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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 ) ) In the Matter of the ) ) ) National Exchange Carrier ) Association, Inc. ) AAD 96-2 ) ) Proposed Modifications to the ) Interstate Average Schedule ) Formulas ) ) ) MEMORANDUM OPINION AND ORDER Adopted: June 26, 1996 Released: June 26, 1996 By the Chief, Common Carrier Bureau: I. INTRODUCTION 1. On January 11, 1996, the National Exchange Carrier Association, Inc., ("NECA") filed a proposal to revise the average schedule formulas that it uses to compensate average schedule incumbent local exchange carriers ("LECs") for the provision of interstate services. The filing was submitted in accordance with the Commission's rules that require NECA to submit proposed modifications to the average schedules annually or to certify that no modifications are warranted. In this Order, we are approving the proposed revisions to the average schedule formulas, which will become effective July 1, 1996. We also direct NECA to make further improvements in the Traffic Sensitive Central Office ("TSCO") formula so that a higher level of statistical confidence can be achieved. II. BACKGROUND 2. Incumbent LECs receive compensation from the NECA pools either as "cost companies," or as "average schedule companies." Cost companies receive compensation for the use of their facilities in originating and terminating interstate common carrier communications services on the basis of their actual interstate costs of performing those functions. Cost companies perform studies of their total costs in accordance with Parts 32, 36, and 64 of the Commission s rules to determine their actual interstate costs. Average schedule companies receive compensation for their interstate common carrier services on the basis of formulas that are designed to "simulate the disbursements that would be received...by a [cost study] company that is representative of average schedule companies." III. PLEADINGS A. NECA's Filing 3. Average schedule companies currently receive interstate compensation pursuant to formulas that became effective July 1, 1995. NECA's filing proposes to modify the formulas for the period July 1, 1996 through June 30, 1997. NECA states that the proposed formulas simulate disbursements that would be received by a cost company that is representative of average schedule companies, as required by Section 69.606(a) of the Commission's rules. 4. NECA states that the net effect of the changes proposed in its 1996 filing would be an increase of 0.04 percent in payments to the average schedule companies. NECA also states that this net effect would reflect an average increase of 2.56 percent above current average schedule levels for the common line portion of settlements and an average decrease of 1.67 percent below current levels for the traffic sensitive portion. NECA states that, while the overall net change over the current formulas would not be significant, the impact on some companies would be substantial. 5. NECA also states that, pursuant to the Commission's directive in the 1995 Average Schedule Order, NECA has examined methods to improve the accuracy of the TSCO formula with regard to high traffic volume companies. As a result, NECA proposes two changes to the TSCO formula: the addition of a fourth (usage) tier with a threshold of 1,300 minutes per line per month; and the introduction of a high volume access line multiplier in the formula. According to NECA, this multiplier would reduce settlements on a per-minute basis for all carriers that serve more than 600 access lines and exceed 350 minutes per line. B. Comments 6. In a Public Notice released January 19, 1996, we invited comments on NECA's 1996 Filing. ICORE, NTCA, OPASTCO, and USTA recommend that the Commission approve NECA's proposed revisions to the average schedule formulas, but ICORE makes what it calls "modest suggestions for improvement" to avoid the anomalies that would be created by the new TSCO formula structure. ICORE states that a transition or phase-in mechanism would be necessary to help ameliorate the effects of large settlement reductions that might result from the TSCO formula changes for high volume companies and from the Signaling System 7 ("SS7") formula changes. ICORE asks the Commission to consider the use of a transition mechanism, such as the Subscriber Plant Factor ("SPF") transition, rather than individual showings of hardship. ICORE proposes that, pending a permanent solution, settlement reductions related to the revised TSCO formula be limited to 5 percent per year for two or three years depending upon the reduction. ICORE also recommends that a vintage schedule be used for the SS7 formula that would compensate companies using the formulas in place during the year of their initial SS7 settlement claims. 7. NTCA states that NECA's proposed modifications to the TSCO formula will likely simulate the costs incurred by average schedule companies more closely than the 1995 formula. OPASTCO states that NECA's proposed TSCO formula fully addresses the Commission's concern that the current TSCO formula may overcompensate a small number of high volume companies. OPASTCO recommends that the Commission unconditionally approve the proposed TSCO formula, along with the other proposed formulas. In addition, OPASTCO urges the Commission to approve transitional support to any average schedule company that can demonstrate hardship resulting from a decline in settlements. USTA states that the proposed revisions to the TSCO formula would reflect more accurately individual companies' per minute switching costs and would improve the distribution of central office settlements among average schedule companies. 8. Hartington is an average schedule incumbent LEC serving approximately 1,500 access lines in northeastern Nebraska. It states that the modifications proposed in NECA's 1996 formula revisions would result in a 23 percent reduction in Hartington's total interstate settlements. Hartington adds that this reduction would force it to revisit plans for a switch replacement and fiber facility upgrades. Hartington encourages the Commission to avoid further adjustments to the TSCO formula without consideration of the significant impact the changes would have on some average schedule companies and the communities in which they operate. C. Reply Comments 9. In its reply comments, ICORE reiterates its claim that a uniform, generic transition for every average schedule company experiencing losses above a certain level would be the most fair and equitable method of protecting those companies from rate shock that would otherwise result from approval of the new average schedule formulas. ICORE cites the Hartington situation, and says that Hartington's 23 percent decrease in settlements gives true meaning to OPASTCO's words concerning demonstrated hardship. NECA states that it is sympathetic to ICORE'S transition concerns and, in fact, routinely evaluates the need for a general transition in connection with each modification. NECA argues, however, that when changes in settlement levels affect only a small number of companies and when changes are not associated with a rule or industry change affecting many companies, individual relief provides a more targeted solution than does a general transition. In response to ICORE's claim that the new TSCO creates anomalies, NECA states that the addition of the high volume access line multiplier would significantly improve the accuracy with which the proposed formulas simulate cost company disbursements. NECA argues that the proposed TSCO formula would accurately compensate all average schedule companies including those with high traffic volumes. Regarding ICORE's proposal to use vintage costing for SS7 investments, NECA states that such an approach would be exceedingly complex, and would require average schedule companies to submit detailed cost study data not required currently. 10. In their reply comments, NTCA and USTA favor an approach that targets individual cases of hardship for consideration of transitional relief. NTCA also states that it disfavors a vintaging approach for SS7 settlements. IV. DISCUSSION A. TSCO Formula Changes 11. In the 1995 Average Schedule Order, we stated that the revised TSCO formula for 1995 was a significant improvement over the 1994 version. Nonetheless, we also directed NECA to consult with the Common Carrier Bureau concerning steps that could be taken to improve the accuracy of the TSCO formula. As a result, NECA recommends two structural changes in the 1996 TSCO formula to improve the accuracy of settlements to study areas with high average minutes per line. First, the structure of the formula would be modified to include a fourth tier of minutes per line to distinguish the switching cost characteristics for study areas with extremely high minutes per line. The revised four tiers of minutes per line and settlement amounts per minute are: 1 to 350 minutes per line (2.8› per minute); 351 to 600 minutes per line (2.4› per minute), 601 to 1,300 minutes per line (1› per minute); and greater than 1,300 minutes per line (.5› per minute). Second, NECA proposes to add a high volume access line multiplier to the TSCO structure that would be applied to each of the three high traffic volume tiers, i.e., those for traffic above 350 minutes per line. This multiplier decreases as the number of access lines increases. NECA proposes this change to ensure that high volume study areas with relatively few access lines are not under-compensated and those with relatively high access line counts are not over-compensated. 12. We have conducted a complete review of the data NECA submitted to support the changes it proposes in the TSCO formula for both normal and high volume companies. We find that the proposed TSCO formula would produce more accurate and more representative results than the formulas currently in use. Therefore, we recognize NECA's efforts to revise the TSCO formula to compensate average schedule companies with high traffic volumes more accurately, and as noted herein, we approve use of the revised formula. Our analysis of the data, however, leads us to conclude that further modification of the TSCO formula is desirable. Accordingly, we direct NECA to continue working with the Bureau's Accounting and Audits Division staff to: 1) continue to improve the accuracy of the formula, within the current formula structure, specifically for high volume traffic settlements; and 2) derive alternative TSCO formula structures and investigate whether the alternative models would improve the accuracy of the TSCO formula. These consultations shall begin within 30 days of this Order's release. B. SS7 Formula Changes 13. ICORE recommends that NECA develop a vintage schedule for SS7 settlements, separately for each company, that would recognize the SS7 costs that were in effect during the first year that each company received SS7 settlements. ICORE claims that SS7 settlements have declined dramatically, especially in the last two years, and therefore do not cover the SS7 revenue requirements for those companies that installed SS7 systems several years ago. In reply comments, NECA and NTCA both recommend rejection of ICORE's vintage schedule procedure for SS7 settlements. We agree with NECA and NTCA, and reject ICORE's SS7 vintage schedule recommendation. As NECA points out, the vintage schedule procedure would add unnecessary complexity, increase the volume of supporting cost data required from all average schedule carriers, and fail noticeably to improve the accuracy of SS7 settlements. In addition, the proposal would substitute company-specific cost data, arrayed by vintage year, for traditional average schedule company data that are not intended to be company or vintage specific. We note that any company that believes it is not adequately compensated under the average schedule formulas can convert to cost status at any time. C. Transition of Settlement Decreases 14. We do not believe that a generic transition or phase-in, as recommended by ICORE, is either required or appropriate, and therefore, we do not approve such a plan. ICORE recommends that a generic transition or phase-in mechanism be offered to every average schedule company to mitigate the financial impact of the settlement decreases caused by the modifications of the formulas. ICORE offers two approaches for consideration, and in both, a 5 percent settlement loss is recommended as the threshold above which a transition would apply over a two or three-year period. We note that no other party favors ICORE's suggested generic transition plan. In addition, NECA, NTCA and OPASTCO argue that, because only a few companies will experience significant settlement decreases, we should consider targeted, individual company transition plans only, not a generic solution. We recognize that a few companies will likely experience large reductions in their average schedule settlements, primarily due to the changes in the TSCO formula. We believe that, contrary to ICORE's position, these reductions will result from flaws in the 1995 Schedules, rather than any deficiency in the formulas this Order approves. Therefore, we decline to adopt any transition plan. Any company that believes that the changes in the formulas will make its rates unreasonably low can, of course, convert to cost status. D. Other Issues 15. ICORE raises two issues that are being addressed in other proceedings and need not be addressed here. ICORE argues that, for purposes of Universal Service Fund ("USF") high-cost assistance for average schedule companies, the Commission should consider measures of density, loop length, terrain, and climate in the determination of loop costs. That argument is already before the Joint Board in the universal service rulemaking, CC Docket No. 96-45. ICORE also argues that cost companies having fewer than 10,000 access lines should be allowed to convert from cost status to average schedule status, and NECA, NTCA, and USTA support ICORE's argument. That issue is raised in a rulemaking petition filed by NECA. V. CONCLUSION 16. We conclude that NECA's Proposed Modifications to the Interstate Average Schedule Formulas, filed on January 11, 1996, shall become effective on July 1, 1996. We find that the revised TSCO formula structure produces settlements that are more accurate for, and more representative of, both normal and high volume cost companies. Further, we conclude that NECA should continue seeking TSCO formula improvements, including the development of alternative formula structures. VI. ORDERING CLAUSE S 17. IT IS ORDERED, pursuant to Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91 and 0.291, that NECA's January 11, 1996 Proposed Modifications to the Interstate Average Schedule Formulas, ARE APPROVED with an effective date of July 1, 1996. 18. So that the modifications to the average schedule formulas that have been approved can become effective on July 1, 1996, IT IS FURTHER ORDERED pursuant to Section 4(i) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91 and 0.291, that THIS ORDER IS EFFECTIVE UPON ITS RELEASE. 19. IT IS FURTHER ORDERED, pursuant to Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91 and 0.291, that within 30 days of this Order's release, NECA shall consult with the Accounting and Audits Division to develop further improvements, including alternative TSCO formula structures, to the average schedule formulas. FEDERAL COMMUNICATIONS COMMISSION Regina M. Keeney Chief, Common Carrier Bureau