responses to First Recon. Oppositions, November4, 1993 (First Recon. Replies): MCI NYNEX Sprint SWBell USWest  X - " F,**"  X-III.XxReconsideration of the Second Transport Order (# Parties filing Petitions for Reconsideration of the Second Transport Order, April4, 1994  (Second Order Petitions): CompTel Sprint WilTel O Parties filing Comments on, or Oppositions to, Second Order Petitions, May3, 1994 L(Second Order Oppositions): Ameritech AT&T Bell Atlantic BellSouth GTE MEANS NYNEX Rochester SWBell USTA USWest Parties filing Replies to Second Order Oppositions, May18, 1994 (Second Order Replies): CompTel SWBell Sprint WilTel " G,**"  Y-  @A-B-@d Appendix B: Impact Data ă   xDuring the course of this proceeding, the Commission has collected from the Bell  x,Operating Companies (BOCs) and GTE estimates and actual data on the impact of the transport  x,restructure on large, medium, and small IXCs. This appendix describes the derivation of those impact data.  XI- BOC and GTE Estimates  Y -  xPrior to the Commission's adoption of the First Transport Order, the BOCs and GTE  xhsubmitted model results that estimated the impact of the transport restructure on large, medium,  xJand small IXCs under a variety of assumed transport rate structures and pricing options. These  xxmodels were designed to compare, for each category of IXC, the level of interstate switched  xaccess costs under the equal charge rule with the level of such costs under alternative rate  xstructure and pricing plans. Estimates of the percentage change in total interstate switched  xaccess costs, as well as the percentage change in transport costs, were calculated and placed in the record.   xThe LEC models addressed facility demand both based on existing facility demand, and  xJbased on projected facility demand taking into account IXC reconfigurations in response to the  xrestructure. The LECs used two different modelling approaches to project reconfigurations in  xresponse to the restructure one based on engineering principles and the other based on least xcost routing assumptions. The Commission determined that the LEC models using existing  xfacility demand, other than that of Pacific, provided a reasonable estimate of the impact of the  xadopted rate structure and pricing plan on IXCs, at least when those estimates were based on  xexisting network configurations. The Pacific model was deemed to be inadequate because it did  Y- xnot account for the entire geographic region, or for all the IXCs, served by Pacific. T-  ԍxSee First Transport Order, 7 FCC Rcd at 708598, AppendixC, for a more extensive description of these modelling approaches and an analysis of their reliability. None of the models based on projected demand after reconfigurations was deemed sufficiently reliable.   #xThe BOCs and GTE submitted updated estimates in the fall of 1993 after the  Y:- xCommission's adoption of the First Reconsideration Order. These estimates accounted for the  Y%- xmodifications made in the First Reconsideration Order. They were based on the same modelling  x;methodology and assumptions that were used to derive the earlier impact estimates, except that  x,they were updated to reflect: (1) customers' existing network configurations; (2) the decisions  Y- xin the First Reconsideration Order; (3) the decision on general support facilities cost  Y -reallocation; B T%-   ԍxAmendment of the Part69 Allocation of General Support Facility Costs, Report and Order, 8 FCC Rcd 3697 (1993). and (4) the effects of the adjustment of the price cap index for 1993.o  T:(-ԍxFirst Reconsideration Order, 8 FCC Rcd at 5381, 65.o "!H^,**""Ԍ X- Quarterly Monitoring Reports   xOn December 29, 1993, the Common Carrier Bureau directed the BOCs and GTE to  x+ provide quarterly reports for 1994 containing information to assist the Commission in monitoring  Y- xthe effect of the transport restructure on IXCs.r T-  [ԍxSee Letter from Kathleen B. Levitz, Acting Chief, Common Carrier Bureau, to Donna M.  x Hermerding, Ameritech Services, dated December29, 1993; Letter from Kathleen B. Levitz, Acting  x Chief, Common Carrier Bureau, to Bell Atlantic, dated December29, 1993; Letter from Kathleen B.  x"Levitz, Acting Chief, Common Carrier Bureau, to BellSouth Communications, dated December29, 1993;  x9!Letter from Kathleen B. Levitz, Acting Chief, Common Carrier Bureau, to GTE, dated December29,  x9!1993; Letter from Kathleen B. Levitz, Acting Chief, Common Carrier Bureau, to NYNEX Telephone  x!Companies, dated December29, 1993; Letter from Kathleen B. Levitz, Acting Chief, Common Carrier  x "Bureau, to Southwestern Bell, dated December29, 1993; Letter from Kathleen B. Levitz, Acting Chief,  x!Common Carrier Bureau, to Pacific Telesis, dated December29, 1993; Letter from Kathleen B. Levitz, Acting Chief, Common Carrier Bureau, to USWest, dated December29, 1993. After discussions with all interested parties, the  Y-Bureau accepted a revised data set and filing format proposed by the LECs.   T@-   ԍxMemorandum from Joseph Mulieri, Bell Atlantic, on behalf of BOCs/GTE to Policy and Program  x!Planning Division, Common Carrier Bureau, dated April 13, 1994; Letter from A. Richard Metzger,  x Jr., Acting Chief, Common Carrier Bureau, to William Blase, Jr., Southwestern Bell, dated May16,  x1994; Letter from A. Richard Metzger, Jr., Acting Chief, Common Carrier Bureau, to Donna  x !Hermerding, Ameritech Services, dated May16, 1994; Letter from A. Richard Metzger, Jr., Acting  x"Chief, Common Carrier Bureau, to Michael McCullough, Bell Atlantic, dated May16, 1994; Letter from  xV"A. Richard Metzger, Jr., Acting Chief, Common Carrier Bureau, to NYNEX Government Affairs, dated  x"May16, 1994; Letter from A. Richard Metzger, Jr., Acting Chief, Common Carrier Bureau, to Everett  x Williams, GTE, dated May16, 1994; Letter from A. Richard Metzger, Jr., Acting Chief, Common  x Carrier Bureau, to Robert Jackson, USWest, dated May16, 1994; Letter from Kathleen B. Levitz,  x!Deputy Chief, Common Carrier Bureau, to Al Swan, Pacific Telesis, dated May16, 1994; Letter from  x !A. Richard Metzger, Jr., Acting Chief, Common Carrier Bureau, to R.W. Fleming, BellSouth, dated May16, 1994.   xThe quarterly reports provided the percentage changes in transport revenues from  xrecurring charges and total interstate switched access revenues from recurring charges, broken  xdown by large, medium, and small IXCs. These percentage changes were measured in two  Y - xways: (1) comparing present quarterly revenues with the revenues of the preceding quarter (i.e.,  xZthe first quarter of 1994 compared with the last quarter of 1993); and (2) comparing present  Y - xquarterly revenues with the revenues of the same quarter of 1993 (i.e., the second quarter of  x1994 compared with the second quarter of 1993). The percentage changes in both the switched  xaccess costs and switched transport costs were presented based on actual revenues, as well as  xadjusted to remove the effects of demand variations and any rate changes between the compared quarters.   /xThe report for the first quarter of 1994 was slightly modified to avoid use of January  xrevenues that reflected December 1993 usage. Therefore, the 1994 first quarter revenue totals  xwere comprised of revenues from flatrated facilities during January through March 1994 and  xusage 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." I,**"Ԍ  /ԙxThe reports also contained growth in minutes by category of IXC, as well as the total  xnumber of local switching minutes of use for each LEC per quarter. These switched minutes  xywere used to weight the impacts reported by each LEC in calculating an industry average  ximpact, which is set forth in Table1 of the attached order. Finally, the reports included other information tracking the course of the restructure.  Xv- Quarterly Monitoring Reports LEC Filings   YH-xFirst Quarter:   XxLetters from Donna Hermerding and Cronan O'Connell, Ameritech, to William Caton, Acting Secretary, FCC, filed June2 and June23, June30, 1994.(#   /XxLetters from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed May31 and June7, 1994.(#   /XxLetters from Whit Jordan, BellSouth, to William Caton, Acting Secretary, FCC, filed May31 and June10, 1994.(#   XxLetters from Everett Williams and F. Gordon Maxson, GTE, to William Caton, Acting Secretary, FCC, filed May31, June9, and June17, June28, 1994.(#  Yb-  L XxLetters from Kenneth Rust and Alan Cort, NYNEX, to William Caton, Acting Secretary, FCC, filed May31 and June15, 1994.(#   [XxLetters from Jo Ann Goddard, Pacific Telesis, to William Caton, Acting Secretary, FCC, filed May31, June2, June7, and June14, 1994.(#   yXxLetter from William Blase, Southwestern Bell, to William Caton, Acting Secretary, FCC, filed May31, 1994.(#   XxLetters from Cyndie Eby, USWest, to William Caton, Acting Secretary, FCC, filed May31 and June14, 1994.(#  Y-x1Second Quarter:   MXxLetter from Cronan O'Connell, Ameritech, to William Caton, Acting Secretary, FCC, filed July 29, 1994.(#   XxLetter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed August 5, 1994.(#   =XxLetter from Whit Jordan, BellSouth to William Caton, Acting Secretary, FCC, filed July 29, 1994.(#   zXx1Letters from Jack Isbell, GTE, to William Caton, Acting Secretary, FCC, filed July 29 and August 11, 1994.(#   XxLetter from Kenneth Rust, NYNEX, to William Caton, Acting Secretary, FCC, filed August 1, 1994.(#   XxLetter from Jo Ann Goddard, Pacific Telesis, to William Caton, Acting Secretary, FCC, filed July 29, 1994.(#   XxLetter from Sandra Wagner, Southwestern Bell, to William Caton, Acting Secretary, FCC, filed July 29, 1994.(#   XxLetter from Cyndie Eby, USWest, to William Caton, Acting Secretary, FCC, filed August 1, 1994.(# "(J,**0*"Ԍ Y-Industry Rollup:   XxLetter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed October 18, 1994.(#   XxLetter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed November14, 1994.(#  Y_-Third Quarter:   MXxLetter from Cronan O'Connell, Ameritech, to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   XxLetter from Joseph Mulieri, Bell Atlantic, to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   XxLetter from Whit Jordan, BellSouth to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   XxLetters from F. Gordon Maxson, GTE, to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   XxLetter from Kenneth Rust, NYNEX, to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   XxLetter from Jo Ann Goddard, Pacific Telesis, to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   XxLetter from Sandra Wagner, Southwestern Bell, to William Caton, Acting Secretary, FCC, filed October 31, 1994.(#   }XxLetter from Cyndie Eby, USWest, to Richard Metzger, Jr., Deputy Chief of Operations, Common Carrier Bureau, filed October 31, 1994.