First Report & Order In the Matter of
Access Charge Reform
Price Cap Performance Review for Local Exchange Carriers
Transport Rate Structure and Pricing
Usage of the Public Switched Network by Information Service and Internet Access Providers
In the Matter of )
)
Access Charge Reform ) CC Docket No. 96-262 )
Price Cap Performance Review ) CC Docket No. 94-1
for Local Exchange Carriers )
)
Transport Rate Structure ) CC Docket No. 91-213
and Pricing )
)
End User Common Line Charges ) CC Docket No. 95-72
)
FIRST REPORT AND ORDER
Adopted: May 7, 1997 Released: May 16, 1997
Comment Date: June 26, 1997
Reply Date: July 11, 1997
By the Commission: Commissioners Quello, Ness, and Chong issuing separate statements.
Table of Contents Paragraph
I. Introduction 1
A. Background 17
1. The Existing Rate System 17
2. Implicit Subsidies in the Existing System28
3. The Telecommunications Act of 199632
B. Access Charge Reform 35
1. Rationalizing the Rate Structure36
2. Baseline Rate Level Reductions42
II. Summary of Rate Structure Changes and Transitions53
A. Common Line Rate Structure Changes54
B. Other Rate Structure Changes 61
III. Rate Structure Modifications 67
A. Common Line 67
1. Overview 67
2. Subscriber Line Charge 72
3. Carrier Common Line Charge 88
4. Common Line PCI Formula 106
5. Assessment of SLCs and PICCs on Derived
Channels 111
B. Local Switching 123
1. Non-Traffic Sensitive Charges123
2. Traffic Sensitive Charges 136
C. Transport 150
1. Entrance Facilities and Direct-Trunked
Transport 152
2. Tandem-Switched Transport 158
D. Transport Interconnection Charge (TIC)210
1. Background 210
2. Discussion 212
E. SS7 Signalling 244
1. Background 244
2. Discussion 252
F. Impact of New Technologies 256
IV. Baseline Rate Levels 258
A. Primary Reliance on a Market-Based Approach
With A Prescriptive
Backdrop and the Adoption of Several Initial
Prescriptive Measures 258
1. Background 258
2. Discussion 262
B. Prescriptive Approaches 285
1. Prescription of a New X-Factor285
2. Rejection of Certain Prescriptive Approaches287
C. Equal Access Costs 299
1. Background 299
2. Discussion 302
D. Correction of Improper Cost Allocations315
1. Marketing Expenses 315
2. General Support Facilities 326
V. Access Reform For Incumbent Rate-of-Return Local
Exchange Carriers 329
A. Background 329
B. Discussion 330
VI. Other Issues 336
A. Applicability of Part 69 to Unbundled Elements336
1. Background 336
2. Discussion 337
B. Treatment of Interstate Information Services341
1. Background 341
2. Discussion 344
C. Terminating Access 349
1. Price Cap Incumbent LECs 350
2. Non-Incumbent LECs 358
3. "Open End" Services 365
D. Universal Service-Related Part 69 Changes367
1. Background 368
2. Discussion 372
E. Part 69 Allocation Rules 388
1. Background 388
2. Discussion 389
F. Other Proposed Part 69 Changes 390
1. Background 390
2. Discussion 391
VII. Further Notice of Proposed Rulemaking397
A. PICCs for Special Access Lines 397
1. Background 398
2. Proposal 403
B. General Support Facilities Costs407
1. Background 408
2. Proposal 412
VIII. Final Regulatory Flexibility Analysis419
IX. Procedural Issues 441
X. Ordering Clauses 459
APPENDIX A List of Commenters
APPENDIX B Comment Summary
APPENDIX C Final Rules
I. INTRODUCTION
1. In passing the Telecommunications Act of 1996 (the 1996 Act),(1) Congress sought to
establish "a pro-competitive, deregulatory national policy framework" for the United States'
telecommunications industry. With this Order, we begin the third part in a trilogy of actions
collectively intended to foster and accelerate the introduction of competition into all
telecommunications markets, pursuant to the mandate of the 1996 Act.
2. In the Local Competition Order,(2) we set forth rules to implement section 251 and
section 252 of the Communications Act of 1934, as amended. As with all of Part II of Title II of
the Communications Act, those sections, and the rules implementing them, seek to remove the
legal, regulatory, economic, and operational barriers to telecommunications competition. Among
other things, sections 251 and 252 provide entrants with the opportunity to compete for
consumers in local markets by either constructing new facilities, leasing unbundled network
elements, or reselling telecommunication services.
3. In the Universal Service Order,(3) which we adopt in a companion order today, we take
steps to ensure that support mechanisms that are necessary to maintain local rates at affordable
levels are protected and advanced as local telecommunication markets become subject to the
competitive pressures unleashed by the 1996 Act. When it enacted section 254 of the
Communications Act, Congress detailed the principles that must guide this effort. It placed on the
Commission and the states the duty to implement these principles in a manner consistent with the
pro-competition purposes of the Act, as embodied in, for instance, the interconnection provisions
of the Act.(4) It stated that "[t]here should be specific, predictable and sufficient Federal and State
mechanisms to preserve and advance universal service."(5)
4. Congress also specified that universal service support "should be explicit," and that,
with respect to federal universal service support, "[e]very telecommunications carrier that
provides interstate telecommunications services shall contribute, on an equitable and non-discriminatory basis, to the specific, predictable, and sufficient mechanisms established by the
Commission to preserve and advance universal service."(6) As explained further in the Joint
Explanatory Statement of the Committee of the Conference, Congress intended that, "[t]o the
extent possible, . . . any support mechanisms continued or created under new section 254 should
be explicit, rather than implicit as many support mechanisms are today."(7) Congress directed the
Commission, by May 8, 1997, to complete a universal service proceeding that "include[s] a
definition of the services that are supported by Federal universal service support mechanisms and
a specific timetable for implementation."(8)
5. Through our accompanying Universal Service Order, we establish the definition of
services to be supported by federal universal service support mechanisms and the specific
timetable for implementation. Further, through this First Report and Order in our access reform
docket and our Universal Service Order, we set in place rules that will identify and convert
existing federal universal service support in the interstate high cost fund, the dial equipment
minutes (DEM) weighting program, Long Term Support, Lifeline, Link-up, and interstate access
charges to explicit federal universal service support mechanisms. As detailed below, we will
identify the implicit federal universal service support currently contained in interstate access
charges through three methods.
6. First, we will reduce usage-sensitive interstate access charges by phasing out local loop
and other non-traffic-sensitive (NTS) costs from those charges and directing incumbent local
exchange carriers (LECs) to recover those NTS costs through more economically efficient, flat-rated charges. Because NTS costs, by definition, do not vary with usage, the recovery of NTS
costs on a usage basis pursuant to our current access charge rules amounts to an implicit subsidy
from high-volume users of interstate toll services to low-volume users of interstate long-distance
services.
7. Second, we will rely in part on emerging competition in local telecommunications
markets, spurred by the adoption of the 1996 Act, to help identify the differences between the
rates for interstate access services established by incumbent LECs under price cap regulation and
those that competition would set. The prices for interstate access services offered by competing
providers presumably will not contain any implicit universal service support such as that
embedded in the incumbent LECs' access charges. Consequently, the introduction of competition
inevitably will help to remove implicit support from the incumbent LECs' access charges where
competition develops and also will help to identify the extent of implicit support in other areas.
8. Third, we will engage in further deliberations on a forward-looking economic cost-based mechanism that we will use to distribute federal support to rural, insular, and high cost
areas, beginning in 1999. Based on cost studies the states will conduct during the coming year
(or, at a state's election, based upon Commission-developed proxy methods), an estimate of the
forward-looking economic cost of providing service to a customer in a particular rural, insular, or
high cost area will be calculated. We will distribute federal universal service support based on the
interstate portion of the difference between forward-looking economic cost and a nationwide
revenue benchmark. The amount of the support will be explicitly calculable and identifiable by
competing carriers, and the support will be portable among competing carriers, i.e., distributed to
the eligible telecommunications carrier chosen by the customer. It will be funded by equitable and
non-discriminatory contributions from all carriers that provide interstate telecommunications
services. Through this First Report and Order, we direct that federal universal service support
received by incumbent LECs be used to reduce or satisfy the interstate revenue requirement
otherwise collected through interstate access charges. Accordingly, through both our Universal
Service Order and this First Report and Order on access reform, interstate implicit support for
universal service will be identified and removed from interstate access charges, and support will
be provided through the explicit interstate universal service support mechanisms.
9. Although these three steps will set in motion a process that will remove implicit
universal service support from access charges, it will not remove all implicit support from all
access charges immediately. This result is fully in accord with Congress's directives. Although
Congress said in the Act that "support should be explicit" (emphasis added), it did not provide
that support shall be explicit.(9) Congress's decision to say "should" instead of "shall" is especially
pertinent in light of Congress's repeated use of "shall" in the 1996 Act.(10) Moreover, in the Act's
legislative history, Congress qualified its intention that "support mechanisms should be explicit,
rather than implicit," with the phrase "[t]o the extent possible."(11) Thus, Congress recognized that
the conversion of the existing web of implicit subsidies to a system of explicit support would be a
difficult task that probably could not be accomplished immediately. As explained below, we
conclude that a process that eliminates implicit subsidies from access charges over time is
warranted primarily for three reasons. First, we simply do not have the tools to identify the
existing subsidies precisely at this time. Second, we prefer to rely on the market rather than
regulation to identify implicit support because we are more confident of the market's ability to do
so accurately. Third, even if we were more confident of our ability to identify all of the existing
implicit support mechanisms at this time, eliminating them all at once might have an inequitable
impact on the incumbent local exchange carriers.
10. Nor, by our orders today, do we attempt to identify or eliminate the implicit universal
service support mechanisms established by state commissions. We recognize that states are
initially responsible for identifying implicit intrastate subsidies. For the reasons stated above, we
believe the Commission has discretion under the statute to employ pro-competitive, deregulatory
policies to aid in the reform of the existing, complex system of universal service. Where pro-competition policies, such as those set forth in sections 251, 252 and 253, can force prices for
telecommunications services to competitive levels, and, as a result, eliminate or, at least,
substantially eliminate implicit support, the Act grants us the authority to rely on such policies
over a period of time. We find that the Act does not require, nor did Congress intend, that we
immediately institute a vast set of wide-ranging pricing rules applicable to interstate and intrastate
services provided by incumbent LECs that would have enormously disruptive effects on both
ratepayers as well as the affected LECs. Indeed, the congressional mandate that we implement
pro-competitive, deregulatory policies is a continuing reminder that, wherever feasible, we should
select competition instead of regulation as our means of accomplishing the stated statutory goals.
Reliance on competition is the keystone that unifies our universal service and access reform
orders.
11. Nevertheless, implicit intrastate universal service support is substantial. States have
maintained low residential basic service rates through, among other things, a combination of:
geographic rate averaging, high rates for business customers, high intrastate access rates, high
rates for intrastate toll service, and high rates for vertical features and services such as call waiting
and call forwarding. By not mandating immediate Commission action to eliminate these policies
and instead by ordering that the Commission and the states together achieve universal service
goals,(12) Congress intended that states, acting pursuant to sections 254(f) of the Communications
Act, must in the first instance be responsible for identifying intrastate implicit universal service
support. Indeed, by our decisions in this Order and in our companion Universal Service Order,
we strongly encourage states to take such steps.
12. To achieve the vital, historic, and congressionally-mandated purposes of universal
service in every state in an era in which competition replaces monopoly, it is necessary that the
states and the Commission develop new and effective mechanisms of complementing the activities
of each other. Therefore, as states implement their universal service plans, we will be able to
assess whether additional federal universal service support is necessary to ensure that quality
services remain "available at just, reasonable, and affordable rates."(13) Our decisions in this Order
are meant in part to provide some elements of the plan and time sufficient to discharge responsibly
an aspect of the federal role in this federal-state universal service partnership.
13. In this First Report and Order, we also take the actions necessary to permit the
market, in the first instance, to expose any implicit universal service support that we may fail to
identify as we implement our federal mechanisms for supporting universal service in insular, rural,
and high cost areas and to drive access rates toward levels that competition would be expected to
produce. Our decision also fulfills the congressional intent that we eliminate the rules that have
helped to sustain de facto or de jure monopolies in access markets and instead create the
conditions for competitive entry on a sustainable, long-term basis. That requires, among other
things, that we phase out opportunities for inefficient entry that are created primarily by anomalies
in the current, monopoly-oriented regime. Consequently, this Order sets forth a plan for
removing distortions and inefficiencies in both the current "rate structures" (the term used to
describe the manner in which a particular charge is assessed, such as through a per-minute-of-use
fee or a flat-rated fee) and "rate levels" (the term used to describe the aggregate size of a
particular access charge). By rationalizing the access charge rate structure, we ensure that
charges more accurately reflect the manner in which the costs are incurred, thereby facilitating the
movement to a competitive market. We also establish, in this First Report and Order, a
prescriptive mechanism to ensure that, through the operation of price caps and by other means,
interstate access charges in areas where competition does not develop will also be driven toward
the levels that competition would be expected to produce. The Price Cap Fourth Report and
Order,(14) which is also the Second Report and Order in this docket and which is also adopted
today, modifies the X-Factor in accordance with this plan.
14. In a subsequent order in the present docket, we will provide detailed rules for
implementing the market-based approach that we adopt in today's Order. That process will give
carriers progressively greater flexibility in setting rates as competition develops, gradually
replacing regulation with competition as the primary means of setting prices and facilitating
investment decisions. A separate order in this docket will also address "historical cost" recovery:
whether and to what extent carriers should receive compensation for the recovery of the allocated
costs of past investments if competitive market conditions prevent them from recovering such
costs in their charges for interstate access services.
15. By our orders today, we reject the arguments made by some parties that section 254
compels us immediately to remove all universal service costs from interstate access charges.(15)
Making "implicit" universal service subsidies "explicit" "to the extent possible" means that we
have authority at our discretion to craft a phased-in plan that relies in part on prescription and in
part on competition to eliminate subsidies in the prices for various products sold in the market for
telecommunications services. Moreover, we have met section 254's clear command that we
identify the services to be supported by federal universal service support mechanisms and that we
establish a specific timetable for implementation. Under that timetable, we will over the next year
identify implicit interstate universal support and make that support explicit, as further provided by
section 254(e).(16)
16. Coupled with the modifications implemented in our Universal Service Order, the
changes we put in place today will provide far-reaching benefits to the American people. This
Order will restructure access charges, resulting in lower long-distance rates for many consumers,
while substantially increasing the volume of long-distance calling. It will promote the spread of
competition by replacing significant implicit subsidies with an explicit and secure universal service
support system. It will foster competition and economic prosperity by creating an access charge
system that is both efficient and fair. We believe that the changes implemented by this Order are
necessary to meet the goal set forth in the 1996 Act -- "opening all telecommunications markets
to competition."(17)
A. Background
1. The Existing Rate System
17. For much of this century, most telephone subscribers obtained both local and long-distance services from the same company, the pre-divestiture Bell System, owned and operated by
AT&T. Its provision of local and intrastate long-distance services through its wholly-owned
operating companies was regulated by state commissions. The Commission regulated AT&T's
provision of interstate long-distance service. Much of the telephone plant that is used to provide
local telephone service (such as the local loop, the line that connects a subscriber's telephone to
the telephone company's switch) is also needed to originate and terminate interstate long-distance
calls. Consequently, a portion of the costs of this common plant historically was assigned to the
interstate jurisdiction and recovered through the rates that AT&T charged for interstate long-distance calls. The balance of the costs of the common plant was assigned to the intrastate
jurisdiction and recovered through the charges administered by the state commissions for
intrastate services. The system of allocating costs between the interstate and intrastate
jurisdictions is known as the separations process. The difficulties inherent in allocating the costs
of facilities that are used for multiple services between the two jurisdictions are discussed below.
18. At first, there was no formal system of tariffed charges to determine how the BOCs
and the hundreds of unaffiliated, independent LECs would recover the costs allocated to the
interstate jurisdiction by the separations rules. Instead, AT&T remitted to these companies the
amounts necessary to recover their allocated interstate costs, including a return on allocated
capital investment.
19. In the 1970s, MCI and other interexchange carriers (IXCs) began to provide switched
long-distance service in competition with AT&T. However, AT&T still maintained monopolies in
the local markets served by its local subsidiaries, the Bell Operating Companies (BOCs). The
BOCs owned and operated the telephone wires that connected the customers in their local
markets. Other independent (non-Bell) LECs held similar monopoly franchises in their local
service areas. MCI and the other IXCs were dependent on the BOCs and the independent LECs
to complete the long-distance calls to the end user.
20. For much of the 1970s, MCI and AT&T fought over the fees -- the access charges --
that MCI should pay the BOCs for originating and terminating interstate calls placed by or to end
users on the BOCs' local networks. That battle took place before federal regulators, as well as in
the federal courts. In December 1978, under Commission supervision, AT&T, MCI, and the
other long-distance competitors entered into a comprehensive interim agreement, known as
Exchange Network Facilities for Interstate Access (ENFIA), that set rates that AT&T would
charge long-distance competitors for originating and terminating interstate traffic over the
facilities of its local exchange affiliates.(18) Several years afterwards, AT&T's divestiture was
completed, separating the local exchange operations of the BOCs from the rest of AT&T's
operations, including AT&T's long distance business. The BOCs maintained monopoly franchises
in their local market, but by splitting them off from AT&T's long-distance business, the federal
courts removed an incentive for the BOCs to favor AT&T's long distance business over its
competitors. Now AT&T competed directly with MCI and the other competitors to provide
interstate service, and all of the competitors paid the BOCs for the service of providing the
necessary access to end users.
21. In 1978, the Commission commenced a wide-ranging review of the system by which
LECs were compensated for originating and terminating interstate traffic. In 1983, following the
decision to break-up AT&T, the Commission adopted uniform access charge rules in lieu of
earlier agreements.(19) These rules governed the provision of interstate access services by all
incumbent LECs, BOCs as well as independents. The access charge rules provide for the
recovery of the incumbent LECs' costs assigned to the interstate jurisdiction by the separations
rules.
22. The Commission uses a multi-step process to identify the cost of providing access service. First, the rules require an incumbent LEC to record all of its expenses, investments, and revenues in accordance with accounting rules set forth in our regulations.(20) Second, the rules divide these costs between those associated with regulated telecommunications services and those associated with nonregulated activities.(21) Third, the separations rules determine the fraction of the incumbent LEC's regulated expenses and investment that should be allocated to the interstate jurisdiction.(22) After the total amount of interstate cost is identified, the access charge rules translate these interstate costs into charges for the specific interstate access services and rate elements. Part 69 specifies in detail the rate structure for recovering those costs. That is, the rules tell the incumbent LECs the precise manner in which they may assess charges on interexchange carriers and end users.
23. Determining the costs that an incumbent LEC incurs to provide interstate access
services and that, consequently, should be recovered from those services, is relatively
straightforward in some cases and problematic in others. Some facilities, such as private lines, can
be used exclusively for interstate services and, in such cases, the entire cost of those facilities is
assigned to the interstate jurisdiction by the separations rules. Most facilities, however, are used
for both intrastate and interstate services. The costs of some of these facilities vary depending on
the amount of telecommunications traffic that they handle. The separations rules typically assign
these traffic-sensitive (TS) costs on the basis of the relative interstate and intrastate usage of the
facilities, as measured, for example, by the relative minutes of interstate and intrastate traffic
carried by such facilities. By contrast, the costs of other facilities used for both interstate and
intrastate traffic do not vary with the amount of traffic carried over the facilities, i.e., the costs are
non-traffic-sensitive. These costs pose particularly difficult problems for the separations process:
The costs of such facilities cannot be allocated on the basis of cost-causation principles because all
of the facilities would be required even if they were used only to provide local service or only to
provide interstate access services. A significant illustration of this problem is allocating the cost
of the local loop, which is needed both to provide local telephone service as well as to originate
and terminate long-distance calls. The current separations rules allocate 25 percent of the cost of
the local loop to the interstate jurisdiction for recovery through interstate charges.(23)
24. The Commission has recognized in prior rulemaking proceedings that, to the extent
possible, costs of interstate access should be recovered in the same way that they are incurred,
consistent with principles of cost-causation. Thus, the cost of traffic-sensitive access services
should be recovered through corresponding per-minute access rates. Similarly, NTS costs should
be recovered through fixed, flat-rated fees. The Commission, however, has not always adopted
rules that are consistent with this goal. In particular, the Commission limited the amount of the
allocated interstate cost of a local loop that is assessed to residential and business customers as a
flat monthly charge, because of concerns that allowing the flat charges to rise above the specified
limits might cause customers to disconnect their telephone service. The residual cost of the loop
not recovered from end users through the flat charge is recovered through a per-minute-of-use
charge assessed to long-distance carriers.
25. Through the end of 1990, the vast majority of access revenues were governed by
"cost-of-service" regulation. Under cost-of-service regulation, incumbent LECs calculate the
specific access charge rates using projected costs and projected demand for access services.(24)
Thus, for example, if an incumbent LEC projects that it will provide 10,000 total minutes of
switching for interstate calls and estimates that it must generate $1,000 dollars in revenue in order
to recover the costs of switching that are allocated to the interstate jurisdiction by the separations
rules, the access charge for local switching would be set at $0.10 per minute ($1,000/10,000
minutes). In 1991, however, we implemented a system of price cap regulation that altered the
manner in which the largest incumbent LECs established their interstate access charges. While
most rural and small LECs remained subject to all of the Part 69 cost-of-service rules, generally
the largest incumbent LECs(25) are now subject to price cap regulations set forth in Part 61 of our
rules.
26. Price cap regulation fundamentally alters the process by which incumbent LECs
determine the revenues they are permitted to obtain from interstate access charges for access
services. Briefly stated, cost-of-service regulation is designed to limit the profits an incumbent
LEC may earn from interstate access service, whereas price cap regulation focuses primarily on
the prices that an incumbent LEC may charge and the revenues it may generate from interstate
access services. Under the Part 69 cost-of-service rules, revenue requirements are based on
embedded or accounting costs allocated to individual services. Incumbent LECs are limited to
earning a prescribed return on investment and are potentially obligated to provide refunds if their
interstate rate of return exceeds the authorized level. By contrast, although the access charges of
price cap LECs originally were set at the cost-of-service levels that existed at the time they
entered price caps, their prices have been limited ever since by price indices that have been
adjusted annually pursuant to formulae set forth in our Part 61 rules. Price cap carriers whose
interstate access charges are set by these pricing rules are permitted to earn returns significantly
higher than the prescribed rate of return that incumbent LECs are allowed to earn under cost-of-service rules. Price cap regulation encourages incumbent LECs to improve their efficiency by
harnessing profit-making incentives to reduce costs, invest efficiently in new plant and facilities,
and develop and deploy innovative service offerings, while setting price ceilings at reasonable
levels.(26) In this way, price caps act as a transitional regulatory scheme until the advent of actual
competition makes price cap regulation unnecessary.(27)
27. Although price cap regulation eliminates the direct link between changes in allocated
accounting costs and change in prices, it does not sever the connection between accounting costs
and prices entirely. The overall interstate revenue levels still generally reflect the accounting and
cost allocation rules used to develop access rates to which the price cap formulae were originally
applied. Price cap indices are adjusted upwards if a price cap carrier earns returns below a
specified level in a given year. Moreover, a price cap LEC may petition the Commission to set its
rates above the levels permitted by the price cap indices based on a showing that the authorized
rate levels will produce earnings that are so low as to be confiscatory. In the past, all or some
price cap LECs were required to "share," or return to ratepayers, earnings above specified levels.
The new rules adopted in the companion Price Cap Fourth Report and Order remove this limit
on the maximum returns that can be earned by price cap incumbent LECs.
2. Implicit Subsidies in the Existing System
28. Both our price cap and cost-of-service rules contain requirements that inevitably
result in charges to certain end users that exceed the cost of the service they receive. To the
extent these rates do not reflect the underlying cost of providing access service, they could be said
to embody an implicit subsidy. Some of these subsidies are due to the rate structures prescribed
by our rules, which in some cases prevent incumbent LECs from recovering their access costs in
the same way they have been incurred. For example, although the cost of the local loop that
connects an end user to the telephone company's switch does not vary with usage, the current rate
structure rules require incumbent LECs to recover a large portion of these non-traffic-sensitive
costs through traffic-sensitive, per-minute charges. These mandatory recovery rules inflate
traffic-sensitive usage charges and reduce charges for connection to the network, in essence
creating an implicit support flow from end users that make many interstate long-distance calls to
end users that make few or no interstate long-distance calls.
29. Several Federal-State Joint Boards have observed that additional subsidies and
distortions may be due, not only to the rate structure, but to the separations rules that divide costs
between the interstate and intrastate jurisdictions. For example, the current separations rules
require larger incumbent LECs to allocate the costs of their switching facilities between the
interstate and intrastate jurisdictions on the basis of relative use (i.e., if 30 percent of the minutes
of use handled by the LEC's switching facilities are interstate long-distance calls, 30 percent of the
LEC's switching costs are allocated to the interstate jurisdiction and recovered through interstate
access charges). Our rules, however, permit smaller incumbent LECs to allocate a greater share
of their switching costs to interstate access services than would result from the relative use
allocator. These smaller incumbent LECs multiply the interstate use ratio by a factor (as high as
3) specified in the separations rules. In its Recommended Decision, the Joint Board on Universal
Service observed that these separations rules "shift what would otherwise be intrastate costs to
the interstate jurisdiction,"(28) thereby allowing such LECs to charge lower prices for intrastate
services. Similarly, in the Marketing Expense Recommended Decision, another Federal-State
Joint Board observed that the separations rules allocate a share of the incumbent LECs' retail
marketing expenses to the interstate jurisdiction that is unreasonably high, given that the interstate
access services consist primarily of wholesale service offerings.(29) To the extent these and other
separation rules do not apportion costs between the jurisdictions in a manner that reflects the
costs incurred to provide service in each jurisdiction, they might be viewed as generating subsidies
from the interstate to the intrastate jurisdiction. These subsidies effectively require incumbent
LECs to charge higher rates for interstate services and lower rates for intrastate services than
would otherwise occur if the subsidies were eliminated.
30. This "patchwork quilt of implicit and explicit subsidies"(30) generates inefficient and
undesirable economic behavior. For example, a rate structure that requires the use of per-minute
access charges where flat-rated fees would be more appropriate increases the per-minute rates
paid by IXCs and long-distance consumers, thus artificially suppressing demand for interstate
long-distance services. Similarly, the possible overallocation of costs to the interstate jurisdiction
may, for some consumers, increase long-distance rates substantially, suppressing their demand for
interstate interexchange services. Implicit subsidies also have a disruptive effect on competition,
impeding the efficient development of competition in both the local and long-distance markets.
For example, where rates are significantly above cost, consumers may choose to bypass the
incumbent LEC's switched access network, even if the LEC is the most efficient provider.
Conversely, where rates are subsidized (as in the case of consumers in high-cost areas), rates will
be set too low and an otherwise efficient provider would have no incentive to enter the market.
In either case, the total cost of telecommunications services will not be as low as it would
otherwise be in a competitive market. Because of the growing importance of the
telecommunications industry to the economy as a whole, this inefficient system of access charges
retards job creation and economic growth in the nation.
31. Despite the existence of distortions and inefficiencies, the current system of cross-subsidies has persisted for over a decade. The structure has been justified on policy grounds, principally as a means to serve universal service goals. By providing incumbent LECs with a stream of subsidized revenues from certain customers, the system allows regulators to demand below-cost rates for other customers, such as those in high-cost areas.
3. The Telecommunications Act of 1996
32. The existing system of implicit subsidies and support flows is sustainable only in a
monopoly environment in which incumbent LECs are guaranteed an opportunity to earn returns
from certain services and customers that are sufficient to support the high cost of providing other
services to other customers. The new competitive environment envisioned by the 1996 Act
threatens to undermine this structure over the long run. The 1996 Act removes barriers to entry
in the local market, generating competitive pressures that make it difficult for incumbent LECs to
maintain access charges above economic cost. For example, by giving competitors the right to
lease an incumbent LEC's unbundled network elements at cost,(31) Congress provided IXCs an
alternative avenue to connect to and share the local network. Thus, where existing rules require
an incumbent LEC to set access charges above cost for a high-volume user, a competing provider
of exchange access services entering into a market can lease unbundled network elements at cost,
or construct new facilities, to circumvent the access charge.(32) In this way, a new entrant might
target an incumbent LEC's high-volume access customers, for whom access charges are now set
at levels significantly above economic cost. As competition develops, incumbent LECs may be
forced to lower their access charges or lose market share, in either case jeopardizing the source of
revenue that, in the past, has permitted the incumbent LEC to offer service to other customers,
particularly those in high-cost areas, at below-cost prices.(33) Incumbent LECs have for some time
been claiming that this process has already made more than trivial inroads on their high-volume
customer base.(34)
33. Recognizing the vulnerability of implicit subsidies to competition, Congress directed
the Commission and the states to take the necessary steps to create permanent universal service
mechanisms that would be secure in a competitive environment.(35) To achieve this end, Congress
directed the Commission to strive to replace the system of implicit subsidies with "explicit and
sufficient" support mechanisms.(36) In calling for explicit mechanisms, Congress did not intend
simply to require carriers to identify and disclose the implicit subsidies that currently exist in the
industry. Rather, as we determine in the Universal Service Order adopted today, Congress
intended to establish subsidies that were both "measurable" and "portable" -- "measurable" in a
way that allows competitors to assess the profitability of serving subsidized end users; and
"portable" in a way that ensures that competitors who succeed in winning a customer also win the
corresponding subsidy. A system of portable and measurable subsidies will permit carriers to
compete for the subsidies associated with high-cost or low-income consumers. In the long run,
this approach may even allow us to set subsidy levels through competitive bidding rather than
through regulation. By contrast, under the current system of implicit subsidies, the only carriers
that will serve high-cost consumers are those that are required to do so by regulation and that are
able (because of their protected monopoly positions) to charge above-cost rates to other end
users.
34. In the Universal Service Order, we establish "explicit and sufficient" support
mechanisms to assist users in high-cost areas, low-income consumers, schools, and health care
providers. By creating explicit support mechanisms, we establish a system to advance the
universal service goals of the 1996 Act that is compatible with the development of competition in
the local exchange and exchange access markets. By creating a portable and measurable system
of subsidies, we utilize the power of the market to serve universal service goals more efficiently.
That order, in short, guarantees that Congress's universal service goals are met in a way that
conforms with the pro-competitive and deregulatory goals of the 1996 Act.
B. Access Charge Reform
35. In light of Congress's command to create secure and explicit mechanisms to achieve
universal service goals, we conclude that implicit subsidies embodied in the existing system of
interstate access charges cannot be indefinitely maintained in their current form. In this Order,
therefore, we take two steps with respect to the rules governing the interstate access charges of
price cap incumbent LECs.(37) First, we reform the current rate structure to bring it into line with
cost-causation principles, phasing out significant implicit subsidies. Second, we set in place a
process to move the baseline rate level toward competitive levels. Together with the Universal
Service Order, these adjustments will promote the public welfare by encouraging investment and
efficient competition, while establishing a secure structure for achieving the universal service
goals established by law. Further, the process we set in place to achieve these goals avoids the
destabilizing effects of sudden radical change, facilitating the transformation from a regulated to a
competitive marketplace.
1. Rationalizing the Rate Structure
36. In this Order, we reshape the existing rate structure in order to eliminate significant
implicit subsidies in the access charge system. To achieve that end, we make several
modifications to ensure that costs are recovered in the same way that they are incurred. In
general, NTS costs incurred to serve a particular customer should be recovered through flat fees,
while traffic-sensitive costs should be recovered through usage-based rates. The present structure
violates this basic principle of cost causation by requiring incumbent LECs to recover many fixed
costs through variable, per-minute access rates. An important goal of this Order is to increase the
amount of fixed costs recovered through flat charges and decrease the amount recovered through
variable rates.
37. Common Line Costs. Because the costs of using the incumbent LEC's common line
(or "local loop") do not increase with usage, these costs should be recovered through flat, non-traffic-sensitive fees. The current rate structure, however, generally allows an incumbent LEC to
recover no more than a portion of its interstate common line revenues through a flat-rated
Subscriber Line Charge (SLC), which is capped at $3.50 per month for residential and single-line
business users, and $6.00 per month for multi-line users. The remaining common line revenues
must be recovered through a per-minute Common Carrier Line (CCL) charge assessed on IXCs
(which, in turn, may recover these charges through their prices to long-distance customers). In
order to align the rate structure more closely with the manner in which costs are incurred, we
adjust access rates over time until the common line revenues of all price cap LECs are recovered
through flat-rated charges.
38. For primary residential and single-line business lines, however, we decline to
implement this goal by increasing the SLC ceiling above its existing $3.50 level as urged by many
companies, including price cap LECs and IXCs.(38) We do not wish to see increases in the price of
basic dial tone charged by local exchange carriers to their end users for fear that such increases
might cause some consumers to discontinue service, a result that would be contrary to our
mandate to ensure universal service.(39) We agree with the Joint Board's finding that increasing the
SLC ceiling may make telecommunications service unaffordable for some consumers.(40)
Consequently, to the extent that common line revenues are not recovered through the customer's
SLC, we conclude that LECs should recover these revenues through a flat, per-line charge
assessed on the IXC to whom the access line is presubscribed -- the presubscribed interexchange
carrier charge, or PICC.(41) Further, in order to provide IXCs with the opportunity to incorporate
these changes into their business plans, we set the PICC for primary residential and single-line
business lines at not more than the existing flat-rated line charges for the first year, and we
gradually increase the ceiling thereafter until it reaches a level that permits full recovery of the
common line revenues from flat charges assessed to both end users and IXCs.(42)
39. For non-primary residential and multi-line business lines, we conclude that
affordability concerns do not require us to retain the current ceiling on the monthly SLC.
Consequently, we raise the SLC ceiling for these lines to the level that permits incumbent LECs
full recovery for their common line revenues, but never more than $3.00 above the current SLC
ceiling for multi-line business lines today, adjusted for inflation.(43) Almost all subscribers will pay
SLCs below, and often substantially below, the ceiling. The increase in the SLC ceiling for multi-line businesses will be implemented in the first year. To ameliorate the impact that a dramatic
increase in the SLC ceiling might have on residential customers, however, the increase for non-primary residential lines will be phased in over time. The data indicate that raising the SLC ceiling
to this level will permit incumbent price cap LECs to recover their average common line revenues
from 99 percent of their non-primary residential and multi-line business lines.(44) For the remaining
lines, many of which are located in rural areas, the SLC ceiling for non-primary residential and
multi-line business lines will ensure that end-user charges are not prohibitive or significantly above
the national average,(45) thereby advancing universal service goals of affordability and access.
40. In summary, the plan we adopt here phases out significant implicit subsidies in the
access charge rate structure, while taking into account universal service concerns of affordability
and access. The resulting rate structure is more closely aligned with cost principles. Under this
plan, most price cap incumbent LECs will recover their interstate common line revenues through
flat-rated SLCs and PICCs.
41. Switching and Transport Charges. Following the same pricing principle that flat
charges should recover fixed costs and variable charges should recover variable costs, we make
several modifications to the rate structure for switching and transport services. Among other
things, we move the cost of line-side ports to the common line and require their recovery through
flat-rated charges. To the extent permitted by the record, we also direct incumbent LECs to
reassign costs in the Transport Interconnection Charge (TIC) in order to comply with principles
of cost causation and the D.C. Circuit's recent decision in CompTel v. FCC.(46)
2. Baseline Rate Level Reductions
42. The rate structure changes that we implement in this Order eliminate some of the
distortions that have characterized the access charge system for over a decade. These changes,
however, are not alone sufficient to create a system that accurately reflects the true cost of service
in all respects. To fulfill Congress's pro-competitive mandate, access charges should ultimately
reflect rates that would exist in a competitive market. We recognize that competitive markets are
far better than regulatory agencies at allocating resources and services efficiently for the maximum
benefit of consumers. We conclude, consequently, that competition or, in the event that
competition fails to develop, rates that approximate the prices that a competitive market would
produce, best serve the public interest.
43. The rate restructuring we implement in this Order results in substantial reductions in
the charges for usage-rated interstate access services. These reductions move these access charges
a long way towards their forward-looking cost levels.(47) Furthermore, in addition to these rate
structure adjustments, we also take several steps in this Order to address specific cost
misallocations that cause access charges to be set above economic costs. For example, we require
incumbent LECs to make an exogenous cost adjustment to reflect the full amortization of certain
equal access costs. We also issue a Further Notice of Proposed Rulemaking to consider our
tentative conclusion that certain General Support Facility (GSF) costs should be reallocated to
detariffed services.
44. We recognize that the prescriptive measures that we implement today represent the
first step toward our goal of removing implicit universal service subsidies from interstate access
charges and moving such charges toward economically efficient levels. In the NPRM, we
identified two separate ways to continue this process in the future -- a prescriptive approach in
which we actively set rates at economic cost levels, and a market-based approach that relies on
competition itself to drive access charges down to forward-looking costs. We conclude in this
Order, based on our experience in exchange access and other telecommunications markets and the
record in this proceeding, that a market-based approach to reducing interstate access charges will,
in most cases, better serve the public interest. Although the Commission has considerable
expertise in regulating telecommunications providers and services efficiently for the maximum
benefit of consumers, we believe that emerging competition will provide a more accurate means
of identifying implicit subsidies and moving access prices to economically sustainable levels.
Further, as discussed above, we believe that this approach is most consistent with the pro-competitive, deregulatory policy contemplated by the 1996 Act. Accordingly, where competition
is developing, it should be relied upon in the first instance to protect consumers and the public
interest.
45. We acknowledge that a market-based approach under this scenario may take several
years to drive costs to competitive levels. We also recognize that several commenters have urged
us to move immediately to forward-looking rates by prescriptive measures utilizing forward-looking cost models. We decline to follow that suggestion for several reasons. First, as a
practical matter, accurate forward-looking cost models are not available at the present time to
determine the economic cost of providing access service. Because of the existence of significant
joint and common costs, the development of reliable cost models may take a year or more to
complete. This situation might be contrasted with that addressed in our Local Competition
Order, where we endorsed the use of cost models to estimate the cost of providing unbundled
network elements. There, we observed that unbundled elements have few joint and common
costs, so that devising accurate cost models for unbundled network elements is more
straightforward.(48)
46. In addition, even assuming that accurate forward-looking cost models were available,
we are concerned that any attempt to move immediately to competitive prices for the remaining
services would require dramatic cuts in access charges for some carriers. Such an action could
result in a substantial decrease in revenue for incumbent LECs, which could prove highly
disruptive to business operations, even when new explicit universal support mechanisms are taken
into account. Moreover, lacking the tools for making accurate prescriptions, precipitous action
could lead to significant errors in the level of access charge reductions necessary to reach
competitive levels. That would further impede the development of competition in the local
markets and disrupt existing services. Consequently, we strongly prefer to rely on the competitive
pressures unleashed by the 1996 Act to make the necessary reductions.
47. To the extent that some commenters contend that the immediate elimination of all
implicit subsidies is mandated by the 1996 Act, we disagree. Neither in the 1996 Act nor its
legislative history did Congress state that all forms of implicit universal service support shall be
made explicit by May 8, 1997. To the contrary, Congress stated that the conversion of implicit
subsidies to explicit support is a goal that "should be" pursued "[t]o the extent possible."(49)
Congress most certainly did not state that we must reach that goal by May 8, 1997. Rather, it
directed that, by that date, we issue rules that "shall include a definition of the services that are
supported by Federal universal service support mechanisms and a specific timetable for
implementation."(50) Our companion order satisfies that timetable, and this Order establishes a
process that will eliminate some implicit subsidies quickly and more gradually eliminate others.
48. We are confident that the pro-competitive regime created by the Act and implemented
in the Local Competition Order and numerous state decisions will generate workable competition
over the next several years in many cases, and we would then expect that access price levels to be
driven to competitive levels. We also recognize, however, that competition may develop at
different rates in different places and that some services may prove resistant to competition.
Where competition has not emerged, we reserve the right to adjust rates in the future to bring
them into line with forward-looking costs. To assist us in that effort, we will require price cap
LECs to submit forward-looking cost studies of their services no later than February 8, 2001, and
sooner if we determine that competition is not developing sufficiently for the market-based
approach to work. We anticipate that the tools needed to complete these cost studies will be
available soon, well before this deadline. Indeed, our Universal Service Order requires
comparable cost models to be ready by 1998. We will then review competitive conditions and the
submitted cost studies.
49. As we acknowledged in the NPRM, a market-based approach will permit and, indeed,
require us progressively to deregulate the access charge regime as competition develops. In a
subsequent order, we will examine specific issues concerning the timing and degrees of pricing
flexibility. That order will identify the competitive triggers that must be met to justify relaxation
of specific regulatory constraints. We also recognize the need to examine whether incumbent
LECs should be compensated for any historical costs that they have no reasonable opportunity to
recover as a result of the transformation from a regulated to competitive marketplace. We
recognize that this issue may raise difficult questions of both law and equity, and we intend to
respond fully to concerns about historical cost recovery in a subsequent order to be issued this
year.
50. Finally, we adopt in this Order our earlier tentative conclusion that incumbent LECs
may not assess interstate access charges on information service providers (ISPs). We find that
our existing policy promotes the development of the information services industry, advances the
goals of the 1996 Act, and creates significant benefits for the economy and the American people.
With respect to second and additional residential lines, which are often used by consumers to
access ISPs, our goal is to move towards price levels and structures that reflect underlying costs,
and thereby to create a neutral market environment in which these lines neither give nor receive
subsidies. We will address fundamental questions concerning ISP usage of the public switched
network as part of a broader set of issues under review in a related Notice of Inquiry.(51)
51. Section II of this Order provides an overview of the rate structure adjustments adopted today. Section III offers detailed explanations of these changes, which include adjustments to the rate structure for the common line, local switching, transport, SS7, and switching, and modifications to the TIC. In Section IV, we adopt a market-based approach to reducing access charges and address several specific rate level adjustments. In Section V, we determine which of the changes adopted in this Order should apply to rate-of-return LECs.
52. Section VI touches upon several additional issues, including the applicability of access
charges to unbundled network elements, our treatment of terminating access, and ISPs. We also
discuss modifications that may be needed to reconcile our access charge rules with the Universal
Service Order released today. In Section VII, we issue an FNPRM to seek comment on
proposals to alter the current allocation of GSF costs and to allow incumbent LECs to impose a
PICC on special access lines.
53. In rationalizing the switched access rate structure in this Order, our primary goal is to
ensure that traffic-sensitive costs are recovered through traffic-sensitive charges and NTS costs
are recovered through flat-rated charges, wherever appropriate. Because many NTS costs are
currently recovered through per-minute charges, the principal effect of our Order is to reduce the
amount recovered through per-minute interstate access charges and increase the amounts
recovered through flat-rated charges. We phase in these changes over time to ameliorate any
disruptions these adjustments might cause end users.
A. Common Line Rate Structure Changes
54. Because the cost of using the incumbent LEC's common line does not increase with
usage, the costs should be recovered through flat non-traffic-sensitive fees. In this Order we
increase the amount of common line revenues recovered through flat-rated charges over time until
incumbent LECs can recover all of their interstate common lines revenues through NTS fees.
55. Primary Residential and Single-Line Business Lines. We agree with the Federal-State Joint Board on Universal Service that the SLC ceiling for primary residential and single-line
business lines should not be increased, because a higher SLC could make telecommunications
service unaffordable for some consumers. To the extent common line revenues cannot be
recovered through the customer's existing SLC, we conclude that LECs should recover these
revenues through a flat, per-line charge (the "primary interexchange carrier charge" or "PICC")
assessed, not on the end user, but on the end user's presubscribed interexchange carrier.(52) We set
a ceiling on the PICC at the level of existing per-line charges for the first year.
56. In order to give IXCs an opportunity to adjust to the new charge, we gradually
increase the PICC ceiling over the next several years until it reaches a level that permits full
recovery of common line revenues -- plus a portion of "residual TIC" revenues. To the extent
that the ceiling on the primary residential and single-line business PICC does not allow for full
recovery of these common line revenues immediately, the remaining revenues will be recovered
through a PICC imposed upon non-primary residential and multi-line business lines, and through
per-minute charges.
57. As the PICC ceiling for primary residential and single-line business lines increases, the
amount of common line revenues transferred to non-primary residential and multi-line business
lines will fall to zero. At that point, all common line costs for primary residential and single-line
business lines will be recovered through flat-charges on those lines.
58. Non-Primary Residential and Multi-Line Business Lines. Because affordability
concerns are not as significant for these lines, we permit a modest increase in the SLC to permit
recovery of the price cap LEC's average per-line common line revenues, but never to more than
$3.00 above the SLC ceiling for multi-line business lines today, adjusted for inflation. To
ameliorate the impact that an increase in the SLC might have on residential customers, the
increase in the SLC ceiling will be phased in for non-primary residential lines over several years.
59. We also establish a flat-rated PICC on non-primary residential and multi-line business
lines. This PICC will cover common line revenues that exceed the ceilings on SLCs and primary
residential PICCs.(53) We set a ceiling on this PICC in the first year of $1.50 for non-primary
residential lines and $2.75 for multi-line business lines, and permit those ceilings to increase
gradually thereafter. We anticipate that the actual PICC imposed upon multi-line business lines
will, on average, decrease from 1998 to 1999, and for every year thereafter, and will fall to less
than $1.00 by 2001.
60. To the extent that the ceilings on SLCs and PICCs do not allow recovery through flat
charges of all common line revenues, LECs shall be permitted to impose a per-minute CCL charge
assessed on originating minutes.(54) As the PICC cap for non-primary residential and multi-line
business lines increases -- and as revenues transferred from primary residential and single-line
businesses fall to zero -- the per-minute CCL charge will fall to zero, too. Eventually, we
anticipate that most, if not all, price cap LECs will be able to recover the full per-line revenues
associated with non-primary residential and multi-line business lines through the SLC, after taking
into account the assistance provided through the explicit high-cost universal service support
mechanisms. In addition, residual TIC revenues will also be recovered through the PICC on non-primary residential and multi-line business lines. As described more fully below, to the extent that
the PICC ceilings prevent full recovery of the residual TIC, the remaining amount will be
recovered through a per-minute residual TIC.
B. Other Rate Structure Changes
61. Switching. The traffic-sensitive costs of local switching will continue to be recovered
through per-minute local switching charges.
62. For price cap LECs, the NTS costs associated with line ports will no longer be
included in the local switching charge, and instead will be recovered through the flat-rated
common line charges discussed above. Price cap LECs will also assess a monthly flat-rated
charge directly on end users that are subscribing to integrated services digital network services,
digital subscriber line, or other services that have higher line port costs than basic, analog service.
This charge recovers the amount by which the cost of the line port exceeds the cost of a line port
for basic, analog service. Costs of local switching attributable to trunk ports are moved to a
separate service category within the traffic-sensitive basket. These costs will be recovered
through flat-rated monthly charges collected from users of dedicated trunk ports and per-minute,
traffic-sensitive charges assessed on users of shared trunk ports. The new rate structure also
includes an optional call set-up charge.
63. Transport. Effective July 1, 1998, the unitary rate structure option for tandem-switched transmission is eliminated and the costs of tandem-switched transmission must be
recovered through the existing three-part rate structure. For price cap LECs, a new flat-rated
monthly charge recovers the NTS costs of tandem switching attributable to dedicated ports. A
new per-minute rate element recovers the costs of multiplexers used between tandem switch DS-1
port interfaces and the DS-3 circuits used to transport traffic from tandem to end offices. For all
incumbent LECs, the formula used to compute the tandem-switched transport rate is based on
actual usage of the circuit, rather than an assumed 9000 minutes of use per month.
64. For all incumbent LECs, certain costs currently recovered through the TIC are
reassigned to specified facilities charges, including tandem-switching rates. For price cap LECs,
those costs of the TIC that remain (the "residual TIC") are recovered through the PICC. To the
extent that the PICC ceiling prevents recovery of the entire residual TIC through the flat-rated
PICC, the remaining portion will be collected through a per-minute residual TIC. As the ceilings
on the PICCs increase, a larger percentage of the residual TIC will be recovered through the
PICC. Beginning in July 1997, price cap reductions will be targeted to the per-minute residual
TIC until it is eliminated. We expect that the per-minute TIC charge will be eliminated in two to
three years. Residual per-minute TICs shall be assessed only on incumbent LEC transport
customers, and therefore shall no longer be assessed on competitive access providers (CAPs) that
interconnect with the LEC switched network at the end office.
65. SS7 Signalling. Price cap LECs may, but are not required to, adopt a rate structure
for SS7 signalling that unbundles SS7 signalling functions, as was permitted in the Ameritech SS7
Waiver Order.(55)
66. Retail Marketing Expense. Price cap LECs may no longer recover certain marketing
expenses through per-minute access charges assessed on IXCs. These expenses are recovered
from end users through per-line charges on second and additional residential lines and multi-line
business lines, subject to ceilings on SLCs. Any residual shall be recovered through the PICCs on
these lines and then through per-minute charges on originating access, subject to the exception
described in Section III.A, below.
A. Common Line
1. Overview
67. In the 1983 Access Charge Order, the Commission established a comprehensive
mechanism for incumbent LECs to recover the costs associated with their provision of access
service required to complete interstate and foreign telecommunications.(56) The access plan
distinguished between traffic sensitive costs and NTS costs incurred by an incumbent LEC to
provide interstate access service An incumbent LEC's NTS costs of providing interstate access,
or costs that do not vary with the amount of usage, include the common line, or "local loop,"
which connects an end user's home or business to a LEC central office.(57)
68. In the Access Charge Order, the Commission emphasized that its long range goal was
to have incumbent LECs recover a large share of the NTS common line costs from end users
instead of carriers, and to recover these costs on a flat-rated, rather than on a usage- sensitive,
basis.(58) The Commission recognized, however, that a sudden increase in the flat rates imposed by
LECs on end users could have a detrimental effect on universal service. For this reason, the rules
adopted in 1983 apportioned charges for common line costs between a monthly flat-rated end-user SLC and a per-minute CCL charge assessed to the IXCs. The SLC is based on average
interstate-allocated common line costs, which the incumbent LEC may average over an entire
region or over a study area,(59) depending on how it files its interstate tariff. These charges
currently are the lesser of the per-line average common line costs allocated to the interstate
jurisdiction or $3.50 per month for residential and single-line business users, and $6.00 per month
for multi-line business users.(60) Any remaining common line revenues permitted under our price
cap rules are recovered by incumbent price cap LECs through per-minute CCL charges assessed
on the IXCs, and are ultimately recovered by IXCs from end-users through long distance toll
charges.(61)
69. Because common line and other NTS costs do not increase with each additional
minute of use transmitted over the loop, the current per-minute CCL charge that recovers loop
costs represents an economically inefficient cost-recovery mechanism and implicit subsidy. A rate
structure that recovers NTS costs through per-minute charges creates an incentive for customers
to underutilize the loop by requiring them to pay usage rates that significantly exceed the
incremental cost of using the loop. Additionally, a rate structure that forces high- volume
customers to pay significantly more than the cost of the facilities used to service them is not
sustainable in a competitive environment because high-volume customers can migrate to a
competitive LEC able to offer an efficient combination of flat and per-minute charges, even if the
competitive LEC has the same or higher costs than the incumbent LEC.
70. The Federal-State Universal Service Joint Board stated, in its Recommended
Decision, that primary residential and single-line business lines are essential to the provision of
universal service,(62) and that current rates for local services are generally affordable based on
subscribership levels.(63) The Joint Board also concluded that the SLC, as a charge assessed
directly on local telephone subscribers, has an impact on universal service concerns such as
affordability,(64) and recommended that the Commission leave the current SLC ceilings in place for
primary residential and single-line business lines.(65) In our companion Universal Service Order,
consistent with that recommendation, we conclude that we should not raise the current $3.50
SLC ceiling on primary residential and single-line business lines.(66)
71. We adjust the SLC ceilings for multi-line business lines and residential lines beyond
the primary connection. Adjusting the SLC ceilings for multi-line business lines and non-primary
residential lines will permit incumbent LECs to recover directly from end users more of the
common line revenues permitted under our price cap rules for those lines and will reduce the
amount of NTS costs related to these lines that are currently recovered through CCL charges.
Where the SLC ceilings do not allow the incumbent LEC to recover its price cap common line
revenues through end-user charges, the remaining, or "residual" amount will be recovered through
flat, per-line charges assessed to each customer's presubscribed interexchange carrier. This
presubscribed interexchange carrier charge, or "PICC", will increase gradually until the incumbent
price cap LECs' full interstate-allocated common line revenues permitted under our price cap rules
are recovered through a combination of flat-rated SLCs and PICCs. To the extent that the flat-rated charges do not recover, during the initial phase, the full interstate-allocated common line
revenues permitted under our price cap rules, incumbent LECs may continue to assess the IXCs a
per-minute CCL charge based on the costs not recovered through flat-rated charges. This per-minute charge, however, will be generally much lower than today's CCL charge and will be
eliminated once all common line revenues are recovered through a combination of SLCs and
PICCs.
2. Subscriber Line Charge
a. Background
72. In the NPRM, we proposed to increase the ceiling on the SLC for second and additional lines for residential customers, and for all lines for multi-line business customers, to the per-line loop costs assigned to the interstate jurisdiction.(67) Alternatively, we proposed to eliminate the ceiling for multi-line business customers and for residential connections beyond the primary connection, especially where the incumbent LEC has entered into interconnection agreements and taken other steps to lower barriers to actual or potential local competition.(68) We sought comment on these proposals.(69) We also invited parties to comment on whether any changes that we adopt to the ceiling on SLCs for incumbent price cap LECs should be extended to incumbent rate-of-return LECs, and on the relationship of any such changes to the Joint Board Recommended Decision.(70) We sought comment on whether to establish a transition mechanism for this increase if the ceilings on SLCs for multi-line business lines and residential lines beyond the primary connection are increased and whether such a transition could be implemented consistent with section 254, the Act's universal service provision.(71) We sought comment on whether geographic averaging of SLCs is an implicit subsidy that is inconsistent with the requirements of section 254(e), and thus on whether we are required to deaverage SLCs.(72)
b. Discussion
73. The Commission has had the longstanding goal of ensuring that all consumers have
affordable access to telecommunications services.(73) In its Recommended Decision, the Joint
Board stated that current rates for local telephone services are generally affordable and that the
SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal
service concerns such as affordability.(74) The Joint Board further recommended that the
Commission maintain the current SLC ceilings for primary residential and single-line business
lines,(75) and we adopt that recommendation in our companion Universal Service Order.(76)
Numerous parties in this proceeding argue that we should raise or eliminate the SLC ceiling on all
lines to permit LECs to recover the full interstate allocated costs of the local loop from end-users.(77) This would increase the average SLC for all residential and single-line business lines from
$3.50 per month to $6.10 per month.(78) We conclude that it would be inappropriate to make
significant changes to the SLC cap for primary residential and single-line business lines. Primary
residential and single-line business lines are central to the provision of universal service. Because
of concerns about affordability, and in light of the significant changes that are still underway in
this proceeding, in the federal universal service support proceeding, and possible future changes
to the separations process, we conclude that the current SLC for these lines should not be raised.
Consistent with the Joint Board's recommendation and our conclusion in the Universal Service
Order, therefore, the ceiling on the SLC for primary residential and single-line business lines will
remain at $3.50 or the permitted price cap common line revenues per line, whichever is less.
74. With regard to multi-line users, the Joint Board suggested in its Recommended
Decision that universal service support should not be extended to non-primary residential lines
and multi-line business lines because it found that cost of service is unlikely to be a factor that
would cause multi-line users not to subscribe to telephone service.(79) Subsequently, the state
members of the Joint Board filed a report with the Commission in which they proposed that we
retain high cost support for all lines served in high cost study areas during a transition to a
forward-looking cost methodology.(80) Consistent with that proposal, we adopt, in our Universal
Service Order, a modified version of the existing high-cost support system and continue support
for all residential and business connections in areas currently receiving high cost support until at
least January 1, 1999.(81) We therefore continue to provide high cost support for non-primary
residential and multi-line business lines at this time, by allocating a lower portion of these costs to
the intrastate jurisdiction than would otherwise be the case.(82) In that order, we also express our
concern, however, that providing universal service support for non-primary residential and multi-line business lines in high-cost areas may be inconsistent with our long-term universal service
goals, and that overly expansive universal service support mechanisms potentially could harm all
consumers by increasing the expense of telecommunications services for all.(83) We state that we
will continue to evaluate the Joint Board's recommendation to limit universal service support to
primary residential connections and businesses with single connections.(84)
75. We conclude here that it is necessary to adjust the ceilings on the interstate SLCs on
both non-primary residential and multi-line business lines in order to create a rate structure that
supports our long-term universal service goals, is pro-competitive, and is sustainable in a
competitive local exchange market. Section 254 of the Act requires that all consumers have
access to basic telephone service at just, reasonable, and affordable rates that are comparable
among different regions of the nation.(85) This section of the Act also requires that universal
service support be achieved through support mechanisms that are "specific, predictable, and
sufficient."(86) Because universal service concerns about ensuring affordable access to basic
telephone services are not as great for non-primary residential and multi-line business lines as they
are for primary residential and single-line business lines, we must take action to remove the
implicit subsidies contained in our current interstate access charges. Thus, we are adopting a rate
structure that will permit LECs to recover greater amounts of their costs on a flat-rated basis from
end users and to reduce the amount of revenues they must recover through per-minute access
charges. Our initial implementation improves upon the current rate structure because it reduces
subsidies by recovering more costs from the cost causer. It also creates a rate structure that is
more pro-competitive than the existing one by providing for greater flat-rated recovery of NTS
costs. Without these modifications, new entrants, which are not subject to the non-cost-causative
rate structure requirements, would be in a position to target the incumbent LECs' most profitable,
high-volume customers based on regulatory requirements. A loss of profitable customers would
increase the incumbent LECs' costs of providing service to the rest of their customers, especially
to those in high-cost areas. Consistent with our universal service goal of ensuring that all
consumers receive affordable rates that are comparable in different parts of the nation, however,
the SLC adjustments will be subject to ceilings to prevent end-user customers in high-cost areas
from paying SLCs that are significantly higher than in other parts of the country.
76. In virtually all cases, current SLC ceilings do not permit incumbent LECs to recover
their average per-line interstate-allocated common line costs.(87) As a result of the existing SLC
ceilings, which have been in place for the past decade, incumbent LECs must recover the shortfall
through usage-sensitive CCL charges assessed on IXCs. The IXCs in turn recover most or all of
these costs from toll users in the form of per-minute charges, keeping toll rates artificially high
and discouraging demand for interstate long distance services. The high per-minute toll charges
also create support flows between different classes of customers. For example, because end-user
customers vary widely in their use of interstate long distance services, low-volume toll users do
not pay the full cost of their loops while high-volume toll users contribute far more than the total
cost of their loops. In addition high-volume toll users, who include significant numbers of low-income customers, effectively support non-primary residential and multi-line business customers.(88)
77. In order to create a rate structure that supports our long-term universal service goals,
is pro-competitive, and is sustainable in a competitive market, we modify our rate structure
requirements to permit incumbent LECs to recover costs in a manner that more accurately reflects
the way those costs are incurred. Because common line costs do not vary with usage, these costs
should be recovered on a flat-rated instead of on a per-minute basis. In addition, these costs
should be assigned, where possible, to those customers who benefit from the services provided by
the local loop. Accordingly, the SLC ceilings for non-primary residential and multi-line business
lines will be adjusted generally to a level that permits incumbent LECs to recover, directly from
the end user, their average per-line interstate common line revenues.(89)
78. For multi-line business lines, the SLC will be adjusted to recover the average per-line
interstate-allocated common line costs beginning July 1, 1997. To the extent incumbent price cap
LECs, mostly in rural areas, have common line costs that significantly exceed the national
average, we establish a ceiling on SLCs for multi-line business lines of $9.00, adjusted annually
for inflation. To ameliorate any possible adverse impact of adjustments in SLC ceilings for non-primary residential lines, we adopt an approach that will gradually phase in adjustments in the
SLC ceilings for these lines. The SLC for non-primary residential lines will be adjusted initially
beginning January 1, 1998. For the first year, beginning January 1, 1998, the SLC ceiling for non-primary residential lines will be adjusted to the incumbent LEC's average per-line interstate-allocated costs, but may not exceed $1.50 more than the current SLC ceiling. Beginning January
1, 1999, the monthly SLC ceiling for these lines will be adjusted for inflation and will increase
annually by $1.00 per-line, until the SLC ceiling for non-primary residential lines is equal to the
ceiling permitted for multi-line business lines.
79. The data indicate that the long term ceilings we are establishing will permit incumbent
price cap LECs to recover their average per-line common line revenues(90) from 99 percent of their
non-primary residential and multi-line business lines.(91) For the few incumbent price cap LECs that
have common line costs in certain study areas that exceed the ceiling, the ceiling will serve as an
economic safeguard for those customers who would otherwise pay significantly higher SLCs.(92)
We conclude that maintaining a ceiling for non-primary residential and multi-line business
customers in high-cost areas is a reasonable response to a legitimate universal service concern
because, consistent with section 254(b)(3), it ensures that these customers have access to
telecommunication services at rates that are comparable to rates charged for similar services in
urban areas.(93)
80. We believe that the approach we adopt should prevent widespread discontinuance of
lines by multi-line customers. The record indicates that nationwide, the average interstate
allocation of common line costs is only $6.10 per line, and that for more than half of multi-line
business lines, the interstate common line costs are below the existing $6.00 ceiling.(94) Therefore,
when the SLC ceiling is adjusted July 1, 1997, more than half of multi-line business lines will see
no immediate increase in their SLC. The $5.00 SLC ceiling for non-primary residential lines for
the first year is a net increase of $1.50 per month and the gradual increase, if any, in subsequent
years, is designed to allow these customers time to adjust to the new rate structure. Moreover,
we expect the rate structure modifications we adopt in this order to benefit the majority of multi-line customers through reductions in per-minute long distance rates. Thus, for many customers,
the access restructuring will lead to an overall reduction in their telephone bill. We also note that,
because we are adjusting the SLC on non-primary residential lines only to a level that recovers the
average interstate allocated costs attributable to the line, to the extent that a customer chooses not
to purchase an additional line because of the SLC increase, it is because the benefits of the second
line to that customer are less than the average cost of the line.
81. Many parties contend that adjusting the SLC ceiling for non-primary residential lines
and multi-line business lines will affect economic development in rural areas.(95) To respond to this
concern, with the limited exception of cost allocation to new elements, discussed in Section V,
below, we are limiting application of the rate structure modifications we adopt in this Order to
incumbent price cap LECs only. Most consumers in rural areas are served by small rate-of-return
LECs that are not affected by the SLC adjustment we are adopting. We will review rate structure
modifications affecting small, rural carriers in a separate proceeding when we address access
charge reform for those carriers. To the extent there are incumbent price cap LECs that serve
high-cost areas of the country and have common line costs that exceed the national average, we
are maintaining a ceiling on the SLCs for these lines to ensure that subscribers do not pay rates
that greatly exceed the national average.(96)
82. We are not persuaded by arguments that an upward adjustment to a SLC ceiling that was set over a decade ago, and that has never been adjusted for inflation, would violate section 254(b)'s requirement that consumers in all regions of the nation have affordable access to telecommunications and information services at rates that are reasonably comparable to those services provided in urban areas.(97) The data indicate that if the SLC ceilings for business and residential lines had been adjusted annually for inflation since they became effective in 1984 and 1989, respectively, the $6.00 business SLC ceiling would have increased by 1996 to $9.00 per line, and the $3.50 residential and single-line business SLC ceiling would have increased to $4.39 per line.(98) Thus, for multi-line business customers, the SLC ceiling we adopt today is not significantly different from what it would have been, if it had been adjusted for inflation annually. Moreover, to adopt a ceiling lower than $9.00 would effectively create an additional impermissible subsidy for a class of customers not enumerated by Congress in section 254 of the 1996 Act as beneficiaries of fundamental universal service goals. We find that the $9.00 ceiling we adopt today strikes a reasonable balance between our desire to establish a more efficient interstate access charge rate structure consistent with our long-term universal service goals in a competitive local exchange environment, and the need to avoid precipitous rate increases to consumers in high cost areas. Although SLCs in some areas may ultimately be lower than SLCs in high-cost areas, we conclude that $9.00 SLCs remain "reasonably comparable" to those in urban areas.(99)
83. We are also not persuaded that we should maintain the current SLC ceiling for non-primary residential lines because of claims that incumbent LECs will be unable to identify second
lines for purposes of billing different SLCs to these lines. Additional telephone lines are a well-established telecommunications product marketed by LECs. This product is supported by a
marketing and billing infrastructure that will enable LECs to distinguish non-primary residential
lines for purposes of billing different SLCs. We note that we are not defining "primary" or "non-primary" lines in this Order. In a further notice of proposed rulemaking in the Universal Service
proceeding, we will address this issue, and release an order defining "primary"and "non-primary"
residential lines by the end of the year.(100)
84. We are unpersuaded by arguments that we should forgo these changes on the grounds
that increasing the SLC ceilings for non-primary residential lines will create undue incentives for
subscribers to order their primary lines from the incumbent LEC and their additional lines from
competitors. The changes we adopt in this Order are intended to permit incumbent LECs to move
their prices for non-primary residential and multi-line business lines toward more economically
efficient levels by substantially reducing implicit subsidies flowing between different classes of
customers. Once these subsidies are eliminated and the new universal service regime is fully
implemented, incumbent LECs will be able to recover their common line costs from customers
through a rate structure that accurately reflects the manner in which these costs are incurred, and
through a targeted, portable universal service contribution where necessary. At that point, both
incumbent LECs and new entrants should be able to compete efficiently in the local exchange
market. Subscribers, therefore, should not have an incentive to use other carriers for their
additional lines unless a competitor is operating more efficiently and can offer local exchange
service at a lower rate than the incumbent LEC is able to offer. Indeed, the ability of a
competitive local exchange carrier to offer local exchange service at a lower rate is precisely the
type of competition envisioned by the 1996 Act: it will encourage the incumbent LEC to reduce
its costs of providing service in order to meet or beat the prices of its competition.
85. To address the concerns of some commenters that charging a higher SLC for second
and additional residential lines will encourage subscribers to order their additional line from
competitors, we will permit LECs to charge competitors the higher SLC when the competitor
provides a customer with a second line through resale of an incumbent LEC offering. If prior to
the development of full competition, we find that disparity between SLC charges on primary and
additional residential lines becomes a significant problem, we will reexamine this issue in
conjunction with further reforms we adopt in an upcoming order.
86. Certain incumbent LECs have requested that any rule that increases the SLC ceiling for non-primary residential lines should be optional for LECs.(101) We adopt this proposal in part and will not require LECs to charge a higher SLC for non-primary residential lines. Thus, if an incumbent LEC finds that charging higher SLCs leads to a large number of disconnections, it is free to charge less. To the extent price cap LECs choose to charge a SLC that is less than the maximum allowed, however, they may not recover these foregone revenues through the PICC or CCL charges. This restriction is consistent with our current price cap rules, which prevent LECs from transferring SLC costs to the CCL charge.(102)
87. Several incumbent price cap LECs argue in favor of deaveraging SLCs, stating that an
averaged SLC creates cross-subsidies between high-cost and low-cost areas, in violation of
section 254 of the Act.(103) We will resolve this issue, along with issues concerning the timing and
degrees of geographic deaveraging, pricing flexibility, and ultimate deregulation in an upcoming
order.
3. Carrier Common Line Charge
a. Background
88. Because we are retaining the $3.50 ceiling on SLCs for primary residential and single-line business customers, virtually all price cap LECs will be unable to recover, through the SLC,
all of their common line revenues permitted under our price cap rules. In the NPRM, we sought
comment on possible revisions to the current CCL charge structure that would allow incumbent
price cap LECs to recover these NTS common line costs in a way that reflects the way costs are
incurred. We proposed a recovery mechanism suggested by the Joint Board in its Recommended
Decision(104) that would permit incumbent LECs to recover common line costs not recovered from
SLCs through a flat, per-line charge assessed against each end-user's presubscribed interexchange
carrier.(105) The Joint Board suggested that the Commission allow incumbent LECs to collect the
flat-rated charge directly from end users who have not selected a primary interexchange carrier
("PIC.")(106) We sought comments on this approach and also invited parties to discuss any
potential problems created when end-user customers have selected PICs, but use other IXCs for
Internet, fax, interexchange, or other interstate services by "dialing-around" the PIC.(107)
89. We also sought comment on several alternative approaches to the per-minute
recovery of interstate NTS loop costs proposed by the Competition Policy Institute (CPI),
including a "bulk billing" method that would assess a charge against the IXC based upon its
percentage share of interstate minutes of use or revenues, a "capacity charge," a "trunk port
charge," and a "trunk port and line port" charge.(108) We invited parties to comment on whether
any changes that we adopt to the recovery of interstate NTS local loop costs for price cap LECs
should be extended to rate-of-return LECs, and on the relationship of interstate NTS loop cost
recovery to the universal service mechanisms proposed in the Joint Board Recommended
Decision. We asked parties to address how such an extension to rate-of-return LECs would
affect small business entities, especially small incumbent LECs.(109)
90. Additionally, we asked parties to address whether an alternative mechanism for
recovering common line costs currently recovered through the CCL charge would be necessary if
we were to eliminate the SLC ceiling for certain lines. We asked interested parties to address the
extent to which any proposed alternative recovery mechanism for recovering common line costs
currently recovered through the CCL charge would affect small business entities, including small
incumbent price cap LECs and new entrants. We also sought comment on whether section
254(g) precludes an IXC from charging its customers the flat, per-line monthly rate assessed on
that line if the amount of that charge varied among customers in different areas within a state or
among customers in different states, and if so, whether conditions exist sufficient to require us to
forbear from the application of section 254(g) to IXC recovery of flat-rate CCL charges.(110)
b. Discussion
91. The $3.50 SLC ceiling for primary residential and single-line business customers
prevents most incumbent price cap LECs from recovering, through end-user charges, all of the
common line revenues permitted under our price cap rules.(111) To the extent that common line
revenues are not recovered through SLCs, incumbent LECs will be allowed to recover these
revenues through a PICC, a flat, per-line charge assessed on the end-user's presubscribed
interexchange carrier.
92. We adopt the Joint Board's recommendation that incumbent LECs may collect
directly, from any customer who does not select a presubscribed carrier, the PICC that could
otherwise be assessed against the presubscribed interexchange carrier. Assessing the PICC
directly against end users that do not presubscribe to a long distance carrier should eliminate the
incentive for customers to access long-distance services solely through "dial-around" carriers in
order to avoid paying long-distance rates that reflect the PICC. Several parties argue that this
type of billing arrangement will create administrative difficulties because it will require LECs to
prorate charges for both the end user and the IXC when a customer leaves an IXC in the middle
of the billing cycle. To avoid any potential administrative difficulties resulting from customers
leaving their presubscribed interexchange carriers in the middle of a billing cycle, we will permit
LECs to assess the full PICC at the beginning of each billing cycle.
93. We recognize that this flat, per-line PICC will not prevent customers from "dialing
around" their presubscribed long distance carrier to obtain interstate service. Collecting a PICC
from a customer, however, in and of itself, creates no incentive for a customer to presubscribe to
one carrier and use "dial-around" service of another. If the presubscribed carrier is an efficient
competitor, it should be able to offer usage-based rates comparable to the prices of a competitor,
thus eliminating any artificial benefits of "dial-around" capability. A combination of lower per-minute long distance rates and attractive long-distance pricing packages that reward customers for
increasing their usage of the presubscribed interexchange carrier's services should also help deter
customers from using separate long-distance carriers for various services solely because of
regulation. There is customer contact value in being a customer's presubscribed interexchange
carrier. Regulators have long concluded that the convenience of making a long-distance call by
simply dialing "1+" conveys certain advantages.(112) And the advantages of "1+" dialing will only
increase if, as many predict, we move to a world in which "one-stop shopping" for a multiplicity
of services becomes the primary paradigm for provision of telecommunication services. We
conclude that the record does not support a finding that assessing a charge on the presubscribed
carrier will artificially encourage "dial-around" traffic to such a degree that we should not adopt
access charge modifications that will move substantially toward efficient pricing for common line
elements and lower usage charges for long-distance service. If evidence appears to us that our
rules do substantially contribute to undue use of "dial-around" capabilities to circumvent
presubscribed interexchange services, we stand ready to revisit this issue at a later time.
94. The rate structure we are adopting calls for the single-line PICC ultimately to recover
the difference between revenues collected through the SLC and the per-line common line
revenues for primary residential lines and single-line business lines permitted under our price cap
rules.(113) In order to provide incumbent LECs and IXCs with adequate time to adjust to this rate
structure change, we cap the PICC for primary residential and single-line business lines at $0.53
per month for the first year, beginning January 1, 1998, and establish ceilings on increases
thereafter. We note that the monthly $0.53 PICC is approximately equal to the current
presubscribed per-line charges that are assessed to IXCs for the Universal Service Fund and
Lifeline Assistance plan,(114) which are being eliminated in our Universal Service Order.(115)
Beginning January 1, 1999, the ceiling on the monthly PICC on primary residential and single-line
business lines will be adjusted for inflation and will increase by $0.50 per year until the sum of the
SLC plus the flat-rated PICC is equal to the price cap LEC's permitted common line revenues per
line. In no event shall the sum of the single-line SLC and PICC exceed the sum of the maximum
allowable multi-line SLC and multi-line PICC.
95. Sprint asserts that if LECs recover NTS common line costs through deaveraged rates
assessed on IXCs, we must forbear from applying section 254(g)(116) to the extent it requires an
IXC to average geographically any flat charges an IXC passes on to its customers.(117) WorldCom
asserts that IXCs should be permitted to recover their costs in any manner the market will allow,
and that unless the Commission forbears with respect to the application of section 254(g) to these
costs, IXCs that operate nationally will be forced to average together numerous subscribers' loop
costs, and thus use long-distance rates as a vehicle for cross-subsidies that run counter to the
overall policies of section 254(b) and (c).(118) We conclude that the information in the record
before us does not demonstrate that we are required, by section 10(a) of the Act,(119) to forbear
from enforcing section 254(g) as it relates to the manner in which IXCs recover their costs.
96. Section 10(a) of the 1934 Act requires the Commission to forbear from applying any
regulation or provision of the Communications Act of 1934 if: (1) enforcement of that provision
is unnecessary to ensure that the relevant charges and practices are just and reasonable and not
unjustly or unreasonably discriminatory; (2) enforcement of that provision is unnecessary to
protect consumers; and (3) forbearance from applying such provision or regulation is consistent
with the public interest.(120) We conclude that, on the basis of the current record, IXCs have not
demonstrated that forbearance of section 254(g) is warranted at this time.
97. We find that establishing a broad exception to section 254(g) to permit IXCs to pass
through flat-rated charges on a deaveraged basis may create a substantial risk that many
subscribers in rural and high-cost areas may be charged significantly more than subscribers in
other areas. Accordingly, we cannot conclude that enforcing our rate averaging requirement is
unnecessary to ensure that charges are just and reasonable. In addition, because assessing
subscribers flat-rated charges on a deaveraged basis could lead to significantly higher rates for
subscribers in high-cost areas, we find no basis in this record to conclude that it is unnecessary to
enforce section 254(g) to ensure protection of consumers or to protect the public interest. In
contrast, IXCs cite no countervailing public interest considerations but merely make broad,
unsupported assertions of the need to deaverage rates in light of the varying PICC amounts
expected to be assessed by incumbent LECs. We also note that IXCs now pay access charges
that often vary from location to location and from incumbent LEC to incumbent LEC, and still
maintain geographically averaged rates. We therefore conclude that, based on the record before
us, the IXCs have not met the test set forth in section 10(a) of the Act, and forbearance of section
254(g) is not warranted.
98. We note that we will continue to examine the issue of whether conditions exist that
require us to forbear from application of section 254(g) as it relates to recovery of the PICC costs
from subscribers. We will resolve this and other specific issues concerning the timing and degrees
of pricing flexibility and ultimate deregulation in an upcoming order.
99. To the extent that the SLC ceilings on all lines and the PICC ceilings on primary
residential and single-line business lines prevent recovery of the full common line revenues
permitted by our price cap rules, incumbent price cap LECs may recover the shortfall through a
flat-rated, per-line PICC on non-primary residential and multi-line business lines.(121) The
incumbent LECs will calculate this additional charge by dividing residual permitted common line
revenues by the number of non-primary residential and multi-line business lines served by the
LEC. For the first year, the ceiling on the PICC will be $1.50 per month for non-primary
residential lines and $2.75 per month for multi-line business lines. To the extent that these PICCs
do not recover an incumbent LEC's remaining permitted CCL revenues, incumbent LECs will be
allowed to recover any such residual common line revenues through per-minute CCL charges
assessed on originating access minutes. The per-minute charges shall be calculated based on
forecasts of originating access minutes as currently provided in our rules.(122)
100. We generally will not permit incumbent LECs to recover residual common line revenues through per-minute CCL charges assessed on terminating access minutes, because terminating minutes are not likely to be subject to as much competitive pressure as originating access minutes. As discussed in Section III.D, below, we are similarly adopting a rule that requires that incumbent LECs be allowed to recover certain residual transport interconnection charge costs through access charges assessed on originating minutes. In placing these various residual costs on originating minutes only, however, we do not want to destroy the salutary effects of our access charge reforms by creating higher prices for originating minutes than exist under our current access charge rules. To the extent, therefore, that the sum of local switching charges, the per-minute CCL charge, the per-minute residual TIC, and any per-minute charges related to marketing expenses(123) exceed the current sum of local switching charges and the per-minute CCL charge and TIC assessed on originating minutes, the excess may be recovered through charges assessed on terminating minutes. We emphasize that any such amounts recovered through charges assessed on terminating minutes would be temporary and would be phased out as the non-primary residential SLC ceilings and the PICC ceilings are adjusted, and in any event, no later than July 1, 2000.
101. Beginning January 1, 1999, the PICC will be adjusted for inflation and will increase
by a maximum of $1.00 per year for non-primary residential lines and $1.50 per year for multi-line
business lines, until incumbent LECs recover all their permitted common line revenues through a
combination of flat-rated SLC and PICCs. These increases will cease as the PICCs on primary
residential and single-line business lines recover more of the common line revenues permitted
under price cap rules. In addition, as the incumbent price cap LECs increase their PICCs for
primary residential and single-line business lines, they shall reduce the amount recovered from the
residual per-minute CCL charges and reduce their PICCs on non-primary residential and multi-line business lines by a corresponding amount in accordance with the procedures described below.
While the plan we adopt today does not eliminate, even on a flat-rated basis, transitional higher
rates for business users, it redistributes collection from a very few high-volume users to business
users generally. This will permit the charges to be sustainable while we finish refining access
charges and implement a forward-looking cost-based universal service mechanism for rural,
insular, and high cost areas. We also acknowledge that our plan will require customers with
multiple telephone lines to contribute, for a limited period, to the recovery of common line costs
that incumbent LECs incur to serve single-line customers. We conclude that this aspect of the
plan is a reasonable measure to avoid an adverse impact on residential customers.
102. As the PICC ceilings on primary residential and single-line business lines increase,
the residual per-minute CCL charge will decrease until it is eliminated. After the residual per-minute CCL is eliminated, incumbent LECs shall make further reductions due to the increase in
the PICC ceilings for primary residential and single-line business lines, first to the PICCs on multi-line business lines until the flat-rated PICCs for those lines are equal to the flat-rated PICCs for
non-primary residential lines. Thereafter, incumbent LECs shall apply the annual reductions to
both classes of customers equally until the combined SLC and PICCs for primary residential and
single-line business lines recover the full average per-line common line revenues permitted under
our price cap rules, and the additional flat-rated PICCs on non-primary residential and multi-line
business lines no longer recover common line revenues.(124) If the incumbent LEC's per-line
common line revenues permitted by our price cap rules exceed the SLC ceiling for non-primary
residential lines and multi-line businesses, the flat-rated charges will continue to apply to those
lines so that the sum of the SLCs and flat-rated charges is equal to the permitted common line
revenues. Once the multi-line PICC no longer recovers any common line revenues, the
calculation of the SLC will be changed from the average per-line interstate allocation of revenue
requirement(125) to the average per-line common line revenues permitted by our current price cap
rules. With this change, the LEC will not be able to recover more than the average per-line
common line revenues permitted under our price cap rules from any access line. We note that at
least one party contends that under our current rules, certain price cap carriers could be required
to charge negative carrier common line charges, if the revenues recovered through the SLC,
which continues to be developed on a cost-of-service basis, exceed the PCI for the common line
basket.(126) This adjustment to the calculation of the SLC will solve any such problem.
103. We are concerned that assessing PICCs on multi-line business lines may create an
artificial and undue incentive for some multi-line customers to convert from switched access to
special access to avoid the multi-line PICC charges. A migration of multi-line customers to
special access could significantly reduce the amount of revenue that could be recovered through
per-minute charges, and would result in higher PICCs for the non-primary residential and multi-line business lines remaining on the switched network. We tentatively conclude that we should
therefore apply PICCs to purchasers of special access lines as well. The NPRM, however, may
not have provided sufficient notice to interested parties that we might apply certain rate structure
modifications to special access lines. We therefore seek comment on this issue in Section VII.A,
below.
104. We reject claims that a flat-rated, per-line recovery mechanism assessed on IXCs
would be inconsistent with section 254(b)(127) which requires "equitable and nondiscriminatory
contribution to universal service" by all telecommunications providers.(128) The PICC is not a
universal service mechanism, but rather a flat-rated charge that recovers local loop costs in a cost-causative manner. Numerous commenters responding to the NPRM support a flat-rated cost
recovery mechanism,(129) and we conclude that the PICC is preferable to the other proposals made
in the NPRM. We agree with MCI and the Minnesota Independent Coalition that proposals based
on the number of trunks or ports that an IXC purchases from the incumbent LEC may encourage
IXCs to use fewer trunks or ports than are needed and thereby have an adverse effect on service
quality. We decline to adopt the bulk billing approach set out in the NPRM, as well as
Ameritech's proposed Loop/Port Recovery charge and the approach proposed by the Competition
Policy Institute, because these mechanisms are substantially affected by usage and do not reflect
the NTS manner in which common line costs are incurred. The Alliance for Public Technology's
proposed "facilities charge," which is a hybrid system that accounts both for level of use and
intensity of use by all telecommunication carriers that use the local network, is flawed because it is
based partly on usage and is complex and administratively burdensome. A cost-recovery
mechanism that recovers common line costs through flat-rated charges imposed on end-user
customers and IXCs is an administratively simple mechanism. Further, under our plan, interstate
common line access charges will become more closely aligned with allocated interstate costs than
they would be under any of the alternative proposals.
105. The plan we describe above should move us from the pricing scheme that has been in place for more than a decade to a flat-rated pricing scheme that seeks to promote competition, while balancing universal service considerations. We recognize that the modifications we adopt in this Order do not eliminate all the existing support flows. The modifications, however, do move to eliminate subsidies built into the current rate structure, to an extent that is compatible with preserving the universal service goals of providing support to primary residential and single-line business and to customers in high-cost areas pursuant to the mandate of section 254. As we set final support levels for universal service, address any legal issues related to the transition from embedded to forward-looking economic costs, and factor in the development of competition, we will identify and deal with any remaining legal issues relating to the recovery of these revenues. In addition, the plan we are adopting allows incumbent price cap LECs to recover costs in the manner that reflects the way in which they are incurred. We believe that this realignment of rates with costs will reduce the per-minute access charges assessed on IXCs and benefit consumers through lower long-distance rates, as well as create a pro-competitive local exchange market in which LECs will be able to compete more efficiently.
4. Common Line PCI Formula
a. Background
106. When we adopted price cap regulation in 1990, we established a separate common
line basket in order to balance the price cap goal of economically efficient prices with important
goals, such as universal service, that were reflected in common line rates prior to the adoption of
price caps. Because common line costs are non-traffic sensitive, growth in demand leads to a
reduction in average per-minute common line charges. Therefore, in the LEC Price Cap Order,
we established a price cap index ("PCI") formula for the price cap basket that differed from the
PCI formula we established for the other three baskets, to ensure that carrier common line
charges declined as common line demand increased.(130) Specifically, we added a term, "g/2," to
the common line PCI formula, to represent half the growth in demand per line in the prior year.(131)
This adjustment was made because we originally concluded that both LECs and IXCs have the
ability to influence common line growth, and that both LECs and IXCs should benefit from
increases in demand.(132)
107. In the LEC Price Cap Performance Review, we found that incumbent LECs in fact
have little influence over per-minute common line demand, and tentatively concluded that we
should remove the "g" term from the common line formula,(133) because including an industry-wide
moving average X-Factor in the common line formula might tend to double-count demand
growth. We sought comment, in the Price Cap Fourth Further NPRM, whether to apply the
same PCI formula to the common line basket that we use for the other baskets if we were to
adopt a TFP-based X-Factor.(134) We also invited comment on whether we could eliminate g/2
from the common line formula if we retain a separate common line formula.(135) In this Order, we
adopt a plan that should quickly convert the CCL charge from a per-minute charge to a flat-rated
per-line charge assessed on interexchange carriers. We also revise the common line formula to
reflect the phase out of the CCL charge.
b. Discussion
108. We conclude that the separate common line PCI formula should be eliminated, and
that the PCI formula for the traffic-sensitive and trunking baskets should be used for the common
line basket, once traffic-sensitive CCL charges have been eliminated. In this Order, we have
reduced substantially traffic-sensitive CCL charges, and replaced them with the per-line PICC.
The remaining traffic-sensitive CCL charges imposed by incumbent price cap LECs will be
reduced and then eliminated over the next two or three years. Once common line costs are
recovered solely through per-line charges, increased minutes will not affect common line
recovery. Therefore, when the traffic-sensitive CCL charges have been eliminated, it will no
longer be necessary to ensure that CCL rates decline as per-minute demand increases. Incumbent
price cap LECs that no longer assess per-minute CCL charges will use the same PCI formula for
the common line basket as they use for the traffic-sensitive and trunking baskets.
109. In the LEC Price Cap Order, we established "g/2" as the common line PCI formula
because we believed that because both LECs and IXCs contributed to encouraging common line
demand growth, both LECs and IXCs should share in the benefits of common line demand
growth.(136) In the LEC Price Cap Performance Review, we tentatively concluded that IXCs
contributed more to common line demand growth, but declined to revise the common line formula
at that time because we were contemplating eliminating the common line PCI formula completely,
and because we did not wish to create unnecessary rate churn.(137) To avoid unnecessary rate churn
here, we decide to retain "g/2" while carriers continue to charge per-minute CCL charges.
110. We revise sections 61.45(c) and 61.46(d), which govern the common line PCI and
API, respectively, to reflect our revisions to the common line rate structure in the common line
PCI formula. First, we redesignate section 61.45(c) as 61.45(c)(1) and adopt a new section
61.45(c)(2) that requires price cap LECs to use the separate common line formula only while they
continue to charge per-minute CCL charges. Section 61.45(c)(2) also states that the common line
PCI will be governed by the same PCI formula LECs use for the traffic-sensitive and trunking
baskets. Second, we redesignate section 61.46(d) as 61.46(d)(1), and amend section 61.46(d)(1)
to recognize that LECs now impose PICC charges as well as CCL charges on IXCs. We also
adopt a new section 61.46(d)(2) to govern PICC charges once per-minute CCL charges have
been phased out. These revisions are set forth in Appendix C of this Order.
5. Assessment of SLCs and PICCs on Derived Channels
a. Background
111. Integrated services digital network (ISDN) services permit digital transmission over
ordinary local loops through the use of advanced hardware and software.(138) ISDN offers data
transmission at higher speeds and with greater reliability than standard analog service. Most
incumbent LECs currently offer two types of ISDN service, Basic Rate Interface (BRI) service
and Primary Rate Interface (PRI) service. BRI service allows a subscriber to obtain two voice-grade-equivalent channels and a signalling/data channel over an ordinary local loop, which
generally is provided over a single twisted pair of copper wires.(139) PRI service allows subscribers
to obtain 23 voice-grade-equivalent channels and one data signalling channel over two pairs of
twisted copper wires.(140) BRI service generally is used by individuals and small businesses, and
PRI service generally is used by larger businesses. LEC services other than ISDN use derived
channel technology to provide multiple channels over a single facility.(141) The LECs also use
derived channel technologies within their networks, for example, to provide customers with
individual local loops. In such situations, the end user has not generally requested derived channel
service and thus most likely is not aware that the LEC is using this technology.
112. On May 30, 1995, we released a Notice of Proposed Rulemaking seeking comment
on the application of SLCs to ISDN and other derived channel services.(142) In that NPRM, we
noted that our current rules, which assess one SLC per derived channel, may discourage efficient
use of ISDN services,(143) and we sought comment on several options, ranging from continuation of
the current rules applying one SLC to each derived channel to requiring LECs to assess one SLC
per each pair of copper wires or each physical facility.(144) Other options presented in the NPRM
included: (1) basing the application of SLCs on a ratio of the average LEC cost of providing a
derived channel service, including the trunk or line card costs, to the average cost of providing an
ordinary local loop or T-1 facility; (2) applying one SLC for every two derived channels; (3)
reducing the number of SLCs applied to derived channel services while increasing slightly the
SLC rates; or (4) giving LECs flexibility concerning the number of SLCs they assess for derived
channel services, at the same time adjusting the price cap rules to prevent an increase in CCL
charges.(145)
113. In addition to the comments filed in response to the ISDN SLC NPRM, several
BOCs provided data on the relative NTS costs of single and derived channel services.(146) The cost
data included information about all NTS cost components, including components located in the
central office, such as line cards. As shown in Table 1 below, the cost data indicates that the ratio
of NTS loop costs of BRI ISDN to standard analog service is approximately 1 to 1. The ratio of
NTS loop costs of PRI ISDN to standard analog service, excluding NYNEX's data, is
approximately 5 to 1. As shown in Table 2, NYNEX's data appear to be outliers because the
ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost
twice those of other incumbent LECs. NYNEX's data, therefore, are excluded from the
calculation of the average ratio for PRI ISDN to standard analog service.
Ratio of costs of standard analog service to BRI ISDN service
| Outside Plant (loop only) costs | All NTS costs | |
| Ameritech | 1:1.07 | 1:1.45 |
| Bell Atlantic | 1:1.01 | 1:1.36 |
| NYNEX | 1:0.85 | 1:1.23 |
| Pacific Bell | 1:1.05 | 1:1.13 |
| US West | 1:0.80 | 1:1.07 |
| Average ratio of costs | 1:0.96* | 1:1.24* |
Ratio of costs of standard analog service to PRI ISDN service
| Outside Plant (loop only) costs | Outside Plant (loop only) costs (excluding NYNEX data) | All NTS costs | All NTS costs (excluding NYNEX data) | |
| Ameritech | 1:5.68 | 1:5.68 | 1:8.9 | 1:8.9 |
| Bell Atlantic | 1:4.13 | 1:4.13 | 1:15.80 | 1:15.80 |
| NYNEX | 1:10.94 | excluded | 1:27.74 | excluded |
| Pacific Bell | 1:4.67 | 1:4.67 | 1:8.70 | 1:8.70 |
| US West | 1:5.33 | 1:5.33 | 1:10.60 | 1:10.60 |
| Average ratio of costs | 1:6.5* | 1:4.95* | 1:15.13* | 1:10.5* |
*Averages may differ due to rounding.
114. We incorporated by reference, in the current proceeding, all pleadings filed in
response to the 1995 ISDN SLC NPRM, as listed in Appendix A of that order.(147) In the NPRM
for the current proceeding, we invited comments on the effect of the 1996 Act on determining
how many SLCs should be applied to ISDN services. We also sought comment on whether
mandatory rate structures or rate caps should be prescribed for ISDN service or other derived
channel services.(148)
b. Discussion
115. Consistent with the goal of this Order of realigning cost recovery in a manner that
more closely reflects the manner in which those costs are incurred, we conclude that we should
establish separate SLC rates for ISDN service based on the NTS loop costs of BRI and PRI
ISDN service. We agree with the majority of commenters that a SLC for ISDN service equal to a
SLC for single-channel analog service multiplied by the number of derived channels exceeds the
NTS costs of ISDN service and therefore artificially discourages efficient use of ISDN. We find
that basing ISDN SLCs on relative costs is most likely to assign costs of ISDN service to
customers who subscribe to, and benefit from, that service. Further, we find that the current
SLC-per-derived channel rule requires LECs to assess charges that are not related to the NTS
costs of the service provided.
116. As set out above, the record indicates that the NTS loop costs of PRI ISDN service,
excluding switching costs, reflect a cost ratio of approximately 5:1 compared to the NTS loop
costs of single-channel analog service. We therefore conclude that we should amend our rules to
establish, effective July 1, 1997, a SLC rate for PRI ISDN service equal to five times the
incumbent LEC's average per-line interstate-allocated common line costs, subject to a ceiling of
five times $9.00, adjusted annually for inflation. Similarly, the record shows that the NTS loop
costs of BRI ISDN service, excluding NTS switching costs, when rounded to the nearest half
SLC, reflect a 1:1 cost ratio relative to the NTS loop costs of single-channel analog service.
Therefore, we here amend our rules to provide for a SLC rate for BRI ISDN service equal to the
incumbent LEC's average per-line interstate-allocated common line costs, subject to the same
ceilings otherwise applicable to non-primary residential lines. Thus, beginning January 1, 1998,
the SLC ceiling for BRI ISDN service will be set at the lesser of the incumbent LEC's average
per-line interstate-allocated costs, or $5.00. Each subsequent year, beginning January 1, 1999,
the SLC ceiling will be adjusted for inflation and increased by $1.00 per line, until the ceiling
equals that permitted for multi-line business lines.
117. The cost data submitted by the BOCs in response to our request for information
includes information about all NTS cost components, including components located in the central
office, such as line cards and trunk cards. The data confirm that line cards and trunk cards for PRI
ISDN service in particular constitute a significant portion of the total NTS costs that are
dedicated to the provision of service to the subscriber, and that ISDN line cards and trunk cards
are many times more expensive than the cards used for standard analog service. As discussed in
Section III.B, below, LECs will be required to recover the difference between the cost of an
ISDN line card and the cost of a line card used for basic, analog service through a separate charge
assessed directly on ISDN end users. For purposes of determining the rate levels for ISDN SLCs,
therefore, we considered only the NTS loop costs associated with providing ISDN service.
118. As with other non-primary residential and multi-line business lines, incumbent price
cap LECs may assess flat-rated PICCs on ISDN service to the extent necessary to recover the
shortfall of common line revenues caused by SLC ceilings. Incumbent price cap LECs are
permitted to assess one PICC for BRI ISDN service and five PICCs for PRI ISDN service. It is
necessary for incumbent LECs to be able to assess up to five PICCs on PRI ISDN service
because, as discussed above, the record indicates that the NTS loop costs of providing PRI ISDN
service, excluding switching costs, reflect a cost ratio of approximately 5:1 compared to NTS
loop costs of single-channel analog service. Because the PICC recovers NTS common line costs
not recovered through the SLC, prohibiting incumbent LECs from charging as many as five
PICCs for PRI ISDN service could prevent them from recovering the common line costs
associated with providing PRI ISDN service in cases where the common line costs exceed the
SLC ceiling.
119. Incumbent LECs shall assess PICCs on BRI and PRI ISDN services in conjunction
with those on the non-primary residential and multi-line business lines. For the first year, the BRI
ISDN PICC will be capped at $1.50 per month, and the PRI ISDN PICC will be capped at $2.75
per month. Each subsequent year these two PICCs shall increase by no more than an inflation
adjustment, plus $1.00 and $1.50, respectively.
120. The record does not contain sufficient information to enable us to determine the relative NTS costs of derived channel services other than ISDN. We therefore limit our decision to BRI and PRI ISDN service. We agree with NYNEX that we should not apply the rules we adopt here regarding SLCs when the LEC uses derived channel technology but the end user has not requested derived channel service. Unless a subscriber orders ISDN or another service that requires derived channel technology, we see no reason to vary from our general rule that the incumbent LEC should charge one SLC for each channel regardless of how it is provisioned.(149)
121. We are not persuaded by PacTel's argument that ISDN service is not an interstate
service and should not, therefore, be regulated by the Commission. ISDN lines are not directly
assigned to the intrastate jurisdiction, but are treated as common lines. The Commission's
jurisdiction thus includes the interstate-allocated portion of the costs of the ISDN lines. The rules
we adopt in this order govern only the manner in which LECs recover the interstate-allocated
common line costs associated with providing ISDN service.
122. Before the Commission initiated CC Docket No. 95-72, Bell Atlantic, Pacific Bell,
GTE, Cincinnati Bell, U S West, and Bellsouth sought waivers of Section 69.104 of the
Commission's rules as it applies to ISDN service.(150) In their petitions, these LECs urged the
Commission to amend its rules regarding the application of SLCs to ISDN service. We have
amended our rules regarding the applications of SLCs to ISDN service. We therefore dismiss the
waiver petitions of Bell Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and Bellsouth on
the grounds that they are moot.
B. Local Switching
1. Non-Traffic Sensitive Charges
a. Background
123. The local switch connects subscriber lines both with other local subscriber lines and
with interoffice dedicated and common trunks. A local switch consists of (1) an analog or digital
switching system; and (2) line and trunk cards, which connect subscriber lines and interoffice
trunks, respectively, to the switch. Because all of this equipment is deployed within the central
office, all of its costs are assigned to the central office switching accounts of the Commission's
Uniform System of Accounts and to the local switching category of central office expenses for
jurisdictional separations purposes.(151) The interstate portion of these costs is currently recovered
through per-minute local switching charges levied on IXCs.(152)
124. In the NPRM we observed that a significant portion of local switching costs may not
vary with usage. For example, the cost of line cards or line-side ports appears to vary with the
number of loops connected to the switch, not with the level of traffic over the loops. We
tentatively concluded that LECs should not recover these costs through per-minute charges.
Instead, we tentatively concluded that it is more reasonable and economically efficient to recover
costs of equipment dedicated to individual customers, such as line-side ports and trunk ports
associated with dedicated transport, through flat-rated charges. Trunk-side ports not associated
with dedicated transport and the central processing portion of the switch, on the other hand, are
shared among multiple carriers. We asked if these costs are driven by usage or by the number of
lines and trunks served by the switch. We sought comment on whether rate structures for shared
local switching facilities should consist of usage-sensitive, flat-rated, or a combination of both
flat-rated and usage-sensitive rate elements. We asked commenters to recommend methods of
identifying non-traffic-sensitive (NTS) local switching costs.(153)
b. Discussion
125. We conclude that, consistent with principles of cost-causation and economic
efficiency, NTS costs associated with local switching should be recovered on a flat-rated, rather
than usage sensitive, basis. The record before us indicates clearly that the costs of the line side
port (including the line card, protector, and main distribution frame)are NTS. We conclude,
therefore, that these costs should be recovered through flat-rated charges. Accordingly, for price-cap LECs, we reassign all line-side port costs from the Local Switching rate element(154) to the
Common Line rate elements.(155) For price cap companies, these costs will be recovered through
the common line rate elements, including the SLC and flat-rated PICC, described in Section
III.A., above.
126. LECs incur differing costs for line ports used in the provision of different services.
The SLC and PICC cost recovery mechanisms will recover only the cost of a line port used to
provide basic, analog service, whether the end user has basic, analog service, or another form of
service. As discussed above, data submitted in response to the ISDN SLC NPRM show that
ISDN line cards cost significantly more than line cards associated with a basic, analog, subscriber
line.(156) To the extent that the costs of ISDN line ports, and line ports associated with other
services, exceed the costs of a port used for basic, analog service, price cap LECs will recover
this excess amount through a separate end-user charge.
127. We conclude that the costs of a dedicated trunk port (including the trunk card and
DS1/voice-grade multiplexers, if needed) should be recovered on a flat-rated basis because these
costs are also NTS in nature. These costs should be recovered from the carrier purchasing the
dedicated trunk terminated by that port. Similarly, we conclude that the costs of shared trunk
ports should be recovered on a per-minute of use basis from the users of common transport
trunks. We therefore establish two separate rate elements for recovery of these costs. Price cap
LECs may recover the costs of each dedicated trunk port on a flat-rated basis from the purchaser
of the dedicated trunk terminating at the port. In order to ensure that these purchasers of
dedicated trunks do not pay the costs of shared trunk ports that they do not use, price cap LECs
must also establish a usage-sensitive rate element for recovery of the costs of shared trunk ports.
The costs of these shared trunk ports will be recovered on a per minute-of-use basis from users of
common transport trunks terminating at these ports. We therefore add a separate category for all
trunk port costs within the traffic sensitive basket, 47 C.F.R. § 61.42(e)(1). As with the other
categories within this basket, the "trunk ports" category will have an upper service band index of
+5 percent and no lower service band index.
128. We do not establish a fixed percentage of local switching costs that incumbent LECs
must reassign to the Common Line basket or newly created Trunk Cards and Ports service
category as NTS costs. In light of the widely varying estimates in the record, we conclude that
the NTS portion of local switching costs likely varies among LEC switches. Accordingly, we
require each price cap LEC to conduct a cost study to determine the geographically-averaged
portion of local switching costs that is attributable to the line-side ports, as defined above, and to
dedicated trunk side ports. These amounts, including cost support, should be reflected in the
access charge elements filed in the LEC's access tariff effective January 1, 1998. Once
established, this service category, like all others in the traffic sensitive basket, shall be subject to
price cap adjustments for inflation and productivity. Although some LECs have obtained
authority to geographically deaverage transport rates under a zone density pricing plan, because
the costs of trunk ports will remain within the Traffic Sensitive basket, we conclude that trunk
port costs should remain geographically averaged for now. We will consider deaveraging of these
costs in connection with our assessment of other forms of pricing flexibility in a subsequent Order
in this proceeding.
129. We direct all price cap LECs to include in their tariff filings implementing this Order
an exogenous downward adjustment to the Traffic Sensitive basket, 47 C.F.R. § 61.42(d)(2), and
corresponding exogenous upward adjustment to the Common Line Interstate Access Elements
basket, 47 C.F.R. § 61.42(d)(1) to reflect the recovery of the interstate NTS costs of line-side
ports from the Common Line rate elements.
130. USTA, SNET, and BA/NYNEX argue that we should not codify any specific local
switching rate elements. We disagree. In the NPRM, we proposed to eliminate local switching
rate elements only when an actual competitive presence is established for an exchange access
service in a relevant geographic area, as measured by (1) demonstrated presence of competition;
(2) full implementation of competitively neutral universal service support mechanisms; and (3)
credible and timely enforcement of pro-competitive rules.(157) We tentatively concluded in the
NPRM that, in the absence of actual competition, the mere availability of unbundled network
elements under efficient rate structures would not provide incumbent LECs with sufficient
incentive to adopt efficient, cost-causative access rate elements or structures.(158) The record
before us indicates that flat-rated pricing for line ports and dedicated trunk ports is efficient, and
reflective of cost causation. We will first amend the baseline switched access rate structure to
reflect this determination. Then, in a subsequent Report and Order in this docket, we will
determine when and under what circumstances we will allow incumbent LECs greater flexibility in
designing interstate access rate structures.
131. In addition, despite arguments from BA/NYNEX to the contrary, we find that the
benefits to be gained from a more efficient, cost-causative rate structure outweigh the burden of
establishing these flat-rate elements. Independent estimates from Cable & Wireless and USTA,
both using NYNEX data, indicate that as much as, or even more than, half of local switching
costs may be NTS.(159) Since the current, per-minute rate structure for the local switch was
established, digital switches have become increasingly predominant in the network.(160) Given
USTA's estimate that six percent of the costs of an analog switch and 51 percent of the costs of a
digital switch are NTS,(161) we find that local switching costs have become increasingly NTS and
now warrant the creation of a NTS recovery mechanism. Including NTS local switching costs in
per-minute access charges contributes significantly toward unnecessarily high per-minute long
distance rates for all customers. Restructuring rates to reflect more accurately cost-causation will
promote competition, reduce per-minute charges, stimulate long-distance usage, and improve the
overall efficiency of the rate structure.
132. We also reject proposals to recover the entire NTS portion of local switching costs
from the new universal service support mechanisms.(162) In the Universal Service Order, we
agreed with the Joint Board that we should establish a "nationwide benchmark based on average
revenues per line for local, discretionary, interstate and intrastate access services, and other
telecommunications revenues that will be used with either a cost model or a cost study to
determine the level of support carriers will receive for lines in a particular geographic area."(163)
We find that it would be inconsistent with the Joint Board's recommendation if we were to
mandate recovery of NTS local switching costs directly from universal service support
mechanisms, independent of the revenue benchmark, and the percentage of high cost support
recoverable from the federal universal service mechanisms at this time.(164)
133. It is not necessary to await action by the Joint Board on Separations(165) before
revising the recovery mechanisms applicable to the interstate portion of the costs attributed to line
ports and dedicated trunk ports. Our revision of the mechanisms used to recover the interstate
portion of the costs in Part 32 local switching accounts that the jurisdictional separations process
allocates to the interstate jurisdiction will have no direct effect on that allocation because these
costs will continue to be separated in Part 36 based on relative dial-equipment-minutes of use.
The fact that local switching costs are apportioned between jurisdictions based on a relative
interstate and state usage is irrelevant to the choice of pricing structure for recovering those costs,
however. Economic efficiency does not require the jurisdictional separation of NTS costs be
based on an NTS (flat) factor. The jurisdictional separations process only determines whether the
billed charges (flat or variable) are characterized as intrastate or interstate. Economic efficiency
does require that NTS costs, regardless of how they are separated, be recovered in each
jurisdiction through flat charges. Thus, there was no loss of economic efficiency when the
Commission, agreeing with the recommendation of the Joint Board, simplified the separation of
local switching by eliminating the former distinction between NTS and traffic-sensitive costs and
creating a single switching category that is assigned to the jurisdictions based on dial equipment
minutes.(166)
134. On the other hand, economic efficiency will be increased if local switching costs
(regardless of the jurisdiction to which they are assigned) are recovered through a combination of
flat charges for NTS costs and traffic sensitive charges for the remainder. Because, at the time
that the Commission established the current jurisdictional separations process, it did not consider
the distinction between the switch and the port that we address today, the current jurisdictional
separations process does not distinguish port costs from the costs of the local switch itself.(167) We
have the authority and obligation, independent from the Joint Board, to establish appropriate rate
structures for recovering the costs the jurisdictional separations process allocates to the interstate
jurisdiction.(168) We take steps today to address the fact that the costs of line ports and dedicated
trunk ports are more properly recovered for Part 69 purposes from the Common Line and Direct-Trunked Transport rate elements as NTS charges, instead of from the traffic sensitive Local
Switching element. We will, however, examine any jurisdictional separations issues presented by
NTS switching costs in our upcoming separations NPRM.
135. Costs may vary for shared local switching facilities according to the number of lines
connected, or the traffic over those lines.(169) In the former case, the costs of the shared facility
may be recovered in the most cost-causative manner by imposing a proportionate share of the
costs on each line while, in the latter case, usage-sensitive charges may better reflect cost
causation. With respect to such shared local switching facilities, including the switching matrix
and shared trunk ports, we gave states flexibility in our interconnection proceeding to establish
either per-minute usage charges, or flat-rated charges, as appropriate.(170) In the access context,
however, we will continue to require price cap incumbent LECs to recover the costs of shared
local switching facilities, including the central processor, switching matrix, and shared trunk ports,
on a per-minute basis. On the basis of the information in the record before us, it would be
difficult to identify the NTS and traffic-sensitive portions of the costs of shared switching facilities
and to verify the accuracy of LEC studies attempting to do so.(171) Therefore, until we gain more
experience with rate structures for unbundled network elements that are implemented pursuant to
Sections 251 and 252 and that segregate these costs into traffic-sensitive and NTS components,
we will continue to adhere to the current, per-minute rate structure for shared switching facilities.
2. Traffic Sensitive Charges
136. In the NPRM, we sought comment on several alternative rate structures for recovery
of usage-sensitive local switching costs. Specifically, we sought comment on whether the
Commission should require or permit LECs to establish a separate charge for call setup, and if so,
whether the charge should be levied on all call attempts, or only completed calls.(172) We also
sought comment on whether the Commission should require or permit incumbent LECs to
establish peak and off-peak pricing structures for shared local switching facilities,(173) and whether
the existing per-minute rate structure adequately reflects the manner in which traffic-sensitive
local switching costs are incurred.(174)
a. Call Setup Charges
137. Among price cap carriers today, most call setup is performed with out-of-band
signalling, generally using the SS7 signalling network.(175) In light of the widely varying estimates
of the costs of call setup in the record,(176) we conclude that these costs may be more than a de
minimis portion of the costs of local switching. The record indicates that these call setup charges
are incurred primarily on a per-call rather than a per-minute basis.(177) By requiring recovery the
costs of call setup on a per-minute basis, our current rate structure mandates an implicit subsidy
running from customers that make lengthy calls to those that make many short-duration calls.
Therefore, we find that we should not continue to require the price cap LECs to recover costs of
call setup from per-minute local switching charges.
138. Accordingly, we will revise Section 69.106 of our rules(178) to permit, but not to
require, price cap LECs to establish a separate per-call setup charge assessed on IXCs for all calls
handed off to the IXC's point of presence (POP). As noted earlier, because an incumbent LEC
originating an interstate call incurs call setup costs even if the call is not completed at the called
location, we permit these LECs to recover call setup charges on all originating interstate calls that
are handed off to the IXC's POP, and on all terminating calls that are received from an IXC's
POP. With respect to originating call attempts, we agree with the California Commission that,
when the call is handed off to the IXC's POP, the incumbent LEC's switches and signalling
network have performed their functions and the incumbent LEC has incurred the full cost of call
setup.(179) We also permit incumbent LECs to impose a setup charge for terminating calls received
from an IXC's POP, whether or not that call is completed at the called location, because the
incumbent LEC signalling network in either case must perform its setup function.
139. We conclude that the call setup charge should not be mandatory because some
incumbent LECs may determine that call setup costs either are in fact de minimis or are otherwise
outweighed by the costs of the network and operations support systems (OSS) upgrades
necessary to install measurement and billing systems. In such cases, it would be economically
inefficient to mandate a separate call-setup charge because the costs of collecting the charge
might exceed the revenue collected from the charge itself. We are aware that, by making the call-setup charge permissive only, we may allow certain incumbent LECs' rate structures to continue
to subsidize short-duration calls. We nevertheless conclude that we should not mandate separate
collection of a call-setup charge in cases where the LEC determines that the costs of eliminating
this subsidy exceed the benefits to be gained. In contrast, we find that those incumbent LECs that
either have or obtain the ability to implement a call-setup charge should have the flexibility to
adopt this cost-causative rate structure.
140. No party disputes the fact that incumbent LECs incur costs of call setup for call
attempts, in addition to completed calls. Some parties, however, argue that call setup charges
should be assessed only on completed calls in order to reduce customer confusion. We anticipate
that consumer confusion will be minimal, however, because the call setup charge we permit will
be imposed on IXCs, not end users. We find it unlikely that IXCs would choose to pass this
charge along to their customers in the form of a separate charge per call attempt. For instance,
IXCs today generally charge their customers for completed long distance calls even though they
incur access charges for many uncompleted calls as well.(180)
141. Other commenters state that setup charges imposed on call attempts will result in
charges being imposed on a caller that has not received service. LCI asserts that "customers do
not expect to pay for uncompleted call attempts, and the carriers are not entitled to recover their
costs of uncompleted call attempts,"(181) citing the Commission's decision in VIA USA, Ltd.(182) The
text cited from that order, however, addresses only customer expectations that have arisen
because our current rules make no explicit provision for the recovery of costs of an uncompleted
call. We now find that a call setup charge, assessed to an IXC, should not be prohibited because a
rate structure that recovers some switching costs through a per-call setup charge on all call
attempts is more cost-causative than one limited to the recovery of costs only from completed
calls.
142. Still other commenters argue that, if we permit call setup charges to be imposed for
call attempts, we will, at best, open the door to unauditable billing errors or, at worst, facilitate
incumbent LEC fraud and duplicity. These commenters argue that the incumbent LEC will be
able to generate additional revenue, or degrade the service of IXC competitors, by blocking calls
at its own switch. Based on this record, we conclude that these concerns are not well-founded.
By permitting a setup charge only for originating call attempts that are handed off to the IXC's
POP, we minimize the originating incumbent LEC's incentive to engage in this type of activity
because the incumbent LEC will receive no compensation for calls blocked at its own switch. In
addition, incumbent LECs have compelling incentives to deliver interstate calls to an IXC's POP.
As competition develops for local service, it appears doubtful that an incumbent LEC would find
it advantageous to block deliberately interstate calls placed by their end user customers. Such
practices would encourage entry by new competitors and increase the interest of affected end
users in finding a more reliable service provider. We also find it unlikely that either originating or
terminating incumbent LECs would intentionally risk the collection of often significant per-minute
access charge revenues on a completed long-distance call in order to collect additional, much
smaller per-call setup charges. Finally, we know of no significant allegations of degraded service
quality attributable to the very similar current regime, under which incumbent LECs collect at
least a full minute of originating access revenues on uncompleted calls delivered to the IXC's
POP. We are prepared, however, to investigate claims that an incumbent LEC is blocking calls in
an intentional or discriminatory manner.
143. Several large business customers that make substantial numbers of short-duration
calls, such as those associated with credit card authorization, automatic teller machine operation,
or other transaction-oriented data transfers, argue that imposing a call setup charge will be
disruptive to their businesses and may force them to use alternatives to the public switched
network.(183) These commenters are the primary beneficiaries of the subsidy that is implicit in the
current recovery of call setup costs on a per-minute basis, running from customers that make
lengthy calls to those that make many short-duration calls. The existing rate structure may well
have encouraged users who make many short duration calls to use the public-switched network in
inefficient ways. Rate structures that are aligned with cost causation, on the other hand, should
encourage economically-efficient use of the telecommunications network. Transaction-oriented
users of the network may be motivated to develop more economically efficient processing
methods, with resulting economic benefits. Because this group of IXC customers may need time
to adjust to the new rate structure, however, incumbent LECs choosing to impose a per-call setup
charge on IXCs may do so, at the earliest, in their access tariff filings effective July 1, 1998. This
gives a customer over one year to make any necessary adjustments. This time should be sufficient
to mitigate any potential disruptive effects of this rate structure change.(184)
144. MCI asserts that there may be costs of call setup in addition to those associated with
signalling,(185) such as a portion of the switch central processor costs.(186) We limit the costs that an
incumbent LEC may recover through call setup charges, however, to those associated with
signalling because we agree with MCI that it would be extremely difficult to separate the costs of
the switch CPU and other traffic-sensitive costs into per-message and per-minute portions and to
verify that the allocation has been done properly.(187)
145. Several commenters caution that, if we permit a call setup charge, we should also
ensure that the charge does not overlap with any SS7-related charges now permitted or developed
in this proceeding.(188) Because call setup is one function of the SS7 network, some of these costs
may already be recovered through the current Part 69 SS7 rate elements.(189) Currently, Section
69.125 of our rules permits LECs to recover from IXCs only (1) a flat-rated signalling link charge
for the Dedicated Network Access Line (DNAL); and (2) a flat rated Signal Transfer Point (STP)
port termination charge.(190) While these elements recover the costs of some dedicated SS7
facilities, they do not include the usage-based signalling costs of call setup, including the costs
incurred to switch messages at the local STP, to transmit messages between an STP and the
incumbent LEC's end office or tandem switch, and to process or formulate signal information at
an end office or tandem switch.(191)
146. Currently, the setup costs of certain calls may be recovered through database query
charges, either for the line information database (LIDB)(192) or the 800 database.(193) In addition,
incumbent LECs recover some costs associated with the provision of certain signalling
information necessary for third parties to offer tandem switching through the "signalling for
tandem switching" rate element.(194)
147. Imposing a call setup charge for interexchange calls should not overlap with any of
these existing rate elements. Nevertheless, we clarify that an incumbent LEC choosing to impose
a call setup charge may not include in that charge any costs that it continues to recover either
through other local switching charges, through charges for dedicated SS7 facilities, or through
other signalling charges. In this Order, we also permit incumbent LECs to adopt a more detailed
SS7 rate structure, modeled on that currently used by Ameritech under waiver.(195) This SS7 rate
structure may permit LECs to recover a significant portion of their call setup costs without an
additional call setup charge. Given estimates in the record that SS7 is used to provide signalling
for more than 95 percent of the large LECs' customers,(196) we conclude that, in the ordinary case,
a price cap LEC will not need to use both the optional SS7 rate structure and a separate call setup
charge to recover the costs of call setup. We recognize, however, that some call setup is still
performed using in-band, multifrequency (MF) signalling, rather than out-of-band signalling
systems. Because SS7 charges will not recover costs of call setup using MF signalling, we do not
prohibit the use of both SS7 and call setup charges. We caution LECs adopting both the optional
SS7 rate structure and an additional call setup charge, however, that cost support filed with
access tariffs must clearly indicate the allocation of individual costs of call setup between these
two recovery mechanisms; the same costs cannot be double-recovered using both mechanisms.
b. Peak and Off-Peak Pricing
148. We conclude that we should not now mandate a peak-rate pricing structure for local
switching. The record reflects significant practical difficulties that may make it difficult or
impossible to establish and enforce a rational, efficient, and fair peak-rate structure as a matter of
regulation. For example, the record outlines a variety of difficulties that incumbent LECs will
confront in determining peak and off-peak hours with any degree of certainty, based on
geographic, user-type, service, and other variations. Moreover, peak usage periods may shift
over time as usage patterns change, and as competitors enter the market. Based on these
difficulties, some incumbent LECs may find it too costly or too difficult to develop, implement,
and maintain a peak-rate structure that will allow them to capture all or most of the benefits this
structure could offer.
149. We do recognize the possible efficiency of a peak-rate structure.(197) Accordingly, we
will consider whether LECs should have the flexibility to develop such peak and off-peak rate
structures for local switching on a permissive basis when we consider other issues of rate
structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.
C. Transport
150. Transport service is the component of interstate switched access consisting of
transmission between the IXC's point of presence (POP) and LEC end offices.(198) Currently,
incumbent LECs offer two basic types of interoffice transport services. The first, direct-trunked
transport, uses dedicated circuits for transport between a LEC end office and the LEC serving
wire center, or between any other two points the direct-trunked transport customer requests. The
second, tandem switched transport, uses common transport facilities to connect the end office to a
tandem switch. Common transport circuits may be used to transmit the individual calls of many
IXCs and even the incumbent LEC itself. Transport circuits dedicated to a particular access
customer connect the tandem switch to the serving wire center. Dedicated entrance circuits carry
traffic between the IXC POP and the serving wire center, whether the IXC uses direct-trunked
transport or tandem-switched transport.
151. In the NPRM, we expressed concern that some of our current Part 69 rules(199) may
require LECs to recover transport costs through rate structures that do not reflect accurately the
way these costs are incurred. We sought comment on possible revisions to many of these rate
elements.(200)
1. Entrance Facilities and Direct-Trunked Transport
a. Background
152. Entrance facilities are dedicated circuits that connect an access customer's POP with
the LEC's serving wire center. Direct-trunked transport facilities are dedicated trunks that carry
an access customer's traffic from the LEC end office to the serving wire center without switching
at the tandem switch. In the First Transport Order, we mandated an interim rate structure under
which entrance facilities and direct trunked transport are priced on a flat-rated basis, which may
be distance sensitive.(201) Initial rate levels for direct-trunked transport and entrance facilities were
presumed reasonable if they were set equal to the rates for corresponding special access service
components (special access service and special access channel termination, respectively).(202) In the
NPRM, we tentatively concluded that, because direct-trunked transport and entrance facilities
appear to be dedicated to individual customers, a flat-rated pricing structure accurately reflected
the way LECs incur the costs of these facilities.(203) We sought comment on this tentative
conclusion and on whether incumbent LECs should be permitted to offer transport services
differentiated by whether the LEC or the IXC is responsible for channel facility assignments
(CFAs).(204) We also sought comment on whether any rules in addition to the interim rules are
necessary to govern rate levels for these services.(205)
b. Discussion
153. We conclude that both entrance facilities and direct-trunked transport services
should continue to be priced on a flat-rated basis and that charges for these services may be
distance-sensitive. In the First Transport Order, we found that such a flat charge would facilitate
competition in the direct-trunked transport market and encourage incumbent LECs to make
efficient network decisions.(206) For the same reasons, and because this pricing structure is
reflective of the manner in which incumbent LECs incur the costs of provisioning these facilities,
we confirm that the interim rate structure the Commission adopted for these facilities should be
made final.
154. U S West and Sprint make a persuasive showing that, as carriers expand their use of
fiber-optic ring architecture and other modern network designs, transport costs should become
less distance sensitive because LECs may transport a call along any one of many paths to its
destination based on transient network traffic levels.(207) We conclude, however, that we need not
amend our Part 69 rules now to reflect the decreasing sensitivity of transport costs to distance.
Our rules permit, but do not mandate, the use of distance sensitive transport charges. Therefore,
if an incumbent LEC determines that its transport costs have become less distance sensitive, it
may reduce or eliminate the distance-sensitivity of its direct-trunked transport rates. For two
reasons, we expect that incumbent LECs will adjust their rates to reflect any change in the
distance sensitivity of transport costs. First, as U S West states, ring architecture will be most
prevalent, and therefore, will reduce the distance sensitivity of rates most dramatically, in densely
populated areas.(208) When an incumbent LEC obtains authority to deaverage access rates
geographically, therefore, it may choose to offer a less distance-sensitive pricing structure in more
densely populated areas than it does in less densely populated areas. Such a structure would
properly reflect the reduced distance sensitivity of the incumbent LEC's costs in more densely
populated areas. Second, as competition develops, incumbent LECs will come under increasing
market pressures to maintain rates that reflect the nature of the costs underlying the service. If
they choose not to do so, we expect that new market entrants will develop competitive service
offerings at prices more reflective of underlying costs.
155. We decline Ameritech's request in its comments for immediate flexibility to offer
new technologies to switched access customers without obtaining a Part 69 waiver or passing a
public interest test.(209) In our Third Report and Order in the Price Cap Performance Review for
Local Exchange Carriers (Price Cap Performance Review Third Report and Order), adopted
along with the NPRM in this proceeding, we eliminated the need for a Part 69 waiver for new
services, and instead required incumbent LECs to file a petition demonstrating that introduction of
the new service would be consistent with the public interest.(210) Such petitions will give LECs that
desire to do so the opportunity to make their cases and receive the requested flexibility.(211) This
procedure significantly streamlined the prior waiver process, and we conclude that the public
interest will not suffer if we do not grant incumbent LECs additional immediate flexibility in this
area as part of our basic rate structure modifications. We will give further consideration to
Ameritech's request for additional flexibility to offer new technologies to switched access
customers as part of our assessment of other aspects of pricing flexibility in a subsequent Report
and Order in this proceeding.
156. We also will consider whether LECs should be permitted to offer direct-trunked
transport services that are differentiated by whether the incumbent LEC or the transport customer
is responsible for performing channel facility assignments in connection with our evaluation of
other forms of pricing flexibility in a subsequent Report and Order in this proceeding. As MCI
argues in its comments, it is unclear whether rates for direct-trunked transport where the LEC
controls the CFA should be higher or lower than the rates that apply where the IXC controls the
CFA.(212) Although the LEC may be able to make more efficient use of its network facilities when
it controls the CFAs itself, this efficiency benefit may be offset by the additional costs the LEC
incurs in performing the CFA function. We agree with MCI that an incumbent LEC may be able
to increase its network efficiency by retaining or assuming control of CFAs, particularly if an IXC
orders a relatively large amount of transport capacity. In those cases, however, rate
differentiation based on CFA control appears to be the functional equivalent of a volume discount.
As a result, we will consider this issue, along with other pricing flexibility issues, in a subsequent
Report and Order planned in this docket.
157. In its comments, USTA requests that we forbear under Section 10 of the
Communications Act(213) from regulating services in the interexchange basket, special access,
collocated direct-trunked transport, and directory assistance.(214) We will address USTA's request
along with other pricing flexibility issues, in a subsequent Report and Order planned in this
docket.
2. Tandem-Switched Transport
a. Background
158. Tandem-switched transport uses trunks that are shared among many IXCs and the
LEC itself to carry traffic between the end office and a tandem switch. The tandem switch routes
IXC traffic onto an appropriate dedicated trunk that runs between the tandem switch and the
serving wire center.(215) An IXC may use tandem-switched transport either as its primary form of
transport in lieu of direct-trunked transport, or to carry traffic that overflows from its direct-trunked transport facilities at peak periods. In 1982, the Modification of Final Judgment (MFJ)
established an interim rule that required, until September 1, 1991, BOC charges to IXCs to be
"equal, per unit of traffic" of a given type transported between end offices and facilities of the
IXCs within an exchange area or within reasonable subzones of an exchange area.(216)
159. The Commission replaced the "equal charge" rule in 1993 with an interim rate
structure for tandem-switched transport. This interim structure allows IXCs to choose between
two rate structures for the purchase of tandem-switched transport. Both options provide for a
per-minute tandem switching charge. Under the first option, an IXC may elect to pay "unitary"
per-minute charge for transmission of traffic from the end office, through the tandem switching
office, to the serving wire center. This charge may be distance sensitive, with distance measured
in airline miles from the end office to the serving wire center. Under the second option, the
"three-part rate structure," in addition to the charge for the tandem switch, an IXC may elect to
purchase transmission on a bifurcated basis, with the end office-to-tandem portion charged on a
per-minute basis, and the tandem-to-serving wire center portion charged as direct-trunked
transport facilities, i.e., on a flat-rated basis. Under the three-part rate structure, both portions of
the transmission charge may be distance sensitive based on the airline mileage to the tandem
office.(217)
160. In adopting the interim rate structure, the Commission stated that initial direct-trunked and tandem-switched transport rates would be presumed reasonable if set based on
special access rates in effect on September 1, 1992 using a DS3 to DS1(218) rate ratio of at least 9.6
to 1.(219) Per-minute tandem-switched transport rates were presumed reasonable if set using a
weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in
use in the tandem-to-end office link, and assuming circuit loading of 9000 minutes of use per
month per voice-grade circuit.(220)
161. Under the interim rate structure, whether a tandem-switched transport customer
elects to purchase tandem-switched transport under the unitary or the three-part rate structure,
the LEC imposes a separate, per-minute charge on the tandem-switched transport customer for
use of the tandem switch. The Commission set this charge initially to recover only twenty percent
of the tandem revenue requirement, in order to: (1) protect small IXCs that use tandem-switched
transport as their primary transport mechanism from substantial increases in tandem-switched
transport rates;(221) (2) ensure that the interim rate structure did not "endanger the availability of
pluralistic supply in the interexchange market" that had developed under the equal charge rule;(222)
and (3) allow IXCs a transitional period to reconfigure their networks to eliminate inefficiencies
that had developed under the equal charge rule and to prepare for a fully cost-based rate
structure.(223) Unlike the direct-trunked and tandem-switched transport rates, which are set using
overhead loadings based on special access, the tandem switching rates used higher overhead
loadings applicable to switched access.
162. As part of the interim rate structure, the Commission also created the TIC to recover
on a per-minute basis from all switched access customers the difference between the Part 69
transport revenue requirement and the revenues projected to be recovered under the interim rate
structure.(224) The TIC was explicitly intended to make the transition to the interim rate structure
revenue neutral.(225) Among other possible costs, the TIC recovers the remaining 80 percent of the
tandem-switching revenue requirement.
163. Portions of the interim transport rate structure were recently remanded to the
Commission by the United States Court of Appeals for the District of Columbia Circuit.(226) With
respect to tandem-switching rates and the TIC, the Court ordered us either to implement a cost-based rate structure or offer a "rational and non-conclusory analysis in support of [our]
determination that an alternative structure is preferable."(227) With respect to overhead loadings,
the Court ordered us either to substantiate that our current method of allocating overhead is cost-based, choose a method that is, or provide a reasoned explanation of our decision to pursue a
non-cost-based system.(228)
164. In the NPRM, we sought comment on several alternative rate structures for tandem-switched transport service facilities, including: (a) maintaining the interim rate structure, which
permits the IXCs to choose between the two pricing alternatives above; (b) eliminating the unitary
rate option and requiring the IXCs to purchase tandem-switched transport under the three-part
rate structure; or (c) developing another, different rate structure.(229) We also sought comment on
whether, in conjunction with any of these pricing options, we should apply to tandem switching
any of the options for local switching discussed above, including whether we should establish
separate flat-rated charges for the dedicated ports on the serving wire center side of the tandem or
other NTS components of the tandem switch, and whether usage-based or flat rates more
accurately reflect shared tandem-switching costs.(230) We also sought comment on whether, in
conjunction with any of these options, we should permit or require peak load pricing for usage-based charges for tandem-switched transport service, and on whether any portion of tandem-switched transport costs should be recovered from direct-trunked transport customers.
b. Overview of Rate Structure and Rate Level Changes
165. In this section, we summarize the changes we make to the tandem-switched
transport rate structure and rate levels below. We conclude that we should require incumbent
LECs to implement a cost-based rate structure for tandem-switched transport in four stages over
a two year transition period. Unlike our previous transition plans, however, we set forth today,
for the first time, the details of a final, cost-based transport rate structure. We have long
recognized that non-cost based rate structures can, among other dangers, (1) threaten the long-term viability of the nations's telephone systems; (2) distort the decision whether to use alternative
telecommunications technologies; and (3) encourage "uneconomic bypass" of the public switched
telecommunications network, raising rates for all.(231)
166. Until today, however, we have limited ourselves to interim transport rate structure
plans, such as the equal charge rule and the interim rate structure described above. While the
interim rate structure increased the cost-based nature of our transport rate structure, it also
included significant non-cost-based elements. We have not, until today, laid out a clear transition
plan that describes all the steps necessary to achieve cost-based transport rates. As a result,
although all carriers have no doubt been aware of our intention to move to a cost-based rate
structure, they have been able only to react to our transitional steps, announced piecemeal.
Because we have not announced a definite and detailed end state -- a final, cost-based rate
structure -- we have afforded carriers little opportunity to plan, adjust, and develop their networks
in preparation for such a rate structure, despite our lengthy period of "transition." Accordingly,
because of the potential magnitude of the rate impact of these changes, we conclude that a four-step implementation over a two-year period will minimize the risk of rate shock and allow
transport customers to adjust while we move as expeditiously as possible to cost-based transport
rates as required by the CompTel decision.
167. The first step will occur in incumbent LEC access tariffs to become effective on
January 1, 1998. In those tariffs, incumbent price cap LECs must establish new rate elements for
recovery of the costs of DS3/DS1 and DS1/voice-grade multiplexers used in conjunction with the
tandem switch. The rate element for the dedicated multiplexers on the serving wire center side of
the tandem will recover these costs on a flat-rated basis, while the rate element for the
multiplexers on the end office side of the tandem will be assessed per minute of use. In addition,
incumbent price cap LECs must establish in those tariffs a flat-rated charge to recover the costs of
dedicated trunk ports on the serving wire center side of the tandem. None of our existing rate
elements currently recovers the costs of either these multiplexers or these dedicated trunk ports.
Accordingly, we conclude that those costs are currently recovered through the TIC, and that
incumbent price cap LECs must reduce the TIC to reflect the recovery of these costs through the
new rate elements. Also on January 1, 1998, all incumbent LECs must take the first of three
annual steps to reallocate to the tandem-switching rate element tandem switching revenues
currently being recovered through the TIC. In tariffs filed to be effective on that date, we require
incumbent LECs to reallocate one third of the portion of the tandem switching revenue
requirement that they currently recover through the TIC, excluding signalling and dedicated port
costs that we reallocate elsewhere, to the tandem switching rate element.
168. The second step will occur in incumbent LEC tariffs to become effective July 1,
1998. At that time, all incumbent LECs must eliminate the unitary pricing option for tandem
switched transport. Instead, incumbent LECs will be required to provide tandem-switched
transport under a three-part rate structure as follows: (1) a per-minute charge for transport of
traffic over common transport facilities between the LEC end office and the tandem office; (2) a
per-minute tandem switching charge; and (3) a flat-rated charge for transport of traffic over
dedicated transport facilities between the serving wire center and the tandem switching office.
Incumbent LECs will continue to impose separate multiplexing and port charges established on
January 1, 1998, as complementary to the three-part rate structure.
169. The third and fourth steps will consist of the reallocation of the remaining portion of
the tandem-switching revenue requirement currently recovered through the TIC to the tandem-switching rate element. All incumbent LECs are to reallocate one half of the remaining portion of
tandem-switching revenue requirement recovered through the TIC to the tandem-switching rate
element in access tariffs to become effective January 1, 1999, and the final portion of the tandem-switching revenue requirement to the tandem-switching rate element in access tariffs to become
effective on January 1, 2000. Before performing this reallocation, price cap incumbent LECs
must account for X-factor reductions to the tandem-switching revenues permitted under price
caps that have occurred since the TIC was created, as described in Section III.C.2.d, below.
c. Rate Structure
170. Multiplexing Costs. As discussed above, we direct incumbent LECs to establish
separate rate elements for the multiplexing equipment on each side of the tandem switch. LECs
must establish a flat-rated charge for DS1/DS3 multiplexers on the serving wire center side of the
tandem, imposed pro-rata on the purchasers of dedicated DS3 trunks on the serving wire center
side of the tandem, in proportion to the amount of DS3 trunking capacity purchased by each
customer. Unlike DS3 rates, rates for DS1 dedicated trunks already include a portion of the
DS1/DS3 multiplexer needed for transport.(232) Multiplexing equipment on the end office side of
the tandem shall be charged to users of common end office-to-tandem transport on a per-minute
of use basis. These multiplexer rate elements must be included in the LEC access tariff filings to
be effective January 1, 1998.
171. We sought comment in the NPRM on the claim that:
The TIC . . . includes the two additional multiplexers needed in order to multiplex
a DS3 circuit down to a DS1 level before switching at the tandem, and then back
up to DS3 afterward for transmission to an end office. To the extent that analog
tandem switches exist, two additional DS1/[voice-grade] multiplexers are needed
to achieve the voice-grade interface with the tandem switch.(233)
None of our existing rate elements explicitly recovers the costs of these multiplexers, and we
conclude that these costs are currently recovered as part of the TIC. Accordingly, we establish
two rate elements for multiplexers used on the serving wire center side of the tandem switch. The
first will recover the costs of DS3/DS1 multiplexers used by purchasers of dedicated DS3
transport trunks from the serving wire center to the tandem switch, and may be levied only on
purchasers of such DS3 transport. The second will recover the costs of DS1/voice-grade
multiplexers used on the serving wire center side of analog tandem switches, and should be levied
on purchasers of DS1 or greater capacity dedicated transport from the tandem switch to the
serving wire center in proportion to the transport capacity purchased on that route. Like serving
wire center-side trunks and trunk ports, both DS3/DS1 and DS1/voice-grade multiplexers on the
serving wire center side of the tandem switch are dedicated to individual customers. Accordingly,
flat-rated NTS charges for these multiplexers are appropriate.
172. On the end office side of the tandem switch, we establish two additional rate
elements. The first will recover the costs of DS3/DS1 multiplexers used on the end office side of
the tandem switch. This rate element will be a per-minute charge imposed on each IXC
purchasing common transport on the end office-to-tandem link. This charge will be calculated
based on actual minutes of use of the common transport circuits and will be assessed on IXCs in a
1:1 ratio with minutes of use of common transport. As with common transport trunks, because
these multiplexers are shared among all users of common transport, traffic-sensitive, per-minute
charges are appropriate. The second rate element should be assessed only at analog tandems, to
recover in a similar manner the costs of DS1/voice-grade multiplexers needed at these analog
tandems.
173. Price cap LECs must reallocate revenues currently being recovered through the TIC
to these rate elements and begin recovery of multiplexing costs using these rate elements in their
access tariffs to become effective January 1, 1998.
174. Dedicated Tandem Switch Trunk Port Costs. Price cap incumbent LECs must
establish a separate rate element for dedicated trunk ports used to terminate dedicated trunks on
the serving wire center side of the tandem switch. LECs incur the costs of these ports on an NTS
basis, but currently must recover their costs through per-minute charges for the tandem switch.
Because we have allocated 80 percent of tandem-switching costs to the TIC, these port costs may
currently be recovered through either per-minute tandem-switching charges, or the per-minute
TIC. We now take this opportunity to establish a separate rate element for these costs. Price cap
LECs must establish a flat-rated element for dedicated trunk ports on the serving wire center side
of the tandem, assessed on the purchaser of the dedicated trunk terminated at that port. This rate
element shall be a flat-rated charge assessed on the carrier purchasing the dedicated trunk
terminated at that port, and must be also be included in tariff filings to become effective January 1,
1998.
175. Three-Part Rate Structure. We also direct all incumbent LECs to discontinue the
unitary rate structure option for the transmission component of tandem-switched transport,
effective July 1, 1998. In their access tariffs that take effect on July 1, 1998, incumbent LECs will
be required to provide tandem-switched transport under a three-part rate structure as follows: (1)
a per-minute charge for transport of traffic over common transport facilities between the LEC end
office and the tandem office; (2) a per-minute tandem switching charge; and (3) a flat-rated
charge for transport of traffic over dedicated transport facilities between the serving wire center
and the tandem switching office. This three part rate structure reflects the manner in which the
incumbent LEC incurs the costs of providing each component of tandem-switched transport. By
establishing a per-minute, traffic-sensitive rate for the shared common transport trunks and the
tandem switch, incumbent LECs will recover these costs from each IXC in proportion to its use.
The incumbent LEC, in contrast, incurs the costs of the dedicated serving wire center-to-tandem
trunk on an NTS basis because, like other dedicated trunks, the LEC must provision the trunk for
the exclusive use of one IXC. Once this capacity is dedicated, the cost of the trunk does not vary
with the amount of traffic transmitted by the IXC.
176. The three-part rate structure may cause some tandem-switched transport customers
to increase their use of direct-trunked transport relative to tandem-switched transport. As
discussed above, making this rate structure change effective on July 1, 1998, will provide tandem-switched transport customers that currently take service under the unitary rate structure with
notice of this change sufficient to enable them to adjust their networks to provide service in the
most efficient way possible, and to mitigate any sudden effect on rates such a change could have if
implemented on shorter notice. In order to encourage transport customers to increase the
efficiency of their transport networks quickly, we will require incumbent LECs to waive certain
nonrecurring charges until six months after the three-part rate structure becomes mandatory.
Therefore, from the effective date of this Order until six months after the effective date of tariffs
eliminating the unitary pricing option for tandem-switched transport, the incumbent LECs shall
not assess any nonrecurring charges for service connection when a transport customer converts
trunks from tandem-switched to direct-trunked transport or orders the disconnection of
overprovisioned trunks.(234)
177. When we replaced the equal charge rule in 1991, we stated three principles that
would guide our efforts to develop the transport rate structure: (1) to encourage efficient use of
transport facilities by allowing pricing that reflects the way costs are incurred; (2) to avoid
interference with the development of interstate access competition; and (3) to facilitate full and
fair interexchange competition.(235) In 1991, we stated that the interim rate structure was a
reasonable first step toward achieving these goals, because it was more cost-based than the equal
charge rule.(236) Even from its inception, however, we have recognized that the interim rate
structure represents significant compromises that cause it to fall substantially short of these goals
in many ways.(237)
178. First, the unitary rate option does not accurately reflect the manner in which LECs
incur costs in providing tandem-switched transport and, therefore, does not provide maximum
incentive for IXCs to use transport facilities efficiently. IXCs may order, and LECs must provide,
dedicated transport links with NTS costs on the serving wire center-to-tandem route with no
assurance that the traffic-sensitive, per-minute revenues collected will cover the NTS costs of the
link. As we stated at the time, the unitary rate structure was intended as an interim measure to
allow IXCs time to prepare for a fully cost-based transport rate structure.(238) IXCs have now had
well over a decade since divestiture to so prepare. We agree with the CompTel decision that it is
time to bring this period of preparation to a close as expeditiously as possible without causing
severe disruption to carriers.(239)
179. Second, by bundling the dedicated and common portions of the transmission
component of tandem-switched transport into a single, end-to-end per-minute charge, the unitary
rate structure inhibits the development of competitive alternatives to incumbent LEC tandem-switched transport. While we have required incumbent LECs to provide the collocation,
signalling, and unbundled network elements necessary for new entrants to compete with
incumbent LECs without having to replicate the incumbent LEC's interoffice transport network,(240)
we have not corrected the non-cost based aspects of our tandem-switched transport rate structure
that reduce incumbent LEC rates for tandem-switched transport services. Several commenters
have noted that the tandem-switched transport market, despite our efforts, is subject only to
limited competition.(241) Moreover, several competitive entrants have stated that they have the
capability and desire to offer some or all of the components of tandem-switched transport on a
competitive basis, but that the present, unitary rate structure inhibits the development of
competition in this area.(242) In addition, each component of tandem-switched transport is not
equally susceptible to competitive entry; it is relatively easier for a new entrant to compete to
provide the dedicated serving wire center-to-tandem link than it would be to compete to provide
either the tandem switch itself or the myriad common transport end office-to-tandem links. Thus,
in order to permit the fullest development of competitive alternatives to incumbent LEC
networks, we need to unbundle reasonably segregable components of incumbent LEC transport
services and price them in the manner in which costs are incurred.
180. Third, the interim rate structure does not best promote "full and fair" interexchange
competition. The unitary rate structure has facilitated the growth of small IXCs to compete with
larger carriers. It has achieved this, however, by requiring incumbent LECs to price facilities with
NTS costs on a per-minute, traffic sensitive basis, in order to allow small IXCs to offer
interexchange services at rates comparable to those offered by larger carriers without regard to
whether the charges paid by the small IXCs cover the costs of the facilities that they use. While
this structure has protected "pluralistic supply in the interexchange market,"(243) our rules should
promote competition, not protect certain competitors. We have recently concluded that no
carrier is dominant with respect to domestic, interexchange services.(244) Therefore, to the extent
that we designed the interim rate structure to facilitate the growth of small IXCs in competition
with AT&T, we find that such protective rules are no longer necessary. In a competitive market,
we believe that we should strive to make our rate structure rules consistent with cost-causation
principles, so long as those principles do not conflict with other statutory obligations, such as
universal service. As the CompTel decision stated, "attempt[ing] to recover costs from IXCs that
did not cause those costs to be incurred would impart the wrong incentives to both actual and
potential providers of local transport, thereby inducing them to offer an inefficient mix of
dedicated, [direct-trunked transport], and tandem-switched service."(245) Because rules that do not
reflect cost-causation may cause IXCs to order an inefficient mix of transport services, such rules
artificially raise the costs of providing interexchange services. Rules properly reflecting cost-causation, in contrast, will benefit LECs, IXCs, and consumers alike by encouraging competitors
to provide service using facilities efficiently. In adopting the interim rate structure, we cited
AT&T's estimate that the efficiency benefit to consumers of cost-based pricing and competition
could reach $1 billion annually.(246) Our adoption of the three-part rate structure is intended to
permit consumers the benefits of even greater service efficiency.
181. We therefore adopt the three-part structure as the final tandem-switched transport
rate structure because this structure most closely reflects the manner in which LECs incur the
costs of each component of the overall tandem-switched transport service. When combined with
our actions with respect to the TIC, our adoption of actual minutes of use as the appropriate
factor for determining per-minute rates for common transport circuits, and our allocation of the
full cost of the tandem-switch to the tandem-switching rate elements, we expect that this structure
will benefit LECs, IXCs, competitive providers of access services, and consumers. Tandem-switched transport facilities are sized to accommodate peak traffic loads, including overflow
traffic from IXCs using direct-trunked transport facilities. Several commenters have stated that,
until now, these overflow customers have not borne the full costs of these facilities because
overflow customers pay only the same per-minute transmission charges applicable to other
IXCs.(247) The three-part rate structure will require the IXC purchasing tandem-switched
transmission facilities to pay the full NTS costs of the dedicated serving wire center-to-tandem
link, without regard for the amount of traffic transported. This benefit, in turn, will substantially
increase IXC incentives to use tandem-switched transport efficiently for overflow traffic.
182. Some commenters argue that we should retain the unitary rate structure because
tandem-switched transport, as a service, has traditionally been offered on an end-to-end basis.
We agree that the transmission component of tandem-switched transport has in fact been offered
on an end-to-end basis, but only pursuant to the requirements of the MFJ and our interim rate
structure rules as part of a transition to cost-based rates. We find, however, that the transmission
component of tandem-switched transport is not, in fact, provisioned by the incumbent LEC on an
end-to-end basis. Purchasers of direct-trunked transport purchase an end-to-end service; they
purchase from the incumbent LEC transport capacity between two end points. Tandem-switched
transport customers, in contrast, purchase use of the tandem switch to route traffic to their POP.
By virtue of their decision to choose tandem-switched transport, these customers specifically
obligate the LEC to transport their traffic between the serving wire center and the tandem serving
a particular end office or group of end offices and to perform the tandem switching function.
Because they cause the incumbent LEC to incur the costs of transmitting their traffic between the
serving wire center and the tandem, tandem-switched transport customers should, as a matter of
cost-causation, pay the costs of reaching the tandem. In providing tandem-switched service,
incumbent LECs must provision two separate circuits with distinctly different cost characteristics
-- one dedicated, and one shared. Tandem-switched service, therefore, is not provisioned on an
end-to-end basis between the end office and serving wire center, but in three parts: (1)
transmission from one "end," the end office, to the tandem; (2) the tandem switching function
itself; and (3) transmission from the tandem to the other "end," the serving wire center. Just as
the tandem-switched transport customer pays a separate charge for the tandem switch, the
tandem-switched transport customer should pay separately for the two distinct transmission
components.
183. Other commenters argue that the three-part rate structure will create LEC incentives
to engage in inefficient network reconfiguration, placing tandems far from end offices and serving
wire centers simply to increase tandem-switched transport revenues.(248) These commenters further
argue that, if we adopt the three-part rate structure, we need to control this incentive by
establishing a process for review of the incumbent LECs' tandem deployment decisions. Based
on this record, we conclude that these commenters' fears are not well founded. An incumbent
LEC would likely incur substantial costs to reconfigure placement of its tandem switches
specifically to disadvantage IXC users of tandem switched transport. Because we expect the
three part rate structure to catalyze the development of competition, we conclude that the
incumbent LEC would not be likely to incur such costs. Although the incumbent LEC might be
able to increase its tandem-switched transmission revenues in the short term to reflect inefficient
routing, as more efficiently configured competitors enter the market, the LEC would not be able
to sustain such artificially inflated rates and would then need to incur additional costs to
reconfigure its network efficiently. Because, under our new competitive paradigm, a multitude of
investment opportunities, including wireless services, video, and interLATA toll, may emerge for
incumbent LECs, we agree with Ameritech that "[s]uch misspent capital outlays and inefficient
network configuration simply would not make good business sense."(249)
184. Moreover, the redeployment of tandem switches affects network efficiency with
respect to both the incumbent LEC's own local and toll traffic, as well as intrastate and interstate
access.(250) Therefore, inefficient network reconfiguration would cause harm both to tandem-switched transport customers and to the incumbent LEC itself. Any additional transport revenues
that the incumbent LEC generated through inefficient network reconfiguration would be at least
partially offset by the additional costs of transporting the LEC's own traffic in similarly inefficient
ways. As discussed above, as competition develops in the local market, we expect that a LEC
would be reluctant to take steps to decrease its own efficiency.
185. Some commenters argue that we should retain the unitary rate structure because
direct-trunked transport and tandem-switched transport circuits often travel along the same routes
using the same physical facilities. These commenters argue, therefore, that it would be unfair or
discriminatory to require tandem-switched transport users to purchase transmission based on
airline mileage from the end office to the tandem to the serving wire center, while users of direct-trunked transport are permitted to purchase the same route on the basis of airline mileage from
end office to the serving wire center directly. Other commenters argue that we should require the
LECs to offer both types of transport based on actual route miles, revealing actual LEC network
efficiencies and inefficiencies.
186. We disagree with both of these proposed modifications. An IXC purchasing direct-trunked transport requires the incumbent LEC to provide transport service between the end office
and the serving wire center. Because the LEC must route direct-trunked transport traffic between
only these two points, our rate structure requires the IXC to pay only for the airline mileage
between those two points, reflecting the direct mileage route between the locations in the
incumbent LEC network designated by the access customer. In contrast, an IXC purchasing
tandem-switched transport purchases use of the access tandem switch and therefore requires the
incumbent LEC to provide service between the serving wire center and the tandem, and between
the tandem and the end office. Under the three part rate structure, the tandem-switched transport
customer, like the direct-trunked transport customer, pays for the direct mileage between the
locations in the incumbent LEC network designated by the customer -- for tandem-switched
transport, the serving wire center to tandem, and the tandem to the end office. Because the IXC
has chosen to make use of the LEC tandem switching facilities, it should pay explicitly for the
transport necessary to reach the tandem. The direct-trunked transport customer, in contrast, does
not make use of the tandem switching facilities; even if the LEC routes direct-trunked transport
traffic through the tandem office, this traffic is not switched at the tandem. While the incumbent
LEC may choose to route direct-trunked traffic through the tandem office based on its own
assessment of whether it is economically efficient to do so, the direct-trunked transport customer
pays only for direct mileage between the locations it designated in the network.
187. We are not persuaded by arguments that we should retain the unitary pricing
structure because the incumbent LEC, and not the tandem-switched transport customer, has
selected the tandem location and, consequently, the tandem-switched transport customer should
not pay for the direct mileage to and from the tandem location. The incumbent LEC equally
chooses the locations of the serving wire center and end office, and yet access customers routinely
pay mileage charges to and from those locations, rather than between the end points of the access
service -- the POP and the end user location. Similarly, we find that the three-part rate structure
does not discriminate against IXCs using tandem-switched transport. As discussed above, the
tandem-switched transport customer, unlike the direct-trunked transport customer, requires the
incumbent LEC to route its traffic to the tandem, and so should pay the costs of reaching the
tandem. In addition, an IXC operating efficiently often may choose to locate its POP at or close
to the tandem, if the tandem-switching office also can function as the serving wire center, thus
eliminating virtually all of the dedicated transport costs of the tandem-to-serving wire center link.
While such an arrangement may be the most efficient transport architecture for tandem-switched
transport, our current unitary pricing structure does not reflect the underlying costs of tandem-switched transport transmission facilities and so does not encourage efficient transport
architectures.
188. The introduction of more modern network architectures, such as Synchronous
Optical Network (SONET) rings, does not alter our conclusion that the three-part rate structure
most closely approximates the nature of costs associated with each component of tandem-switched transport. WorldCom, for instance, asserts that the "pyramid" diagram included in the
NPRM as Figure 1 is outdated(251) and submits a diagram illustrating interoffice tandem-switched
transport in a ring-based network.(252) WorldCom states that the multiple routing options and the
reduced distance sensitivity of transport costs in a SONET environment compel retention of the
unitary rate structure.(253) We conclude, however, that the differences WorldCom identifies do not
support retention of the unitary rate structure because, even in a ring-based network, the three-part rate structure treats direct-trunked and tandem-switched transport consistently. In a fiber-optic or ring-based network, dedicated, direct-trunked transport circuits are given a constant, and
exclusive, time slot assignment on a large, time-division multiplexed fiber-optic cable. The
incumbent LEC routes traffic for the IXC purchasing the direct trunk into the dedicated circuit or
time slot, where it is received elsewhere on the ring or in the network at the serving wire center.
The direction or precise routing of the signal around the ring is irrelevant for purposes of the rate
structure because the transport is priced on an airline-mileage basis between the two end points.
Capacity dedicated to a particular IXC, however, is not available to the LEC for other purposes.
189. SONET ring architecture offers the LEC the capability to transport large traffic
volumes with redundant routing options, but it does not alter the fundamental nature of tandem-switched transport. Tandem-switched transport is functionally very different from direct-trunked
transport because, by definition, the incumbent LEC must route an IXC's tandem-switched traffic
through the tandem switch serving a particular end office. Whether using a SONET ring or not,
the LEC must route its tandem-switched traffic into one of many shared common transport
circuits or time slots allocated for transport between the end office and the tandem switch, and
onto a second dedicated circuit or time slot for transport between the serving wire center and the
tandem. Despite parties' arguments to the contrary, the precise routing of the traffic to the
tandem, including the direction it may take around a SONET ring, is irrelevant to the rate
structure because IXCs purchase transport under the three-part rate structure based on airline
mileage to the tandem.
190. As discussed in connection with direct-trunked transport, above, ring network
architectures may cause incumbent LECs transport costs to become less distance sensitive.
Because our rate structure permits, but does not require, transport rates to be distance sensitive,
LECs remain free to establish less distance sensitive transport rates to reflect the changing nature
of these costs.
191. We also decline Teleport's suggestion to establish a flat-rated charge for the tandem
switch, tied to the amount of dedicated capacity each IXC's serving wire center-side trunk ports
provide. While the costs of these dedicated trunk ports are NTS, the record before us does not
reflect that all of tandem-switching costs are similarly NTS. Rather, we conclude at this time that
the costs of tandem switching likely vary, as do those of local switching, on a traffic-sensitive
basis. In light of this conclusion, we find that it would be unreasonable to permit the incumbent
LEC to recover all of its tandem-switching costs through flat-rated charges. As with the local
switch, until we gain more experience with rate structures for unbundled network elements that
are implemented pursuant to Sections 251 and 252 and that segregate switching costs into traffic-sensitive and NTS components, we will continue to adhere to the current, per-minute rate
structure for shared switching facilities.
192. We also decline to adopt in full suggestions that we (1) retain the unitary pricing
structure for tandem-switched transport, while (2) exempting IXCs and competing LECs that do
not use the transport facilities supplied by the incumbent LEC from paying the TIC and (3)
preventing the incumbent LEC from deaveraging the TIC within a state during a five year
transition period.(254) We are modifying our rules to prohibit incumbent LECs from assessing any
per-minute residual TIC charge on any switched minutes of CAPs that interconnect with the
incumbent LEC switched access network at the end office.(255) In doing so, we adopt a position
substantially similar to the second enumerated point, above, which Teleport and CompTel
characterize as the "most important" feature of this proposal.(256) In addition, we are also taking
other measures that will reduce substantially or eliminate the TIC in an expeditious manner. We
decline, however, to adopt the other two suggestions. As explained in more detail above, the
unitary rate structure is not cost-based in that it requires incumbent LECs to recover costs
incurred on an NTS basis through per-minute charges and inhibits the development of competition
by bundling reasonably segregable components of tandem-switched transport together and pricing
them in a manner that does not reflect cost causation. We conclude that our new paradigm of
promoting efficient competition requires that incumbent LECs adopt a cost-based transport rate
structure and that entrants providing transport facilities in competition with the incumbent LEC
not pay the TIC.
193. Although in their comments in this proceeding the incumbent LECs virtually
unanimously favor the three-part rate structure as most consistent with principles of cost-causation, we recognize that incumbent LECs may face competition from competitors that are not
limited to the three-part rate structure we adopt for incumbent LECs today. As such competition
develops, the incumbent LEC may wish to respond by offering tandem-switched transport on a
unitary pricing basis. We will address issues relating to when incumbent LECs should have the
flexibility to offer a unitary tandem-switched transport rate structure in connection with our
discussion of other pricing flexibility issues in a subsequent Report and Order that we will adopt
in this proceeding.
194. Peak and Off-Peak Pricing. As with the local switch, we conclude that we should
not mandate a peak-rate pricing structure for the tandem switch or common transport at this time.
Many of the same practical difficulties with establishing, verifying, and enforcing a rational,
efficient, and fair peak-rate structure exist in the context of the tandem switch. We will consider
whether incumbent LECs should have the flexibility to develop such peak and off-peak rate
structures for local switching on a permissive basis when we consider other issues of rate
structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.
d. Rate Levels
195. Allocation of 80 Percent of the Tandem Switching Revenue Requirement to the TIC.
In establishing the interim transport rate structure, we required incumbent LECs to base their
initial tandem switching charge on 20 percent of the interstate tandem-switching revenue
requirement. In remanding this portion of the interim rate structure to us, the D.C. Circuit
directed us either to implement a cost-based tandem switching rate or offer a rational and non-conclusory analysis in support of our determination that an alternative structure is preferable.
196. Based on the record in this proceeding, we reallocate much of the remaining 80
percent of the tandem switch revenue requirement back to the tandem switching rate elements in
three steps. We conclude that this action is most consistent with cost-causation, and with the
general approach we are taking in this Order regarding pricing issues. We do not require all of
the 80 percent to be reallocated to tandem switching rates because the tandem-switching revenue
requirement includes, not only the costs of the tandem switch, but other costs, such as SS7
signalling costs and tandem port costs, which we are requiring to be reallocated elsewhere.
197. Furthermore, if we required the price cap LECs to reallocate, dollar-for-dollar, the
entire portion of the tandem switching revenue requirement that we reallocated to the original
TIC in the First Transport Order, we would deny tandem-switched transport customers the
continuing benefits of past X-factor reductions in the revenues permitted under price caps.
Therefore, in order to preclude recovery of tandem switching costs in excess of the current
revenues permitted under price caps, we direct price cap incumbent LECs first to account in the
following manner for the effects of "GDP-PI minus X-factor" reductions to the original portion of
the tandem switching revenue requirement allocated to the TIC in the First Transport Order.
Each price cap LEC first should calculate the percentage of its total original TIC that represented
the 80 percent reallocation of its tandem switching costs when the TIC was created. It should
then calculate this percentage of its current TIC, which represents the extant portion of the
reallocated tandem switching costs. It is this extant portion that the price cap LECs should
reallocate to tandem switching as described in the next paragraph.
198. In access tariff filings to become effective on January 1, 1998, incumbent LECs must
identify the portion of the tandem-switching revenue requirement currently in the TIC that they
reallocate to each rate element, including, as applicable, SS7 signalling, tandem port costs, or
other rate elements. They must then reallocate one third of the tandem switching revenue
requirement remaining in the TIC to the tandem switching rate element. Effective January 1,
1999, incumbent LECs shall reallocate approximately one half of the remaining amount of the
tandem switching revenue requirement in the TIC to the tandem switching rate elements.
Effective January 1, 2000, incumbent LECs shall reallocate any portion of the tandem switching
revenue requirement remaining in the TIC to the tandem switching rate element. This three-step
implementation of this change permits IXCs time to adjust their use of various incumbent LEC
transport services, but sets a definite end date in the near future, thus responding to the CompTel
decision's concerns regarding the length of the transition to a cost-based transport rate structure.
199. Some commenters argue that, rather than reallocating revenues from the TIC to
other rate elements, we should reinitialize tandem-switched transport rates to levels reflecting
long run incremental costs, making reallocation of TIC revenues to other transport rate elements
unnecessary. We have decided in this Order, however, not to reinitialize access rates based on
forward-looking cost principles. We have instead determined that the first step in access reform is
to make the current system as economically efficient as is possible within the limits of current
ratemaking practices. Thus, the focus of this portion of this proceeding is on the development of
cost-causative rate structure rules. While we are taking several prescriptive steps using existing
ratemaking methods to reduce initial baseline rates, we are generally adopting a market-based
approach, with a prescriptive backdrop, to move rates over time to levels reflecting forward-looking economic costs. We disagree with those commenters that argue that the Local
Competition Order requires us immediately to prescribe rate levels for access elements based on
long-run incremental costs. The Local Competition Order addressed, inter alia, the pricing of
unbundled network elements. While unbundled network elements may be used to provide
interstate access services, their availability at TELRIC-based prices does not compel adoption of
similar rates for access services. We intend instead to rely on the availability of unbundled
network elements to place market-based downward pressures on access rates, subject to a
prescriptive backstop. We will further address questions related to reinitialization to TELRIC
rate levels in connection with our discussion of the prescriptive approach to access reform.(257)
200. Use of Switched Access Overhead Loadings for Initial Tandem Switching Rates. In
setting rates, the interim transport rate structure derived both direct-trunked transport rates and
tandem-switched transmission rates using relatively low overhead loadings applicable to special
access. Tandem switching rates, in contrast, were set using relatively higher switched access
overhead loadings. As a result, the tandem switching revenue requirement became relatively high,
in comparison to other transport rate elements.
201. Several commenters in this proceeding contend that our use of special access
overheads in setting direct trunked transport rates was inappropriate because, while special access
is used almost exclusively in high density, generally urban areas, direct-trunked transport and, to
an even greater extent, tandem-switched transport are used in less dense areas.(258) In these less
dense areas, overhead costs associated with transport may be higher than those associated with
special access in urban areas. Some commenters have argued that we should either (1) equalize
the overhead loading factors for all transport options by directing that the difference in transport
rates is equal to the difference in the long run incremental cost of each transport option (DS3,
DS1, and tandem-switched transport); or (2) otherwise ensure that transport customers pay an
equal dollar amount of overhead per unit of traffic transported.(259)
202. We conclude that we need to make no change to the overheads attributed to tandem
switching. As discussed above, we have decided not to base access prices directly at this time on
incremental cost studies, but instead to make significant changes in existing ratemaking practices
as the first step in access reform. Our current methods allocate overhead in a reasonable, cost-based manner. In consultation with the Joint Board on Jurisdictional Separations, the
Commission established procedures for allocating overhead expenses between the state and
interstate jurisdictions.(260) Our Part 69 cost allocation rules in turn allocated interstate direct
investment to broad categories, including Central Office Equipment (with respect to both local
switching and tandem switching) and Carrier Cable and Wire Facilities (with respect to special
access, direct-trunked transport, and tandem-switched transport transmission facilities).(261) Other
investment, including overhead, was allocated among these categories in proportion to the dollar
amounts of net direct investment allocated to these categories.(262) Similarly, direct expenses,
where possible, were allocated to the category to which the expenses are related.(263) Other
expenses, including overheads, are allocated on the same basis as other investment, according to
relative dollar amounts allocated to the various categories.(264) The Commission has stated that
initial allocation of overheads based on relative costs closely approximates an economically
efficient method assuming that the elasticity of demands for the various outputs is not too
dissimilar.(265)
203. Our Part 69 cost allocation rules, therefore, established category revenue
requirements that included overheads allocated generally based on relative costs. Once these
initial revenue requirements were established, our Part 69 rules permitted incumbent LECs to
recover all costs assigned to each category through the rate elements established for that
category.(266) The incumbent LECs were permitted to assign overhead costs among the category
rate elements in any way that is just and reasonable and not unreasonably discriminatory.(267) We
find that it is reasonable to have set overhead loadings for tandem switching consistently with the
overhead loadings for local switching, and disagree with those parties that argue that there is no
cost justification for the current allocation of overheads to the tandem switch. The direct costs of
both kinds of switching are fundamentally the same in that both types of switches are comprised
of ports and a switching matrix. By contrast, the direct costs of transmission consist of outside
plant and circuit equipment and certain central office equipment. So long as consistent overhead
loading methodologies were used across switching functions, and across transmission functions,
we find that a reasonable cross-over is established for access customers between direct-trunked
transport and tandem-switched transport. As competition develops, we can also rely on market
forces to pressure incumbent LECs to allocate overheads among rate elements in economically
efficient ways. We address issues concerning the use of special access prices to initialize direct-trunked transport rates in the interim rate restructure below in our discussion of the TIC.
204. We also decline to adopt a requirement for equalized overhead loadings. Overhead
loadings are used to assign costs that do not qualify as the direct costs of a particular service.
Reasonable definitions of direct costs often leave in the overhead category costs that might
reasonably be deemed attributable to a given service. Thus, if all of a carrier's costs are classified
as either "direct costs" or "overheads," the overhead category will likely include costs that should
not necessarily apply uniformly to all services. As a result, we think it desirable not to adopt a
policy that is too specific and too rigid, and that might not permit recognition of legitimate
differences in costing definitions. Furthermore, in a competitive market, it would be mere
happenstance if different products or services of a single company recovered uniform amounts of
overhead. If we were to require equalized overhead loadings, we would be interfering with the
market discipline on which we are primarily relying. We might, for example, prevent an entrant
from realizing a reasonable profit opportunity based on a rigid overhead loading requirement.
205. In determining that our existing cost allocation rules reasonably allocated overhead
to the initial tandem switching rate element and that we thus need not change the overheads
currently attributed to tandem switching, we recognize that the D.C. Circuit in CompTel
remanded the overhead issue to the Commission for further explanation and stated that the "cost
allocation to the tandem switch" under the existing allocation rules "is, by the Commission's own
estimation, grossly excessive."(268) The court did not provide a cite for its characterization of the
Commission's "estimation," but the court may have been referring to the agency's finding in the
First Transport Order that "most, but not all, of the interstate tandem revenue requirement is
attributable to tandem-switched transport."(269) The Commission in that order also identified only
one category of costs -- having to do with SS7 technology -- that appeared to be misallocated to
tandem switching.(270) Elsewhere in this Order, we have taken steps to address that misallocation
of SS7 costs.(271) That correction having been made, we find that our existing rules reasonably
allocate overhead to tandem switching for the reasons discussed above.
206. Use of actual minutes of use rather than an assumed 9000 minutes of use. For
tandem-switched transport rates to be presumed reasonable, the interim rate structure requires
incumbent LECs to set per-minute tandem-switched transport rates using a weighted average of
DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandem-to-end office link, and assuming circuit loading of 9000 minutes of use per month per voice-grade
circuit.(272) Based on the record before us, we find that continued use of this 9000 minutes of use
assumption is no longer reasonable. Many commenters state that their actual traffic levels are
substantially lower than 9000 minutes of use per month. Some incumbent LECs, particularly
smaller LECs in rural areas, indicate that their actual traffic levels may be as low as 4000 minutes
of use per month per voice-grade circuit. Accordingly, we conclude that rates for the common
transport portion of tandem-switched transport must be set using a weighted average of DS1 and
DS3 rates reflecting the relative numbers of DS1 and DS3 circuits in use in the tandem-to-end
office link, and using the actual voice-grade switched access common transport circuit loadings,
measured as total actual minutes of use, geographically averaged on a study-area-wide basis, that
the incumbent LEC experiences based on the prior year's annual use. Incumbent LECs that
deaverage their transport rates under our existing zone-based deaveraging rules(273) may similarly
deaverage the actual minutes of use figures that they use to calculate per-minute common
transport rates.
207. Our assumption that voice-grade common transport circuits experience uniform
loadings of 9000 minutes of use was initially based on 1983 data submitted in the original MTS
and WATS Market Structure proceeding.(274) In using this assumption as part of the interim rate
structure, we stated that, "[t]he 9000 minutes per circuit per month standard serves as a
convenient starting point in the context of a short-term, interim rate structure."(275) We rejected at
that time requests to develop a loading factor for small LECs that would reflect their actual,
substantially lower circuit loading levels, stating that, "the benefits to be obtained from use of
more individualized loading factors are outweighed by the benefits of the administrative
convenience of a uniform loading factor and of avoiding verification difficulties."(276) Given the
new competitive paradigm embodied in the 1996 Act, we conclude that this assumption must give
way to charges based on actual usage levels. The same conversion factor is not appropriate for
each incumbent LEC.(277) Because the 9000 minute assumption appears to have substantially
overstated the actual traffic levels on many circuits, we now conclude that the current rate
structure is unlikely to recover the full costs of common transport. Costs that properly should be
recovered from common transport rate elements may currently be recovered through TIC
revenues. Because the 9000 minutes of use loading factor has contributed, possibly significantly,
to the level of the non-cost-based TIC, we find that continued use of this factor is no longer
reasonable.
208. We therefore direct incumbent LECs to develop common transport rates based on
the relative numbers of DS1 and DS3 circuits in use in the tandem-to-end office link, and using
actual voice-grade circuit loadings, geographically averaged on a study-area-wide basis, that the
incumbent LEC experiences based on the prior year's annual use. As discussed above, incumbent
LECs that deaverage their transport rates under our existing zone-based deaveraging rules may
similarly deaverage the actual minutes of use figures that they use to calculate per-minute
common transport rates. As they develop transport rates based on actual minutes of use, we
require incumbent LECs to use any increase in common transport revenues to decrease the TIC.
These rates must be included in the LEC access tariff filings effective January 1, 1998.
209. We disagree with commenters arguing that the actual number of minutes a circuit is
in use is irrelevant in a rate-setting context.(278) These commenters argue that rates should be set
based on forward-looking cost studies using Commission-determined "efficient" traffic levels,
which they argue may be far higher than either the actual traffic levels, or the 9000 minutes of use
assumption. As explained elsewhere, we are not taking the general approach of prescribing rates
at forward looking economic costs, and we decline to make an exception in this instance. We are
instead reforming access charges so that they more closely reflect the costs imposed by individual
access customers. We also do not find it necessary to employ different principles here to ensure
that incumbent LECs face sufficient incentives to design their networks to achieve efficient usage
levels. LECs subject to price cap regulation already have only limited ability to raise rates to
cover the costs of inefficient network designs, and are able to benefit from increased profits as
their efficiency improves. In addition, as competition develops for local service, all incumbent
LECs will face increasing pressure to provide service as efficiently as possible.
D. Transport Interconnection Charge (TIC)
1. Background
210. Under our Part 36 separations rules, certain costs of the incumbent LEC network are
assigned to the interstate jurisdiction. The Part 69 cost allocation rules allocate these costs
among the various access and interexchange services, including transport. In the First Transport
Order,(279) we restructured interstate transport rates for incumbent LECs. The restructure created
facility-based rates for dedicated transport services based on comparable special access rates as of
September 1, 1991, derived per-minute tandem-switched transport transmission rates from those
dedicated rates, established a tandem switching rate, and established a TIC that initially recovered
the difference between the revenues from the new facility-based rates and the revenues that would
have been realized under the preexisting "equal charge rule." Under the equal charge rule, which
arose from the AT&T divestiture of the BOCs,(280) the BOCs were required to charge a per-minute,
distance-sensitive rate for their transport offerings, regardless of how the underlying costs were
incurred. The TIC was intended as a transitional measure that initially made the transport rate
restructure revenue neutral for incumbent LECs and reduced any harmful interim effects on small
IXCs caused by the restructuring of transport rates.(281) Approximately 70 percent of incumbent
LEC transport revenues are generated through TIC charges, or approximately $3.1 billion,
according to USTA.(282)
211. The TIC is a per-minute charge assessed on all switched access minutes, including
those of competitors that interconnect with the LEC switched access network through expanded
interconnection. In the NPRM, we sought comment on how to reduce and eliminate the TIC in a
manner that fosters competition and responds to the D.C. Circuit's CompTel remand. We sought
comment on different methods of recovering the costs currently recovered by the TIC, including:
(1) giving the incumbent LECs significant pricing flexibility and allowing market forces to
discipline the recovery of the TIC, either alone or in conjunction with a phase-out of the TIC; (2)
quantifying and correcting all identifiable cost misallocations and other practices that result in
costs being recovered through the TIC; (3) combining the above approaches, for example, by
addressing directly the most significant and readily-corrected misallocations, and then relying on a
market-based approach to reduce what remains of the TIC; (4) providing for the termination of
the TIC over a specified time, such as three years. We specifically sought comment on the
possible reassignment of costs based on several explanations for the amounts in the TIC. The
NPRM also sought comment on how the resolution of the issues surrounding the TIC would be
affected by decisions on universal service, by the level of any residual costs, and by the adoption
of either the market-based or prescriptive approach to access reform.
2. Discussion
212. As a per-minute charge assessed on all switched access minutes, including those of competing providers of transport service that interconnect with the LEC switched access network through expanded interconnection, the TIC adversely affects the development of competition in the interstate access market. First, as discussed more fully below, some of the revenues recovered through the TIC should be recovered through other switched access elements, including transport rates other than the TIC. The TIC, as currently structured, provides the incumbent LECs with a competitive advantage for some of their interstate switched access services because the charges for those services do not recover their full costs. At the same time, the incumbent LECs' competitors using expanded interconnection(283) must pay a share of incumbent LEC transport costs through the TIC. Second, all other things being equal, the usage-rated TIC increases the per-minute access charges paid by IXCs and long-distance consumers, thus artificially suppressing usage of such services and encouraging customers to explore ways to bypass the LEC switched access network, particularly through the use of switched facilities of providers other than the incumbent LEC that may be less economically efficient than incumbent LECs.
213. As we noted in the NPRM, our goal is to establish a mechanism to reduce and
eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's remand.
To that end, we below identify several costs included in the TIC that should be reallocated to
other access elements. We conclude, however, that on the present record, we cannot immediately
eliminate the TIC entirely through these reassignments. We establish a mechanism that should
substantially reduce the remaining TIC over a short, but reasonable period. In addition, we will in
the near future refer a broad range of separations issues to a Joint Board for purposes of
determining whether certain costs currently allocated to the interstate jurisdiction and recovered
through the TIC more properly should be allocated to the intrastate jurisdiction. Finally, we
establish the means by which the remaining TIC amounts are to be recovered.
a. Reallocation of costs in the TIC
214. The record in response to the NPRM clearly establishes that some costs in the TIC
should be reallocated to other access elements. USTA, in conjunction with the incumbent LECs,
submitted extensive comments setting forth an incumbent LEC consensus explanation of the
causes for the sums in the TIC and estimates of the amounts associated with each explanation.(284)
While the current rulemaking record will not permit us to prescribe specific amounts that
individual incumbent LECs must shift from the TIC to specific access rate elements, it does permit
us to direct incumbent LECs to make certain cost reallocations and to require them to calculate
the appropriate level of the reallocation in the supporting materials filed with the tariffs
implementing the changes. Below, we discuss each of the identified causes of costs being
included in the TIC and the extent to which costs should be reallocated to other access elements
or categories.
215. In this Order, we do not address certain rate structure issues relating to incumbent
LECs subject to rate-of-return regulation. These LECs account for relatively few access lines.(285)
In some instances we direct price cap LECs to allocate costs to new rate elements that do not
currently exist for rate-of-return LECs. We anticipate that we will propose similar rate elements
in the forthcoming notice of proposed rulemaking addressing rate structure issues for incumbent
LECs subject to rate-of-return regulation. Recognizing the expense and difficulties of modifying
billing systems, we conclude that, until the rate structure issues are resolved for rate-of-return
companies, the costs allocated to new elements and any residual TIC revenues may continue to be
recovered by the incumbent LECs that are not subject to price cap regulation through per-minute
TIC rates assessed on both originating and terminating access.
216. As their primary challenge to the incumbent LEC proposals to reallocate costs from
the TIC, several parties argue that we should use forward-looking cost principles, or TELRIC, in
determining how much to shift from the TIC to other access categories. Some parties advocating
the use of such forward-looking cost standards assert that any costs not meeting these forward-looking cost standards should be eliminated from the TIC, and the incumbent LECs should not be
permitted to recover those amounts. One group of consumer advocates proposes that we need
not complete TELRIC studies before substantially reducing the TIC because BA/NYNEX has
already proposed, as part of their access charge reform compromise plan, to eliminate up to 80
percent of the TIC pending a determination of "service related" costs by the Commission.(286) We
conclude, however, that immediate, widespread, prescriptive action is not necessary to pressure
access rates toward market-based levels. Instead, we have determined that the most appropriate
first step towards access reform is to make the current rate structure as economically efficient as
possible within the limits of past ratemaking practices. These practices include setting rates based
on interstate-allocated costs, subject to price cap constraints for most large carriers.(287) As we
discuss more fully in Section IV, below, we intend in the future to rely primarily on market forces,
with a prescriptive backdrop, to move rates toward forward-looking economic cost. Therefore,
because we currently are not prescribing a forward-looking cost method for access reform, we
will require reassignment of certain TIC revenues based on an analysis of the separated, booked
costs already recovered through the TIC.
217. SS7 costs. Based on the record before us, we conclude that SS7 costs that are
recovered by the TIC should be removed from the TIC and allocated to the traffic-sensitive
basket. The record demonstrates that these costs are related to the signalling function and should
be recovered through local switching or signalling rate elements. The costs to be removed are the
costs of signal transfer points (STPs) that were included in the tandem-switching category for
jurisdictional separations purposes and the cost of the link between the end office and the STP
that is used only for SS7 signalling. The incumbent LECs shall distribute the STP costs
reallocated from the TIC to local switching or, if the incumbent LEC has established an unbundled
signalling rate structure, to appropriate SS7 elements, in tariffs filed to be effective January 1,
1998. The incumbent LEC shall distribute the costs of the link between the local switch and the
STP that are included in the TIC to local switching or, if provided, to the call-setup charge. This
change means that the incumbent LECs' SS7 prices will reflect the full cost of providing SS7
signalling and provide the proper price signals to developers of new services utilizing SS7. We
decline to adopt the suggestion of US West that we reallocate SS7 costs to services in the
trunking basket. As we conclude below in conjunction with our consideration of the SS7 rate
structure, the costs being reallocated are appropriately included in the traffic-sensitive basket.
218. Tandem switching costs. Several parties argue that the tandem switching rate must
be set to reflect the cost of providing the service. In the preceding section, we modified the
existing tandem-switched transport rate structure and revised certain of the pricing rules
applicable to elements of tandem-switched transport to establish a cost-based structure and to
respond to the court remand in CompTel v. FCC. The revised pricing rules applicable to tandem
switching include two separate elements -- a flat-rated port charge to be assessed when a port is
dedicated to a single customer and a per minute charge to be assessed for the traffic-sensitive
portion of the tandem switch. In three approximately equal annual steps, beginning January 1,
1998, we require reallocation of all tandem-switching revenues currently allocated to the TIC to
the tandem-switching rate element. As a result of this modification, the total revenues recovered
through the tandem switching rates will, subject to price cap limits, increase to the level of costs
assigned to the interstate jurisdiction by the separations process at the end of our plan. Equivalent
changes to the amounts recovered through the TIC must be made to ensure that over-recovery
does not occur. After this adjustment, in accordance with the CompTel remand, and to facilitate
the development of economically-efficient competition for tandem-switching services, the TIC
will not recover any costs that are attributable to tandem switching.
219. DS1/voice-grade multiplexer costs. We conclude that the costs of DS1/voice-grade
multiplexing(288) associated with analog local switches should be reassigned to the newly created
trunk ports category within the traffic sensitive basket. Analog switches require a voice-grade
interface on the trunk-side of the end office switch. Our separations rules assign the costs of
DS1/voice-grade multiplexers to the cable and wire category. The costs of these multiplexers
associated with switched access were originally included in the Part 69 transport revenue
requirement. The revised transport rules adopted in 1992 established transport rates based on
DS1 switch interfaces, and thus the rates did not include the costs of DS1/voice-grade
multiplexers. The costs of the DS1/voice-grade multiplexers are, therefore, included in the TIC.
Therefore, the costs associated with DS1/voice-grade multiplexing associated with analog local
switches should be reassigned to the trunk ports category within the traffic sensitive basket, to be
considered in conjunction with the development of appropriate rates for trunk ports, in tariffs filed
to become effective January 1, 1998. This will make recovery of the costs necessary to use an
analog switch port equivalent to the recovery of digital switch port costs, in which the
multiplexing function is included in the port itself.
220. Host/remote trunking costs. We agree with the parties that allege that the costs of host/remote links not recovered by the current tandem-switched transport rates should be included in the tandem-switched transport category. The record reflects that the rates for carrying traffic between the host and a remote switch, for which the tandem-switched transport rates, both fixed and per mile, are assessed, do not recover the full costs of this transmission service. These charges for host/remote service are in addition to charges that an IXC is assessed for either direct-trunked transport, or tandem-switched transport, between the serving wire center and the host end office. This reassignment will ensure that these transmission costs will be recovered from those using the transmission facilities, and must be included in tariff filings to become effective January 1, 1998. We reject NECA's suggestion that we include these costs in local switching on the theory that remote facilities are installed when it is more cost effective to do that than it is to install a new switch at the remote location. That would require all users of local switching to pay for these host/remote transmission facilities. Imposing the host/remote transmission cost on the users of host/remote facilities is more cost causative and will facilitate the development of access competition.
221. Additional multiplexers associated with tandem switching. Based on the record
before us, we conclude that an IXC's decision to utilize tandem-switched transport imposes the
need for additional multiplexing on each side of the tandem switch. The revised tandem-switched
transport rate structure provides for these multiplexers. For price cap LECs, recovery of the
costs associated with the multiplexers should, therefore, be shifted from the TIC to the tandem-switched transport category as of January 1, 1998, as explained in Section III.C. This realignment
of costs helps ensure that tandem-switched transport rates are cost based, as required by the
CompTel decision, and facilitates competitive entry for those services.
222. Use of actual minutes of use rather than an assumed 9000 minutes of use. The data
in the record provided by USTA and other incumbent LECs support a finding that for many
incumbent LECs, especially those serving less densely populated areas, the assumed 9000 minutes
of use per circuit is far higher than actual minutes of use. A tandem-switched transport rate
derived by dividing the cost of a circuit by an assumed usage level does not recover the costs of
the circuit when the actual usage is below that level. The costs not recovered through tandem-switched transport rates based on our current 9000 minutes of use assumption are being
recovered through the TIC. In the preceding section, we conclude that the pricing of tandem-switched transport transmission should be based on the actual average minutes of use on the
shared circuits and that such pricing would produce a cost-based rate. Accordingly, costs should
be removed from the TIC equal to the additional revenues realized from the new tandem-switched
transport rates when it is implemented in accordance with the rate structure established in Section
III.C.
223. Central Office Equipment (COE) Maintenance Expenses. The record in this
proceeding demonstrates that allocating COE maintenance expenses on the basis of combined
COE investment produces misallocations of these expenses among access services. USTA
correctly traces this problem to the Part 36 separations rules; the problem is then tracked in our
Part 69 cost allocation rules. Under our current rules, COE maintenance expenses are allocated
among separations categories, and then access services, based on the combined investment in the
three categories of the COE plant being maintained -- Central Office Switching, Operator
Systems, and Central Office-Transmission -- rather than on the individual investment in each of
those categories. As a result, a portion of the expense of maintaining local switches and operator
systems is recovered in rates for common line, transport, and special access even though those do
not utilize any local switching or operator systems.(289) Correcting this misallocation through
changes to Part 36 would require referral to a Federal-State Joint Board and therefore could not
be done in this proceeding. The misallocation can, however, be corrected by modifying section
69.401 of our rules to provide that the COE expenses assigned to the interstate jurisdiction should
be allocated on the basis of the allocation of the specific type of COE investment being
maintained, and we make the correction here. This will shift some costs to local switching from
common line and transport, and result in more cost-based rates. This shift must be reflected in
tariff filings to be effective January 1, 1998. We also plan to refer the underlying separations issue
to a Joint Board for its recommendation.
224. Separations-related causes. Several incumbent LECs argue that a substantial
portion of the TIC can be traced to decisions separating costs between the interstate and intrastate
jurisdictions. As explained by USTA and incumbent LECs, the largest portion of the amounts
recovered by the TIC results from the differences in the jurisdictional separations allocation
procedures for message (i.e., switched) services and special access services, and from the
consequent effects of the Commission's decision to use special access rates to establish transport
transmission rates when the Commission restructured transport rates. The current jurisdictional
separations process separates the costs of message services based on average cost factors; costs
of DS1 and DS3 special access services, in contrast, are separated using unit costing methods.
Because of the differences in these separations methodologies, special access-derived rates reflect
the costs of transport in areas in which special access services are most often offered (urban,
higher density areas), and do not reflect the costs of transport in rural, less dense areas. Another
alleged separations-related cause of the amounts in the TIC is the use of circuit termination counts
in the separations process to allocate costs between special access and switched services before
they are allocated between federal and state jurisdictions. This practice appears to allocate costs
disproportionately to switched services. The incumbent LECs assert that the use of direct costing
methods would assign many of these costs to local and intrastate services and to interstate
services other than transport.(290)
225. We find that some of the remaining costs recovered by the TIC result from at least
two different causes: (1) the separations process assigned costs differently to private line and
message (i.e., switched) services, resulting in costs allocated to special access being lower than
those allocated to the message category, even though the two services use comparable facilities --
rates for direct-trunked transport and the transmission component of tandem-switched transport,
which are switched services, therefore, do not recover the full amount of separated costs; and (2)
the cost of providing transport services in less densely populated areas is higher than that reflected
by transport rates derived from those special access rates. The existing record is inadequate to
permit us to identify more costs that could clearly be reallocated to interstate services.
Furthermore, the record indicates that some residual TIC costs may be appropriately allocated to
intrastate services. Because we will soon be considering a Notice of Proposed Rulemaking to
refer to a Joint Board questions regarding separations, we will leave the determination of the
ultimate allocation of the remaining costs recovered by the TIC until the conclusion of that
proceeding.
226. Incumbent LEC parties generally contend that special access rates provided an
acceptable initializing pricing level for transport transmission services in geographic areas where
significant amounts of special access services are provided, but do not reflect the cost of
providing transport service in low-density areas in which special access services are not as
widespread.(291) We recognize that rates for direct-trunked transport and for the transmission
component of tandem-switched transport, because they were established based on special access
rates, do not reflect the full cost of providing transport services in higher-cost, rural areas.
Because none of our other facilities-based rate elements recover costs reflecting this differential,
we conclude that the additional costs of rural transport currently are recovered through the TIC.
On the basis of the current record, however, we are unable to quantify these cost differentials.
Moreover, based on differences in network architectures, population density variations,
topography, and other factors that vary among LECs, we find that transport cost differentials are
also likely to vary greatly among incumbent LECs and among study areas served by the same
incumbent LEC. We do not believe, however, that we need to quantify these differences in this
Order to ameliorate this distortion caused by the current rate structure, because the requirements
set forth in the next paragraph will address this issue.
227. If an incumbent LEC deaverages its transport rates, either by implementing zone-density pricing under our rules(292) or by waiver, the underlying predicate is that the costs in low-density areas are higher than those in higher-density areas. The rates it sets for the different areas
should reveal a cost differential of at least that magnitude between low-density and high-density
areas served by that LEC. When an incumbent LEC deaverages transport rates, therefore, we
require it to reallocate additional TIC amounts to facilities-based transport rates, reflecting the
higher costs of serving lower-density areas. The reallocation we require here will permit
incumbent LECs, in deaveraging their transport rates, to achieve cost-based transport rates while
ensuring that a significant portion of costs reflecting the geographic cost difference are removed
from the TIC. Each incumbent LEC must reallocate costs from the TIC each time it increases the
deaveraging differential. We find that any incumbent LEC that has already deaveraged its rates
must move an equivalent amount from the TIC to its transport services. Under any of these
scenarios, the costs shall be reassigned to direct-trunked transport and tandem-switched transport
categories or subcategories in a manner that reflects the way deaveraging is being implemented by
the incumbent LEC. We do not require incumbent LECs that average their transport rates to
make a similar reallocation at this time, because of the difficulty in determining the amount to be
reallocated.
228. Price Cap Implementation issues. For purposes of phasing out the TIC, we are
keeping the TIC in its own service category in the trunking basket. The reallocation of costs from
the TIC to other access elements will require price cap LECs to adjust their price cap indices
(PCIs) and service band indices (SBIs) to reflect the new revenue streams. To accomplish these
reallocations, price cap LECs shall make exogenous adjustments to their PCIs and SBIs that are
targeted to the indices in question, rather than applying the exogenous adjustment proportionately
across all categories in the affected price cap basket. Thus, when a reallocation occurs within a
price cap basket, only the affected SBIs will be adjusted. When the reallocation affects service
categories in more than one basket, however, the affected PCIs and SBIs must be adjusted. The
upward or downward adjustment to the PCIs and upper SBIs shall be calculated as the percentage
of the revenues being added or subtracted from a basket or category, divided by the total revenues
recovered through the basket or category at the time of the adjustment. For example, if ten
percent of the revenues are being reallocated from a service category, the category upper SBI will
be reduced by ten percent. If that revenue amount is only three percent of the PCI for the basket,
the PCI is reduced by three percent.
b. Treatment of Remaining Costs Recovered by the TIC
229. Residual TIC reduction plan. After the costs identified above have been reallocated
to other access services, some costs will continue to be recovered by the TIC. While it is
desirable to eliminate the TIC as soon as possible by shifting the costs recovered by the TIC to
facilities-based rates, referring separations questions to a Joint Board is the best means of reaching
that ultimate objective, as we noted earlier. Even as we make this referral, we will require
incumbent LECs to target to the TIC price cap reductions arising in any price cap basket as a
result of the application of the "GDP-PI minus X-factor" formula until the per-minute TIC is
eliminated, as many parties have suggested.(293) These parties submit that this targeting will permit
incumbent LECs to manage the reduction in revenues recovered by the TIC, while reducing the
amount at issue in the TIC. Sprint states that, using a targeting approach, we would not need to
address the cost allocation issues raised by Part 36 and Part 69.(294) Targeting these price cap
reductions to the TIC reduces the TIC over a reasonable period, thereby ultimately substantially
reducing what is widely recognized to be an inefficient aspect of the access rate structure. We
require price-cap LECs to begin these targeted X-factor reductions to the TIC in tariff filings to
become effective July 1, 1997.
230. Targeting PCI reductions to the per-minute TIC will not change the overall revenue
levels that our price cap mechanisms permit incumbent LECs to receive. We have reallocated
those costs that the record shows are clearly related to other facilities-based elements. The
upcoming separations proceeding may provide additional data that will permit us to reallocate
more costs to facilities-based rate elements, or to the intrastate jurisdiction. The approach we
take is a reasonable response to the D.C. Circuit's remand directive, and establishes a plan that
should substantially reduce the TIC within a reasonable period, pending review of the
jurisdictional separations process.
231. We reject ALTS' allegation that targeting the productivity factor to the TIC
undercuts the rationale for the "just and reasonable" status of all price-cap rates, which ALTS
contends is dependant on the widespread application of the X-factor. The targeting approach that
we adopt will eliminate anticompetitive aspects of the TIC, which promotes inefficient entry into
the transport market by imposing some transport costs on IXCs that do not cause the costs to be
incurred. In addition, by spreading current TIC revenues across all price cap PCIs and SBIs, our
targeting method does not offer TIC revenues special insulation against the pressures of the
competitive marketplace, as would some proposals to bulk-bill the TIC to IXCs. We also decline
to adopt the approach of spreading the remaining costs recovered by the TIC proportionately
among all transport services, as proposed by State Consumer Advocates.(295) That approach might,
because of the unknown nature of the costs that will remain in the TIC, result in an excessive
reallocation to transport.
232. The D.C. Circuit instructed us to revise our transport rate structure rules to be more
consistent with cost-causation principles. There is conflicting evidence in the record concerning
the nature of the costs contained within the residual TIC; these costs may be traffic sensitive or
NTS and may be associated with common line, transport or switching services. BA/NYNEX
states, without explanation, that the costs in the TIC are NTS in nature.(296) To the extent that
some portion of the residual TIC has its origin in the methods used to separate cable and wire
facilities between the regulatory jurisdictions, it seems likely that BA/NYNEX is partially correct
in this assertion. The evidence, however, does not clearly resolve this issue.
233. If the costs remaining in the residual TIC are NTS, as BA/NYNEX suggests, then
traffic-sensitive recovery could artificially raise per-minute rates for interstate access. These
higher per-minute access rates could distort the market for interstate toll services by artificially
suppressing demand for interstate toll services and by encouraging users that efficiently could
make use of the network to instead seek other alternatives. Conversely, if costs remaining in the
residual TIC are usage-sensitive, flat-rating may also create a distortion by encouraging inefficient
overuse of interstate toll services. Because the limited evidence in the record suggests that at
least some amount of the residual TIC represents NTS costs, and because we wish to see that
consumers enjoy the benefits of usage of the network to the greatest extent possible, we find that
we should err, if at all, on the side of NTS recovery of these costs. For elements not
demonstrably reflecting usage-sensitive costs, therefore, we find, on balance, compelling policy
arguments in favor of flat-rated pricing because usage-sensitive recovery of any NTS costs
artificially suppresses demand for interexchange calling by inflating per-minute rates. In the
absence of definitive evidence as to the nature of the residual TIC amounts, we conclude that the
public interest would be better served by imposing these costs on IXCs on a flat per-line basis,
rather than on a per-minute basis.
234. Accordingly, we seek to migrate the current usage-based charges into flat-rated
charges as quickly as possible consistent with avoiding short-term market distortions. We do that
by: (1) on July 1, 1997, drawing down the per-minute-of-use residual TIC charge by targeting the
price cap productivity (X-factor) adjustment to the trunking PCI and, specifically, the TIC SBI,
thus effectively spreading those residual TIC revenues, which otherwise would be recovered
exclusively on a minute of use basis, among the universe of (both traffic-sensitive and NTS)
access services and moving TIC recovery closer to flat-rated recovery; (2) starting in January
1998, recovering remaining residual TIC revenues through PICC charges each year, subject to the
PICC cap; and (3) drawing down any remaining residual per-minute TIC revenues each July by
targeting the annual X-Factor adjustments to those revenues.
235. The targeting of price cap productivity reductions to the TIC will be accomplished in
the following manner. Because the price cap LECs will not have reallocated facilities-based costs
contained in the TIC before they file tariffs to be effective July 1, 1997, we first direct the price
cap LECs to compute their anticipated "residual" TIC amount by excluding revenues that are
expected to be reassigned on a cost-causative basis to facilities-based charges in the future,
pursuant to the transition plan described in this Order. To determine TIC amounts so excluded,
NYNEX, BellSouth, U S West, and Bell Atlantic shall use the residual TIC percentage estimates
contained in USTA's ex parte letter filed May 2, 1997, to compute their respective anticipated
residual TICs.(297) SBC Communications shall use the cost data for SWBT, Pacific Bell, and
Nevada Bell contained in its ex parte letter filed April 24, 1997 to estimate its residual TICs.(298)
Each remaining price cap LEC shall estimate a "residual" TIC in an amount equal to 55 percent of
its current TIC revenues. For these remaining price cap LECs, we find that this 55 percent level
represents a reasonable, but conservative estimate. The 55 percent level corresponds
approximately to the lowest residual TIC percentage identified in the record, and three of the
price cap LECs that submitted data on the record are within a few percentage points of this level.
We therefore find that residual TIC estimates at the 55 percent level for companies that have not
developed actual percentage estimates on the record will be reasonable, but will also minimize the
risk that we will eliminate facilities-based TIC costs with targeted X-factor price cap reductions.
236. The "GDP-PI minus X" adjustments LECs ordinarily would apply to each of their
price cap indices (i.e. revenues) for the July 1, 1997, annual filing shall be applied by LECs to
reduce their calculated anticipated "residual" TIC revenues. For tariffs to become effective July 1,
1997, the price cap LECs shall calculate the annual price cap reduction resulting from the
application of the productivity adjustment to each basket other than the interexchange basket, and
shall sum the dollar effects of the adjustment. If the effect is to reduce PCIs, the dollar amount
shall be targeted completely to the trunking basket PCI and the TIC SBI, without changing the
PCIs or SBIs for any other basket or service category. The percentage reduction in the PCI and
SBI shall equal the ratio of the total dollar effect of the price cap annual adjustment to the dollar
value of the PCI and SBI, respectively. If the effect of the productivity adjustment would increase
the PCIs, the PCIs shall be adjusted in their usual fashion, and no targeting to the TIC shall occur.
This avoids exacerbating an already inefficient aspect of the access rate structure.
237. Price cap LECs will begin reallocation of facilities-based TIC components on
January 1, 1998. At that time, the price cap LECs should all have actual cost data reflecting the
facilities-based components of the TIC. If, at that time, any price cap incumbent LEC determines
that its use of the applicable residual TIC estimate, above, resulted in more PCI reductions being
targeted to the interconnection charge in its tariff filing to become effective on July 1, 1997, than
were required to eliminate the per-minute interconnection charge, then that price cap LEC shall
make necessary exogenous adjustments to its PCIs and SBIs to reverse the effects of the excess
targeting.
238. For tariff filings to become effective July 1, 1998, and annually in July thereafter, all
price cap LECs will have actual cost data reflecting the facilities-based components of the TIC
and will be able to target reductions to actual anticipated residual per-minute TIC amounts
without resort to the percentage estimates prescribed above. For these filings, "GDP-PI minus X"
adjustments similar to those described above shall be targeted to the trunking basket PCI and the
TIC SBI to reduce residual per-minute TIC amounts recovered through per-minute originating
and terminating access charges.
239. To avoid the adverse effects of per-minute pricing of costs that may be NTS, we
require price cap LECs to recover residual TIC amounts not otherwise eliminated by targeted X-factor reductions, described above, through the flat-rated PICC to the extent the PICC is below
its ceiling. In order to ensure that primary residential and single line business subscribers do not
pay more than their fair share of the residual TIC, however, we prohibit price cap LECs from
charging a PICC on primary residential or single-line business lines that recovers TIC revenues
that exceed residual TIC revenues permitted under our price cap rules divided by the total number
of access lines. As the PICC caps increase each year, more of the residual TIC charge can be
included in the flat-rated PICC. Any residual TIC amounts that cannot be recovered through the
PICC shall be recovered on a per-minute basis from originating traffic, subject to a cap on per-minute originating access charges, as explained in Section III.A, above.(299) If this cap is exceeded,
the residual TIC shall be recovered through per-minute terminating switched access rates.
Although a portion of the residual TIC will be recovered through PICC charges, the TIC will
remain in the trunking basket. Therefore, to ensure that excess headroom is not created in the
trunking basket, price cap LECs shall include the TIC revenues received from the flat-rated PICC
in calculating the API for the trunking basket and the SBI for the TIC.
240. The policies adopted when the TIC was created require incumbent LECs to assess
the TIC on all minutes that interconnect with the incumbent LEC switched access network,
including minutes that transit a CAP's transport network without using any incumbent LEC
transport facilities. As we noted in the NPRM,(300) and as some commenters assert,(301) if the
incumbent LEC's transport rates are kept artificially low and the difference is recovered through
the TIC, competitors of the incumbent LEC pay some of the incumbent LEC's transport costs. In
a recent arbitration between Teleport and US West, the Colorado Commission has precluded US
West from imposing the TIC on competitors for the portion of transport that U S West does not
provide.(302) We find that our current policy, which requires competitive entrants to pay the TIC
even in cases where it provides its own transport, is inconsistent with the procompetitive goals of
the 1996 Act. We therefore modify our rules to permit incumbent LECs to assess any per-minute
residual TIC charge only on minutes that utilize incumbent LEC transport facilities, and not on
any switched minutes of CAPs that interconnect with the incumbent LEC switched access
network at the end office.
241. Other Approaches. We reject alternative methods for recovering the TIC that were
proposed in the record. The majority of the incumbent LEC parties supported recovering any
remaining costs in the TIC by bulk billing such amounts to IXCs based on each IXC's share of
revenues, or presubscribed lines.(303) Other incumbent LECs proposed establishing "public policy"
elements to recover the residual TIC.(304) These approaches would insulate TIC costs from the
pressures of the competitive market and guarantee incumbent LECs the recovery of these
amounts, even where such costs have resulted from inefficiencies that the competitive market --
but not regulators -- detected and otherwise would eliminate. This would be inconsistent with the
development of an efficient competitive market. Our resolution of the TIC will allow LECs a
reasonable opportunity to recover their costs, without providing a guarantee. We also reject the
idea of spreading the remaining costs recovered by the TIC proportionately over all transport
services, as suggested by AARP, et al. As we noted earlier, some of the remaining costs in the
TIC may implicate certain Commission decisions separating costs between the federal and state
jurisdictions and thus may be related to services other than transport. We, therefore, believe that
awaiting further consideration by a Joint Board is a more practical means of ultimately resolving
the TIC issue.
242. Some parties have requested that a portion of the costs recovered by the TIC should
be considered to be universal service costs.(305) We do not find this argument persuasive.
Elsewhere in this Order, we have reallocated the TIC's identifiable cost components. On the basis
of the record before us, we cannot clearly associate the remaining TIC revenues with any
particular facilities or services. The parties arguing that these costs are related to universal service
have not made any clear showing as to the source of these costs or demonstrated why they believe
that these TIC revenues are either costs of universal service that should be recovered from the
universal service fund or constituent costs of supported services.
243. We have analyzed the effect of the reallocation of TIC costs and the new recovery
procedures on small business entities, including small LECs and new entrants, and find that the
changes will facilitate the development of a competitive marketplace by moving incumbent LEC
rates toward cost-based levels and by eliminating the ability of incumbent LECs to assess the TIC
on switched access minutes that do not use incumbent LEC transport facilities. These pricing
revisions may create new opportunities for small entities wishing to enter the telecommunications
market.
E. SS7 Signalling
1. Background
244. SS7 is a network protocol used to transmit signalling information over common
channel signalling networks. As described in greater detail in the NPRM, signalling networks like
SS7 establish and close transmission paths over which telephone calls are carried.(306) Signalling
networks are also used to retrieve information from remote data bases to enable credit card and
collect calling. SS7 systems are also used to transmit information needed to provide custom local
area signalling services like automatic call back.(307)
245. An SS7 network consists of several primary components -- signalling points, signal
transport links, and dedicated lines used for access to an incumbent LEC's signalling network
(signal links). Signalling points are nodes in an SS7 network that originate, transmit, or route
signalling messages. There are three principal types of signalling points: service switching points
(SSPs), service control points (SCPs), and signalling transfer points (STPs). An SSP is a switch
that can originate, transmit, and receive messages for call setup and database transactions. An
SCP serves as a database that stores and provides information used in the routing of calls, such as
the line information database (LIDB) used to validate calling cards or the database that identifies
the designated long-distance carrier for toll-free service. An STP is a specialized packet switch
that performs screening and security functions and switches SS7 messages within the signalling
network.
246. Signal transport links are facilities dedicated to the transport of SS7 messages within
the incumbent LEC's signalling network. Finally, dedicated network access lines (DNALs) consist
of dedicated circuits that transmit queries between the incumbent LEC's signalling network and
the signalling networks of other individual carriers, such as IXCs. A carrier's DNAL is connected
to an incumbent LEC's signalling network through a port on an incumbent LEC's STP.
247. Under the interim transport rate structure, incumbent LECs charge IXCs and other
access customers a flat-rated charge (dedicated signalling transport) under Part 69 for the use of
dedicated facilities used to connect to the incumbent LEC's signalling network. This rate element
has two subelements -- a flat-rated signalling link charge for the dedicated network access line
(dedicated signalling line) and a flat-rated STP port termination charge.(308) Most other signalling
costs, such as costs for switching messages at the STP and transmitting messages within the
signalling network, are not recovered through facility-based charges and thus most, if not all, of
these costs are embedded in the TIC or in the local switching charge and recovered through per-minute-of-use charges. Retrieval of information from databases for toll-free calls and LIDB
databases, however, is charged on a per-query basis.(309)
248. In the NPRM, we solicited comment on whether the Commission should revise its
rate structure for SS7 services to reflect the SS7 rate structure implemented by Ameritech.(310) In
March, 1996, the Commission granted a waiver to Ameritech, allowing it to restructure its
recovery of SS7 costs through four unbundled charges.(311) These charges correspond to various
functions performed by signalling networks: signal link, STP port termination, signal transport,
and signal switching.
249. The Ameritech waiver was granted to allow Ameritech to realign its charges for SS7
services more closely with the manner in which such costs are incurred. Unbundling of SS7
services from transport and local switching ensures that transport and local switching customers
do not pay for SS7 services they do not use. Unbundling also enables Ameritech to offer SS7
services to competing providers of local exchange and exchange access services without requiring
the purchase of other elements that the competitors do not need.(312) In support of its waiver
petition, Ameritech noted that it had received numerous customer requests for such unbundling.
It also explained that it had deployed equipment necessary for measuring third-party usage of its
SS7 networks, enabling the company to bill its SS7 services separately from its switched access
services.(313)
250. The NPRM also requested comment on whether incumbent LECs should be allowed
to impose separate charges for ISDN User Part (ISUP) messages and Transaction Capabilities
Application Part (TCAP) messages.(314) ISUP messages are used to set up and take down calls.
For example, ISUP messages include the initial address message used to establish and close the
transmission path used to carry a telephone call.(315) TCAP messages, on the other hand, are used
to carry information between SSPs that support particular services, such as toll free services,
LIDB services and certain custom local area signalling services (CLASS) like automatic call
back.(316) We noted that differentiation between charges for ISUP and TCAP messages may be
economically justified because TCAP messages tend to be shorter in average length and place
lower demands on the signalling network that ISUP messages.(317)
251. The NPRM also requested comment regarding the appropriate placement of SS7
signalling elements in price cap baskets. Currently, STP port termination rates and charges for the
signalling link, or DNAL, are placed in the trunking basket.(318) Because both services are
dedicated to particular SS7 customers, rates for these elements are flat-rated. We requested
comment on whether the STP port termination charge should be placed in its own service
category in the traffic-sensitive basket. We noted that interconnectors can provide their own
signalling link, exposing that service element to some measure of competition. The STP port
termination, on the other hand, is relatively insulated from competitive pressures because it is part
of the incumbent LEC's STP and must be purchased from the incumbent LEC under existing
network architecture.
2. Discussion
252. As we noted in the Ameritech SS7 Waiver Order, the removal of SS7 costs from the
local switching and transport interconnection charge rate elements would benefit access
customers that pay for these services but do not actually use an incumbent LEC's signalling
services. It would also benefit alternative local service providers by enabling them to purchase
separate SS7 services from incumbent LECs to support their provision of competing local
exchange or exchange access services.(319) Unbundling the individual SS7 components into
separate charges would further promote efficiency by ensuring that signalling charges more
accurately reflect the costs of providing such services. Competitive service providers could limit
their signalling costs by purchasing only the signalling elements they need.(320) Despite these
benefits, however, we are reluctant to impose on incumbent LECs the cost burden of installing
metering or other equipment needed to measure third party usage of signalling facilities.(321) In
granting Ameritech a waiver to implement its unbundled SS7 rate structure, we noted that
Ameritech had previously installed the equipment and other facilities needed to meter independent
signalling usage.(322) Although we encourage actions that would promote disaggregation and
unbundling of SS7 services, we will not require incumbent LECs to implement such an approach
and incur the associated equipment costs of doing so. The record indicates that, as a general
matter, the costs of mandating the installation of metering equipment may well exceed the benefits
of doing so.(323)
253. Instead, we will permit incumbent LECs to adopt unbundled signalling rate
structures at their discretion and acquire the appropriate measuring equipment as needed to
implement such a plan. Specifically, incumbent LECs may implement the same unbundled rate
structure for SS7 services that we approved in the Ameritech SS7 Waiver Order.(324) We
recognize, however, that other signalling rate structures may achieve the same benefits that are
available under the Ameritech rate structure. Hence, an incumbent LEC may implement an
unbundled signalling rate structure that varies from the approach implemented in the Ameritech
SS7 Waiver Order by filing a petition demonstrating that the establishment of new rate elements
implementing such a service is consistent with the public interest.(325) We note, however, that
variations in signalling rate structures among incumbent LECs could impose burdens on IXCs if
IXCs must adapt to a diverse range of unbundled signalling rate structures.(326) We anticipate that,
if incumbent LECs choose to adopt unbundled rate structures for their SS7 network services, they
will evaluate how the implementation of these plans will affect their prospective customers.(327)
254. With respect to rate differentiation between ISUP and TCAP messages, the NPRM
expressed the concern that imposing rate differentiation may be inconsistent with rate structure
simplicity.(328) Several commenters indicate that the costs of implementing rate differentiation
would exceed the benefits of such an approach.(329) We further note that commenters offered little,
if any, general support for the adoption of rate differentiation. Accordingly, to avoid unnecessary
complexity and to avoid the imposition of unnecessary regulatory costs, we will not impose a rate
differential between ISUP and TCAP messages.
255. With respect to the placement of SS7 rate elements in price cap baskets, we have
previously recognized that the signalling link and the STP port termination are not subject to the
same level of competition. As noted in the Ameritech SS7 Waiver Order, STP port termination is
provided only by incumbents while the signalling link can be provided by SS7 customers
themselves or by other alternative providers.(330) Comments filed in this proceeding also
acknowledge this competitive disparity.(331) Although Ameritech discounts the risk that STP port
termination charges would be used to offset price reductions for the signal link, it nevertheless
acknowledges the existence of the competitive differential we suggested in the NPRM. Other
commenters argue that the competitive disparity is sufficient to justify concerns that price cap
LECs would adjust their rates to account for the competitive differential. Accordingly, we will
establish a new STP port termination rate element in the traffic-sensitive basket. Placing these
SS7 services in different price cap baskets will ensure consistency with the Commission's general
approach of maintaining elements with similar competitive characteristics in the same service
baskets.
F. Impact of New Technologies
256. The NPRM requested comment regarding the rate structure treatment of new
technologies that enable new telecommunications services and, by enhancing the productivity of
telecommunications facilities, lower prices for services in the future. These technologies, which
we describe in greater detail in the NPRM, include synchronous optical networks (SONET),
Asynchronous Transfer Mode (ATM) switching, and advanced intelligent networks (AIN). We
invited commenters to recommend specific rate structure rules that would reflect the manner in
which incumbent LECs incur costs when providing services utilizing such new technologies.(332)
257. As a general matter, the Commission is reluctant to adopt detailed rules governing
rate structures for recovering the cost of deploying advanced technologies. We note that, in the
Price Cap Third Report and Order, we adopted rules that permit price cap LECs to petition the
Commission for the establishment of one or more switched access rate elements to accommodate
new services.(333) Under these rules, petitioners must demonstrate either of the following: 1) that
the new rate elements would be in the public interest; or 2) that another LEC has previously
obtained approval to establish identical rate elements and that the original petition did not rely
upon a competitive showing as part of its public interest justification.(334) Because technological
advancements emerge rapidly, the adoption of uniform rate structures corresponding to particular
technologies may slow investment in the development of newer technologies or improvements in
current technologies. Indeed, as a general matter, incumbent LECs oppose the adoption of
uniform rate structures for new technologies, suggesting that strict uniform rules in this regard
could inhibit development of such technologies. Accordingly, we will refrain from adopting in
this Order specific rate structures with respect to SONET, AIN, or other new technologies. As
noted above, however, our rules already accommodate rate element adjustments that may be
needed on an ad hoc basis when technological advancements justify such modifications. As
particular new technologies become used on a widespread basis, we can always consider whether
there is a need for a uniform rate structure at that point.
IV. BASELINE RATE LEVELS
A. Primary Reliance on a Market-Based Approach
With A Prescriptive Backdrop and the
Adoption of Several Initial Prescriptive Measures
1. Background
258. In the NPRM, we established a goal of encouraging efficient competitors to enter
local exchange access markets so that incumbent LECs would face substantial competition for the
entire array of interstate access services.(335) As a particular service becomes subject to substantial
competition from new providers, we proposed to remove that service from price cap and tariff
regulation.(336) We sought comment on two general approaches for a transition to reliance on
substantial competition to ensure that interstate access charges are closely related to forward-looking economic costs: a "market-based" approach and a "prescriptive" approach. Under a
market-based approach, we would permit market forces to operate as competition emerges,
allowing an incumbent to change its prices in response to competitive entry. To that end, we
proposed a two-phase approach in which incumbent LECs would be permitted certain pricing
flexibility upon a showing that meaningful competitive entry is possible within a particular local
exchange and exchange access market, followed by a further relaxation of price cap regulation
when meaningful actual competition developed within the market.(337) We did not propose,
however, to abandon the possibility of using the prescriptive tools at our disposal in the event that
competition does not develop in some places.
259. As an alternative to the proposed market-based approach, we also sought comment
on a prescriptive approach, under which incumbent LECs would be required to change their
prices for some or all exchange access services using specific measures adopted by the
Commission to more accurately ensure that access charges are closely related to the economic
costs of providing interstate access services.(338) We also invited comment whether the two
approaches could be merged in some fashion.(339) We emphasized that our ultimate goal under any
approach, whether market-based, prescriptive or combined, is to remove from price cap
regulation LEC services that are subject to substantial competition. Instead of price cap
regulation, we expect eventually to rely on the operation of competitive local markets to prevent
incumbent LECs from exercising market power, and thereby to protect consumers.
260. In this section, we endorse the use of a market-based approach generally. Our
market-based approach will retain the protection afforded by price cap regulation, while relaxing
particular restrictions on incumbent LEC pricing as competition emerges, thereby permitting the
development and operation of competitive markets, which will maximize the efficient allocation of
telecommunications services and promote consumer welfare. This section also explains how, if
competition fails to emerge over time for certain access services in particular geographic areas,
we will ensure that the rates for those services reflect the forward-looking economic costs of
providing the services. In the NPRM, we sought comment on a number of specific issues
concerning the timing and degrees of pricing flexibility and ultimate deregulation. We recognize
that we must attend carefully to this task of granting incumbent LECs increased pricing flexibility
commensurate with competitive developments, and we will resolve these issues of timing and
degree in detail in a subsequent report and order in this docket, where we can more fully discuss
these matters.
261. Elsewhere in this Order, we adopt or propose several measures that work within our
current price cap structure to lower baseline access charge rate levels consistent with evidence
that the revised rate levels better reflect the underlying costs of providing interstate access
services. In Section IV.C below, we order an exogenous cost reduction to reflect the completion
of the amortization of equal access costs. In Section IV.D, we order reallocation of certain
marketing and retail expenses and discuss the reallocation of GSF costs. We issue a further notice
on GSF costs in Section VII. In the companion Price Cap Fourth Report and Order, which we
also adopt today, we modify our current price cap plan by adopting a single productivity offset
(X-Factor) of 6.5 percent and eliminating sharing while maintaining the low-end adjustment.
2. Discussion
262. The Commission's objective is the one set forth in the 1996 Act -- "opening all
telecommunications markets to competition."(340) Therefore, we must ensure that our own
regulations do not unduly interfere with the development and operation of these markets as
competition develops. If we successfully reform our access charge rules to promote the operation
of competitive markets, interstate access charges will ultimately reflect the forward-looking
economic costs of providing interstate access services. This is so, in part, because Congress
established in the 1996 Act a cost-based pricing requirement for incumbent LECs' rates for
interconnection and unbundled network elements, which are sold by carriers to other carriers. As
we have recognized, interstate access services can be replaced with some interconnection services
or with functionality offered by unbundled elements.(341) Because these policies will greatly
facilitate competitive entry into the provision of all telecommunications services, we expect that
interstate access services will ultimately be priced at competitive levels even without direct
regulation of those service prices.
263. We decide that adopting a primarily market-based approach to reforming access
charges will better serve the public interest than attempting immediately to prescribe new rates for
all interstate access services based on the long-run incremental cost or forward-looking economic
cost of interstate access services. Competitive markets are superior mechanisms for protecting
consumers by ensuring that goods and services are provided to consumers in the most efficient
manner possible and at prices that reflect the cost of production. Accordingly, where competition
develops, it should be relied upon as much as possible to protect consumers and the public
interest. In addition, using a market-based approach should minimize the potential that regulation
will create and maintain distortions in the investment decisions of competitors as they enter local
telecommunications markets. Finally, under the 1996 Act, implicit universal service subsidies,
wherever possible, are to be made explicit and supported by all carriers on an equitable and non-discriminatory basis.(342) To the extent that any implicit subsidies remain in interstate access
charges because it was not feasible to identify them or make them explicit, our market-based
approach will have the effect of making those implicit subsidies subject to being competed away
as competitors offer comparable services at prices that do not include the subsidies. In addition,
we note that the rate structure changes we adopt today go a long way towards achieving such
ends because the inefficiency produced by distortions in markets "rises as a quadratic function of
the relative price distortion."(343) Therefore, the first steps made toward removing distortions
caused by our regulations will produce the greatest benefits.
264. The market-based approach to access charge reform that we adopt will not, as some
parties assert, expose customers of interstate access services to the unfettered exercise of market
power.(344) We will continue to maintain the current mechanisms upon which we rely to ensure that
rates for these services are "just and reasonable,"(345) and not unjustly or unreasonably
discriminatory.(346) Instead of exposing customers to harm, we expect that permitting incumbent
LECs certain kinds of pricing flexibility in response to the development of competition will allow
prices for interstate access services to adjust in ways that reflect the underlying economic costs of
providing those services without moving outside the range of rates that are just and reasonable.
This process of relaxing regulation as competition develops, and ultimately deregulating services
subject to effective competition, is well established. For example, many of the types of pricing
flexibility discussed in the NPRM are similar to forms of pricing flexibility we have in the past
accorded incumbent LECs and IXCs facing increased competition in markets for particular
services.(347)
265. Economic teaching also leads to the conclusion that rates for interstate access
services will generally move toward the forward-looking economic cost of providing such
services in response to increased competition in local exchange and exchange access markets.(348)
In addition, competition will do a better job of determining the true economic cost of providing
such services. As competitive entry becomes increasingly possible, IXCs that now purchase
interstate switched access services from incumbent LECs will be able to bypass those services
where the prices (interstate access charges) do not reflect the economic costs of providing the
underlying services. Those IXCs can do this by entering the local markets themselves as local
exchange service providers, thereby self-providing interstate access services for their new local
exchange service customers. They can also seek out competitive providers of comparable
services. As customers choose providers other than incumbent LECs as their local providers,
interstate access services will come to be priced competitively. Incumbent LECs will have to
respond to competitors' offerings with lower-priced access services of their own in order to retain
customers that would otherwise switch to competitors' networks, further increasing the effect of
competition on overall access charge payments.
266. The 1996 Act has created an unprecedented opportunity for competition to develop
in local telephone markets. It also has provided this Commission with tools for opening markets
to competition, and for implementing our market-based relaxation of regulation so that interstate
access charges reflect forward-looking economic costs. We recognize, however, that competition
is unlikely to develop at the same rate in different locations, and that some services will be subject
to increasing competition more rapidly than others.(349) Accordingly, we anticipate that
competition will drive rates for some interstate access services toward more economically efficient
levels more rapidly in some areas than rates for other services or in other areas. Where
competition develops, we will provide incumbent LECs with additional flexibility, culminating in
the removal of incumbent LECs' interstate access services from price regulation where they are
subject to sufficient competition to ensure that the rates for those services are just and reasonable,
and are not unjustly or unreasonably discriminatory.
267. We also recognize, however, that there will be areas and services for which
competition may not develop. Therefore, we shall retain many of the existing safeguards afforded
by our price cap regulation, including the productivity offset (X-Factor), which requires
incumbent LECs to adjust their access charges to reflect changes in the economic cost of
providing service. In addition, we also adopt a prescriptive "backstop" to our market-based
approach that will serve to ensure that all interstate access customers receive the benefits of more
efficient prices, even in those places and for those services where competition does not develop
quickly. To implement our backstop to market-based access charge reform, we require each
incumbent price cap LEC to file a cost study no later than February 8, 2001, demonstrating the
cost of providing those interstate access services that remain subject to price cap regulation
because they do not face substantial competition. The Commission will require submission of
such studies before that date if competition is not developing sufficiently for our market-based
approach to work. Studies should identify and quantify forward-looking costs, short-run and
long-run, that are incremental to providing each such service, and also costs that are common as
between various services. These studies are required only for non-competitive services; as stated
above, we do not intend to regulate prices of services that are subject to substantial competition.
268. We have chosen this date in order to give competition sufficient time to develop
substantially in the various markets for interstate exchange access services. We have also chosen
this date to permit us and all interested parties to take into account the effects of implementing the
substantial changes that we adopt in this Order and that we will be adopting elsewhere to satisfy
the universal service goals in section 254. By this date, we also expect to have additional
regulatory tools by which to assess the reasonableness of access charges. We may, for example,
be able to establish benchmarks based on prices for the interstate access services for which
competition has emerged, and use the prices actually charged in competitive markets to set rates
for non-competitive services and markets. Carriers could be required either to set their rates in
accordance with the benchmarks or to justify their rates using their cost studies.
269. We anticipate that the pro-competitive regime created by the 1996 Act, and
implemented in the Local Competition Order and numerous state commission decisions, will
generate competition over the next few years. Further, it would be imprudent to prejudge the
effectiveness of those measures at creating competitive local markets. Rather than ignore or
interfere with the effects of this developing competition on prices for interstate access services,
we find that the public interest is best served by permitting emerging competition to affect access
charge rate levels. In addition, the experience we gain from observing the effects of emerging
competition on interstate access services will permit us more effectively and efficiently to
implement any prescriptive measures that may be needed in the future to ensure that interstate
access services remaining subject to regulation are priced in accordance with the forward-looking
economic cost of providing those services.
270. Economic logic holds that giving incumbent LECs increased pricing flexibility will
permit them to respond to competitive entry, which will allow prices to move in a way that they
would not have moved were the pricing restrictions maintained.(350) This can lead to better
operating markets and produce more efficient outcomes. Deregulation before competition has
established itself, however, can expose consumers to the unfettered exercise of monopoly power
and, in some cases, even stifle the development of competition, leaving a monopolistic
environment that adversely affects the interests of consumers.(351) Therefore, it is important that
we design our market-based approach carefully. We must, among other things, decide which, if
any, of the rules setting forth specific competitive triggers and corresponding flexibility as
proposed in the NPRM we should adopt. We will resolve these issues in the subsequent report
and order in this docket.
271. As set forth in the summary of comments appended to this order, AT&T cites to
Farmers Union Central Exchange, Inc. v. FERC(352) for the proposition that "[r]eliance on
competitive forces to constrain exchange access rates, particularly in the presence of strong
indications that market forces will not produce the intended results, would be arbitrary and
capricious and contravene the Commission's statutory duty to ensure just, reasonable, and
nondiscriminatory rates."(353) We disagree with AT&T's assertion. In Farmers Union, FERC had
stated in its relevant order that ratemaking for oil pipelines should be used solely to prevent price
gouging, and had interpreted the Congressional mandate of "just and reasonable" rates as
requiring that rates be kept within the zone of commercial reasonableness, not public utility
reasonableness.(354) Under this interpretation, FERC had concluded that it would rely primarily on
market forces to keep rates reasonable.(355)
272. The court in Farmers Union recognized that "[m]oving from heavy to lighthanded
regulation . . . can be justified by a showing that . . . the goals and purposes of the statute will be
accomplished through substantially less regulatory oversight," but objected to FERC's failure to
establish that its new approach would satisfy the "just and reasonable" standard.(356) The court
rejected FERC's position that oil pipeline ratemaking should protect only against "egregious
exploitation and gross abuse" as being inconsistent with the mandate that Congress had
established for FERC.(357) The court concluded that FERC had not shown that market forces were
sufficient to rely upon in setting reasonable rates.(358)
273. We reject AT&T's argument that our market-based approach to access charge
reform is analogous to FERC's conduct at issue in Farmer's Union. Our access charge and price
cap rules are designed to ensure that access charges remain within the "zone of reasonableness"(359)
defining rates that are "just and reasonable,"(360) and our market-based approach will also be
designed to implement this statutory requirement. It will not remove incumbent LECs from
regulation immediately, but will implement deregulation in steps, as competitive conditions
warrant. Throughout the transition to deregulation in the face of substantial competition, we will
maintain many safeguards against unjust or unreasonable rates, such as the price cap indices. We
will deregulate incumbent LEC services only when it is reasonable to conclude that competition
has developed to such an extent that the market will ensure just and reasonable rates.(361)
274. Second, our market-based approach is an eminently reasonable method for pursuing
our goal of promoting competition and ensuring the economically efficient pricing of interstate
access services. As competition emerges, the market-based approach will permit access charges
to move towards the levels that will prevail in competitive markets. During the transition to
competitive markets, access services not subject to competition will remain subject to price cap
regulation, and we will eventually prescribe rates for those services at forward-looking economic
cost levels, to ensure that all consumers reap the benefits of economically-efficient prices. Unlike
the FERC regulation at issue in Farmers Union, our market-based approach to promoting the
development of competitive markets and economically-efficient pricing will not be based on
"largely undocumented reliance on market forces . . . ."(362) Instead, we will design our approach
so that deregulation occurs only when the reliability of market forces can be fully determined with
respect to a particular service. Finally, we observe that FERC's mandate in Farmers Union was
one of rate regulation due to market failure and concern over monopoly power.(363) In light of the
1996 Act, our mandate is no longer strictly or solely one of rate regulation. Congress has stated
its desire to establish "a pro-competitive, deregulatory national policy framework."(364) Our
market-based approach will be designed to coincide with and promote this objective.
275. Price Squeeze Concerns Are Adequately Addressed. Several parties have argued
that current access charge rate levels create the conditions for an anticompetitive price squeeze
when a LEC affiliate offers interexchange services in competition with IXCs.(365) A price squeeze,
as the term is used by these parties, refers to a particular, well-defined strategy of predation that
would involve the incumbent LEC setting "high" prices for interstate exchange access services,
over which the LEC has monopoly power (albeit constrained by regulation), while its affiliate is
offering "low" prices for long-distance services in competition with the other long-distance
carriers. Because interstate exchange access services are a necessary input for long-distance
services, these parties argue that an incumbent LEC can create a situation where the relationship
between the LEC's "high" exchange access prices and its affiliate's "low" prices for long-distance
services forces competing long-distance carriers either to lose money or to lose customers even if
they are more efficient than the LEC's affiliate at providing long-distance services. It is this
nonremunerative relationship between the input prices and the affiliate's prices, and not the
absolute levels of those prices, that defines a price squeeze. In the most extreme case, a price
squeeze involves a monopolist setting input prices that are actually higher than its prices in the
output market.
276. Price cap regulation of access prices limits the ability of LECs to raise the prices of
the input services. Commenters raising price squeeze concerns argue, however, that a LEC's
interexchange affiliate will still be in a position to implement a price squeeze by setting long-distance rates close to the rates for access services, thereby forcing IXCs to charge below-cost
rates to retain customers. They argue that LECs' interexchange affiliates have lower costs of
providing interexchange services because of their affiliation with monopoly providers of interstate
access services, and not as a result of being more efficient. According to these commenters, the
relevant economic costs of providing interstate interexchange services will be lower for the LEC
affiliate offering interexchange services than for competing IXCs because it only has to recover
the true economic cost of providing the interstate access services (since the owners of the LEC
and its interexchange affiliate will want the two entities to maximize their joint profits), whereas
the IXCs will be forced to pay interstate access charges that are above the true economic cost of
providing the underlying services.
277. Absent appropriate regulation, an incumbent LEC and its interexchange affiliate
could potentially implement a price squeeze once the incumbent LEC began offering in-region,
interexchange toll services. Although no BOC affiliate may offer such services at this time, GTE,
SNET, Sprint and other incumbent LECs do have affiliates offering such services. The incumbent
LEC could do this by raising the price of interstate access services to all interexchange carriers,
which would cause competing in-region carriers to either raise their retail rates to maintain their
profit margins or to attempt to maintain their market share by not raising their prices to reflect the
increase in access charges, thereby reducing their profit margins. If the competing in-region,
interexchange providers raised their prices to recover the increased access charges, the incumbent
LEC's interexchange affiliate could seek to expand its market share by not matching the price
increase. The incumbent LEC affiliate could also set its in-region, interexchange prices at or
below its access prices. Its competitors would then be faced with the choice of lowering their
retail rates for interexchange services, thereby reducing their profit margins, or maintaining their
retail rates at the higher price and risk losing market share.
278. We conclude that, although an incumbent LEC's control of exchange and exchange
access facilities may give it the incentive and ability to engage in a price squeeze, we have in place
adequate safeguards against such conduct. The Fifth Competitive Carrier Report and Order(366)
requirements aid in the prevention and detection of such anticompetitive conduct. In our recent
In-Region Interexchange Order we decided to retain the Fifth Competitive Carrier Report and
Order separation requirements for incumbent LEC provision of in-region interLATA services.(367)
These requirements apply both to BOCs and to other incumbent LECs. In addition, as discussed
in that order, BOC interexchange affiliates are subject to the safeguards set forth in section 272 of
the Act.(368)
279. The Fifth Competitive Carrier Report and Order separation requirements have been
in place for over ten years, and independent (non-BOC) incumbent LECs have been providing in-region, interexchange services on a separated basis with no substantiated complaints of a price
squeeze. Under these separation requirements, incumbent LECs are required to maintain separate
books of account, permitting us to trace and document improper allocation of costs and/or assets
between a LEC and its long-distance affiliate, as well as to detect discriminatory conduct. In
addition, we prohibit joint ownership of facilities, which further reduces the risk of improper
allocations of the costs of common facilities between the incumbent LEC and its interexchange
affiliate, as discussed at length in the In-Region Interexchange Order(369) and the Non-Accounting
Safeguards Order (addressing the Act's prohibition of BOC joint ownership with its
interexchange affiliate pursuant to Section 272).(370) As we also discussed at length in those orders,
the prohibition on jointly-owned facilities also helps to deter any discrimination in access to the
LEC's transmission and switching facilities by requiring the affiliates to follow the same
procedures as competing interexchange carriers to obtain access to those facilities. Finally, our
requirement that incumbent LECs offer services at tariffed rates, or on the same basis as
requesting carriers that have negotiated interconnection agreements pursuant to section 251(371)
reduces the risk of a price squeeze to the extent that an affiliate's long-distance prices would have
to exceed their costs for tariffed services.
280. Current conditions in markets for interexchange services give us comfort that an
anticompetitive price squeeze is unlikely to occur as a result of our decision not to prescribe
immediately access charge rates at forward-looking economic cost levels. If an incumbent LEC
does attempt to engage in an anticompetitive price squeeze against rival long-distance providers,
the provisions of the Act should permit new entrants or other competitors to seek out or provide
competitive alternatives to tariffed incumbent LEC access services. For example, under the
provisions of section 251,(372) a competitor will be able to purchase unbundled network elements to
compete with the incumbent LEC's offering of local exchange access. Therefore, so long as an
incumbent LEC is required to provide unbundled network elements quickly, at economic cost,
and in adequate quantities, an attempted price squeeze seems likely to induce substantial
additional entry in local markets. Accordingly, there should be a reduced likelihood that an
incumbent LEC could successfully employ such a strategy to obtain the power to raise long-distance prices to the detriment of consumers.
281. Furthermore, even if a LEC were able to allocate improperly the costs of its
affiliate's interexchange services, we conclude that it is unlikely that the LEC's interexchange
affiliate could engage successfully in predation.(373) At least four interexchange carriers -- AT&T,
MCI, Sprint, and LDDS WorldCom -- have nationwide, or near-nationwide, network facilities
that cover every LEC's region.(374) These are large, well-established companies with millions of
customers throughout the nation. It is unlikely, therefore, that one or more of these national
companies can be driven from the market with a price squeeze, even if effectuated by several
LECs simultaneously, whether acting together or independently. Even if it could be done, it is
doubtful that the LECs' interexchange affiliates would later be able to raise, and profitably sustain,
prices above competitive levels. As Professor Spulber has observed, "[e]ven in the unlikely event
that [LECs' interexchange affiliates] could drive one of the three large interexchange carriers into
bankruptcy, the fiber-optic transmission capacity of that carrier would remain intact, ready for
another firm to buy the capacity at distress sale and immediately undercut the [affiliates']
noncompetitive prices."(375)
282. Finally, in addition to our regulations and the provisions of section 251 of the Act,
the antitrust laws also offer a measure of protection against a possible price squeeze.(376) Although
we believe it would not serve the public interest for us knowingly to permit a price squeeze to
occur, and to rely entirely on the adequacy of antitrust law remedies to protect the public, we take
comfort in the fact that such remedies exist should an anticompetitive price squeeze occur in spite
of the safeguards we have adopted.(377) In particular, although a price squeeze engaged in by
several LECs, particularly if it involved more than one of the BOCs or GTE, could have a
significant impact on interexchange competitors, we believe that the antitrust laws will act as a
strong backstop to our own enforcement process so that the risk of such concerted activity is
sufficiently limited.(378)
283. Other Concerns Raised by Commenters. Several commenters raised concerns that
our market-based approach to access charge reform might permit incumbent LECs to engage in
cross subsidization, either between competitive and non-competitive services, or between
interstate access services and other services such as video distribution.(379) No evidence has been
presented, however, indicating any likelihood that current price cap regulation, which is designed,
in part, to prevent cross subsidization, might become less effective under a market-based
approach to access charge reform. Those price cap regulations will remain in place until there is
sufficient competition to prevent an incumbent LEC from charging rates that are not just and
reasonable. Therefore, we find that the record does not contain substantial evidence that a
market-based approach to access charge reform is any less likely than current regulation to permit
incumbent LECs to engage in unreasonable cross subsidization with their interstate access
charges.
284. Finally, several commenters based their support for a market-based approach, in
part, on arguments that it would reduce, or minimize, administrative burdens. Other commenters,
on the other hand, opposed a market-based approach on the grounds that it would increase
administrative burdens. Based on the record before us, however, we cannot reach a conclusion as
to the relative administrative burdens of the two approaches. Some parts of our proposed
market-based approach, such as grants of increased pricing flexibility as competitive conditions
warranted, were modeled on waivers that we have granted within the context of our current price
cap plan and would likely be necessary even if we had adopted a primarily prescriptive approach
to access charge rate level reform. Similarly, some parts of a prescriptive approach, such as
annual changes in price cap calculations, will necessarily be a part of our market-based approach.
Accordingly, we can see no basis in this record for concluding that a market-based approach to
access charge reform will be any more or less burdensome than any other alternative.
B. Prescriptive Approaches
1. Prescription of a New X-Factor
a. Background
285. In the NPRM, we observed that the Commission had initiated a rulemaking
proceeding in the Price Cap Fourth Further NPRM to examine a number of proposals for revising
the productivity offset component of the X-Factor, and to consider related issues such as
eliminating sharing obligations and the low-end adjustment mechanism.(380) We invited parties to
discuss in this proceeding whether the record developed pursuant to the Price Cap Fourth
Further NPRM justified increasing the productivity offset, and specifically invited comment on the
effects of a forward-looking cost of capital and economic depreciation on total factor productivity
(TFP) measurement.(381)
b. Discussion
286. The commenters generally repeat arguments made in the Price Cap Fourth Further
NPRM proceeding. For reasons explained in detail in our companion Price Cap Fourth Report
and Order, we conclude that we should prescribe an X-Factor on the basis of total factor
productivity studies, the difference between LEC input price changes and input price changes in
the economy as a whole, and the 0.5 percent consumer productivity dividend (CPD). In the
companion order we find that this results in an X-Factor prescription of 6.5 percent.
2. Other Prescriptive Approaches
a. Background
287. In the NPRM, we sought comment on four options for a prescriptive approach:
reinitializing price cap indices (PCIs) to economic cost-based levels;(382) reinitializing PCIs to levels
targeted to yield no more than an 11.25 percent rate of return, or some other rate of return;(383)
adding a policy-based mechanism similar to the CPD to the X-Factor;(384) or prescribing economic
cost-based rates.(385) We have decided above to rely primarily on a market-based approach, and
impose prescriptive requirements only when market forces are inadequate to ensure just and
reasonable rates for particular services or areas. We will determine the details of our market-based approach in a future Order. In that Order, we will also discuss in more detail what
prescriptive requirements we will use as a backstop to our market-based access charge reform.(386)
In this Section, we explain why we have decided not to adopt any specific prescriptive mechanism
in this Order.
b. Rate Prescription
288. Background. We sought comment on prescribing new interstate access rates
because simply reinitializing PCIs would not necessarily compel incumbent LECs to establish
reasonable rate structures.(387) We also noted, however, that prescribing access rates on a TSLRIC
basis could raise common cost allocation issues to a much greater extent than did TELRIC pricing
for unbundled network elements.(388)
289. Discussion. In Section IV.A, above, we explain why we can and should rely
primarily on market forces to cause interstate access rates to move toward economic cost levels
over the next several years. Prescribing TSLRIC-based access rates would be the most direct,
uniform way of moving those rates to cost. But, precisely because of its directness and
uniformity, rate regulation can only be, at best, an imperfect substitute for market forces.
Regulation cannot replicate the complex and dynamic ways in which competition will affect the
prices, service offerings, and investment decisions of both incumbent LECs and their competitors.
A market-based approach to rate regulation should produce, for consumers of
telecommunications services, a better combination of prices, choices, and innovation than can be
achieved through rate prescription. A market-based approach, with continued price cap
regulation of services not subject to substantial competition and with the prescriptive backstop
described in Section IV.A, is thus consistent both with the pro-competitive, deregulatory goals of
the 1996 Act and with our responsibility under Title II, Part I of the Communications Act to
ensure just and reasonable rates.
290. Furthermore, immediate prescription of TSLRIC-based rates would not necessarily
move rates to those levels faster than the market-based approach and prescriptive backstop
developed in Section IV.A. Some parties that favor a prescriptive approach have asserted that
setting access rates immediately at TSLRIC levels would reduce incumbent LEC revenues by $10
billion or more.(389) Were we to make such a rate prescription, we would consider phasing in rate
reductions of that magnitude over a period of years, in order to avoid the rate shock that would
accompany such a great rate reduction at one time.(390) Finally, because we have adopted a more
efficient rate structure for interstate switched access services, it is not necessary to prescribe new
rates in order to achieve efficient rate structures, as TRA and TCI recommend. Accordingly, we
will not prescribe TSLRIC-based access rates at this time.
c. Reinitialization of PCIs on a Rate-of-Return Basis
291. Discussion. We reject reinitialization on the basis of any rate of return at this time.
As a general matter, the parties advocating a rate-of-return based reinitialization do not provide
any persuasive reason for adopting that particular approach. They favor reinitialization largely
because they believe interstate access charges should be lower than they are now. As explained
above, however, we are adopting a primarily market-based approach to rate level adjustments.
The prescriptive backstop to that approach will be based on TSLRIC cost studies and, most
likely, applied to geographically deaveraged rates. That approach is more likely to result in rates
that are aligned with economic costs than would reinitialization to a particular rate of return on an
embedded cost rate base.
292. Moreover, because the basic theory of our existing price cap regime is that the prospect of retaining higher earnings gives carriers an incentive to become more efficient, we believe that rate of return-based reinitialization would have substantial pernicious effects on the efficiency objectives of our current policies.(391) In this regard, we have often expressed concern in past price cap orders that maintaining links between rate levels and a carrier's achieved rate of return would undercut the efficiency incentives price cap regulation was designed to encourage. In the LEC Price Cap Order, we rejected a so-called "automatic stabilizer" adjustment to the price cap index that -- like reinitialization -- would have permanently adjusted index levels downward in the event that carriers achieved earnings above a certain rate of return.(392) Similarly, in our 1995 LEC Price Cap Performance Review Order, we cited as a disadvantage of AT&T's "Direct Model" method of determining the PCI formula's "X-Factor" the fact that "a target rate of return is a critical factor in measuring productivity."(393) And although we sought comment in the Access Reform NPRM on the question of rate of return-based reinitialization of the price cap indices, we once again expressed concern that such action "could have a negative effect on the productivity incentives of the LEC price cap plan."(394) We, of course, have authority to change our methods and theories of regulating LEC rates when we believe the purposes of the Communications Act would be better served by doing so. However, we find that, given our consistently critical past statements about rate of return-based adjustments to price caps, a decision now to reinitialize PCIs to any specified rate of return would further undermine future efficiency incentives by making carriers less confident in the constancy of our regulatory policies.
293. In declining to reinitialize PCIs on the basis of carriers' rates of return, we reject
GSA/DOD's suggestion that access rates have been excessive merely because the earnings of most
price cap carriers have exceeded 11.25 percent, and, in some cases, by substantial amounts.
When the Commission adopted price cap regulation, it specifically permitted price cap carriers to
earn in excess of 11.25 percent in order to encourage them to become more productive.(395) The
Commission also concluded that complaints alleging excessive earnings relative to costs will not
lie as long as the carrier is in compliance with the sharing mechanism.(396) In addition, we found in
the LEC Price Cap Performance Review Order that access rates declined substantially under
price cap regulation from 1991 to 1994, in spite of the increases in earnings to which GSA/DOD
alluded.(397) Furthermore, the vastly different results among companies(398) show that the incentive
plan we have for cost reduction (price caps) largely is working as predicted, whereas a rate-of-return-based scheme would have cost much in terms of inefficiency.
d. Reinitialization of PCIs on a TSLRIC Basis
i. Background
294. In the NPRM, we sought comment on reducing price cap PCIs by an amount equal
to the difference between the incumbent LECs' PCIs and the revenues that would be produced by
rates set at TSLRIC levels. We noted that a TSLRIC-based PCI reinitialization might be
preferable to a TSLRIC-based rate prescription because it would not require us to prescribe
common cost allocations.(399) We also sought comment on whether or to what extent we could
rely on TELRIC studies developed for pricing unbundled network elements, and whether we
should initiate joint board proceedings to rely on state commissions to evaluate the incumbent
LECs' TELRIC studies.(400)
ii. Discussion
295. We have decided not to require incumbent LECs to reinitialize PCIs on a TSLRIC basis at this time. As we discuss in Section IV.A above, we expect market forces to develop as a result of the 1996 Act and to drive access rate levels to forward-looking economic costs. Furthermore, the record in this proceeding is unclear on whether there is an accurate and convenient method for determining TSLRIC for purposes of reinitializing PCIs at this time. Specifically, it is unclear whether the TELRIC studies used to develop unbundled network element prices can be used for access services.(401)
e. Policy-Based X-Factor Increase
i. Background
296. In the NPRM, we observed that we adopted a consumer productivity dividend
(CPD) to assure that some portion of the benefits of the incumbent LECs' increased productivity
growth under price cap regulation would flow to ratepayers in the form of reduced rates. We
sought comment on establishing a policy-based mechanism similar to the CPD to force access
rates to cost-based levels.(402)
ii. Discussion
297. Discussion. We do not require a policy-based X-Factor increase at this time for the
same reason we do not require a TSLRIC-based PCI reinitialization; we expect market forces to
control access charges effectively in a less intrusive manner.
298. BellSouth and GTE oppose increasing the CPD as an arbitrary and confiscatory
measure.(403) SNET claims that increasing the X-Factor merely because the price cap LECs have
earned too much, or simply to drive rates down, is essentially an abandonment of price cap
regulation, because it would punish incumbent LECs for their efficiency gains made under the
price cap regime.(404) BA/NYNEX and GTE contend that the X-Factor should be chosen to reflect
reasonably expected incumbent LEC productivity growth rather than to achieve a specific rate
reduction.(405) We emphasize that we have done nothing in this Order to increase the X-Factor. In
our companion Price Cap Fourth Report and Order, we prescribe a new X-Factor of 6.5 percent,
but this prescription is based on detailed studies of LEC productivity growth and input price
changes.(406) We decline to increase the CPD,(407) and we reject a proposal to set the X-Factor to
target an industry average rate of return of 11.25 percent.(408) Thus, none of our actions in either
this Order or our companion Order can properly be characterized as an abandonment of price cap
regulation, or as motivated merely by a desire to drive rates down.
C. Equal Access Costs
1. Background
299. In the NPRM, we solicited comment on whether to require incumbent price cap
LECs to make an exogenous cost decrease to one or more of their PCIs to account for the
completion of the amortization of equal access costs on December 31, 1993.(409)
300. Under court order, the BOCs and GTE were required to provide equal access.(410)
This conversion, estimated at more than $2.6 billion, was largely completed by 1990, and involved
both capital and non-capital expenditures. Under the Equal Access Cost Order, incumbent LECs
were required to identify separately the incremental capital investments and the incremental non-capital-related expenses associated with the implementation of equal access. The Equal Access
Cost Order directed that the capital investments, which it estimated to comprise approximately 55
percent of the $2.6 billion, be treated pursuant to ordinary accounting and ratemaking
principles.(411) The Commission determined that the remaining 45 percent of the expenditures --
which were non-capitalized equal access expenses -- required special treatment:
[W]e are concerned that these expenditures will cause irregular and substantial
fluctuations in revenue requirements associated with equal access. Because they
are extraordinary, are for the greatest part expected to be incurred over the next
few years, and, therefore, are likely to be distortive of financial results and rate
requirements, we find that these equal access expenses should be deferred and
amortized.(412)
The Commission ordered that these equal access expenses be separately identified and recorded,
and that they be written off over a period of eight years, ending December 31, 1993.(413) In the
reconsideration of the Equal Access Cost Order, the Commission found that the specific
termination date of the eight year amortization of these expenses would "shorten the period
during which the unamortized balances are entitled to earn a rate of return."(414) It is clear that the
LECs' rate-of-return (ROR) rates included revenue recovery for both capitalized expenditures
(recovered through the ordinary depreciation process) and non-capitalized expenses (recovered
through the special amortization process).(415) It is also clear that at the time the amortization was
imposed, the Commission envisioned an end to the recovery for the amortized expenses and a
subsequent decrease in ROR rates.(416)
301. In converting to price cap regulation, the Commission found that equal access conversion was, in large part, completed and that the associated costs, which included both the capitalized expenditures and the amortized expenses, were embedded in the existing rates. As such, the Commission refused to grant LECs an exogenous increase for equal access costs, finding that these costs were already accounted for in the existing rates.(417) The Commission also based its decision to deny an exogenous increase on its concern that exogenous treatment of equal access expenditures would create inappropriate incentives for the LECs to inflate the amounts spent on equal access. The Commission noted the difficulty of reviewing equal access costs, as well as the risk that incumbent LECs might willfully or inadvertently shift switched access costs into the proposed equal access category in order to benefit from the requested exogenous increase.(418)
2. Discussion
302. We find that an exogenous cost decrease to account for completion of the
amortization of equal access non-capitalized expenses is necessary and appropriate. Although we
have addressed this issue in the past and declined to act, we now find that an exogenous decrease
is merited. We recognize our decision departs from our past decisions that have declined to
impose an exogenous decrease for the completed recovery of these costs. As discussed below,
our decision today reverses those decisions and is based on an extensive record from this, and
prior proceedings.(419) Our decision today aligns our treatment of the completion of the
amortization of equal access costs with two other similar amortizations that were ordered under
ROR regulation and carried over into price cap regulation, namely, the exogenous decrease
imposed for the completion of the amortization of depreciation reserve deficiencies,(420) and the
exogenous decrease imposed for the completion of the amortization of inside wire costs.(421) We
are convinced that this treatment is the proper method to ensure that ratepayers are not paying for
costs that have already been completely recovered.
303. The need for an exogenous adjustment to account for the expiration of the equal
access expense amortization stems from the different ways in which rates are established under
ROR regulation, on the one hand, and price cap regulation, on the other hand, and from the
Commission's decision to establish initial price cap levels at the outset of price cap regulation on
the basis of existing ROR-derived rates.(422) When converting from ROR regulation to price cap on
regulation January 1, 1991, the Commission needed to select a set of "baseline" rate levels to
which the price cap index of incremental cost changes would be tied. For that purpose, we chose
the ROR-developed rates that were in effect on July 1, 1990.(423) The Commission found that, in
general, those rates served as an appropriate starting point for measuring subsequent incremental
cost changes under price cap regulation, because they "reflect[ed] the reasonable operation of
ROR regulation."(424)
304. In two respects, however, the Commission recognized that existing rates did not
reflect equilibrium ROR-derived rates, but rather reflected special corrective adjustments that we
had ordered previously. In particular, the Commission noted that existing rates had embedded
within them costs associated with Commission-ordered "one-time" amortizations of depreciation
reserve deficiencies and inside wiring costs.(425) Had ROR regulation continued, the rates subject
to these amortizations would have been reduced when the amortizations were completed. To
ensure that ratepayers under price caps would not be required permanently to bear these
temporary Commission-ordered, ROR-derived rate adjustments, we directed LECs to make
downward exogenous cost adjustments to their price cap indices upon the expiration of those
amortizations.(426)
305. Similarly, the Commission ordered amortization of equal access expenses, which
also were reflected in baseline rates at the outset of price cap regulation. Under normal ROR
ratemaking principles, those expenses -- which, for the most part, already had been incurred
before price cap regulation was initiated -- would have been recovered in the BOCs' rates the
same year they were incurred and would no longer have been reflected in rates at the time price
caps were instituted. However, as explained supra, the Commission required the carriers to
amortize these extraordinary expenses over eight years because of the potential fluctuations in
revenue requirements associated with equal access.(427) Thus these expenses remained embedded
within BOC rates at the outset of price caps even though, for the most part, the extraordinary
expenses themselves were no longer being incurred.
306. The specific question of whether the completely amortized equal access expenses should be treated exogenously has been presented to the Commission on a number of occasions.(428) In the past, procedural impediments arising from our rules, as well as the lack of an adequate record, convinced us to decline to impose such treatment at that time. For example, when AT&T raised the issue of downward adjustment for completed amortization of equal access expenses in an annual access charge tariff proceeding, the Common Carrier Bureau found that the issue was beyond the scope of the proceeding because it would require a substantive change to the price cap rules.(429) Similarly, in response to AT&T's and MCI's revisiting the question in both the First 1994 Annual Access Charge Order and the Second 1994 Annual Access Charge Order, the Commission found that exogenous treatment would require a rule change to section 61.45(d) of the Commission's rules. Because no LEC had filed for a waiver of section 61.45(d), the Common Carrier Bureau found that the issue was not properly presented for investigation.(430)
307. In denying the requests for procedural reasons, the Commission supported its
decisions with various rationales. In some instances, these rationales appear now not to have
been considered to a sufficient degree. In addressing equal access costs in the orders adopting
price cap regulation, the Commission focused primarily on the question of whether future equal
access investments and expenses should be treated exogenously because equal access had been
compelled by regulatory (or judicial) order.(431) We concluded, subject to consideration of waiver
requests, that we should not accord exogenous cost treatment to such future equal access
conversion costs, because of concerns that exogenous cost treatment would create disincentives
to implement equal access in an efficient manner.(432) We did not focus in detail on the logically
distinct question of whether equal access expenses that were already embedded within baseline
BOC rates pursuant to the temporary "one-time" amortizations (and thus raised no question with
respect to future incentives) should be removed through exogenous adjustments when the
amortizations expired.(433) Instead, we relegated that issue to a footnote, which denied exogenous
cost treatment on the basis of a skeletal analysis that makes no reference to our treatment of the
depreciation reserve deficiency and inside wiring amortizations. In the footnote, it is clear that the
Commission was not distinguishing between capitalized costs, which were properly treated as
depreciated expenses, and non-capitalized expenses, which were actually amortized per the
Commission's own requirement.(434) The Commission framed the issue of a downward adjustment
in terms of whether the completion of depreciation required a downward adjustment, querying
"whether the BOCs will experience any cost change in 1994 [at the completion of the
amortization] that stems from factors beyond their control." In support of its implicitly negative
answer, the Commission analogized to the absence of a price cap index change when a piece of
equipment is fully depreciated, or when a carrier increased or decreased the speed with which it
recovered investments.(435) The Commission found that, "[b]ased on a meager factual record
presented on the issue of equal access expense, we are reluctant to depart from our practice of not
adjusting PCI levels to reflect levels of cost recovery."(436)
308. The Commission's analysis at that time was incomplete. The Equal Access Cost
Order and the Equal Access Cost Reconsideration Order explicitly recognized two components
of equal access costs -- capitalized, which were to be depreciated, and non-capitalized, which
were extraordinary and were to be amortized over a set period.(437) The Commission established
different treatment for these two sets of costs based on policy reasons, and ordered an
amortization schedule for the non-capitalized costs. The Commission's establishment of this
schedule was beyond the incumbent LECs' control. The Commission's analogy to the lack of
exogenous treatment for equipment depreciation and changes in the tempo of recovery should
have only applied to the capitalized portion of the equal access costs.
309. The Commission explicitly stated in the LEC Price Cap Order that completed
amortizations of depreciation reserve deficiencies require an exogenous downward adjustment.(438)
The Commission found that such an adjustment was necessary to ensure that ratepayers were not
paying for a cost that no longer existed. Analytically, the amortized portion of equal access
expenses should have been treated in the same fashion as the amortized depreciation reserve
deficiency costs. The Commission's imposition of a downward exogenous adjustment for the
completion of inside wire amortizations further supports our finding today that an exogenous
decrease is appropriate and necessary for the completion of the amortization of equal access non-capitalized expenses.(439)
310. We reject our prior analysis of amortized equal access costs and accord the expiration of equal access cost amortizations the same exogenous cost treatment given to the amortizations of the depreciation reserve deficiencies and inside wiring costs. Both of those amortizations were given exogenous cost treatment when they expired because they reflected temporary, one-time treatment of costs under ROR regulation that, due to the mid-stream switch to price cap regulation, would have become permanent (even though the costs already had been recovered) absent an exogenous cost adjustment. The same is true for equal access cost amortizations.
311. Because this is a rulemaking, we do not face the same procedural impediments as in
some of our prior decisions, as explained supra. We determine that the record from this
proceeding allows us to make a reasoned decision on this issue. We find that an exogenous
decrease is necessary in order to adjust the price caps for the completed recovery of the specified
equal access non-capitalized expenses that we required be amortized over an eight-year period.
Because the current price cap index includes an expense that has now been completely recovered,
the price cap should be adjusted downward to account its recovery. Simply stated, we find that
ratepayers should not be forced to pay for a cost that, were it not for the way price cap regulation
occurred in this instance, they would no longer be paying. By imposing a downward exogenous
adjustment to adjust the PCI for the complete recovery of specific equal access expenses through
amortization, we will avoid unfairly imposing a subsidy burden on ratepayers. Our decision in this
matter will align charges more closely to costs.
312. Several commenters have argued that they continue to incur costs as a part of the
provision of equal access. These ongoing costs are not at issue in the present proceeding. As
explained above, the costs at issue were a set of costs that the Commission determined should be
amortized for policy reasons. These costs were extraordinary and, if allowed to be imposed in the
normal fashion, would have resulted in huge rate fluctuations. We consider the ongoing costs of
providing equal access as part of the normal costs of providing telephone service. Exogenous
treatment of these costs is unnecessary. In response to BellSouth's contention that the record is
inadequate for us to make a decision about an exogenous decrease, we find that the current
record provides a sufficient basis for our decision.(440) Furthermore, we note that in the past, the
record may have been sufficient, but, as explained above, the Commission's analysis was incorrect.
313. TCA and GCI are concerned about how the Commission will treat cost recovery for
LECs that convert to equal access in the future.(441) As we stated in the LEC Price Cap First
Report and Order, LECs that have not received a bona fide request for equal access at the time
they become subject to price cap regulation may request a waiver for special treatment of those
special conversion costs when the time arises.(442)
314. We hereby direct price cap LECs to make a downward exogenous adjustment to the
traffic sensitive basket in the Annual Access Tariff filing that takes effect on July 1, 1997 to
account for the completed amortization of equal access expenses.
D. Correction of Improper Cost Allocations
1. Marketing Expenses
a. Background
315. Prior to 1987, incumbent LEC marketing expenses were allocated between the
interstate and intrastate jurisdictions on the basis of local and toll revenues. In 1987, a Federal-State Joint Board recommended that interstate access revenues be excluded from the allocation
factor used to apportion marketing expenses between the interstate and intrastate jurisdictions
because marketing expenses are not incurred in the provision of interstate access services.(443) The
Commission agreed with the Joint Board's recommendation and adopted new procedures that
allocated marketing expenses in Account 6610 on the basis of revenues excluding access
revenues.(444) In petitions for reconsideration of the Commission's order, several incumbent LECs
argued that the revised separations treatment of marketing expenses would result in a significant,
nationwide shift of $475 million in revenue requirements to the intrastate jurisdiction.(445) On
reconsideration, the Commission adopted for marketing expenses an interim allocation factor that
includes access revenues, pending the outcome of a further inquiry by the Joint Board.(446)
316. In the NPRM, we stated that some of the difference between the price cap LECs'
interstate allocated costs and forward-looking costs may be traced to past regulatory practices
that were designed to shift some costs from the intrastate jurisdiction to the interstate jurisdiction
in order to further universal service goals.(447) We observed that the Commission's decision in the
Marketing Expense Reconsideration Order to allocate intrastate marketing costs to the interstate
jurisdiction was an example of such past regulatory practices.(448) We asked parties to comment on
the extent to which the difference between price cap LECs' interstate allocated costs and forward-looking costs is a result of such decisions.(449)
b. Discussion
317. Under current separations procedures, approximately 25 percent of price cap LECs'
total marketing expenses are allocated to the interstate jurisdiction.(450) We agree with parties that
contend that, because marketing expenses generally are incurred in connection with promoting the
sale of retail services, those expenses for the most part should be recovered from incumbent LEC
retail services, which are found predominantly in the intrastate jurisdiction. Pursuant to section
410(c) of the Act, however, the Commission must refer any rulemaking proceeding regarding the
jurisdictional separation of common carrier property and expenses between interstate and
intrastate operations to a Federal-State Joint Board.(451) We intend to initiate a proceeding to
review comprehensively our Part 36 jurisdictional separations procedures in the near future. We
will refer this issue to the Federal-State Joint Board in CC Docket No. 80-286 for resolution as
part of that comprehensive review. We therefore do not reallocate these costs between the
interstate and intrastate jurisdictions at this time.
318. In the Marketing Expense Recommended Decision, the Joint Board stated that the
inclusion of access revenues in the allocation factor for marketing expenses is unreasonable
because incumbent LECs do not actively market or advertise access services.(452) Although parties
contested the accuracy of this statement on reconsideration, the Commission did not assess
incumbent LEC claims that the decision to exclude access revenues in the allocator for marketing
expenses was based on an inaccurate perception of the extent to which LECs actively market or
advertise exchange access services. The Commission instead referred marketing expense issues
back to the Joint Board, with specific instruction to the parties to identify any Account 6610
marketing activities that are related to access services and any such activities that are related to a
specific jurisdiction. We continue to recognize that some expenses recorded in Account 6610
may indeed be incurred in the provision of interstate access service, and that this is an issue that
must be addressed by the Joint Board when it examines the appropriate allocation factor for
marketing expenses. We note, however, that the Commission did not find in the Marketing
Expense Reconsideration Order that the Joint Board's initial conclusion in the Marketing Expense
Recommended Decision that incumbent LECs do not market or advertise access services to be
inaccurate.
319. We conclude that price cap LECs' marketing costs that are not related to the sale
or advertising of interstate switched access services are not appropriately recovered from IXCs
through per-minute interstate switched access charges. Pending a recommendation by the Joint
Board on a new method of apportioning marketing costs between the intrastate and interstate
jurisdictions, we direct price cap LECs to recover marketing expenses allocated to the interstate
jurisdiction from end users on a per-line basis, for the reasons we discuss below.
320. Recovering these expenses from end users instead of from IXCs is consistent with
principles of cost-causation to the extent that price cap LEC sales and advertising activities are
aimed at selling retail services to end users, and not at selling switched access services to IXCs.
Recovery on a per-line basis, while perhaps not precisely reflective of the manner in which
marketing costs are incurred, is preferable to the current rule requiring price cap LECs to recover
their marketing expenses through per-minute access charges. A price cap LEC's retail marketing
costs are not caused by usage of switched access services, and its efforts to sell additional lines,
vertical features, and other retail services would only indirectly cause an increase in switched
access usage. Per-minute recovery of retail marketing costs thus distorts prices in the long
distance and local markets in the same way as does per-minute recovery of other NTS costs.
321. In the past, price cap LEC retail marketing may have focused on the sale of optional
vertical features such as call waiting and caller ID, and on features and services designed for
business customers. As local competition develops, we would expect that sales expenses would
be driven by the price cap LEC's need to respond to competition. In any case, it is beyond our
jurisdiction to reassign retail marketing costs to retail services on a truly cost-causative basis.
There is probably a relationship, however, between the number of lines purchased by an end user,
particularly a business user, and the amount of effort a price cap LEC expends to sell services and
features to that end user. Furthermore, as parties have observed in the record in this proceeding,
price cap LECs actively market second lines to residential customers.(453) We conclude, therefore,
that the most efficient and cost-causative method legally available to this Commission at this time
for recovery of price cap LEC retail marketing costs allocated to the interstate jurisdiction is to
charge those end users to whom the price cap LECs' marketing is directed -- multi-line business
and non-primary residential line end users. We further note that by not permitting price cap LECs
to recover these costs from primary residential and single-line business customers, we avoid
potential universal service concerns that weigh against increasing charges on these end users.(454)
322. Moreover, continued recovery of interstate-allocated marketing expenses in per-minute switched access charges would raise competitive concerns. Increasingly, IXCs will be
competing with incumbent, price cap LECs in the provision of local exchange and exchange
access services. By permitting incumbent, price cap LECs to recover from IXCs through
interstate switched access charges their costs of marketing retail services, these potential
competitors are forced to bear the incumbent, price cap LECs' costs of competing with the IXCs.
Assigning recovery of marketing costs to end users, on the other hand, subjects these costs to the
competitive pressures of the market.
323. Marketing expenses are currently recovered through all interstate access rate
elements and the interexchange category in proportion to the investment originally assigned to
these elements and categories by the Part 69 cost allocation rules.(455) Special access and
interexchange services are purchased by, and marketed to, retail customers. It is therefore
appropriate to allow rates for those services to continue to include recovery of marketing
expenses.(456) Marketing expenses must be removed from all other rate elements by means of
downward exogenous adjustments to the PCIs for the common line, traffic sensitive, and trunking
baskets. With respect to the trunking basket, the exogenous adjustment shall not reflect the
amount of any Account 6610 marketing expenses allocated to special access services. The service
band indices (SBIs) within the trunking basket shall be decreased based on the amount of Account
6610 marketing expenses allocated to switched services included in each service category to
reflect the exogenous adjustment to the PCI for the trunking basket.
324. After performing the appropriate downward exogenous adjustments described above
to the PCIs in the common line, traffic sensitive, and trunking baskets, price cap LECs may
recover the revenues related to the Account 6610 marketing expenses removed from these
baskets by increasing the SLCs for multi-line business and non-primary residential lines. To
prevent end-user charges from exceeding levels we have established earlier in this Order,(457) the
amount of marketing expenses to be recovered from multi-line business and non-primary
residential lines in their SLCs shall be limited by the ceilings we establish for these SLCs in this
Order.(458) To the extent these ceilings prevent full recovery of these amounts, price cap LECs may
recover these costs by increasing equally both the non-primary residential line PICC and the multi-line business PICC, not to exceed the ceilings on the PICC for non-primary residential and multi-line business lines.(459) In the event the PICC ceilings prevent full recovery of these expenses, any
residual may be recovered through per-minute charges on originating access service, subject to its
ceiling. Finally, to the extent price cap LECs cannot recover their remaining marketing expenses
through per-minute charges on originating access, any residual may be recovered through per-minute charges on terminating access service.(460) Although these marketing expenses will be
recovered through the SLC, they shall not be included in the base factor or considered common
line revenues. To prevent price cap LECs from recovering these expenses from access services,
we are establishing a separate basket for these marketing expenses.
325. We reject, however, AT&T's assertion that recovery of interstate-allocated
marketing expenses through interstate access charges violates the wholesale pricing provisions
contained in section 252(d)(3) of the Act.(461) Section 252(d)(3) establishes a pricing standard for
the wholesale provision of retail offerings to other carriers that resell the LEC retail services.(462)
Section 252(d)(3) does not apply to the pricing of interstate access, which is not a retail service.
2. General Support Facilities
a. Background
326. In the NPRM, we sought comment on other possible cost misallocations that may
contribute to the difference between embedded costs and forward-looking costs allocated to the
interstate jurisdiction.(463) AT&T suggests that the allocation of embedded general support
facilities (GSF) costs, including general purpose computer expenses, among access categories is
one such misallocation.(464) This allocation, AT&T contends, results in the inappropriate support of
LECs' billing and collection service, which is a nonregulated, interstate service, through regulated
access charges.(465) AT&T estimates that $124 million of expenses recovered in interstate access
support the nonregulated billing and collection category.(466) Of the $124 million, $60.1 million is
included in interstate switched carrier access, and $20.5 million is in interstate special access, with
the remainder recovered by the SLC.(467)
327. The GSF investment category in Part 36 includes assets that support other
operations, such as land, buildings, vehicles, as well as general purpose computer investment
accounted for in USOA Account 2124.(468) Some incumbent LECs use general purpose computers
to provide nonregulated billing and collection services to IXCs. Part 69 allocates GSF investment
among the billing and collection category, interexchange category, and the access elements based
on the amount of Central Office Equipment (COE), Cable and Wire Facilities (CWF), and
Information Origination/Termination Equipment (IO/T) investment allocated to each Part 69
category.(469) Because no COE, CWF, or IO/T investment is allocated to the billing and collection
category, no investment in general support facilities, and thus no portion of general purpose
computer investment, is allocated to the billing and collection category. Likewise, because
expenses related to GSF investment are allocated in the same manner as GSF investment, no GSF
expenses, including expenses related to general purpose computers, are allocated to the billing and
collection category. To the extent that costs are underallocated to the billing and collection
category, incumbent LECs' regulated services recover through interstate access charges costs
associated with nonregulated provision of billing and collection services.
b. Discussion
328. We agree with AT&T and WorldCom that the current allocation of GSF costs
enables incumbent LECs to recover through regulated interstate access charges costs caused by
the LECs' nonregulated billing and collection functions. By shifting some costs from interstate
access services to the nonregulated billing and collection category, we would move interstate
access rates closer to cost. The NPRM, however, may not have provided sufficient notice to
interested parties that we would change in the allocation of LEC interstate costs between
regulated interstate services and nonregulated billing and collection activities. We therefore seek
comment on this issue in Section VII.B below.
A. Background
329. In the NPRM we concluded that, with limited exceptions, the scope of this
proceeding should be limited to incumbent price cap LECs because these carriers face the
potential of significant competition in the interstate exchange access market due to the new duties
and obligations imposed upon them by the 1996 Act.(470) We proposed limited exceptions that
would subject all incumbent LECs to the rules addressing allocation of universal service support
to the interstate revenue requirement, discussed in Section VI.D, below, and to the reforms to the
transport rate structure, including the TIC, discussed in sections III.D., above. We invited
comment on these tentative conclusions on the scope of this proceeding. We also sought
comment on whether we should apply our proposed changes to the common line rate structure to
rate-of-return incumbent LECs and whether we should update Part 69 access rules in light of
various developments. We further invited comment on the effect of these proposals and tentative
conclusions on small business entities, including small incumbent LECs and new entrants.(471) We
also noted that we would address access reform for rate-of-return carriers in a separate
proceeding in 1997.(472)
B. Discussion
330. We conclude that, with the limited exceptions discussed in Sections III.D and VI.D,
the scope of this proceeding should be limited to price cap incumbent LECs.(473) Price cap
regulation governs almost 91 percent of interstate access charge revenues(474) and more than 92
percent of total incumbent LEC access lines.(475) Currently, all ten of the incumbent LECs with
more than two million access lines and 13 of the 17 non-NECA incumbent LECS with more than
50,000 access lines are subject to price cap regulation.(476) Therefore, even though this proceeding
applies only to price cap incumbent LECs, it will nonetheless affect the vast majority of all access
lines and interstate access revenues.
331. Small and rural LECs will most likely not experience competition as fast as
incumbent price cap LECs. We do not expect small and rural LECs generally to face significant
competition in the immediate future because, for the most part, the high cost/ low-margin areas
served by these LECs are unlikely to be the immediate targets of new entrants or competitors.
Moreover, as we noted in the NPRM, all non-price cap incumbent LECs may be exempt from, or
eligible for a modification or suspension of, the interconnection and unbundling requirements of
the 1996 Act.(477) By contrast, all incumbent LECs that are ineligible for section 251(f) exemption,
suspensions, or modifications are incumbent price cap LECs.(478) Because the latter incumbent
LECs must fulfill the section 251(b) and (c) duties to provide interconnection and unbundled
elements to new entrants, they are likely to face significant competition in the interstate exchange
access market before the small and mid-sized rate-of-return incumbent LECs face such
competition.
332. We recognize that small and rural rate-of-return LECs face unique circumstances
and that a few of these carriers may now have, or may soon receive, bona fide requests for
interconnection. Although all rate-of-return carriers may not be completely insulated from
competitive pressures, we are not persuaded by arguments that delaying the initiation of an access
reform proceeding for these carriers until later this year will have a detrimental impact on their
viability. A separate proceeding for small and rural rate-of-return LECs will provide us with the
opportunity to conduct a comprehensive review of the circumstances and issues unique to these
carriers.
333. We do not agree that Citizens Utilities should be exempt from some of the rules we
adopt in this order for price cap companies. The decisions we reach here accommodate many of
the concerns that Citizens Utilities, as well as a number of other price cap LECs that serve rural
areas, voices in its pleadings. Although Citizens Utilities arguably may face different
circumstances than other price cap LECs that serve larger urban and suburban populations,
Citizens has indicated, by electing price cap regulation, that it believes it can achieve a higher rate
of productivity than smaller rate-of-return LECs and that price cap regulation is more beneficial to
it than rate-of-return regulation. Citizens Utilities has not demonstrated that the modifications we
are adopting in this proceeding would necessarily affect it differently than other price cap LECs.
If Citizens Utilities believes that it cannot remain financially viable as a price cap carrier under the
revised access charge regime, it may petition for a waiver of the rule that makes its decision to
elect price cap regulation irreversible.(479)
334. We reject Centennial's suggestion that we adopt access reform modifications for all
incumbent LECs but then grant waivers for small, rural LECs whose special circumstances
warrant different accommodations. For the most part, rate-of-return LECs face a common set of
complex issues, different than those faced by price cap LECs, that are better addressed in a
separate proceeding. In that proceeding, we will address any differences that may exist between
large and small rate-of-return carriers.
335. We therefore limit application of the rules we adopt in this proceeding to the
incumbent price cap LECs, with limited exceptions. Because rate-of-return LECs will collect
revenues from the new universal service support mechanisms, we address allocation of universal
service support to the interstate revenue requirement for all incumbent LECs in Section VI.D.
In addition, because rate-of-return incumbent LECs' transport rates were subject to the rules that
were remanded by the court in CompTel v. FCC,(480) the changes to the TIC that we adopt in
Section III.D. pursuant to the court's remand, except for changes that require reallocation of costs
to newly-created rate elements, will also apply to rate-of-return incumbent LECs. Finally, in
order to prevent double recovery of the costs associated with providing access services to new
entrants through the sale of unbundled network elements, we conclude in Section VI.A, below,
that our exclusion of unbundled network elements from Part 69 access charges applies to all
incumbent LECs.
VI. OTHER ISSUES
A. Applicability of Part 69 to Unbundled Elements
1. Background
336. In the NPRM, we requested comment regarding the potential application of Part 69
access charges to unbundled network elements purchased by carriers to provide local exchange
services or exchange access services.(481) We tentatively concluded that unbundled network
elements should be excluded from such access charges. We noted that the 1996 Act allows
telecommunications carriers to purchase access to unbundled network elements and to use those
elements to provide all telecommunications services, including originating and terminating access
of interstate calls.(482) We further noted that the 1996 Act requires purchasing carriers to pay cost-based rates to incumbent LECs to compensate them for use of the unbundled network elements.(483)
Accordingly, we tentatively concluded that the requesting carrier paying cost-based rates to the
incumbent LEC would have already compensated the incumbent LEC for the ability to deploy
unbundled network elements to provide originating and terminating access.(484)
2. Discussion
337. We will adhere to our tentative conclusion to exclude unbundled network elements
from Part 69 access charges. This conclusion applies to all incumbent LECs.(485) As we noted in
the Local Competition Order, payment of cost-based rates represents full compensation to the
incumbent LEC for use of the network elements that carriers purchase.(486) We further noted that
sections 251(c)(3) and 252(d)(1), the statutory provisions establishing the unbundling obligation
and the determination of network element charges, do not compel telecommunications carriers
using unbundled network elements to pay access charges.(487) Moreover, these provisions do not
restrict the ability of carriers to use network elements to provide originating and terminating
access.(488) Allowing incumbent LECs to recover access charges in addition to the reasonable cost
of such facilities would constitute double recovery because the ability to provide access services is
already included in the cost of the access facilities themselves. Excluding access charges from
unbundled elements ensures that unbundled elements can be used to provide services at
competitive levels, promoting the underlying purpose of the 1996 Act.(489) If incumbent LECs
added access charges to the sale of unbundled elements, the added cost to competitive LECs
would impair, if not foreclose, their ability to offer competitive access services.(490) The availability
of access services at competitive levels is vital to the general approach we adopt in this Order,
which relies on the growth of competition, including from competitors using unbundled network
elements, to move overall access rate levels toward forward-looking economic cost.(491) In
addition, we note that excluding unbundled network elements from access charges benefits small
entities seeking to enter the local service market by ensuring that they can acquire unbundled
elements at competitive prices.
338. We disagree with suggestions offered by some commenters that access charges
should be imposed on unbundled elements because cost-based rates for such elements would not
recover universal service support subsidies built into the access charge regime.(492) Although our
plan to implement comprehensive universal service reform is not fully implemented, we believe
excluding access charges from the sale of unbundled elements will not dramatically affect the
ability of price cap LECs to fulfill their universal service obligations. First, competitors using
unbundled network elements to provide interstate services will contribute to universal service
requirements pursuant to section 254. Carriers receive no exemption from their obligation to
contribute to universal service by using unbundled network elements. Second, rate structure
modifications adopted in this Order -- including reallocation of TIC costs, adoption of a
mechanism to phase out the TIC, and raising multi-line SLCs -- should reduce the impact on price
cap LECs of excluding the recovery of TIC costs in the sale of unbundled network elements.
Third, if unbundled network element prices are geographically deaveraged, LECs will receive
higher prices when they sell unbundled network elements that embody higher costs. Fourth,
because the difference between the level of access charges and the forward-looking economic
costs of network elements may include more than universal service support, imposing access
charges on the sale of unbundled network elements could recover from market entrants
substantially more than amounts used to support universal service. Accordingly, we are not
persuaded by suggestions that the universal service obligations of price cap LECs compel the
imposition of access charges on the purchase of unbundled network elements by requesting
carriers.
339. Although, in the Local Competition Order, we allowed application of certain non-cost-based access charges (the CCLC and a portion of the TIC) to unbundled elements, we
limited the duration of such application to a transition period ending June 30, 1997 even if access
and universal service reform were not completed by the end of the transition period.(493) The
transition period was limited in order to minimize the burden on competitive local service
providers seeking to use unbundled network elements to offer the competitive services that the
1996 Act sought to promote. The interim application of certain access charges was also limited
to non-cost-based charges because such charges, unlike facilities-based charges, were more likely
to include subsidies for universal service. All facilities-based charges were completely excluded
from unbundled network elements to prevent double recovery by incumbent LECs of the costs of
these facilities when they are purchased by competitive carriers.
340. We are also unpersuaded by suggestions that access charges should be imposed on
unbundled elements because provision of competitive service by rebundling the same network
elements used by the incumbent LEC to provide access is equivalent to resale of a retail service.(494)
First, in the Local Competition Order, we recognized major differences between competition
through the use of unbundled network elements and competition through resale of an existing
retail service offered by an incumbent LEC. We explained, for example, that an entrant relying on
unbundled elements rather than resale has the flexibility to offer all telecommunications services
made possible by using network elements but also assumes the risk that end users will not
generate sufficient demand to justify the investment. The entrant using a resale strategy, however,
is limited to offering the retail service itself without the attendant investment risk.(495) Thus, we
reject the notion that the rebundling of network elements is equivalent to resale. Second,
although we concluded in the Local Competition Order that IXCs must continue to pay access
charges to incumbent LECs for access services when the end user is served by a competitive
carrier reselling the incumbent LEC's retail services, our conclusion was based on the resale
provisions of the 1996 Act which limit resale to retail services offered to subscribers or other
customers who are not telecommunications carriers.(496) The resale provision does not apply to
non-retail services, including access services, that may be offered using the same facilities.(497)
Unlike the provision of local exchange services, access services are not services that LECs
provide directly to end users on a retail basis. To impose access charges on the sale of unbundled
elements would contravene the terms of the resale provision by effectively treating exchange
access as a service provided on a retail basis.
B. Treatment of Interstate Information Services
1. Background
341. In the 1983 Access Charge Reconsideration Order, the Commission decided that,
although information service providers(498) (ISPs) may use incumbent LEC facilities to originate
and terminate interstate calls, ISPs should not be required to pay interstate access charges.(499) In
recent years, usage of interstate information services, and in particular the Internet and other
interactive computer networks, has increased significantly.(500) Although the United States has the
greatest amount of Internet users and Internet traffic, more than 175 countries are now connected
to the Internet.(501) As usage continues to grow, information services may have an increasingly
significant effect on the public switched network.
342. As a result of the decisions the Commission made in the Access Charge
Reconsideration Order, ISPs may purchase services from incumbent LECs under the same
intrastate tariffs available to end users. ISPs may pay business line rates and the appropriate
subscriber line charge, rather than interstate access rates, even for calls that appear to traverse
state boundaries.(502) The business line rates are significantly lower than the equivalent interstate
access charges, given the ISPs' high volumes of usage.(503) ISPs typically pay incumbent LECs a
flat monthly rate for their connections regardless of the amount of usage they generate, because
business line rates typically include usage charges only for outgoing traffic.
343. In the NPRM, we tentatively concluded that ISPs should not be required to pay interstate access charges as currently constituted. We explained that the existing access charge system includes non-cost-based rates and inefficient rate structures. We stated that there is no reason to extend such a system to an additional class of customers, especially considering the potentially detrimental effects on the growth of the still-evolving information services industry. We explained that ISPs should not be subjected to an interstate regulatory system designed for circuit-switched interexchange voice telephony solely because ISPs use incumbent LEC networks to receive calls from their customers.(504) We solicited comment on the narrow issue of whether to permit incumbent LECs to assess interstate access charges on ISPs.(505) In the companion Notice of Inquiry (NOI), we sought comment on broader issues concerning the development of information services and Internet access.(506)
2. Discussion
344. We conclude that the existing pricing structure for ISPs should remain in place, and
incumbent LECs will not be permitted to assess interstate per-minute access charges on ISPs. We
think it possible that had access rates applied to ISPs over the last 14 years, the pace of
development of the Internet and other services may not have been so rapid. Maintaining the
existing pricing structure for these services avoids disrupting the still-evolving information
services industry(507) and advances the goals of the 1996 Act to "preserve the vibrant and
competitive free market that presently exists for the Internet and other interactive computer
services, unfettered by Federal or State regulation."(508)
345. We decide here that ISPs should not be subject to interstate access charges. The
access charge system contains non-cost-based rates and inefficient rate structures, and this Order
goes only part of the way to remove rate inefficiencies. Moreover, given the evolution in ISP
technologies and markets since we first established access charges in the early 1980s, it is not
clear that ISPs use the public switched network in a manner analogous to IXCs. Commercial
Internet access, for example, did not even exist when access charges were established. As
commenters point out, many of the characteristics of ISP traffic (such as large numbers of
incoming calls to Internet service providers) may be shared by other classes of business
customers.
346. We also are not convinced that the nonassessment of access charges results in ISPs
imposing uncompensated costs on incumbent LECs. ISPs do pay for their connections to
incumbent LEC networks by purchasing services under state tariffs. Incumbent LECs also receive
incremental revenue from Internet usage through higher demand for second lines by consumers,
usage of dedicated data lines by ISPs, and subscriptions to incumbent LEC Internet access
services. To the extent that some intrastate rate structures fail to compensate incumbent LECs
adequately for providing service to customers with high volumes of incoming calls, incumbent
LECs may address their concerns to state regulators.
347. Finally, we do not believe that incumbent LEC allegations about network congestion
warrant imposition of interstate access charges on ISPs.(509) The Network Reliability and
Interoperability Council has not identified any service outages above its reporting threshold
attributable to Internet usage, and even incumbent LEC commenters acknowledge that they can
respond to instances of congestion to maintain service quality standards. Internet access does
generate different usage patterns and longer call holding times than average voice usage.
However, the extent to which this usage creates congestion depends on the ways in which
incumbent LECs provision their networks, and ISPs use those networks. Incumbent LECs and
ISPs agree that technologies exist to reduce or eliminate whatever congestion exists; they disagree
on what pricing structure would provide incentives for deployment of the most efficient
technologies.(510) The public interest would best be served by policies that foster such
technological evolution of the network. The access charge system was designed for basic voice
telephony provided over a circuit-switched network, and even when stripped of its current
inefficiencies it may not be the most appropriate pricing structure for Internet access and other
information services.
348. Thus, in our review of the record filed in response to the NOI, we will consider
solutions to network congestion arguments other than the incumbent LECs' recommendation that
we apply access charges to ISPs' use of circuit-switched network technology. We intend rather to
focus on new approaches to encourage the efficient offering of services based on new network
configurations and technologies, resulting in more innovative and dynamic services than exist
today. In the NOI, we will address a range of fundamental issues about the Internet and other
information services, including ISP usage of the public switched network.(511) The NOI will give us
an opportunity to consider the implications of information services more broadly, and to craft
proposals for a subsequent NPRM that are sensitive to the complex economic, technical, and legal
questions raised in this area. We therefore conclude that ISPs should remain classified as end
users for purposes of the access charge system.
C. Terminating Access
349. In the NPRM, we requested comment regarding the regulation of terminating
access. We noted that, unlike originating access, the choice of an access provider for terminating
access is made by the recipient of the call. The call recipient generally does not pay for the call
and, therefore, is not likely to be concerned about the rates charged for terminating access. We
suggested that neither the originating caller nor its long-distance service provider can exert
substantial influence over the called party's choice of terminating access provider.(512) Thus, even if
competitive pressures develop at the originating end as new entrants offer alternatives, the
terminating end of a long-distance call may remain a bottleneck, controlled by the LEC providing
access for a particular customer.(513) We also recognized, however, that excessive terminating
access charges could furnish an incentive for IXCs to enter the access market in order to avoid
paying excessive terminating access charges.(514)
1. Price Cap Incumbent LECs
a. Background
350. We requested comment on various alternative special methods for regulating the
terminating access rates of price cap LECs. For instance, we sought comment on whether to
establish a ceiling on the terminating access rates of price cap LECs equal to the forward-looking
economic cost of providing the service. We suggested alternative methods for measuring
forward-looking economic cost, including reference to prices in reciprocal compensation
arrangements for the transport and termination charges of telecommunications under sections
251(b)(5) and 252(d)(2) or a requirement that terminating rates be based on a TSLRIC study or
other acceptable forward-looking cost-based model.(515)
b. Discussion
351. We believe that new entrants, by purchasing unbundled network elements or
providing facilities-based competition, will eventually exert downward pressure on originating
access rates assessed by incumbent LECs. We agree that excessive terminating access rates could
encourage long-distance companies to avoid the payment of such charges by seeking to become
the local exchange and exchange access provider for end user customers. These market
developments, however, would not fully address the concerns expressed in the NPRM and
reflected in comments with respect to the ability of incumbent LECs to charge unreasonable rates
for terminating access.
352. We are also not convinced that a significant competitive impact would result from
changes in calling patterns between pairs of callers. Commenters have not described any realistic
way that users, by changing their calling patterns, could experience savings attributable to
differing levels of terminating access charges paid by IXCs.(516) Although one commenter points to
high termination charges in foreign countries as affecting the market for overseas calls originating
in the United States,(517) such results are less likely to occur for domestic calls, which are much less
expensive than international calls and are subject to geographic rate averaging and rate integration
requirements.(518) Thus, we are reluctant to base our approach on the expectation that a significant
proportion of callers will implement such a strategy.
353. Accordingly, we are establishing regulatory requirements that will address the
potential that incumbent LECs could charge unreasonable rates for terminating access.
Specifically, we are adopting rules in this Order that, for price cap LECs, will limit recovery of
TIC and common line costs from terminating access rates for a limited period, and then eliminate
any recovery of common line and TIC costs from terminating access. Under this approach,
beginning January 1, 1998, price cap LECs will recover common line and residual TIC revenues
through a new flat charge, subject to a ceiling. Remaining common line and residual TIC
revenues will then be first recovered through originating access rates, subject to a ceiling. Any
remaining common line and residual TIC revenues may then be recovered through terminating
rates. As the caps on SLCs applicable to non-primary residential lines and the PICC are raised,
none of these residual revenues will be recovered through terminating access charges. When the
increased SLCs and PICCs are fully implemented, recovery of these costs will be more susceptible
to competitive forces because IXCs could seek to influence the end user's choice of its provider of
local service, and the end user's choice of service provider will determine whether the incumbent
LEC is able to recover these costs from the end user.
354. In addition, pending full recovery of all common line and residual TIC costs in flat
rate SLCs and PICCs, this approach will put downward pressure on terminating access rates by
lowering the overall service revenues derived from terminating access charges. Because
competitive pressure is more likely to develop on the originating end of a long-distance call, we
can rely to a greater extent on competitive forces to ensure just and reasonable rates under this
approach by moving recovery of certain revenues from terminating access to originating access.
By stripping terminating access rates of CCL and residual TIC charges and, pending full
implementation of the new flat charges, placing more of the burden of TIC recovery on
originating access rates, we reduce potential excesses in terminating access charges while
exposing the CCL and residual TIC recovery to competitive pressures in the originating access
market.
355. The NPRM described proposals linking terminating rates to originating rate levels or
shifting costs from terminating to originating access charges.(519) Some commenters support
limiting price cap LEC terminating access rates to the level of the LEC originating access rates.(520)
If originating access charges are lowered because of competition, the ceiling on terminating access
rates would be lowered as well, placing downward pressure on terminating rates. This approach,
however, would not substantially affect terminating access rates where originating access rates
have not responded to competitive inroads. Moreover, linking an incumbent LEC's terminating
access rate to its own originating rate could reduce the incumbent LEC's incentive to lower its
originating access rates. Thus, we decline to adopt this method of regulating terminating access
rates.
356. The NPRM requested comment on the possibility of eliminating all charges for terminating access by shifting the burden of recovering all costs currently recovered in terminating access rates to originating access charges.(521) We decline to adopt this approach because a complete shift of terminating access costs to originating access conflicts with one of the basic objectives of this proceeding -- to ensure that charges for access services reflect the manner in which the costs of providing those services are incurred. Switching costs, for example, should continue to be recovered in part from terminating access charges because those costs are traffic sensitive and are related to the volumes of both originating and terminating traffic. Moreover, we emphasize that, as discussed in Section III.A, the rate structure we are adopting, which will replace per-minute recovery of the CCL charge and the TIC with flat rate charges, helps to achieve our goal of ensuring that charges for access services reflect the manner in which costs are incurred. Our requirement that incumbent LECs recover a greater portion of common line and TIC costs in originating access rates pending full implementation of flat-rated charges will address concerns about the reasonableness of terminating access charges while providing price cap LECs sufficient latitude to recover the reasonable costs of deploying their facilities to provide terminating access services.
357. The NPRM also discussed the alternative of requiring price cap LECs to establish end user charges for terminating access. This approach would place direct responsibility for the cost of terminating access on the recipient of terminating access services and would expose terminating access to competitive pressures. We noted that wireless companies already charge called parties for receiving calls and requested comment on how we might implement a system of end user charges in the context of access reform and whether its implementation would increase the number of uncompleted calls due to a reluctance by called parties to accept the charges.(522) We agree with commenters that such a change could prove disruptive to consumers of wireline services.(523) After review of the record, which produced few, if any, advocates of such an approach, we conclude that we should not mandate at this time this change in current pricing practices for wireline service.
2. Non-Incumbent LECs
a. Background
358. In the NPRM, we requested comment about whether to impose ceilings on the
terminating access rates of non-incumbent LECs.(524) We stated in the NPRM that our policy since
the Competitive Carrier Proceeding,(525) has consistently been that a carrier is non-dominant unless
the Commission makes or has made a finding that it is dominant.(526) We noted that, since the
Competitive Carrier Proceeding, new entrants into the exchange access market have been
presumptively classified as non-dominant because they have not been shown to exercise
significant market power in their service areas.(527) At the same time, we stated that competitive
LECs may possess market power over IXCs needing to terminate calls because the LEC
controlling the terminating local loop is the only access provider available to the IXC seeking to
terminate a long-distance call on that particular loop.(528) We solicited comment on several
alternatives, including whether we should use incumbent LEC terminating access rates as a
benchmark to determine the reasonableness of competitive LEC terminating rates. We invited
commenters to offer other approaches including, for example, whether we should establish a
presumption of reasonableness if the competitive LEC's terminating access rate is no higher than
the incumbent LEC's rate in the same geographic market.(529)
b. Discussion
359. We recently noted that the test in deciding whether to apply dominant carrier
regulation to a class of carriers is whether those carriers have market power.(530) As we discussed
in the Dominant/Nondominant Order, in determining whether a firm possesses market power, the
Commission has previously focused on certain well-established market features, including market
share, supply and demand substitutability, the cost structure, size or resources of the firm, and
control of bottleneck facilities.(531) Competitive LECs currently have a relatively small market
share in the provision of local exchange and exchange access service. Nonetheless, at first blush,
there is a concern that a competitive LEC may have market power over an IXC that needs to
terminate a long-distance call to a customer of that particular competitive LEC. Therefore, we
sought comment on whether and to what extent we should regulate the terminating access
charges of competitive LECs.
360. We conclude, based on the record before us, that non-incumbent LECs should be
treated as nondominant in the provision of terminating access. Although an IXC must use the
competitive LEC serving an end user to terminate a call, the record does not indicate that
competitive LECs have previously charged excessive terminating access rates. Nor have
commenters provided evidence demonstrating that competitive LECs are, in fact, charging
excessive terminating rates. Indeed, the record suggests that the terminating rates of competitive
LECs are equal to or below the tariffed rates of incumbent LECs.(532) In addition, the record does
not show that competitive LECs distinguish between originating and terminating access in their
offers of service. Therefore, it does not appear that competitive LECs have structured their
service offerings in ways designed to exercise any market power over terminating access.
Accordingly, the concerns expressed in the NPRM about the ability of competitive LECs to
exercise market power in the provision of terminating access are not substantiated in the record.
361. Further, as competitive LECs, which have a small share of the interstate access
market, attempt to expand their market presence, the rates of incumbent LECs or other potential
competitors will constrain the terminating access rates of competitive LECs.(533) Specifically,
competitive LECs compete with incumbent LECs whose rates are regulated. The record indicates
that long-distance carriers have established relationships with incumbent LECs for the provision
of access services, and new market entrants are not likely to risk damaging their developing
relationships with IXCs by charging unreasonable terminating access rates.(534) This is especially
true with respect to competitive access providers seeking to maintain or expand their access
transport, special access, or other services apart from switched access.(535)
362. In addition, we believe that overcharges for terminating access could encourage
access customers to take competitive steps to avoid paying unreasonable terminating access
charges. If, for example, a competitive LEC consistently overcharged an IXC for terminating
access, the IXC would have an incentive to enter a marketing alliance with another competitive
LEC in the same market or in other geographic markets where the overcharging competitive LEC
seeks to expand. Although high terminating access charges may not create a disincentive for the
call recipient to retain its local carrier (because the call recipient does not pay the long distance
charge), the call recipient may nevertheless respond to incentives offered by an IXC with an
economic interest in encouraging the end user to switch to another local carrier. Such an
approach could have particular impact when the IXC has significant brand recognition among
consumers. Moreover, as noted in the NPRM, excessive terminating access charges could
encourage IXCs to enter the access market in an effort to win the local customer.(536) We believe
that the possibility of competitive responses by IXCs will have a constraining effect on non-incumbent LEC pricing.
363. Thus, we will not adopt at this time any regulations governing the provision of
terminating access provided by competitive LECs.(537) Because competitive LECs have not
charged unreasonable terminating access rates, and because they are not likely to do so in the
future, competitive LECs do not appear to possess market power. Thus, the imposition of
regulatory requirements with respect to competitive LEC terminating access is unnecessary. We
similarly find no reason to adopt a presumption of reasonableness where a competitive LEC's
terminating access rates are less than its rates for originating access or less than the incumbent
LEC's terminating access rates. Instead, if we need to examine the reasonableness of competitive
LEC terminating access rates in an individual instance, we can do so taking into account all
relevant factors including relationships to other rates. Thus, if an access provider's service
offerings violate section 201 or Section 202 of the Act, we can address any issue of unlawful rates
through the exercise of our authority to investigate and adjudicate complaints under section
208.(538) On the basis of the current record, we conclude that reliance on the complaint process will
be sufficient to assure that non-incumbent LEC rates are reasonable. We emphasize that we will
not hesitate to use our authority under section 208 to take corrective action where appropriate.
364. We will be sensitive to indications that the terminating access rates of competitive
LECs are unreasonable. The charging of terminating access rates above originating rates in the
same market, for example, may suggest the need to revisit our regulatory approach. Similarly,
terminating rates that exceed those charged by the incumbent LEC serving the same market may
suggest that a competitive LEC's terminating access rates are excessive. If there is sufficient
indication that competitive LECs are imposing unreasonable terminating access charges, we will
revisit the issue of whether to adopt regulations governing competitive LEC rates for terminating
access.
3. "Open End" Services
365. In some cases, an IXC is unable to influence the end user's choice of access provider
for originating access services because the end user on the terminating end is paying for the call.
For example, charges for the "open end" originating access minutes for 800 or 888 services are
paid by the recipient of the call. Consequently, the Commission has treated incumbent LEC
originating "open end" minutes as terminating minutes for access charge purposes.(539) The NPRM
solicited comment on whether such regulatory treatment should be retained for "open end"
services under which terminating access rates serve as originating access rates, and whether this
approach should be extended to competitive LECs.(540)
366. We continue to believe that "open end" originating minutes should be treated as
terminating minutes for access charge purposes. Although few comments were filed regarding
this issue, commenters addressing this matter advocate retention of the current regulatory
approach.(541) By continuing to treat "open end" originating minutes as terminating minutes for
access charge purposes, we recognize that access customers have limited ability to influence the
calling party's choice of access provider. Accordingly, access charges for these "open end"
minutes will be governed by the requirements we adopt in this Order applicable to terminating
access provided by incumbent LECs. Thus, residual common line charges and the per-minute TIC
will not be recovered through "open end" originating minutes except to the extent such recovery
is permitted under the rules described in Section III.A of this Order.
D. Universal Service-Related Part 69 Changes
367. In the NPRM, we recognized that, because of the role that access charges have
played in funding and maintaining universal service, it is critical to implement changes in the
access charge system together with complementary changes in the universal service system. In
this section, we address the manner in which incumbent LECs must adjust their interstate access
charges to reflect the universal service support mechanisms adopted in the Universal Service
Order.
1. Background
368. In November 1996, pursuant to Section 254 of the Act, the Federal-State Universal
Service Joint Board issued its recommendations to the Commission for reforming our system of
universal service so that universal service is preserved and advanced, but in a manner that permits
the local exchange and exchange access markets to move from monopoly to competition.(542) In
our Universal Service Order, we are adopting most of the Joint Board's recommendations relating
to the support of rural and high cost areas.
369. Section 254 of the Act requires that any federal universal service support provided
to eligible carriers be "explicit"(543) and recovered on an "equitable and nondiscriminatory basis"(544)
from all telecommunications carriers providing interstate telecommunications service. In our
companion Universal Service Order, we agree with the Joint Board that these programs must be
replaced with universal service support mechanisms that satisfy section 254.(545)
370. Currently, there are three mechanisms designed expressly to provide support for
high cost and small telephone companies: the Universal Service Fund (high cost assistance
fund),(546) the Dial Equipment Minutes (DEM) weighting program,(547) and Long Term Support
(LTS).(548) An incumbent LEC is eligible for high cost assistance from the current Universal
Service Fund if its embedded loop costs exceed 115 percent of the national average loop cost.
This program is funded entirely by IXCs.(549) DEM weighting assistance is an implicit support
mechanism that permits LECs with fewer than 50,000 access lines to apportion a greater
proportion of these local switching costs to the interstate jurisdiction than larger LECs may
allocate. Finally, the existing LTS program supports carriers with higher-than average subscriber
line costs by providing carriers that are members of the NECA pool with enough support to
enable them to charge IXCs only a nationwide average CCL interstate access rate.(550) LTS
payments reduce the access charges of smaller, rural incumbent LECs participating in the loop-cost pool by raising the access charges of non-participating incumbent LECs.
371. In the NPRM, we sought comment on whether incumbent LECs' access charges
must be adjusted to reflect elimination of LTS contribution requirements and receipt of explicit
universal service funds in order to prevent incumbent LECs from being compensated twice for
providing universal service.(551) We proposed a downward exogenous cost adjustment for price
cap incumbent LECs to reflect elimination of LTS contribution requirements and any revenues
received from any new universal service support mechanisms, and sought comment on how
interstate costs must also be reduced to account for explicit universal service support.(552)
2. Discussion
372. In our companion Universal Service Order, we conclude that a carrier will continue
to receive universal service support based upon the existing LTS, high cost, DEM weighting
mechanisms, until the carrier begins to receive support based upon forward-looking economic
cost.(553) In the following sections, we will discuss the manner in which incumbent LECs must
reduce their interstate access charges to reflect the elimination of the obligation to contribute to
LTS, increase their interstate access charges to permit recovery of the new universal service
obligation, and, to the extent necessary, adjust their interstate access charges to account for any
additional universal service funds received under the modified universal service mechanisms.
a. Removal of LTS Obligation from Interstate Access Rates
373. In our companion Universal Service Order,(554) we agree with the Joint Board that
LTS payments constitute a universal service support mechanism that is inconsistent with the Act's
requirement that support be collected from all providers of interstate telecommunications services
on an equitable and non-discriminatory basis(555) and be available to all eligible telecommunications
carriers.(556) In that order, we conclude that LTS should be removed from the interstate access
charge system. We provide, instead, for recovery of comparable payments from the new federal
universal service support mechanisms.(557)
374. Currently, only incumbent LECs that do not participate in the NECA CCL tariff
(non-pooling incumbent LECs) make LTS payments and only incumbent LECs participating in the
NECA CCL tariff receive LTS support.(558) Non-pooling incumbent LECs' contributions to the
common line pool are set annually based on the total projected amount of LTS, converted to a
monthly payment amount. Non-pooling incumbent LECs recover the revenue necessary for their
LTS contributions through their CCL charges. We agree with commenters that argue that, to the
extent we do not reduce interstate access revenues by the amount of LTS contribution currently
recovered in the rates, incumbent LECs will double recover. We therefore conclude that
incumbent LEC interstate access charges must be reduced to reflect elimination of the obligation
to contribute to LTS.
375. Because payments from the existing LTS mechanism will cease on January 1, 1998,
incumbent LECs should no longer contribute to the existing LTS fund after that date. For price
cap LECs, which were requested to stop participating in the NECA Common Line tariff before
coming under price cap regulation, LTS contributions were included in the common line revenue
requirement when the PCI for the common line basket was established.(559) We conclude that price
cap LECs must make a one-time downward exogenous adjustment to the PCI for the common
line basket to account fully for the elimination of their LTS obligations. This exogenous
adjustment shall be made in a manner consistent with section 61.45 and other relevant provisions
of the Commission's rules.(560)
376. Non-pooling, rate-of-return LECs recover their LTS contributions in the common
line revenue requirement.(561) Because current LTS contributors will no longer be making such
contributions after January 1, 1998, their CCL charges should be adjusted to account for this
change. Rate-of-return LECs that formerly made LTS contributions should recompute their
common line revenue requirements based on the elimination of their LTS obligations, and adjust
their CCL charges accordingly.(562)
377. We note that the replacement of LTS with comparable support from the new
universal service support mechanisms requires us to amend the NECA Common Line tariff rules,
which establish the CCL for pooling members at the average of price cap LECs' CCL charges.(563)
Under the current LTS support system, NECA annually projects the common line revenue
requirement, including an 11.25 percent return on investment, for incumbent LECs that
participate in the common line pool.(564) NECA then computes the total amount of LTS support
needed by subtracting the amount pooling carriers will receive in CCL revenues and SLCs from
the pool's projected revenue requirement, after removing pay telephone costs and revenues. Our
rules currently provide that the NECA CCL tariff be set to recover the average of price cap LECs'
CCL charges.(565) If we were to retain this rule, our decision eliminating LTS obligations for price
cap LECs and requiring them to reduce their CCL charges accordingly would automatically
reduce the CCL revenues of NECA pool members. Further, reductions would occur as price cap
LECs implemented our decisions in Section III of this Order, which restructures the common line
rate structure for price cap LECs to recover common line costs through flat-rated charges instead
of the per-minute CCL charge. Because we have deferred consideration of access reform for non-price cap LECs(566) and did not seek comment on this issue in the NPRM, we must address this
issue in a future proceeding that undertakes access reform for small, non-price cap LECs.
b. Recovery of New Universal Service Obligations
378. In the Universal Service Order, we conclude that assessment of contributions for the
interstate portion of the high cost and low-income support mechanisms shall be based solely on
end-user interstate revenues,(567) and that assessment of universal support for eligible schools,
libraries, and rural health care providers shall be based on interstate and intrastate total end-user
revenues.(568) As to the manner in which carriers may recover their contributions to the universal
service fund, in our Universal Service Order we conclude that carriers may recover universal
service contributions via interstate mechanisms.(569) In this Section, we address the manner in
which incumbent price cap LECs may recover their universal service contributions. We address
non-price cap LECs' recovery of universal service contributions in Section XIII.F of the Universal
Service Order.
379. Price cap LECs may treat their contributions to the new universal service
mechanisms, including high cost and low-income support and support for eligible schools,
libraries, and health care, as exogenous changes to their price cap indices (PCIs).(570) Because the
only interstate revenues that will serve as the basis for assessing universal service contributions in
1998 will be end-user revenues, we find that price cap LECs recovering their universal service
obligation through interstate access charges must recover those contributions in the baskets for
services that generate end-user interstate revenues. Because price cap LECs do not recover
revenues from end users of services in all baskets, the exogenous adjustment should not be
across-the-board. The baskets containing end-user interstate services are the common line,
interexchange, and trunking baskets.(571) Price cap LECs electing to recover their universal service
obligation through interstate access charges must therefore apply the full amount of the
exogenous adjustment among these three baskets on the basis of relative size of end-user
revenues. We note, however, that the tandem-switched transport, interconnection charge, and
tandem switch signalling service categories(572) in the trunking basket do not recover end-user
interstate revenues. In order to prevent recovery from customers of these services, the service
band indices (SBI) for these service categories should not be increased to reflect the exogenous
adjustment to the PCI for the trunking basket. To reflect the exogenous adjustment to the
trunking basket PCI, price cap LECs should, instead, increase the SBIs for the remaining service
categories in the trunking basket(573) based on the relative end-user interstate revenues generated in
each service category.
380. In 1999, the percentage of price cap LECs' revenues that will be assessed for
universal service support may increase as a result of the anticipated increases in high cost, low-income support and support for schools, libraries, and health care in 1999. Price cap LECs shall
therefore perform an upward exogenous adjustment to the PCIs for the common line,
interexchange, and trunking baskets in the same manner as the exogenous adjustment performed
in 1998, to reflect any change in the assessment rate in 1999.
c. Adjustments to Interstate Access Charges to Reflect Additional
Support from the Modified Universal Service Mechanisms
381. In our Universal Service Order, we conclude that the federal universal service
mechanism should support 25 percent of the difference between the forward-looking economic
cost of serving the customer and the appropriate revenue benchmark.(574) We further conclude in
that order that 25 percent approximates the portion of the cost of providing the supported
network facilities that would be assigned to the interstate jurisdiction, and that, by funding these
interstate costs, we will ensure that federal implicit universal service support is made explicit.
Consistent with our decision in the Universal Service Order to fund only interstate costs through
the federal universal service fund, we direct incumbent LECs to use any universal service support
received from the new universal service mechanisms to reduce or satisfy the interstate revenue
requirement otherwise collected through interstate access charges.
382. Non-Rural Carriers. In our Universal Service Order, we conclude that, until a
forward-looking economic cost methodology takes effect on January 1, 1999, non-rural carriers
will continue to receive high cost assistance and LTS amounts based on the existing universal
service mechanisms.(575) As there will be no change until January 1, 1999 to the support non-rural
incumbent LECs currently receive as high cost and LTS support, we conclude that it is not
necessary at this time to determine the manner in which non-rural carriers should adjust their
interstate access charges to reflect a difference in universal service support. We will address this
issue prior to the January 1, 1999, effective date of the forward-looking cost mechanisms for non-rural carriers.
383. Rural Carriers. In our Universal Service Order, we conclude that rural carriers, as
defined in section 153(37) of the Act,(576) shall continue to receive support based on embedded
costs for at least three years.(577) Beginning on January 1, 1998, rural carriers shall receive high
cost loop support, DEM weighting assistance, and LTS benefits on the basis of the modified
support mechanisms.
384. In our Universal Service Order, we adopt modified per-line support mechanisms for
providing support comparable to the LTS support received under the existing mechanisms.
Beginning on January 1, 1998, we will allow a rural carrier's annual LTS support to increase from
its support for the preceding calendar year based on the percentage of increase of the nationwide
average loop cost.(578) Rural, non-price cap LECs should continue to apply any revenues received
from the modified universal service support mechanisms that replace current LTS amounts to the
accounts to which they are currently applying LTS support.
385. We also decide in the Universal Service Order that, from January 1, 1998 through
December 31, 1999, rural carriers shall calculate their high cost support using the current high
cost formulas. We conclude that no adjustment to rural incumbent LECs' interstate access
charges is necessary at this time because incumbent LECs will continue to use the existing high
cost formulas to determine high cost support. As we determine in that order, however, beginning
January 1, 2000, rural carriers shall receive high cost loop support for their average loop costs
that exceed 115 percent of an inflation-adjusted nationwide average loop cost. The inflation
adjusted nationwide average cost per loop shall be calculated by multiplying the 1997 nationwide
average cost per loop by the percentage in change in Gross Domestic Product Chained Price
Index (GDP-CPI) from 1997-1998.(579) We conclude that rural, non-price cap LECs should
continue to apply any revenues received from the modified universal service support mechanism
that replace amounts received under the current high cost support system to the accounts to
which they are currently applying high cost support.
386. Finally, in our Universal Service Order, we adopt the Joint Board's recommendation
that a subsidy corresponding in amount to that generated formerly by DEM weighting be
recovered from the new universal service support mechanisms.(580) Beginning on January 1, 1998
and continuing until permanent mechanisms for them become effective, rural carriers will receive
DEM weighting assistance calculated as follows: assistance will equal the difference between the
1996 weighted DEM factor and the unweighted DEM factor multiplied by the annual unseparated
local switching revenue requirement. As with comparable LTS and high cost support, rural, non-price cap LECs should continue to apply any support received from the modified universal service
support mechanisms that replaces existing DEM weighting amounts to the accounts to which they
are currently applying DEM weighting assistance.
387. Currently, the high cost and DEM weighting support mechanisms shift a portion of
the intrastate revenue requirement to the interstate jurisdiction in order to permit LECs to recover
a greater percentage of their costs from the interstate jurisdiction. Some non-price cap LECs are
concerned that, to the extent that support from the modified universal service mechanisms is not
applied to the intrastate jurisdiction, an intrastate revenue shortfall will occur.(581) In the Universal
Service Order, we conclude that, until universal service support is based on forward-looking
economic cost, carriers should continue to receive amounts from the new universal service
mechanisms comparable to existing high cost and DEM weighting support. In that order, we do
not alter the existing revenue-shifting mechanisms in place for the current high cost support and
DEM weighting at this time.(582) Thus, no intrastate revenue shortfall will occur, because no
revenue requirement is being shifted back to the intrastate jurisdiction.
E. Part 69 Allocation Rules
1. Background
388. In the NPRM, we solicited comment on whether it would be appropriate for
incumbent price cap LECs to be relieved of complying with Subparts D and E of Part 69 of our
rules, which address the allocation of investments and expenses to the access rate elements.(583)
2. Discussion
389. We conclude that at this time we should maintain our Part 69 cost allocation rules.
In this Report and Order, we have instituted a phasing out of the CCL charge. Until the per-minute CCL charge is phased out completely and multi-line PICCs do not recover any common
line revenues,(584) price cap LECs will need to use these rules to calculate the SLC. Therefore, we
decline to eliminate the cost allocation rules at this time. We note that we may revisit this issue
when these rules are no longer needed to calculate the SLC.
F. Other Proposed Part 69 Changes
1. Background
390. In the NPRM, we sought comment on revisions necessary to update Part 69 and
conform it to the 1996 Act. In the NPRM, we made several proposals that we thought necessary
to bring Part 69 current, including: eliminating the rules that provide for a "contribution charge"
that may be assessed on special access and expanded interconnection; removing the rule and
sections referencing the rule that establishes the equal access rate element; and removing the rule
and sections referencing the rule that establishes a rate element for costs associated with lines
terminating at "limited pay telephones"; and changing the definition of "Telephone Company" to
mean incumbent LEC. We also sought comment on whether rate elements and subelements
established pursuant to waiver should be incorporated into Part 69.(585)
2. Discussion
391. The passage of the 1996 Act and the subsequent enactment of implementing
regulations requires that we update and revise various sections of Part 69. Sections 69.4(f) and
69.122 of our rules provide for a "contribution charge" that may be assessed on special access and
expanded interconnection. These sections are inconsistent with section 254 as amended by the
1996 Act, which requires, inter alia, that such carrier contributions be equitable and
nondiscriminatory. Furthermore, our rules governing the contribution charge merely allow a LEC
to try to justify this charge in the expanded interconnection context. No party has even attempted
to justify such a charge in more than four years. Given this and the relevant amendments in the
1996 Act, we find that there is no need for this rate element. We conclude that sections 69.4(f)
and 69.122 of our rules, which provide for a "contribution charge" that may be assessed on
special access and expanded interconnection, should be deleted.
392. Under Part 69, we required carriers to eliminate any separate equal access charge by
January 1, 1994.(586) We conclude, therefore, that section 69.4(d), which established the equal
access rate element for a limited duration, should be deleted because of the expiration of the
designated time period. Similarly, we conclude that section 69.107, which governs the
computation of the equal access rate element charges, and sections 69.308 and 69.410, which
concern allocation of costs to that rate element, should be deleted because the designated time
period for separate equal access rate elements has expired. We conclude that references to these
deleted sections should also be removed from Part 69.(587) To ensure consistency, a new section,
designated as section 69.3(3)(12), should be added and should read as follows: "Such a tariff
shall not contain any separate carrier's carrier tariff charges for an Equal Access element."
Similarly, we conclude that section 69.205, which concerns transitional premium charges for IXCs
and others should be deleted because the designated transition period for these charges has
expired.
393. Section 69.103 requires incumbent LECs to establish a separate rate element for
costs associated with lines terminating at "limited pay telephones."(588) Sections 69.303(a),
69.304(c), 69.307(c), and 69.406(a)(9) concern the allocation of costs to this rate element.
Section 276 of the Act and the implementing regulations require a new per call compensation
plan, which requires, inter alia, that incumbent LECs remove all payphone costs from access
charges.(589) This new compensation plan, as well as the payphone dialing parity requirements,(590)
have eliminated the need for sections 69.103, 69.303(a), 69.304(c), 69.307(c), and 69.406(a)(9).
We conclude that these sections should be deleted.
394. We conclude that codifying previously-granted Part 69 waivers is not necessary at
this time. Under the Price Cap Performance Review Third Report and Order, a party seeking to
introduce a new service may do so by filing a petition showing that the new service is in the public
interest.(591) Once that petition for a new service has been granted, carriers seeking to introduce the
same service with the same rate structure may do so under expedited procedures.(592) This
streamlined alternative for introducing new services should resolve past difficulties encountered
with the Part 69 waiver process. The proposed codification of previously-granted waivers is thus
unnecessary. We therefore decline to codify previously-granted Part 69 waivers into our rules.
395. NECA and TCA have requested that the Commission extend to all rate-of-return
companies, the right to offer new services based on an expedited process, which requires, inter
alia, a showing that the new service is in the public interest. In the Third Report and Order, we
granted to incumbent price cap LECs the right to introduce new services under a streamlined
procedure.(593) We will address the request of NECA and TCA when we take up access reform for
rate-of-return companies in the near future.
396. In the NPRM, we solicited comment on whether we should adopt regulatory
requirements to govern rates for terminating access offered by competitive LECs. In Section
VI.C., supra, we conclude that we will not adopt such regulatory requirement at this time. For
the same reasons, we find it unnecessary to apply any of our Part 69 regulations to competitive
LECs. We therefore conclude that Section 69.2(hh), which currently defines "Telephone
Company" by reference to Section 3(r) of the 1934 Act, should be changed to read as follows:
"`Telephone Company' or `local exchange carrier' as used in this Part means an incumbent local
exchange carrier as defined in section 251(h)(1) of the 1934 Act as amended by the 1996 Act."
There is no indication in the record that competitive LECs have exercised any degree of market
power in provision of terminating access or other access services. By definition, non-dominant
carriers do not exercise market power. Further, non-dominant carriers possess a negligible share
of the current access market and they will be competing with incumbent LECs whose rates are
subject to regulation. As a practical matter, the rates of the incumbent LECs will serve as a
constraint to some degree on the pricing and practices of non-dominant LECs. We therefore find
on this record that it is sufficient to rely on the Section 208 complaint process to assure
compliance with the Act by competitive LECs, and that we should not apply Part 69 to them. To
the extent that our definitions or our application of Part 69 needs in the future to be expanded to
encompass LECs other than incumbent LECs, we can revisit this issue.
A. PICCs for Special Access Lines
397. In this Further Notice of Proposed Rulemaking, we seek comment on our proposal
to allow incumbent local exchange carriers to impose a PICC on special access lines.
1. Background
398. As discussed in Section III.A., in most cases, the $3.50 SLC ceiling for primary
residential and single-line business customers does not allow recovery through the SLC of the
average per-line common line revenues permitted under our price cap rules. Similarly, in certain
service areas, the $6.00 SLC for multi-line business lines is insufficient to recover the average per-line revenues permitted by price cap regulation. To alleviate this shortfall, we are instituting a
number of changes, including raising the ceiling on the SLC for multi-line business and second and
additional residential lines.(594) Although this increase in the SLC will recover some of the shortfall,
other measures are needed to allow recovery of the common line revenues permitted under our
rules.
399. Therefore, we have permitted LECs to recover common line revenues not recovered
from the SLC by assessing flat, per-line charges on the end-user's presubscribed interexchange
carrier. Specifically, we are permitting LECs to assess a PICC on all lines, subject to ceilings
which will be increased each year. To the extent that the revenues from SLCs and PICCs on
primary residential lines and single-line business lines are insufficient to recover the full common
line revenues permitted by our price cap rules for these lines, or the multi-line SLCs are at their
ceilings, incumbent LECs shall recover the difference by assessing an additional PICC on non-primary residential and multi-line business lines. To the extent that these PICCs do not recover an
incumbent LEC's remaining permitted CCL revenues, incumbent LECs generally shall recover any
such residual common line revenues through per-minute CCL charges assessed on originating
access minutes.
400. As a result of our new rules, certain multi-line businesses will be paying higher SLCs
than they do now. Similarly, as the PICCs are phased in, IXCs initially will be required to pay
higher PICCs for a multi-line business end user compared to the PICC paid for a primary
residential end user or a single-line business end user.
401. In contrast, users of special access do not pay a SLC. Furthermore, under special
access, IXCs do not incur the same local access charges that are incurred by end users using
switched access. In light of our most recent changes to charges incurred by multi-line businesses,
including the higher SLC and the new multi-line business PICC, it may be cost effective for some
multi-line businesses that are currently using switched access to purchase instead special access
lines.
402. We are concerned that these facts could lead to the migration of certain businesses
from the public switched network to special access, which would result in a decrease in projected
revenue from multi-line SLCs. As a result PICCs for all remaining switched access lines will
necessarily increase to make up for the loss of revenue.
2. Proposal
403. We tentatively conclude that we should permit price cap LECs to assess a PICC on
special access lines to recover revenues for the common line basket. The special access PICC
would be no higher than the PICC that an incumbent LEC could charge for a multi-line business
line. Under our proposal, the special access PICC would not recover TIC or marketing expense.
404. We acknowledge that our proposal is a departure from established Commission
practice that special access will not subsidize other services. Although our proposal is a subsidy,
it is temporary in nature and will be phased out as the single-line PICC is phased in. We
tentatively conclude that our proposal is necessary for our transition from the per-minute CCL
charge to the flat PICC to work.
405. We invite parties to comment on this proposal. We also seek comment on how
special access connections should be counted for purposes of assessing a "per line" PICC. Parties
should also address the extent to which our proposal affects large and small LECs differently and
how small business entities, including small incumbent LECs and new entrants, will be affected.(595)
406. Consistent with our approach to reform the interstate access charge regime,
however, we tentatively conclude that the scope of this proceeding should be limited to incumbent
price cap LECs. As discussed in Section V., supra, we have limited the scope of access reform,
with some limited exceptions, to price cap incumbent LECs.(596) Similarly, we limit the scope of
this NPRM. To the extent necessary, we will instead address the effect of these issues on rate-of-return carriers in our separate access reform proceeding for rate-of-return carriers in 1997. In
that proceeding, we will have the opportunity to conduct a comprehensive review of the
circumstances unique to these carriers. We seek comment on this tentative conclusion regarding
the scope of this proceeding. We also invite parties to identify any changes that should be made
to other access elements as a result of this proposed change.
B. General Support Facilities Costs
407. As discussed in Section IV. D above, the current allocation of GSF costs enables
incumbent LECs to recover through regulated interstate access charges costs associated with the
LECs' nonregulated billing and collection functions. In this section, we seek comment on
proposed changes in the allocation of price cap LECs' interstate costs between regulated interstate
services and nonregulated billing and collection activities.
1. Background
408. The costs that incumbent LECs recover through interstate access charges are
determined by a multi-step process. Incumbent LECs first record their investment costs and
booked expenses in the accounts prescribed by the Commission's Part 32 Uniform System of
Accounts (USOA).(597) They next divide the recorded investment and expenses between regulated
and nonregulated services pursuant to Part 64 of the Commission's rules. Incumbent LECs then
divide regulated expenses and investment costs between the state and interstate jurisdictions
pursuant to the separations procedures prescribed in Part 36 of the Commission's rules.(598) Finally,
in accordance with our Part 69 access charge rules, the LEC apportions its regulated interstate
costs among the interstate access and interexchange service categories.(599)
409. Because the Part 69 access charge rules are applied at the end of this multi-step
process, they are written to accommodate the accounts defined by the USOA and the cost
categories prescribed by the Separations Manual. In 1987, the Commission revised its access
charge rules(600) in response to the Commission's comprehensive revision of both the USOA(601) and
the Separations Manual.(602) In its Part 69 Conformance Order, the Commission amended Part 69
to reapportion regulated interstate costs, including General Support Facilities (GSF) investment
expenses, among the existing access elements.
410. As discussed in Section IV.D above, the GSF investment category in Part 36
includes assets that support other operations, such as land, buildings, vehicles, as well as general
purpose computer investment accounted for in USOA Account 2124.(603) Some incumbent LECs
use general purpose computer equipment, which is included in the GSF investment category, to
provide nonregulated billing and collection services to IXCs.(604) The costs of providing interstate
billing and collection service are not, however, treated as nonregulated in the Part 64 cost
allocation process. Instead, nonregulated interstate billing and collection costs are identified
through the Part 36 and Part 69 cost allocation process. The separations process allocates these
costs to the various separations categories based on the separations of the three largest categories
of expenses, i.e., plant specific expenses, plant non-specific expenses, and customer operations
expenses.(605)
411. In its comments in response to the NPRM, AT&T refers to the allocation of
embedded GSF expenses, including general purpose computer expenses, among access categories
as a misallocation resulting in an implicit cross-subsidy of incumbent LECs' nonregulated billing
and collection services. This allocation, AT&T contends, results in the inappropriate support
through regulated access charges of LECs' billing and collection service, which is a nonregulated,
interstate service. AT&T estimates that $124 million of expenses recovered in interstate access
support the nonregulated billing and collection category.(606) Of the $124 million, AT&T states
that $60.1 million is included in interstate switched access, and $20.5 million is in interstate
special access, with the remainder recovered by the SLC.(607)
2. Proposal
412. The failure of Part 69 to assign general purpose computer costs to the billing and
collection category can be traced to our decision in the Part 69 Conformance Order to use an
investment-based allocator to apportion general support facilities (GSF) investment.(608) As
discussed in Section IV.D above, Section 69.307 of the Commission's rules apportions GSF
investment among the billing and collection category, the interexchange category, and the access
elements based on the amount of Central Office Equipment (COE), Cable and Wire Facilities
(CWF), and Information Origination/Termination Equipment (IO/T) investment allocated to each
Part 69 category.(609) This rule appears on its face to provide for an allocation of GSF investment
to billing and collection. Because no COE, CWF, or IO/T investment is allocated to the billing
and collection category, however, no GSF investment, and thus no portion of general purpose
computer investment, is allocated to the billing and collection category. Similarly, because
expenses related to GSF investment are allocated in the same manner as GSF investment, no GSF
expenses (including expenses related to general purpose computers) are allocated to billing and
collection. Price cap LECs' costs allocated to the interstate billing and collection category are
estimated to be approximately $480 million.(610)
413. As discussed in Section V of the Access Reform Order, we limit the scope of access
reform, with some limited exceptions, to price cap incumbent LECs. Consistent with our
approach to reform the interstate access charge regime, we tentatively conclude that our proposed
changes to the allocation of GSF investment will apply only to price cap LECs. We will address
the misallocation of rate-of-return LECs' interstate costs between regulated interstate services and
nonregulated billing and collection activities in our separate access reform proceeding for rate-of-return carriers in 1997, which will provide us with the opportunity to conduct a comprehensive
review of the circumstances unique to these carriers. We seek comment on this tentative
conclusion regarding the scope of this proceeding.
414. To the extent that incumbent LECs' costs are underallocated to the billing and
collection category, incumbent LECs' regulated services are recovering through interstate access
charges costs associated with unregulated services. We therefore tentatively conclude that price
cap incumbent LECs' general purpose computer costs attributable to billing and collection should
not be recovered through regulated access charges. We seek comment on two options for
reassigning these costs to the billing and collection category.
415. Under the first option, a price cap LEC would study the uses of the general purpose
computer assets recorded in Account 2124 to determine the percentage of investment in that
account that is used for billing and collection activities.(611) That percentage, multiplied by the ratio
of the dollar amount in Account 2124 to the dollar amount in Account 2110,(612) which
accumulates the total GSF investment, would be applied to the interstate portion of Account 2110
to determine a dollar amount that represents general purpose computer assets used for interstate
billing and collection activities. The dollar amount so identified would be attributed directly to the
billing and collection category. The remainder of the interstate portion of Account 2110 shall be
apportioned among the access elements and the interexchange category using the current
investment allocator. General purpose computer expenses recorded in Account 6124 would be
treated in a similar fashion to Account 2124.(613) The interstate portion of Account 6124 would be
allocated between (a) the billing and collection category and (b) all other elements and categories
using the percentage derived for Account 2124. The remainder of Account 6120 (GSF expense)
would be apportioned based on current GSF allocators.(614) Appropriate downward exogenous
cost adjustments would be made to all price cap baskets.
416. Two objections are commonly raised to the use of special studies to make regulatory
cost allocations. First, such studies are said to be costly. We recognize that there are costs
attached to a special study approach. We note, however, that price cap LECs may already be
required to study the use of computer investment in Account 2124 as part of the process of
allocating that investment between regulated and nonregulated activities pursuant to the Part 64
joint cost rules. Second, it may be claimed that permitting price cap LECs to use special studies
gives them too much discretion and that regulators are unable to ascertain the validity of the
studies. To remedy this concern, we propose that each price cap LEC add to its cost allocation
manual (CAM) a new section entitled "Interstate Billing and Collection." That section would
describe: (1) the manner in which the price cap LEC provides interstate billing and collection
services, and (2) the study it uses to determine the portion of Account 2124 investment that it
attributes to the billing and collection category. The special study would then be subject to the
same independent audit requirements as other regulated and nonregulated cost allocations. In
addition, to obtain an independent certification of the validity of the procedures adopted by the
price cap LEC, we would instruct the independent auditors to examine the design and execution
of the study during the first independent audit following the addition of the billing and collection
section to the CAM and to report their conclusions on the validity of the study.
417. Under the second option, we would modify Section 69.307 of our rules to require
use of a general expense allocator to allocate the interstate portion of Account 2110 between: (1)
the billing and collection category, and (2) all other elements and categories. We propose to use
the "Big Three Expense" allocator used elsewhere in Part 69,(615) excluding, however, any account
or portion of an account that is itself apportioned based on the apportionment of GSF to avoid
circularity. The GSF investment not allocated to the billing and collection category would then be
apportioned among the access elements and the interexchange category using the current
investment allocator. This would ensure that GSF costs are allocated among all access categories,
including the billing and collection category. The interstate portion of Account 6120 would be
apportioned among all elements and categories based on the overall apportionment of GSF
investment. This option covers only price cap incumbent LECs that provide interstate billing and
collection using regulated assets. Carriers that acquire billing and collection services from
unregulated affiliates through affiliate transactions or from third parties would continue recording
their expenses for acquiring such services in Account 6623,(616) which is already apportioned to the
billing and collection category.
418. We invite parties to comment on the feasibility of these two options and propose
alternative methods for reassigning general purpose computer costs to the billing and collection
category. Parties should also address the extent to which either option affects large and small
LECs differently and how small business entities, including small incumbent LECs and new
entrants, will be affected.(617) We invite parties to identify any changes that should be made to
other access elements as a result of any changes we may make to the GSF allocation procedures.
419. As required by the Regulatory Flexibility Act (RFA),(618) an Initial Regulatory
Flexibility Analysis (IRFA) was incorporated in the NPRM in this proceeding.(619) The Commission
sought written public comments on the proposals in the NPRM, including the IRFA. The
Commission's Final Regulatory Flexibility Analysis (FRFA) in this Order (the First Report and
Order in this Access Charge Reform proceeding) conforms to the RFA, as amended.(620) We
provide this summary analysis to provide context for our analysis in this FRFA. To the extent
that any statement contained in this FRFA is perceived as creating ambiguity with respect to our
rules or statements made in preceding sections of this Order, the rules and statements set forth in
those preceding sections shall be controlling.
A. Need for and Objectives of this First Report and Order
420. The Telecommunications Act of 1996 requires incumbent LECs to offer
interconnection and unbundled elements on an unbundled basis, and imposes a duty to establish
reciprocal compensation arrangements for the transport and termination of calls. The
Commission's access charge rules were adopted at a time when interstate access and local
exchange services were offered on a monopoly basis, and in many cases are inconsistent with the
competitive market envisioned by the 1996 Act. This proceeding is being conducted to revise the
Commission's access charge rules to make them consistent with the Telecommunications Act of
1996.
B. Summary of Significant Issues Raised by the
Public Comments in Response to the IRFA
421. Only one party, Rural Tel. Coalition, commented on the IRFA contained in the
NPRM. Rural Tel. Coalition disagrees with our conclusion that rules applying only to price cap
LECs will not affect non-price cap LECs in a way that requires analysis under the RFA.
According to Rural Tel. Coalition, the decisions made in this Order will "prejudge and prejudice"
a later rulemaking addressing access charge reform for non-price cap LECs.(621) In addition, Rural
Tel. Coalition argues that non-price cap LECs, which include small incumbent LECs, will be
injured if the access reform issues addressed in this Order are not implemented for them as well as
price-cap LECs. Finally, Rural Tel. Coalition argues that the Commission impermissibly
determined that small incumbent LECs are not small businesses within the meaning of the RFA.(622)
422. Rather than attempt to enact "one size fits all" access charge reform that would risk
not fully accounting for the special circumstances of rate-of-return and other non-price cap LECs,
we have chosen to address those LECs separately in a proceeding in which we may better focus
on their needs. We do not agree with Rural Tel. Coalition that our decisions in this Order will
"prejudge and prejudice" our consideration of the issues in a subsequent rulemaking. Although
we may often find that the public interest concerns are similar for large and small carriers, our
analysis will begin anew, and will address all relevant factors. Moreover, where the special
circumstances faced by small incumbent LECs justify different treatment than is accorded price
cap LECs in this Order, we will be better able to explain and address those concerns in a separate
proceeding. For the reasons set forth in Section V above, we also disagree with Rural Tel.
Coalition that small incumbent LECs may be injured by the delay involved in conducting separate
rulemakings. Finally, although we are not persuaded on the basis of this record that our prior
practice of finding incumbent LECs not subject to regulatory flexibility analysis (because they are
not small businesses) has been incorrect,(623) we have fully performed an RFA analysis for small
incumbent LECs in this Order, including consideration of any adverse impact of the rules we
adopt and consideration of alternatives that may reduce adverse impacts on such entities.
C. Description and Estimate of the Number of
Small Entities To Which the Rules Will Apply:
423. The RFA generally defines "small entity " as having the same meaning as the terms
"small business," "small organization," and "small governmental jurisdiction."(624) In addition, the
term "small business" has the same meaning as the term "small business concern" under the Small
Business Act unless the Commission has developed one or more definitions that are appropriate
for its activities.(625) A small business concern is one which: (1) is independently owned and
operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria
established by the Small Business Administration (SBA).(626)
424. Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies
"unless an agency after consultation with the Office of Advocacy of the Small Business
Administration and after opportunity for public comment, establishes one or more definitions of
such term which are appropriate to the activities of the agency and publishes such definition(s) in
the Federal Register." SBA has developed a definition of small business for Standard Industrial
Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone). We
first discuss the number of small businesses falling within this category, and then we attempt to
refine further our estimate to correspond with the categories of telephone companies that are
commonly used under our rules.
425. Consistent with our prior practice, our use of the terms "small entities" and "small
businesses" does not encompass "small incumbent LECs." We use the term "small incumbent
LECs" to refer to any incumbent LECs that arguably might be defined by SBA as "small business
concerns."(627) Because the small incumbent LECs subject to these rules are either dominant in
their field of operations or are not independently owned and operated, they are, consistent with
our prior practice, excluded from the definition of "small entity" and "small business concerns."(628)
Out of an abundance of caution, however, for regulatory flexibility analysis purposes, we will
consider small incumbent LECs within this analysis and use the term "small incumbent LECs" to
refer to any incumbent LECs that arguably might be defined by the SBA as "small business
concerns."(629)
1. Telephone Companies, Except
Radiotelephone Companies (SIC 4813)
426. Total Number of Telephone Companies Affected. The United States Bureau of the
Census ("the Census Bureau") reports that, at the end of 1992, there were 3,497 firms engaged in
providing telephone services, as defined therein, for at least one year.(630) This number contains a
variety of different categories of carriers, including local exchange carriers, interexchange carriers,
competitive access providers, cellular carriers, mobile service carriers, operator service providers,
pay telephone operators, personal communications services providers, covered specialized mobile
radio providers, and resellers. It seems certain that some of those 3,497 telephone service firms
may not qualify as small entities or small incumbent LECs because they are not "independently
owned and operated."(631) For example, a PCS provider that is affiliated with an interexchange
carrier having more than 1,500 employees would not meet the definition of a small business. It
seems reasonable to conclude that fewer than 3,497 telephone service firms are small entity
telephone service firms or small incumbent local exchange carriers.
427. According to the Telecommunications Industry Revenue: Telecommunications
Relay Service Fund Worksheet Data (TRS Worksheet), there are 2,847 interstate carriers. These
carriers include, inter alia, local exchange carriers, wireline carriers and service providers,
interexchange carriers, competitive access providers, operator service providers, pay telephone
operators, providers of telephone toll service, providers of telephone exchange service, and
resellers.
428. Wireline Carriers and Service Providers. The SBA has developed a definition of
small entities for telephone communications companies other than radiotelephone (wireless)
companies. According to the SBA's definition, a small business telephone company other than a
radiotelephone company is one employing no more than 1,500 persons.(632) The Census Bureau
reports that, there were 2,321 such telephone companies in operation for at least one year at the
end of 1992.(633) All but 26 of the 2,321 non-radiotelephone companies listed by the Census
Bureau were reported to have fewer than 1,000 employees. Thus, even if all 26 of those
companies had more than 1,500 employees, there would still be 2,295 non-radiotelephone
companies that might qualify as small entities or small incumbent LECs. We do not have
information on the number of carriers that are not independently owned and operated, and thus
are unable at this time to estimate with greater precision the number of wireline carriers and
service providers that would qualify as small business concerns under the SBA's definition.
Consequently, we estimate that there are fewer than 2,295 small telephone communications
companies other than radiotelephone companies.
429. Incumbent Local Exchange Carriers. Neither the Commission nor the SBA has
developed a definition for small incumbent providers of local exchange services (LECs). The
closest applicable definition under the SBA rules is for telephone communications companies
other than radiotelephone (wireless) companies.(634) The most reliable source of information
regarding the number of LECs nationwide is the data that we collect annually in connection with
the TRS Worksheet. According to our most recent data, 1,347 companies reported that they were
engaged in the provision of local exchange services.(635) We do not have information on the
number of carriers that are not independently owned and operated, nor what carriers have more
than 1,500 employees, and thus are unable at this time to estimate with greater precision the
number of incumbent LECs that would qualify as small business concerns under SBA's definition.
Consequently, we estimate that there are fewer than 1,347 small incumbent LECs.
2. Information Service Providers and
Competitive LECs Are Not Affected
430. In Section VIII.B of the NPRM, we sought comment on whether to continue to
exempt enhanced service providers (which we now refer to as information service providers, or
ISPs) from any requirement to pay access charges. Because we decide to retain the ISP
exemption, and do not permit LECs to impose access charges on ISPs at this time, we conclude
that the RFA does not require us to consider the effects of any proposed rules on ISPs that fall
within the definition of a small entity. Instead, as set forth in Section VI.B above, we find that the
proceeding commenced with the Notice of Inquiry issued contemporaneously with the NPRM is
the appropriate forum to address the fundamental questions about ISP usage of the public
switched network.(636) Similarly, we sought comment in Section VIII.A of the NPRM on whether
the public interest would be served by regulating interstate terminating access services offered by
competitive (non-incumbent) LECs. Because we conclude that the public interest would not be
served by imposing any regulations on competitive LECs' interstate terminating access offerings at
this time, we conclude that the RFA does not require us to consider the effects of any proposed
rules on competitive LECs that fall within the definition of a small entity.
D. Summary Analysis of the Projected Reporting,
Recordkeeping, and Other Compliance Requirements
431. In Section V.A above, we adopt changes to transport interconnection charge (TIC)
rate structures and transport rate structures to comply with the court order in CompTel v. FCC.(637)
These changes will affect all incumbent LECs, including small incumbent LECs, and will require
small incumbent LECs to make one or more tariff filings reflecting the new rate structures, which
will involve the use of legal skills, and possibly accounting, economic, and financial skills.
432. As set forth in Section VI.D above, incumbent LECs, including small incumbent
LECs, must reduce their interstate access charges to reflect the elimination of those former
universal service obligations that are being replaced with new universal service obligations,
increase their interstate access charges to reflect their new universal service obligations, and, to
the extent necessary, adjust their interstate access charges to account for any additional universal
service funds received under the modified universal service mechanisms. This will require small
incumbent LECs to make one or more tariff filings, which will involve the use of legal skills.
E. Burdens on Small Entities, and Significant
Alternatives Considered and Rejected
433. Sections III.C-D: Transport/TIC Rate Structure Changes. As set forth in Sections
III.C-D above, we adopt a new tandem-switched transport rate structure and rate levels that
replace the interim rate structure in place prior to today. In addition, we adjust the TIC to reflect
the changes made by the new tandem-switched transport rate structure and rate levels. Unlike
before, we adopt for the first time a final, cost-based rate structure, which should reduce and
minimize uncertainty for those small businesses and small incumbent LECs whose businesses
involve these services. Moreover, the new rate structure and rate levels are more closely related
to the costs of providing the underlying services, which should minimize the economic impact of
these rules on small businesses and small incumbent LECs by minimizing the adverse impacts that
can accompany non-cost based regulation.(638)
434. We also adopt a transition plan that will have the effect of giving small businesses
and small incumbent LECs the opportunity to plan, adjust, and develop their networks with a
minimum of disruption for them and their customers. Finally, as set forth in Section III.C-D
above, we find that the reallocation of TIC costs and the new recovery procedures will facilitate
the development of competitive markets. This is because incumbent LEC rates will move toward
cost-based levels and incumbent LECs will no longer have the ability to assess TICs on switched
access minutes that do not use their transport facilities. These pricing revisions may create new
opportunities for small entities, including small business and small incumbent LECs wishing to
enter local telecommunications markets.
435. Section V: Access Reform for Incumbent Rate-of-Return Local Exchange Carriers.
Our decision to limit access charge reform, with certain specified exceptions, to price cap LECs,
which do not include small businesses or small incumbent LECs, should mitigate the potential that
access charge reform could have a significant economic impact on any small incumbent LECs.
This is because the Commission will address in a separate proceeding the common set of complex
issues faced by non-price cap LECs, which are different than those faced by price cap LECs.
Moreover, as discussed above in Section V, we find that small incumbent LECs are unlikely to
face imminent harm as a result of the continued application of our current access charge rules
because all non-price cap incumbent LECs may be exempt from, or eligible for a modification or
suspension of, the interconnection and unbundling requirements of the 1996 Act.
436. Section VI.A: Applicability of Part 69 to Unbundled Elements. As a result of the
exclusion of unbundled elements from Part 69 access charges, described in Section VI.A above,
incumbent LECs, including small incumbent LECs, may receive reduced overall levels of
interstate access charges as competitors enter local markets using unbundled network elements.
They will, however, receive payment for those unbundled network elements pursuant to
interconnection agreements under Section 251 of the Act. Moreover, to the extent that small
incumbent LECs receive universal service support through interstate access charges, such funding
will continue to be received without regard to any loss of revenue from interstate access charges.
This is because all universal service support received by small incumbent LECs will be received
from the new Universal Service Fund, established in a separate order released today. Finally, we
note that section 251 of the Act contains provisions expressly designed to take into account the
special circumstances of small incumbent LECs, including those that qualify as rural LECs, with
respect to interconnection obligations.
437. Our decisions in Section VI.A above to exclude unbundled elements from the
application of Part 69 access charges is likely to facilitate the development of competitive
markets. This is because prices for unbundled elements will reflect the costs of those elements,
and will not impose on competitors additional charges unrelated to the costs of elements being
purchased. Accordingly, as set forth in Section VI.A above, competitors using unbundled
elements will contribute to universal service on an equitable and non-discriminatory basis instead
of paying implicit subsidies to incumbent LECs (whether in addition to, or in place of, explicit
universal service mechanisms). These decisions may create new opportunities for small entities,
including small businesses and small incumbent LECs, wishing to enter local telecommunications
markets.
438. Section VI.C: Terminating Access Services Offered by Non-Incumbent LECs. As
set forth in Section VI.C above, we find that treating new entrants as dominant carriers subject to
regulation of their terminating access services until we find otherwise would impose unnecessary
regulation, including potentially increased regulatory burdens on small businesses. Instead of
imposing such burdens, we find that the imposition of regulatory requirements with respect to
competitive LEC terminating access is unnecessary in the absence of some stronger record
evidence that competitive LECs have in the past charged unreasonable terminating access rates,
or are likely to do so in the future. If there is sufficient indication that competitive LECs are
imposing unreasonable terminating access charges, we will revisit this issue.
439. Section VI.D: Universal Service Related Part 69 Changes. As set forth in Section
VI.D.2.a above, we require that LECs that contribute to the Long Term Support (LTS) program
and LECs that receive LTS payments revise their tariffs to reflect the fact that the LTS program is
being replaced with explicit support from the new Universal Service Fund implemented pursuant
to the Universal Service Order adopted today. This will require small incumbent LECs to make
one or more tariff filings. The new Universal Service Fund will facilitate the transition to
competitive markets while maintaining specific, predictable and sufficient support for universal
service as required under section 254 of the Act. Accordingly, the required changes in LECs'
tariff filings, including those in tariffs filed by small incumbent LECs, are part of an overall
mechanism designed to minimize the economic impact of the 1996 Act on small businesses and
small incumbent LECs. The other universal service related changes that we adopt in this Order
affect only price-cap LECs, which do not include any small businesses or small incumbent LECs.
F. Report to Congress
440. The Commission shall include a copy of this FRFA, along with this Order, in a
report to be sent to Congress pursuant to SBREFA.(639) A copy of this FRFA (or a summary
thereof) will also be published in the Federal Register.
A. Paperwork Reduction Act
441. On April 1, 1997, the Office of Management and Budget (OMB) approved all of our
proposed information collection requirements in accordance with the Paperwork Reduction
Act.(640) The OMB made one recommendation, suggesting that we try "to minimize the number of
new filings that firms must create in order to be compliant with the rules adopted . . . allowing
firms to use many of the filings they must create in order to demonstrate that they meet the
Telecommunications Act of 1996 requirements for provision of inter-LATA services within their
operating regions." The recommendation of OMB primarily affects proposals that were not
adopted in this Order, but will be the subject of a future Report and Order. At that time, the
Commission will consider carefully whether the number of required new filings can be minimized
by relying to the greatest extent possible on those filings referenced by OMB in its approval.
Furthermore, in this Order, although we have made certain adjustments, we have minimized the
paperwork burden where possible. For example, the first inflation adjustment will be done in
January 1, 1999, but the next one will not be done until July 1, 2000. This schedule will minimize
the number of filings and paperwork burden associated with necessary adjustments for inflation.
442. In the course of preparing this Order, we have decided to modify several of the
information collection requirements proposed in the NPRM. For example, price cap local
exchange carriers must make a downward exogenous adjustment to the price cap index for the
common line basket to account fully for the elimination of their LTS obligations by December 16,
1997 to be effective January 1, 1998.(641) We conclude that these modifications constitute a new
"collection of information," within the meaning of the Paperwork Reduction Act of 1995, 44
U.S.C. §§ 3501-3520. These modifications are subject to OMB review and the Commission has
requested emergency approval of these modifications to ensure that the requirements may be
effective on June 16, 1997. In addition, we will seek final OMB approval for these modifications.
443. The Further Notice of Proposed Rulemaking contains either a proposed or modified
information collection. As part of its continuing effort to reduce paperwork burdens, we invite
the general public and the OMB to take this opportunity to comment on the information
collections contained in the Further Notice of Proposed Rulemaking, as required by the
Paperwork Reduction Act of 1995, 44 U.S.C. §§ 3501-3520. Public and agency comments are
due at the same time as other comments on the Further Notice of Proposed Rulemaking; OMB
comments are due 60 days from date of publication of the Further Notice of Proposed
Rulemaking in the Federal Register. Comments should address: (a) whether the proposed
collection of information is necessary for the proper performance of the functions of the
Commission, including whether the information shall have practical utility; (b) the accuracy of the
Commission's burden estimates; (c) ways to enhance the quality, utility, and clarity of the
information collected; and (d) ways to minimize the burden of the collection of information on the
respondents, including the use of automated collection techniques or other forms of information
technology.
B. Initial Regulatory Flexibility Act Analysis
444. Pursuant to the Regulatory Flexibility Act (RFA),(642) the Commission has prepared
the following initial regulatory flexibility analysis (IRFA) of the expected impact on small entities
of the policies and rules proposed in the Further Notice of Proposed Rulemaking (Further
Notice). Written public comments are requested on the IRFA. These comments must be filed in
accordance with the same filing deadlines as comments on the rest of the Further Notice, but they
must have a separate and distinct heading designating them as responses to the regulatory
flexibility analysis. The Secretary shall cause a copy of the Further Notice, including the initial
regulatory flexibility analysis, to be sent to the Chief Counsel for Advocacy of the Small Business
Administration in accordance with Section 603(a) of the RFA.(643)
445. Reason for action. The Commission has revised its interstate access charge rules to
make them consistent with the Telecommunications Act of 1996. As discussed in Section VII.A
of the Further Notice, multi-line business customers will pay a higher subscriber line charge as a
result of access charge reform, while special access customers do not pay such a charge. In
addition, as the PICCs are phased in IXCs will be required to pay a substantially higher PICC for
a multi-line business end user compared to the PICC paid for a primary residential end user or
single-line business end user. An IXC serving multi-line business customers through special
access can avoid paying the PICCs. As discussed in Section VII.B, the current allocation of
general support facilities expenses enables incumbent LECs to recover through regulated
interstate access charges costs caused by the LECs' nonregulated billing and collection functions.
446. Objectives. In Section VII.A, by proposing to allow LECs to impose a subscriber
line charge on special access customers, we seek to prevent a decrease in projected revenue from
multi-line subscriber line charges and PICCs caused by the migration of certain multi-line business
customers from the public switched network to special access. In Section VII.B, we seek to
revise the Commission's current allocation of price cap LECs' interstate costs between regulated
interstate access services and nonregulated billing and collection activities to move interstate
access rates closer to cost, consistent with the 1996 Act's new competitive paradigm.
447. Legal Basis. The proposed action is supported by Sections 4(i), 4(j), 201-205, 208,
251, 252, 253, and 403 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i),
154(j), 201-205, 208, 251, 252, 253, 403.
448. Description, potential impact and number of small entities affected. For purposes of
this Further Notice, the Regulatory Flexibility Act defines a "small business" to be the same as a
"small business concern" under the Small Business Act (SBA), 15 U.S.C. § 632, unless the
Commission has developed one or more definitions that are appropriate to its activities.(644) Under
the SBA, a "small business concern" is one that: (1) is independently owned and operated; (2) is
not dominant in its field of operation; and (3) meets any additional criteria established by the
SBA.(645) The Small Business Administration has defined a small business for Standard Industrial
Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be a
small entity that has no more than 1500 employees.(646)
449. Total Number of Telephone Companies Affected. The proposals in Sections VII.A
and VII.B of this Further Notice, if adopted, would affect all LECs that are regulated by the
Commission's price cap rules. Currently, 13 incumbent LECs are subject to price cap regulation.
We tentatively conclude that all price cap carriers have more than 1500 employees and, therefore,
are not small entities.
450. Reporting, record keeping and other compliance requirements. It is not clear
whether, on balance, all proposals in this Further Notice would increase or decrease incumbent
LECs' administrative burdens.
451. We believe that the reforms proposed in Section VII.A of this Further Notice would
require price cap LECs (not small entities) to make at least one tariff filing, and possibly several
additional filings, but otherwise should not affect their administrative burdens. The reforms
proposed in Section VII.B of the Further Notice may require price cap LECs (not small entities)
to study the uses of the general purpose computer assets recorded in Account 2124 to determine
the percentage of investment in that account that is used for billing and collection activities, but
otherwise should not affect their administrative burdens.
452. Federal rules which overlap, duplicate or conflict with this proposal. None.
453. Any significant alternatives minimizing impact on small entities and consistent with
stated objectives. In Sections VII.A and VII.B of this Further Notice, we limit the scope of our
proposals to incumbent price cap LECs, thereby not affecting small entities. We seek comment
on these proposals and urge that parties support their comments with specific evidence and
analysis.
C. Further Notice of Proposed Rulemaking Comment Filing Dates
454. Pursuant to applicable procedures set forth in Section 1.399 and 1.411 et seq. of the
Commission's rules, 47 C.F.R. Sections 1.399, 1.411 et seq., interested parties may file comments
in response to the Further Notice of Proposed Rulemaking, including comments ont he
information collection requirements, no later than June 26, 1997 with the Secretary, Federal
Communications Commission, Washington D.C. 20554. Interested parties may file replies no
later than July 11, 1997, except that reply comments on the information collection requirements
are due no later than July 28, 1997. To file formally in this proceeding, participants must file an
original and twelve copies of all comments, reply comments, and supporting comments. If
participants want each Commissioner to receive a personal copy of their comments, an original
plus 16 copies must be filed. In addition, parties should file two copies of any such pleading with
the Competitive Pricing Division, Common Carrier Bureau, Room 518, 1919 M Street, N.W.,
Washington, D.C. 20554. Comments and reply comments will be available for public inspection
during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W.,
Washington D.C. 20554.
455. Parties submitting diskettes should submit them along with their formal filings to the
Office of the Secretary. Submissions should be on a 3.5 inch diskette formatted in an DOS PC
compatible form. The document should be saved in WordPerfect 5.1 for Windows format. The
diskette should be submitted in "read only" mode. The diskette should be clearly labelled with the
party's name, proceeding, type of pleading (comment or reply comment), docket number, and date
of submission.
456. You may also file informal comments electronically via e-mail <access@fcc.gov>.
Only one copy of electronically-filed comments must be submitted. You must put the docket
number of this proceeding in the subject line (see the caption at the beginning of this Notice, or in
the body of the text if by Internet). You must note whether an electronic submission is an exact
copy of formal comments on the subject line. You also must include your full name and Postal
Service mailing address in your submission.
457. Comments and replies must comply with Section 1.49 and all other applicable
sections of the Commission's rules. We also direct all interested parties to include the name of the
filing party and the date of the filing on each page of their comments and replies. Comments and
replies must also clearly identify the specific portion of this Notice of Proposed Rulemaking to
which a particular comment or set of comments is responsive. If a portion of a party's comments
does not fall under a particular topic listed in the Table of Contents of this Notice, such comments
must be included in a clearly labelled section at the beginning or end of the filing.
458. Written comments by the public on the proposed and/or modified information
collections are due July 28, 1997. Written comments must be submitted by the Office of
Management and Budget (OMB) on the proposed and/or modified information collections on or
before 60 days after date of publication in the Federal Register. In addition to filing comments
with the Secretary, a copy of any comments on the information collections contained herein
should be submitted to Judy Boley, Federal Communications Commission, Room 234, 1919 M
Street, N.W., Washington, DC 20554, or via the Internet to jboley@fcc.gov and to Timothy
Fain, OMB Desk Officer, 10236 NEOB, 725 - 17th Street, N.W., Washington, DC 20503 or via
the Internet to fain_t@al.eop.gov.
X. ORDERING CLAUSES
459. Accordingly, IT IS ORDERED, pursuant to Sections 1-4, 10, 201-205, 251, 254,
303(r), and 410(a) of the Communications Act of 1934, as amended, and Section 601 of the
Telecommunications Act of 1996, 47 U.S.C. §§ 151-154, 160, 201-205, 251, 254, 303(r), 410(a),
and 601, that the ORDER IS ADOPTED.
460. IT IS FURTHER ORDERED that the provisions in this Order will be effective June
17, 1997. We anticipate this date will be at least thirty days after publication of the rules in the
Federal Register. If publication of the rules is delayed, however, we find good cause under 5
U.S.C. § 553(d)(3) to make the rules effective less than thirty days after publication, because the
local exchange carriers subject to price cap regulation must file tariffs by June 16, in order for
them to be effective on July 1, 1997, as required by Section 69.3 of the Commission's rules, 47
C.F.R. § 69.3. In addition, to ensure that the local exchange carriers subject to price cap
regulation have actual notice of these rules immediately following their release, we are serving
those entities by overnight mail. The collections of information contained within are contingent
upon approval by the Office of Management and Budget.
461. IT IS FURTHER ORDERED that the waiver petitions of Bell Atlantic, Pacific Bell,
GTE, Cincinnati Bell, U S West, and BellSouth discussed in Section III.A.5., regarding Section
69.104 as applied to ISDN service ARE DISMISSED.
462. IT IS FURTHER ORDERED that the rulemaking proceeding in CC Docket No. 95-72 IS TERMINATED.
463. IT IS FURTHER ORDERED, pursuant to Sections 1-4, 10, 201-205, 251, 254, 303(r), and 701 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151-154, 160, 201-205, 251, 254, 303(r), and 601, that NOTICE IS HEREBY GIVEN OF the rulemaking described above and that COMMENT IS SOUGHT on these issues.
FEDERAL COMMUNICATIONS COMMISSION
William F. Caton
Acting Secretary
APPENDIX A
ACC Long Distance Corp. (ACC Long Distance)
Ad Hoc Telecommunications Users Committee (Ad Hoc)
AirTouch Communications, Inc. (AirTouch)
Alabama Public Service Commission (Alabama Commission)
Alaska Telephone Association
Aliant Communications Co., formerly Lincoln Telephone (Aliant)
Allied Communications Group, Inc. (Allied)
Alliance for Public Technology
ALLTEL Telephone Services Corporation (ALLTEL)
American Association for Adult and Continuing Education, et al.
American Assocation for Retired Persons, et al. (AARP, et al.)
America On-Line, Inc. (America On-Line)
American Library Association
American Petroleum Institute (API)
America's Carriers Telecommunication Association (ACTA)
Ameritech
Association for Local Telecommunications Services (ALTS)
AT&T Corp. (AT&T)
Bankers Clearing House, et al.
Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX)
BellSouth Corporation, BellSouth Telecommunications, Inc. (BellSouth)
Cable & Wireless, Inc. (Cable & Wireless)
[People of the State of] California and the Public Utility Commission of the State of
California (California Commission)
California Cable Television Association
Cathey, Hutton and Associates
Centennial Cellular Corporation
Cincinnati Bell Telephone Company (Cincinnati Bell)
Citizens for a Sound Economy Foundation (CSE)
Citizens Utilities Company (Citizens Utilities)
Commercial Internet Exchange Association (CIEA)
Communications Workers of America (CWA)
Competition Policy Institute
Competitive Telecommunications Association (CompTel)
CompuServe, Inc. and Prodigy Services Corporation (CompuServe/Prodigy)
Consumer Project on Technology (Consumer Project)
[Public Service Commission of the] District of Columbia (District of Columbia Commission)
Evans Telephone Company, et al. (Evans, et al.)
Excel Telecommunications, Inc. (Excel)
Florida Public Service Commission (Florida Commission)
Frederick & Warinner, L.L.C. (Frederick & Warinner)
Frontier Corporation (Frontier)
General Communication, Inc. (GCI)
General Services Administration/United States Department of Defense (GSA/DOD)
Gallegos Family Network (Gallegos)
Gray Panthers
GVNW Inc./Management (GVNW)
GTE Service Corporation (GTE)
Harris, Skrivan & Associates, LLC (Harris, Skrivan & Associates)
ICG Telecom Group, Inc. (ICG)
Illinois Commerce Commission (Illinois Commission)
Illuminet
Independent Telephone & Telecommunications Alliance
Information Industry Association
Interactive Services Association
International Communications Association (Intl. Comm. Ass'n)
Internet Access Coalition
ITCs, Inc. (ITC)
IXC Long Distance, Inc.
Kansas Corporation Commission (Kansas Commission)
LCI International Telecom Corp. (LCI)
MCI Telecommunications Corporation (MCI)
Media Access Project, et al. (MAP, et al.)
Microsoft Corporation (Microsoft)
Minnesota Independent Coalition
Missouri Public Service Commission (Missouri Commission)
National Association of Regulatory Utility Commissioners (NARUC)
National Cable Television Association, Inc. (NCTA)
National Exchange Carrier Association, Inc. (NECA)
New York State Department of Public Service (New York Commission)
Newspaper Association of America
Northern Arkansas Telephone Company
[Commonwealth of] Northern Marianna Islands (Northern Marianna Islands)
[Public Utilities Commission of] Ohio (Ohio Commission)
Ohio Consumers' Counsel
[Public Utility Commission of] Oregon (Oregon Commission)
Ozarks Technical Community College
Pacific Telesis Group (PacTel)
Pennsylvania Internet Service Providers
Personal Communications Industry Association (PCIA)
Puerto Rico Telephone Company (Puerto Rico Tel.)
[Jon] Radoff (Radoff)
Roseville Telephone Company (Roseville Tel.)
Rural Telephone Coalition (Rural Tel. Coalition)
Rural Telephone Finance Cooperative
Rural Utilities Service
SDN Users Association Inc. (SDN Users Association)
Service-oriented Open Network Technologies, Inc. (SONETECH)
South Dakota Public Utilities Commission (South Dakota Commission)
Southern New England Telephone Company (SNET)
Southwestern Bell Telephone Company (SWBT)
Spectranet Interactive, Inc. (Spectranet)
Sprint Corporation (Sprint)
State Consumer Advocates
[John] Staurulakis, Inc. (Staurulakis)
TCA, Inc.-Telecommunications Consultants (TCA)
TDS Telecommunications Corporation (TDS)
Telco Communications Group, Inc. (Telco Communications Group)
Tele-Communications, Inc. (TCI)
Telecommunications Resellers Association (TRA)
Teleport Communications Group Inc. (Teleport)
Tennessee Regulatory Authority (Tennessee Commission)
[Public Utility Commission of] Texas (Texas Commission)
Texas Office of Public Utility Counsel (Texas Public Utility Counsel)
Time Warner Communications Holdings, Inc. (Time Warner)
United States Telephone Association (USTA)
U S West, Inc. (U S West)
Washington Independent Telephone Association (WITA)
Washington Utilities and Transportation Commission (Washington Commission)
Lyman C. Welch
Western Alliance
WinStar Communications, Inc. (WinStar)
WorldCom, Inc. (WorldCom)
ACC Long Distance Corp. (ACC Long Distance)
Ad Hoc Telecommunications Users Committee (Ad Hoc)
Alarm Industry Communications Committee
[State of] Alaska (Alaska Commission)