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This figure is based on NECA's analysis of the proposed formula changes relative to those currently in effect, with demand held constant.(# NECA also  x-states that this net effect would reflect an average increase of 2.56 percent above current average  x>schedule levels for the common line portion of settlements and an average decrease of 1.67  X- x-percent below current levels for the traffic sensitive portion.  y {Ou-  ԍXxId.  NECA explains that the net effect is not the difference between the common line and traffic sensitive percentages because traffic sensitive settlements represent a larger portion of total settlements.(# NECA states that, while the overall  xnet change over the current formulas would not be significant, the impact on some companies would be substantial.  XH- `  x5. ` ` NECA also states that, pursuant to the Commission's directive in the 1995 Average  X3- x=Schedule Order, 3zy {O^-ԍXxSee 1995 Average Schedule Order, 10 FCC Rcd at 13252, n.6, supra.(#ƒ NECA has examined methods to improve the accuracy of the TSCO formula  X - xwith regard to high traffic volume companies.R  y yO-ԍXx1996 Filing at I5 and 6.(#R As a result, NECA proposes two changes to the  xTSCO formula: the addition of a fourth (usage) tier with a threshold of 1,300 minutes per line  xper month; and the introduction of a high volume access line multiplier in the formula.  xAccording to NECA, this multiplier would reduce settlements on a perminute basis for all  X -carriers that serve more than 600 access lines and exceed 350 minutes per line.J y {O-ԍXxId. at I6.(#J  X - x  X-   B. Comments   Xf- ` x 6. ` ` In a Public Notice released January 19, 1996, we invited comments on NECA's  XO- x[1996 Filing. O. y yO.-  kԍXxNational Exchange Carrier Association, 1996 Proposed Modifications to the Interstate Average Schedule  {O-  Formulas, Public Notice, 11 FCC Rcd 1825 (1996). Comments were filed by Hartington Telephone  LCompany ("Hartington"), ICORE, Inc. ("ICORE") (a consulting firm), the National Telephone Cooperative  Association ("NTCA"), the Organization for the Advancement of Small Telephone Companies  /("OPASTCO"), and the United States Telephone Association ("USTA"). Reply comments were filed by ICORE, NECA, NTCA, and USTA. (#Ʈ ICORE, NTCA, OPASTCO, and USTA recommend that the Commission approve  xNECA's proposed revisions to the average schedule formulas, but ICORE makes what it calls  x"modest suggestions for improvement" to avoid the anomalies that would be created by the new  X - xTSCO formula structure.U y yOc%-ԍXxICORE Comments at 4 and 79.(#U ICORE states that a transition or phasein mechanism would be  xnecessary to help ameliorate the effects of large settlement reductions that might result from the"8,N(N(ZZ"  X- xTSCO formula changes for high volume companies and from the Signaling System 7 ("SS7")y yOy-   ԍXxSS7 is an out of band signaling technique that enables carriers to use their networks more efficiently and to provide a number of advanced customer services, such as caller ID.(#  xformula changes. ICORE asks the Commission to consider the use of a transition mechanism,  xsuch as the Subscriber Plant Factor ("SPF") transition, rather than individual showings of  X- xjhardship.N y {O-ԍXxId. at 5 and 6.(#N ICORE proposes that, pending a permanent solution, settlement reductions related  xto the revised TSCO formula be limited to 5 percent per year for two or three years depending  xupon the reduction. ICORE also recommends that a vintage schedule be used for the SS7  x.formula that would compensate companies using the formulas in place during the year of their  X_-initial SS7 settlement claims.<_y {O -  >ԍXxId. at 1013. ICORE's vintage schedule would use the SS7 formula for the year in which those costs were   first incurred by each average schedule company. For example, all companies that first incurred SS7 costs   .in 1993 would continue to receive the 1993 average schedule settlement amount of $2,401 for SS7 facilities   each year thereafter, including 1996 when the proposed formula amount, based on current costs, is $1,551 per facility.(#<  X1- ` Px7.` ` NTCA states that NECA's proposed modifications to the TSCO formula will likely  xsimulate the costs incurred by average schedule companies more closely than the 1995 formula.  xxOPASTCO states that NECA's proposed TSCO formula fully addresses the Commission's concern  X - xthat the current TSCO formula may overcompensate a small number of high volume companies. d y {O-ԍxSee 1995 Average Schedule Order, 10 FCC Rcd at 13256, n.6, supra.    xMOPASTCO recommends that the Commission unconditionally approve the proposed TSCO  X - x@formula, along with the other proposed formulas.O y yOe-ԍXxOPASTCO Comments at 2.(#O In addition, OPASTCO urges the  x?Commission to approve transitional support to any average schedule company that can  X- xdemonstrate hardship resulting from a decline in settlements.H y {O-ԍXxId. at 4.(#H USTA states that the proposed  xrevisions to the TSCO formula would reflect more accurately individual companies' per minute  xswitching costs and would improve the distribution of central office settlements among average  XK-schedule companies.LKy yO!-ԍXxUSTA Comments at 2.(#L  X- ` `x8.` ` Hartington is an average schedule incumbent LEC serving approximately 1,500  xaccess lines in northeastern Nebraska. It states that the modifications proposed in NECA's 1996  xformula revisions would result in a 23 percent reduction in Hartington's total interstate  x/settlements. Hartington adds that this reduction would force it to revisit plans for a switch  x-replacement and fiber facility upgrades. Hartington encourages the Commission to avoid further  xadjustments to the TSCO formula without consideration of the significant impact the changes",N(N(ZZ"  X- xwould have on some average schedule companies and the communities in which they operate.Zy yOy-ԍXxHartington Comments at 12.(#Z x` `  X- C. Reply Comments  X- ` 2x9.` ` In its reply comments, ICORE reiterates its claim that a uniform, generic transition  x<for every average schedule company experiencing losses above a certain level would be the most  xLfair and equitable method of protecting those companies from rate shock that would otherwise  x?result from approval of the new average schedule formulas. ICORE cites the Hartington  xsituation, and says that Hartington's 23 percent decrease in settlements gives true meaning to  X - xOPASTCO's words concerning demonstrated hardship.J Xy yO# -ԍXxICORE Reply at 5.(#J NECA states that it is sympathetic to  xICORE'S transition concerns and, in fact, routinely evaluates the need for a general transition in  xconnection with each modification. NECA argues, however, that when changes in settlement  xlevels affect only a small number of companies and when changes are not associated with a rule  xor industry change affecting many companies, individual relief provides a more targeted solution  X - xthan does a general transition.U y yO@-ԍXxNECA Reply at 6 and 7.(#U In response to ICORE's claim that the new TSCO creates  xanomalies, NECA states that the addition of the high volume access line multiplier would  xsignificantly improve the accuracy with which the proposed formulas simulate cost company  xdisbursements. NECA argues that the proposed TSCO formula would accurately compensate all  XK- xaverage schedule companies including those with high traffic volumes.NKxy {Ot-ԍXxId. at 8 and 9.(#N Regarding ICORE's  xproposal to use vintage costing for SS7 investments, NECA states that such an approach would  xbe exceedingly complex, and would require average schedule companies to submit detailed cost  X-study data not required currently.P y {O-ԍXxId. at 13 and 14.(#P @  X- ` x 10.` ` In their reply comments, NTCA and USTA favor an approach that targets  xindividual cases of hardship for consideration of transitional relief. NTCA also states that it  X-disfavors a vintaging approach for SS7 settlements.by yO!-ԍXxNTCA Reply at 24; and USTA Reply at 24.(#b ", ,N(N(ZZo"  X-IV. DISCUSSION ĐTP  X< A. TSCO Formula Changes  X- ` Ax  11. ` `  In the 1995 Average Schedule Order, we stated that the revised TSCO formula for  x1995 was a significant improvement over the 1994 version. Nonetheless, we also directed NECA  xto consult with the Common Carrier Bureau concerning steps that could be taken to improve the  xaccuracy of the TSCO formula. As a result, NECA recommends two structural changes in the  x1996 TSCO formula to improve the accuracy of settlements to study areas with high average  xminutes per line. First, the structure of the formula would be modified to include a fourth tier  xZof minutes per line to distinguish the switching cost characteristics for study areas with extremely  xkhigh minutes per line. The revised four tiers of minutes per line and settlement amounts per  xminute are: 1 to 350 minutes per line (2.8 per minute); 351 to 600 minutes per line (2.4 per  xminute), 601 to 1,300 minutes per line (1 per minute); and greater than 1,300 minutes per line  xz(.5 per minute). Second, NECA proposes to add a high volume access line multiplier to the  xTSCO structure that would be applied to each of the three high traffic volume tiers, i.e., those  xfor traffic above 350 minutes per line. This multiplier decreases as the number of access lines  xincreases. NECA proposes this change to ensure that high volume study areas with relatively few  x-access lines are not undercompensated and those with relatively high access line counts are not  XL-overcompensated.SLy yO-ԍx1996 Filing at VII42.S  X5-  X- ` x 12.` ` We have conducted a complete review of the data NECA submitted to support the  xchanges it proposes in the TSCO formula for both normal and high volume companies. We find  xythat the proposed TSCO formula would produce more accurate and more representative results  xjthan the formulas currently in use. Therefore, we recognize NECA's efforts to revise the TSCO  xjformula to compensate average schedule companies with high traffic volumes more accurately,  xand as noted herein, we approve use of the revised formula. Our analysis of the data, however,  xleads us to conclude that further modification of the TSCO formula is desirable. Accordingly,  xwe direct NECA to continue working with the Bureau's Accounting and Audits Division staff to:  x?1) continue to improve the accuracy of the formula, within the current formula structure,  x-specifically for high volume traffic settlements; and 2) derive alternative TSCO formula structures  x<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.  X- B. SS7 Formula Changes  X - ` x  13. ` ` ICORE recommends that NECA develop a vintage schedule for SS7 settlements,  x[separately for each company, that would recognize the SS7 costs that were in effect during the  xfirst year that each company received SS7 settlements. ICORE claims that SS7 settlements have  xdeclined dramatically, especially in the last two years, and therefore do not cover the SS7"#X,N(N(ZZ""  X- xrevenue requirements for those companies that installed SS7 systems several years ago.My {Oy-ԍxSee n.17, supra.M In reply  xcomments, NECA and NTCA both recommend rejection of ICORE's vintage schedule procedure  X- x0for SS7 settlements.]Zy {O-ԍxSee NECA Reply at 14; NTCA Reply at 3.] We agree with NECA and NTCA, and reject ICORE's SS7 vintage  xschedule recommendation. As NECA points out, the vintage schedule procedure would add  xjunnecessary complexity, increase the volume of supporting cost data required from all average  x=schedule carriers, and fail noticeably to improve the accuracy of SS7 settlements. In addition,  xithe proposal would substitute companyspecific cost data, arrayed by vintage year, for traditional  xaverage schedule company data that are not intended to be company or vintage specific. We note  xthat any company that believes it is not adequately compensated under the average schedule  X1-formulas can convert to cost statusO1y {O -ԍxSee  2, supra.O at any time.  X - C. Transition of Settlement Decreases  X - ` x  14. ` ` We do not believe that a generic transition or phasein, as recommended by  x[ICORE, is either required or appropriate, and therefore, we do not approve such a plan. ICORE  xrecommends that a generic transition or phasein mechanism be offered to every average schedule  x-company to mitigate the financial impact of the settlement decreases caused by the modifications  xof the formulas. ICORE offers two approaches for consideration, and in both, a 5 percent  xxsettlement loss is recommended as the threshold above which a transition would apply over a two  XK- x-or threeyear period.U K~y yOz-ԍxICORE Comments at 10 and Reply at 6.U We note that no other party favors ICORE's suggested generic transition  x[plan. In addition, NECA, NTCA and OPASTCO argue that, because only a few companies will  xexperience significant settlement decreases, we should consider targeted, individual company  X- xtransition plans only, not a generic solution.]!y {O-ԍxSee notes 20, 24, and 27, supra.] We recognize that a few companies will likely  xjexperience large reductions in their average schedule settlements, primarily due to the changes  X- xin the TSCO formula.Q"Zy yO) -  ԍXxICORE reports that five companies will lose between 20 and 28 percent of their interstate settlements and  {O -  jthat two additional companies will lose between 5 and 10 percent of their interstate settlements. See ICORE Comments at 5. (#Q We believe that, contrary to ICORE's position, these reductions will  xresult from flaws in the 1995 Schedules, rather than any deficiency in the formulas this Order  xapproves. Therefore, we decline to adopt any transition plan. Any company that believes that  xthe changes in the formulas will make its rates unreasonably low can, of course, convert to cost status.  Xe- "N ",N(N(ZZ"ԌD. Other Issues  X- ` #x 15. ` ` ICORE raises two issues that are being addressed in other proceedings and need  X- xnot be addressed here.F#y yO4-ԍxICORE Comments at 16.F ICORE argues that, for purposes of Universal Service Fund ("USF")  xKhighcost assistance for average schedule companies, the Commission should consider measures  xof density, loop length, terrain, and climate in the determination of loop costs. That argument  Xv- xis already before the Joint Board in the universal service rulemaking, CC Docket No. 9645.H$\vXy {O -  ԍXxSee FederalState Joint Board on Universal Service, Notice of Proposed Rulemaking and Order Establishing  {OI -  MJoint Board, CC Docket 9645, 61 Fed. Reg. 10499 (1996); ICORE Comments in CC Docket No. 9545 at 1618.(#H  xICORE also argues that cost companies having fewer than 10,000 access lines should be allowed  xjto convert from cost status to average schedule status, and NECA, NTCA, and USTA support  X1-ICORE's argument. That issue is raised in a rulemaking petition filed by NECA.L%\1|y {O^-  OԍXxSee NECA's Proposed Revision of Section 69.605 of the Commission's Rules to Allow Small Cost  {O(-   Settlement Companies to Elect Average Schedule Settlement Status, Petition for Rulemaking, RM 8357, filed September 13, 1993. (#L T  X - V. CONCLUSIONTP  X - ` x 16.` ` We conclude that NECA's Proposed Modifications to the Interstate Average  X - xSchedule Formulas, filed on January 11, 1996, shall become effective on July 1, 1996. We find  xthat the revised TSCO formula structure produces settlements that are more accurate for, and  xmore representative of, both normal and high volume cost companies. Further, we conclude that  xzNECA should continue seeking TSCO formula improvements, including the development of  XK-alternative formula structures.  X4- x` `  hh "%,N(N(ZZ"  X- VI. ORDERING CLAUSES ĐTP  X- ` x17.` ` IT IS ORDERED, pursuant to Sections 0.91 and 0.291 of the Commission's rules,  xN47 C.F.R. 0.91 and 0.291, that NECA's January 11, 1996 Proposed Modifications to the  x[Interstate Average Schedule Formulas, ARE APPROVED with an effective date of July 1, 1996.  X_- ` @x18.` ` So that the modifications to the average schedule formulas that have been approved  xzcan become effective on July 1, 1996, IT IS FURTHER ORDERED pursuant to Section 4(i) of  xthe Communications Act of 1934, as amended, 47 U.S.C.  154(i), and Sections 0.91 and 0.291  xof the Commission's rules, 47 C.F.R. 0.91 and 0.291, that THIS ORDER IS EFFECTIVE UPON ITS RELEASE. x  X - ` x19.` ` IT IS FURTHER ORDERED, pursuant to Sections 0.91 and 0.291 of the  xCommission's rules, 47 C.F.R. 0.91 and 0.291, that within 30 days of this Order's release,  xNECA shall consult with the Accounting and Audits Division to develop further improvements, including alternative TSCO formula structures, to the average schedule formulas. x` `  hh x` `  hhFEDERAL COMMUNICATIONS COMMISSION x` `  x` `  hhRegina M. Keeney x` `  hhChief, Common Carrier Bureau