APPENDIX B

COMMENT SUMMARY⁽⁶⁴⁷⁾

Table of Contents Paragraph

III. Rate Structure Modifications 1

A. Common Line 1

2. Subscriber Line Charge 1

3. Carrier Common Line Charge 11

4. Common Line PCI Formula 22

5. Assessment of SLCs on Derived Channels 24

B. Local Switching 33

1. Non-Traffic Sensitive Charges 33

2. Traffic Sensitive Charges 38

C. Transport 50

1. Entrance Facilities and Direct-Trunked Transport 50

2. Tandem Switched Transport 54

D. Transport Interconnection Charge (TIC) 76

1. Causes and Possible Reassignment of Amounts in the TIC 77

2. Market-Based Approaches 108

3. Approaches that Eliminate or Phase Out the TIC 118

E. SS7 Signalling 131

F. Impact of New Technologies 136

IV. Baseline Rate Levels

A. Primary Reliance on a Market-Based Approach With Adoption of

Several Initial Prescriptive Measures 138

B. Prescriptive Approaches 159

1. Prescription of a New X-Factor 159

2. Rejection of Certain Prescriptive Approaches 162

C. Equal Access Costs 176

D. Correction of Improper Cost Allocations 179

1. Marketing Expenses 179

2. General Support Facilities 182

V. Access Reform For Incumbent Rate-of-Return Local Exchange Carriers 182

VI. Other Issues 186

A. Application of Part 69 to Unbundled Elements 186

B. Treatment of Interstate Information Services 190

C. Terminating Access 208

1. Incumbent LECs 208

2. Non-Incumbent LECs 210

D. Universal Service-Related Part 69 Changes 212

E. Part 69 Allocation Rules 223

F. Other Proposed Part 69 Changes 226

A. Common Line

2. Subscriber Line Charge

1. Raising or eliminating the SLC cap on non-primary residential lines and multi-line business lines. Several commenters, including incumbent LECs, IXCs, and cable companies support the proposal to raise or eliminate the SLC cap for multi-line business customers and for residential lines beyond the primary connection to the level necessary to recover the full per-line loop costs assigned to the interstate jurisdiction.⁽⁶⁴⁸⁾ Several incumbent LECs are not opposed to raising the SLC for multi-line businesses, but are opposed to increasing the SLC for non-primary residential lines.⁽⁶⁴⁹⁾ BA/NYNEX states that raising the SLC cap for multi-line business lines is an appropriate, but small step towards correct recovery of NTS costs.⁽⁶⁵⁰⁾ Ad Hoc supports increasing the SLC cap for multi-line business and non-primary residential lines as long as users of those lines do not pay more than the costs the incumbent LEC incurs to provide those lines.⁽⁶⁵¹⁾ SWBT, PacTel and GSA/DOD support raising the SLC to recover NTS common line costs, but argue that because loop costs are the same for residential and business lines, there is no economic justification for imposing different SLCs for these lines.⁽⁶⁵²⁾

2. Several LECs opposing the proposal to raise the SLC on non-primary residential lines contend that in addition to imposing new charges on the end-user, this method of cost recovery would be administratively burdensome, because no practical way exists to identify second residential lines or lines into second homes.⁽⁶⁵³⁾ BA/NYNEX argues that charging different SLCs on second lines would require information collection and verification procedures that are not in place today.⁽⁶⁵⁴⁾ Other parties also argue that eliminating or raising the SLC cap on additional residential lines will create the incentive for customers to "game" the system by reporting their additional lines under different names or by obtaining additional lines from competitors to avoid paying an additional SLC.⁽⁶⁵⁵⁾ BA/NYNEX, PacTel, and Citizens Utilities argue that if the Commission adopts a cost-recovery mechanism that raises the SLC on second residential lines, it should be optional.⁽⁶⁵⁶⁾

3. Most non-price cap LECs and several state commissions and consumer groups oppose increasing or eliminating the SLC cap for multi-line business lines and for residential lines beyond the primary connection.⁽⁶⁵⁷⁾ Rural carriers and Internet providers are concerned about the potential negative impact that raising or eliminating the SLC cap on second and additional residential lines and multi-line business lines will have on rural areas. These commenters argue that by reducing demand for additional access lines, this proposal would have a negative impact on Internet usage and economic growth in rural areas.⁽⁶⁵⁸⁾ TCA asserts that a reduction in demand for additional access lines will increase the cost of remaining lines, placing an additional burden on the Universal Service fund.⁽⁶⁵⁹⁾ Parties opposed to raising the SLC cap also argue that, especially in light of the Universal Service Joint Board's recommendation not to support multi-line business lines and residential lines beyond the primary connection, raising SLCs for these lines will make them unaffordable in rural communities, violating section 254(b) which requires that all consumers have access to rates and services that are "reasonably comparable" with those provided in urban areas.⁽⁶⁶⁰⁾

4. Frontier, Sprint, and AT&T contend that raising the SLC cap only for additional residential lines and multi-line business lines will not solve the problem of uneconomic recovery of loop costs.⁽⁶⁶¹⁾ These IXCs and other commenters, including LECs, consumer groups, and wireless and cable companies, urge the Commission to raise or eliminate the SLC caps on all lines, thus permitting LECs to recover all of the interstate allocated costs of the local loop from end-users.⁽⁶⁶²⁾ Some of these parties argue that because IXCs do not cause the costs associated with the local loop, assigning any portion of the costs associated with the loop to the IXCs is economically inefficient.⁽⁶⁶³⁾ Sprint contends that raising the SLC cap for residential users is unlikely to have a significant effect on subscribership.⁽⁶⁶⁴⁾ WorldCom states that a subscriber loop is a fixed facility dedicated to the end user and that once the loop has been ordered and installed, the incumbent LEC incurs no additional costs for additional traffic passing over that loop.⁽⁶⁶⁵⁾

5. Several parties that oppose raising the SLC cap argue that the common line is a joint and common or shared cost that should be recovered from IXCs and other service providers, as well as from the end user.⁽⁶⁶⁶⁾ The Texas Public Utility Counsel disagrees with Sprint's assertion that raising the SLC cap will have minimal effect on subscribership.⁽⁶⁶⁷⁾ State consumer advocates and the Oregon Commission favor eliminating the SLC entirely and allowing all common line costs to be recovered from the IXCs.⁽⁶⁶⁸⁾

6. USTA and J. Staurulakis argue that because the common line revenue requirement is a much larger percentage of total costs for rate-of-return LECs than it is for most price cap LECs, any changes in the SLC cap adopted for price cap LECs should not be extended to rate-of-return LECs.⁽⁶⁶⁹⁾ Roseville argues that any change to the SLC should be optional for rate-of-return LECs.⁽⁶⁷⁰⁾

7. The Illinois Commission, U S West, and Pennsylvania Internet Service Providers argue that if the Commission raises the SLC cap, the increase should be phased in over time.⁽⁶⁷¹⁾ WorldCom and Ad Hoc oppose any transition period for a rate structure change.⁽⁶⁷²⁾ Ad Hoc states that because an increase in the SLC for second and additional residential lines and multi-line business lines would not result in service disruptions, a transition period is not needed and would delay implementation of an efficient common line rate structure.⁽⁶⁷³⁾ GVNW asserts that a three-year transition period would not be sufficient in a number of cases.⁽⁶⁷⁴⁾

8. Geographic Deaveraging of the SLC. The Illinois Commission and several incumbent LECs argue in favor of allowing LECs to deaverage SLCs.⁽⁶⁷⁵⁾ They argue that an averaged SLC creates cross-subsidies between high-cost and low-cost areas, in violation of the 1996 Act and that deaveraging the SLC is economically efficient and consistent with cost-causation principles. Several of these parties state that the Commission should permit SLC deaveraging to the same extent that unbundled network elements or network access lines are deaveraged, i.e., within the same geographic areas.⁽⁶⁷⁶⁾ Sprint contends that LECs should be required to deaverage the SLC.⁽⁶⁷⁷⁾ BA/NYNEX and US West argue that geographic deaveraging should be optional.⁽⁶⁷⁸⁾ The Ohio Commission argues that although it may be necessary to deaverage the SLC based on differing loop costs among the individual service areas in an incumbent LEC's service territory, the deaveraged rates must not exceed the current SLC caps.⁽⁶⁷⁹⁾

9. The Washington Utilities and Transportation Commission and BA/NYNEX argue that section 254(e) does not require deaveraged SLC rates.⁽⁶⁸⁰⁾ State Consumer Advocates and the New York Commission argue that geographic averaging of the SLC is not an implicit subsidy that is inconsistent with the requirements of section 254(e).⁽⁶⁸¹⁾ BA/NYNEX explains that rates should not be considered subsidized simply because they are averaged, because any rate that is not developed on a customer-specific basis involves averaging.⁽⁶⁸²⁾ BA/NYNEX also states, however, that if the SLC is deaveraged, it should be subject to the existing $6.00 and $3.50 caps.⁽⁶⁸³⁾ The Washington Commission states that deaveraged rates may be appropriate in the future, if adequate universal service mechanisms are in place.⁽⁶⁸⁴⁾

10. Several commenters oppose deaveraging the SLC.⁽⁶⁸⁵⁾ These parties argue that deaveraging the SLC violates the "comparable services and comparable rates" requirement of section 254 and will increase local rates in high-cost areas or increase the burden on the Universal Service Fund. The Texas Public Utility Counsel argues that deaveraging rates is inconsistent with market practices and the social policy embodied in the 1996 Act.⁽⁶⁸⁶⁾ It argues further that deaveraging SLC costs would complicate the calculations of Universal Service subsidies and make it more difficult for long distance companies to maintain geographically averaged rates, as required by section 254(g).⁽⁶⁸⁷⁾ Time Warner agues that the Commission should not permit geographic deaveraging of SLCs at this time because it will give incumbent LECs opportunity to engage in anticompetitive conduct.⁽⁶⁸⁸⁾

3. Carrier Common Line Charge

11. Most commenters agree that the per-minute CCL charge is economically inefficient because it does not reflect the way in which underlying loop costs are incurred and sends incorrect signals into the marketplace, encouraging inefficient use of telecommunications services and uneconomic bypass of incumbent LEC facilities.⁽⁶⁸⁹⁾ BellSouth states that recovering more common line costs through NTS per-line charges "would greatly enhance economic welfare primarily because it would reduce the marginal cost of interstate long-distance calls and therefore would greatly expand interstate long-distance calling."⁽⁶⁹⁰⁾ Some commenters state that the CCL charge functions as an implicit cross-subsidy from long distance access to local service, and from high-volume users to low-volume users.⁽⁶⁹¹⁾ Although most parties agree that the CCL charge structure should be revised so that incumbent LECs are no longer required to recover any of the NTS costs of the loop from IXCs on a traffic-sensitive basis, they disagree on the best approach to use for assessing that charge.

12. Flat Per-Line Charge. Many commenters, including both price cap and non-price cap incumbent LECs, IXCs, and some state commissions support recovering all common line costs or the common line costs not recovered through the SLCs through a flat, per-line charge assessed against the customer's PIC.⁽⁶⁹²⁾ Several of these parties also support the proposal to bill the customer directly in cases where the customer has not chosen a PIC.⁽⁶⁹³⁾ Supporters of this approach state that converting the common line charge to a per-line flat charge paid by the customer's IXC is administratively simple and will allow IXCs to recover their costs through a variety of pricing plans, as the market will allow.⁽⁶⁹⁴⁾ USTA and BA/NYNEX state that recovering the common line costs through a flat, per-line charge paid by the IXCs will improve economic efficiency and will rebalance rates so that high-volume customers do not overpay, and low-usage customers do not underpay, for interstate use of the local loop.⁽⁶⁹⁵⁾ BA/NYNEX, SWBT, and U S West support the flat, per-line charge but argue that if the Commission adopts such a rate structure, it would need to adjust the price cap formula because the existing formula assumes the ability of the LECs to apply usage-based rates to recover network costs that are largely non-traffic sensitive.⁽⁶⁹⁶⁾ The Rural Telephone Coalition and Minnesota Independent Coalition assert that a flat-rated, non-traffic sensitive common line charge would be feasible for rate-of-return LECs.⁽⁶⁹⁷⁾

13. Several parties support the proposal to recover common line costs through a flat, per-line charge assessed against the PIC but are opposed to permitting LECs to bill end-users who have not selected a PIC.⁽⁶⁹⁸⁾ Cincinnati Bell argues that billing end users who have not selected a PIC would create administrative difficulties because it would require the LEC to prorate charges for both the end user and the IXC when the customer leaves an IXC in the middle of a billing cycle.⁽⁶⁹⁹⁾ NARUC suggests that if a customer uses another carrier for other services, a per line charge could be divided among all carriers using the common line on the basis of relative use by the carrier.⁽⁷⁰⁰⁾ NARUC opposes any solution that would effectively impose additional flat charges on the end-user.⁽⁷⁰¹⁾

14. Others commenters state that they support the proposal to assess IXCs a flat, per-line charge as a second-best approach in the event the Commission declines to increase or eliminate the SLC cap, or if increasing the SLC is insufficient to allow incumbent LECs to recover all of their interstate loop costs.⁽⁷⁰²⁾ PacTel advocates recovering residual loop costs not recovered from an increase in the SLC through bulk billing IXCs on the basis of presubscribed lines.⁽⁷⁰³⁾ TCI supports the proposal to assess IXCs a flat, per-line rate as a temporary measure, stating that to ensure economic efficiency, common line costs should be directly assigned to the SLC.⁽⁷⁰⁴⁾

15. The Competition Policy Institute and AARP et al. argue that the common line costs should be recovered from all telecommunications providers including wireless, enhanced service, and "dial around" providers based on the amount of carriage.⁽⁷⁰⁵⁾ Similarly, Alliance for Public Technology proposes that the carrier common line charge and subscriber line charge be replaced with a "common facilities" charge imposed on all telecommunication carriers who use the local network to deliver services.⁽⁷⁰⁶⁾ PacTel opposes the proposals made by Competition Policy Institute and Alliance because they would require a usage-sensitive charge.⁽⁷⁰⁷⁾

16. Parties opposed to the flat, per-line charge assessed on IXCs argue that recovering common line costs on a flat-rate basis from IXCs will allow IXCs to pass the cost on to customers as higher rates, reducing demand for long distance service. They further argue that this type of cost recovery will distort the market by encouraging IXCs to bypass the switched network using competitive access providers and by creating a disincentive for IXCs to compete for low-volume long distance users.⁽⁷⁰⁸⁾ Other parties argue that the proposal imposes an additional administrative burden on LECs and does not adequately address the problem of "dialing around" the switched network.⁽⁷⁰⁹⁾ AT&T and Sprint claim that assessing a flat, presubscribed line charge on IXCs would not eliminate the inefficiencies or the implicit cross-subsidies embedded in the CCL charge.⁽⁷¹⁰⁾ These carriers assert that a flat-rated per-line recovery mechanism would force IXCs to subsidize other service providers, including LECs, wireless carriers, ISPs, and resellers that originate or terminate traffic over the loop but are not subject to the charge. They contend that this would be inconsistent with section 254(b) which requires "equitable and nondiscriminatory contribution to universal service" by all telecommunications providers.⁽⁷¹¹⁾ Sprint asserts that a flat-rated charge assessed on IXCs will force IXCs to adopt two-part tariffs to avoid being undercut by the usage-based rates of carriers that rely on 10XXX dial-around traffic for their business, but that would not be assessed common line charges.⁽⁷¹²⁾

17. Alternative Recovery Methods. Several state commissions and incumbent non-price cap LECs support the proposal to recover the CCL charge through bulk billing.⁽⁷¹³⁾ The Oregon Commission, ACTA, and the Florida Commission favor recovering the interstate portion of loop costs through a capacity charge assessed on carriers based upon the number of switch trunk ports purchased from the incumbent LEC.⁽⁷¹⁴⁾ The Missouri Commission, the Texas Commission, and the Alabama Commission favor the proposal to assess common line charges based on the number of trunk port and line port connections an IXC has to the switched network.⁽⁷¹⁵⁾ NECA requests flexibility for pool members to recover the CCL charge through either a per-line charge and/or a bulk billing method.⁽⁷¹⁶⁾ Specifically, NECA proposes a method allowing the pool members to charge a nationwide average CCL per-line rate and bulk bill any residual amount.⁽⁷¹⁷⁾

18. Cable & Wireless, MCI, Teleport, and others oppose the bulk billing, capacity charge, and trunk port charge alternatives because they are based on minutes of use and do not accurately reflect costs.⁽⁷¹⁸⁾ ACTA asserts that bulk billing causes operational and administrative problems.⁽⁷¹⁹⁾ According to Teleport and GCI, bulk billing ensures total recovery for the LEC because the LEC receives the same revenues whether it faces no competition or substantial competition.⁽⁷²⁰⁾ Several commenters oppose these alternative recovery mechanisms because they are based on historical usage or revenue data.⁽⁷²¹⁾ Sprint argues that if a cost recovery mechanism is based on historical usage or revenue data, an interexchange carrier that is losing market share will be penalized, while a carrier whose market share is growing will receive a windfall.⁽⁷²²⁾

19. The Minnesota Independent Coalition and TCA argue that a capacity charge based on trunks is not feasible for smaller LECs because most IXCs serving smaller LECs do not use dedicated trunks.⁽⁷²³⁾ MCI and the Minnesota Independent Coalition argue that imposing NTS costs based on the relative number of trunks or ports may encourage IXCs to use fewer trunks or ports than are needed, leading to adverse impacts on service quality.⁽⁷²⁴⁾

20. Ameritech proposes to recover common line costs via a Loop/Port recovery charge that it would assess as a single, aggregate charge per carrier on IXCs based upon their percentage share of state- or region-wide interstate retail revenues.⁽⁷²⁵⁾ Sprint and Time Warner oppose Ameritech's proposal, stating that such an approach would insulate incumbent LECs from the forces of competition.⁽⁷²⁶⁾ According to Sprint, long distance carriers entering the local market through unbundled network elements or their own facilities or that purchased access from new entrants would be required to pay Ameritech regardless of the extent to which they utilized Ameritech's loops or switching.⁽⁷²⁷⁾ Time Warner states that Ameritech's proposal ensures the survival of the local loop bottleneck by eliminating opportunities for low-cost new entrants to compete in the provisioning of local loops.⁽⁷²⁸⁾

21. Impact of 254(g) on Carrier Common Line Charge Recovery. Excel and the Alaska Commission argue that section 254(g) does not impose any limitations on the Commission's authority to assess flat-rated CCL charges on IXCs because the section pertains to rates charged to "subscribers" or the ultimate end-user, not other carriers.⁽⁷²⁹⁾ The majority of commenters responding to this inquiry argue that section 254(g) prohibits IXCs from passing their flat-rated charges through to end users on a deaveraged basis.⁽⁷³⁰⁾ USTA argues that although the flat-rate CCL charged to the IXCs should be deaveraged by customer and by region to be consistent with cost-causation principles, it will not conflict with section 254(g) because IXCs can average any disparate flat-rate CCL charges into their rate structure as they have averaged disparate per-minute CCL charges.⁽⁷³¹⁾ Sprint and WorldCom argue that forbearance from Section 254(g) would be warranted.⁽⁷³²⁾ Sprint asserts that if incumbent LECs continue to recover NTS costs, particularly common line costs, from the IXCs and these costs are recovered through deaveraged rates charged to the IXCs, forbearance from section 254(g) would be warranted because of the magnitude and variability of these costs.⁽⁷³³⁾ WorldCom argues that IXCs should be free to recover subscriber loop costs assessed by incumbent LECs through a flat charge per line or through any other rate recovery mechanism the long distance market will allow.⁽⁷³⁴⁾ WorldCom argues further that unless the Commission forbears with respect to application of section 254(g), IXCs will be forced to average common line costs and recover them through long distance rates--a cross-subsidy that runs counter to the overall policies of section 254(b) and (c).⁽⁷³⁵⁾ Several parties oppose forbearance.⁽⁷³⁶⁾

4. Common Line PCI Formula

22. Incumbent LECs argue that TFP incorporates growth into the X-Factor, and that retaining the current separate common line formula would tend to double-count growth.⁽⁷³⁷⁾ Some of those incumbent LECs assert that a separate common line formula might impede certain access reforms that they support.⁽⁷³⁸⁾ Lincoln claims that common line demand growth output would be reflected as common line output growth in a TFP calculation, and so would transfer the benefits of demand growth to IXCs.⁽⁷³⁹⁾ Sprint and AT&T maintain that the Commission must retain a separate common line formula, regardless of how the X-Factor is calculated.⁽⁷⁴⁰⁾ AT&T argues that a separate common line formula is necessary to avoid giving more revenues to the LECs with the highest common line costs, and to recognize the IXCs' role in promoting common line demand growth.⁽⁷⁴¹⁾ AT&T also asserts that the LECs' claims of double-counting growth have not been adequately substantiated.⁽⁷⁴²⁾

23. Southwestern Bell argues that the g/2 term should be removed from the common line formula because common line minutes of use grow more quickly than number of access lines. Southwestern Bell asserts that flat CCL charges would reduce incumbent LECs' revenue growth by about 0.5 percent per year.⁽⁷⁴³⁾

5. Assessment of SLCs on Derived Channels

24. Pleadings filed in response to the ISDN SLC NPRM.⁽⁷⁴⁴⁾ Only one commenter, AT&T, favors retaining the current approach for PRI ISDN service. AT&T does not support assessing a SLC per derived channel for BRI service, but instead favors assessing a SLC for each BRI facility. All of the other parties, including the other IXCs, oppose it. ISDN users, LECs, and equipment manufacturers argue that retaining the current rule will deter ISDN deployment, and will discourage development of new technologies.⁽⁷⁴⁵⁾ Almost all of the LECs, user groups, equipment manufacturers, IXCs, and other commenters support a rule that would assess a SLC for each pair of copper wires,⁽⁷⁴⁶⁾ or a SLC for each ISDN facility.⁽⁷⁴⁷⁾ Some commenters express a preference for one of these approaches, but urge the Commission to adopt one or the other of the two options.⁽⁷⁴⁸⁾ Some parties further assert that, if the Commission fails to adopt a rule that assesses a SLC per copper pair or per service, it should adopt a rule based on the actual non-traffic-sensitive costs of providing derived channel services compared to costs of providing conventional local loops.⁽⁷⁴⁹⁾ Numerous trade groups, ISDN users, and LECs assert that a SLC per pair of copper wires or a SLC per facility approach would encourage use of advanced services, such as ISDN, that offer numerous potential benefits.⁽⁷⁵⁰⁾

25. The parties also assert that assessing a SLC per facility or pair of copper wires would best reflect the underlying purpose of the SLC, which is to recover non-traffic-sensitive loop costs.⁽⁷⁵¹⁾ Some parties also assert that charging a SLC per facility is consistent with the Commission's goals of eliminating unreasonable discrimination and undue preferences among rates for interstate services, using the local network efficiently, preventing uneconomic bypass, and preserving universal service.⁽⁷⁵²⁾ Others argue that this approach is administratively simple,⁽⁷⁵³⁾ that it will reduce the opportunity for uneconomical pricing by competitors,⁽⁷⁵⁴⁾ and that it will reduce the likelihood of migration from switched access to dedicated service.⁽⁷⁵⁵⁾

26. Many parties, including LECs and ISDN users, argue that any method for assessing SLCs should be based on the costs of providing ISDN service.⁽⁷⁵⁶⁾ Parties opposing the proposal to assess SLCs for derived channel services based on the cost ratio allege that such an approach is too complicated,⁽⁷⁵⁷⁾ and that the potential benefits of this approach are outweighed by the substantial effort required to make such a cost comparison.⁽⁷⁵⁸⁾ Others object that the proposal set forth in the ISDN SLC NPRM would not take into account the relevant costs. Some companies assert that ISDN service does not increase the average loop costs.⁽⁷⁵⁹⁾ Others contend that the additional costs incurred to provide ISDN service are switching costs rather than common line costs.⁽⁷⁶⁰⁾

27. Few parties commented on our proposal to impose a SLC for every two derived channels. Those who did generally opposed it for many of the same reasons they opposed assessing a SLC per derived channel. For example, parties asserted that such a rule would bear no relationship to the cost of providing service, and would discourage subscription to derived channel services.⁽⁷⁶¹⁾

28. Several parties also filed comments regarding other modifications to access charges and our price cap rules.⁽⁷⁶²⁾ In addition, NYNEX asserts that the Commission should not apply the rule we adopt to derived channel technologies that are not apparent to the end user and that are exclusively in the LEC's network infrastructure.⁽⁷⁶³⁾ NYNEX claims that it would be impossible to identify the subscribers served by such technology, and that it would be inappropriate to treat those subscribers differently.

29. The BOCs subsequently provided data on the relative non-traffic-sensitive costs of single and derived channel services, in response to our request for information.⁽⁷⁶⁴⁾

As shown in Table 1 below, the cost data submitted in response to the ISDN SLC NPRM 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 roughly 5 to 1. As shown in Table 2, NYNEX's data appear to be outliers and are therefore excluded from the calculation of the average ratio for PRI ISDN to standard analog service 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.

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	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.

30. GTE and MCI filed comments, and America Online, NYNEX, Pacific Bell, Southwestern Bell, and US West filed reply comments in response to the cost data. Several of those parties contend that cost ratios should not be used to determine the number of SLCs to be assessed for derived channel services, because SLCs currently are set at arbitrary levels, and do not reflect the actual costs of providing any particular service.⁽⁷⁶⁵⁾ Several parties also contend that, even if we decide to assess SLCs for derived channel services based on the relative non-traffic-sensitive costs of those services, we should not include switching costs such as trunk or line cards in our assessment of costs.⁽⁷⁶⁶⁾ They argue that a cost-based ratio would be complex to develop, and would create substantial and unnecessary recordkeeping burdens.⁽⁷⁶⁷⁾ Many parties also assert that the cost data demonstrate that there is no difference between the non-traffic-sensitive loop costs for standard analog service and BRI service, and that there is not a significant difference in the non-traffic-sensitive loop costs between standard analog service and PRI service,⁽⁷⁶⁸⁾ or between digital PBX trunks and PRI service.⁽⁷⁶⁹⁾

31. Comments filed in response to the Access Reform NPRM. Comments filed in the current proceeding are consistent with those filed in response to the ISDN SLC NPRM. The majority of commenters support a rate structure that assesses one SLC per ISDN facility,⁽⁷⁷⁰⁾ or per pair of copper wires.⁽⁷⁷¹⁾ State Consumer Advocates, argues that assessing SLC based on pairs of wires would inhibit the introduction of new technologies and service because LECs would have a financial incentive to keep customers on conventional service.⁽⁷⁷²⁾ TDS recommends assessing one SLC charge on a BRI ISDN line and no more than two SLCs on a PRI ISDN line.⁽⁷⁷³⁾ Ad Hoc argues that although assessing SLCs based on derived channels should recover the costs of providing such channels, the Commission has not provided sufficient information to determine whether a ratio of 1.24 to 1 for BRI, and 10.5 to 1 for PRI accurately reflect the costs of those services.⁽⁷⁷⁴⁾ PacTel argues that ISDN service is not an interstate service and, therefore, not within the Commission's jurisdiction.⁽⁷⁷⁵⁾

32. Those commenters that oppose assessing a SLC per derived channel argue that imposing one SLC per channel discourages demand for advanced services and inhibits technological development.⁽⁷⁷⁶⁾ USTA states that the current multiple SLC rule imposes disproportionate burdens of cost recovery on ISDN users and that changing to a single SLC per facility would be consistent with the objectives of this proceeding.⁽⁷⁷⁷⁾

B. Local Switching

1. Non-Traffic Sensitive Charges

33. The majority of commenters agree with our tentative conclusion that cost-causative principles indicate that costs associated with line cards, line-side ports, and those trunk ports associated with dedicated transport should be recovered through flat-rated charges.⁽⁷⁷⁸⁾ Several incumbent LECs argue that there is no need to codify specific rate elements for local switching costs and, instead, advocate flexibility in the rate structure for local switching.⁽⁷⁷⁹⁾ BA/NYNEX amplifies this argument by stating that it may be both difficult to quantify the NTS portion of local switching costs, and burdensome to separately charge for trunk ports based on the type of transport used by an IXC.⁽⁷⁸⁰⁾ BellSouth claims that an adequately-sized universal service fund could replace all implicit support currently provided through interstate access charges that recover NTS costs, thereby reducing the carrier common line charge to zero and recovering fully the NTS portion of local switching charges.⁽⁷⁸¹⁾ The Georgia Commission argues that the assertion that NTS local switching costs are related to the provision of universal service is tantamount to saying that most costs are related to universal service and that the USF should not be the first place to look for recovery of any cost element.⁽⁷⁸²⁾

34. Several small LECs and the State Consumer Advocates argue that changes to the rate structure to recover NTS local switching costs on a NTS basis should be left to the Joint Board on Separations.⁽⁷⁸³⁾ These commenters state that local switching costs formerly were recovered through a combination of TS and NTS charges and that new Parts 32 and 36, when adopted, consolidated these mechanisms because of difficulties in separating the TS and NTS costs of digital switches.⁽⁷⁸⁴⁾ Therefore, these commenters argue that, if part of the costs of local switching are to recovered through NTS flat-rated charges, the Joint Board should first expand Part 36 and 69 categories related to NTS local switching equipment.⁽⁷⁸⁵⁾ Otherwise, the inconsistent treatment of some local switching costs as TS for purposes of Part 36 but NTS for purposes of Part 69 would improperly transfer costs from the interstate to the intrastate jurisdictions.⁽⁷⁸⁶⁾

35. U S West, Sprint and other commenters argue that to the extent that NTS line-side costs are attributable to the end user, they ought to be recovered from end users.⁽⁷⁸⁷⁾ Others, such as TCI, favor an increased SLC, but support a PIC-based charge as a second-best option for recovering NTS local switching costs.⁽⁷⁸⁸⁾ Ameritech and ALLTEL propose that NTS local switching costs be recovered by a charge assessed on IXCs on the basis of interstate retail service revenues or minutes of use.⁽⁷⁸⁹⁾ Sprint responds that such proposals do not recover these costs on a cost-causative basis, and insulate the incumbent LEC from competition.⁽⁷⁹⁰⁾ TCI maintains that the cost of the trunk side ports dedicated to an individual IXC varies directly with the number of trunks dedicated to that IXC.⁽⁷⁹¹⁾ TCI also states, however, that the costs of trunk ports associated with dedicated transport need to be recovered through a separate rate element because an IXC may use a trunk port supplied by the incumbent LEC without using the incumbent LEC's dedicated transport.⁽⁷⁹²⁾

36. MCI notes that identifying TS and NTS costs of local switching is not simple, and supports adoption of the proposed rate structure only if cost studies allocating costs between TS and NTS can be performed.⁽⁷⁹³⁾ The record reflects widely varying estimates of the portion of local switching costs that are NTS. USTA estimates that the NTS portion of local switching costs ranges from 6% for analog switches to 51% for modern, digital switches.⁽⁷⁹⁴⁾ ALLTEL reports that NTS local switching costs make up 31 percent of its interstate local switching revenue requirement.⁽⁷⁹⁵⁾ SWBT claims NTS local switch costs could be recovered through a flat charge of $0.35 a month per line.⁽⁷⁹⁶⁾ Sprint, in contrast, estimates that one-third of local switching costs are NTS, and that recovering those costs directly from end users would add $0.80 per month to end user bills.⁽⁷⁹⁷⁾ Cable & Wireless reports that, based on data submitted by NYNEX, at least 49 percent of the local switching costs are NTS for modern switches.⁽⁷⁹⁸⁾

37. Cable & Wireless and other commenters state that many components of the local switch, such as the central processing portion of the switch, switch fabric, and the trunk-side ports that are not associated with dedicated transport, are shared. These commenters assert that these shared facilities should be priced on a usage-sensitive basis.⁽⁷⁹⁹⁾ BellSouth, however, states that in addition to the costs of line cards and the main distribution frame, many other switching costs, e.g., the cost of the switching matrix, depend substantially on the number of lines rather than usage.⁽⁸⁰⁰⁾ The Texas Commission disagrees, noting that while growth in the number of dedicated lines or trunks attached to the switch does cause the central processing unit to grow in size, it is usage of these lines or trunks that cause costs.⁽⁸⁰¹⁾ The Rural Tel. Coalition states that, because small carriers lack economies of scale and scope, rural switching costs are higher per minute or per line than urban switching costs.⁽⁸⁰²⁾

2. Traffic Sensitive Charges

38. Many IXCs, consumer groups, ESPs, and LECs oppose the establishment of a mandatory call setup charge.⁽⁸⁰³⁾ Collectively, they raise two primary concerns: (1) the costs of call setup are de minimis or difficult to separate from other TS costs;⁽⁸⁰⁴⁾ (2) the costs of measuring, tracking and billing for call setup would outweigh the costs of the call setup itself.⁽⁸⁰⁵⁾

39. AT&T argues that a such a mandatory charge would be inconsistent with the rate structure the Commission mandated for the local switching unbundled network element (UNE) because no call setup charge has been established as part of the unbundled local switching rate structure at either the state or federal level.⁽⁸⁰⁶⁾ In addition, AT&T argues that a separate rate element is unnecessary because many of the costs of call setup are now allocated to signalling, and the signalling rate structure proposed in the NPRM includes signalling message charges for all calls.⁽⁸⁰⁷⁾

40. Cable & Wireless asserts that per-call setup costs are too small relative to the other TS costs of local switching to justify a new and separate rate element; therefore, any economic inefficiency resulting from collection on a per-minute basis is de minimis and would be offset by increased complexity in the rate structure.⁽⁸⁰⁸⁾ LCI states that the current per-minute recovery mechanism has not been controversial in the past, and that imposing a call setup charge on call attempts would result in charges being assessed on a caller who has not received any service.⁽⁸⁰⁹⁾ LCI states that, in addition to the LEC's setup costs, the IXC also incurs transport costs associated with call attempts that are not recovered explicitly from the calling party.⁽⁸¹⁰⁾

41. MCI opposes a separate call setup charge, asserting that it is unclear at best which part of the TS portion of local switching costs are sensitive to call attempts and which part is sensitive to minutes of use. In addition to signalling, MCI hypothesizes that some part of the cost of the central processor may be sensitive to call attempts. Any attempt to separate TS costs into per-message and per-minute categories could involve arbitrary assumptions and, therefore, MCI argues that TS costs of local switching should be left as per-minute charges.⁽⁸¹¹⁾ MCI states, however, that any call setup charge the Commission does adopt should be assessed only on completed calls because, otherwise, the incumbent LEC will be able to charge for calls blocked by its own switch and will have reduced incentives to ensure quality service on its network.⁽⁸¹²⁾

42. Several large corporate consumers of telecommunications services oppose the imposition of a call setup charge because they assert that the charge would cause churn and would be disruptive to consumers, especially banks with automatic teller machines and businesses that accept credit cards.⁽⁸¹³⁾ In addition, Bankers Clearing House argues that neither IXCs nor other third parties have the capability to track or audit call attempts, so assessment of setup charges based on call attempts raises the potential for unauditable billing errors.⁽⁸¹⁴⁾

43. Several state commissions, incumbent LECs, and others favor the creation of a separate call setup charge. The costs of call setup, these parties argue, do not vary with the length of a call, so a per call charge, rather than the current per-minute recovery of these costs, would be more consistent with cost-causation principles.⁽⁸¹⁵⁾ In addition, under the current, per-minute recovery mechanism, long hold-time calls subsidize short calls and uncompleted calls.⁽⁸¹⁶⁾ Two years ago, the California Commission established mandatory call setup charges intrastate switched access, imposing charges on originating attempts that are handed off to the IXC's POP, and on terminating completions.⁽⁸¹⁷⁾ The California Commission states that this structure is appropriate because, at the point the call is handed off to the IXC's POP, the LEC switch has performed its function and the LEC has incurred the setup cost.⁽⁸¹⁸⁾ In addition, the California Commission reports that, under this structure, it has not encountered problems with LEC duplicity in generating deliberate incompletions.⁽⁸¹⁹⁾

44. Several parties advocate recovery of call setup costs through a separate signalling rate element. Frederick & Warinner argues that, by performing call setup prior to dedicating a trunk to the call, LECs require fewer transport trunks; this efficiency should be passed along to IXCs in the form of lower access charges. Frederick & Warinner, therefore, suggests that we refer this issue to the Joint Board on Separations so that call setup expenses currently assigned to Central Office Equipment (COE) Category 3 and Interexchange Circuit Equipment Category 4.23 can be reassigned to a separate COE category designed to identify and recover all SS7 call setup charges.⁽⁸²⁰⁾

45. A number of the parties that favor the principle of a separate call setup charge assert that the Commission should permit, but not require, such a charge.⁽⁸²¹⁾ They argue that flexibility will allow incumbent LECs to establish rate structures that are responsive to market conditions.⁽⁸²²⁾ Competition Policy Institute argues that separate call setup charges may be appropriate in light of the increasingly "bursty" use of the network.⁽⁸²³⁾ The Georgia Commission argues that the multiplicity of opinions on this issue points to a need for flexibility,⁽⁸²⁴⁾ while the Illinois Commission suggests that flexibility will allow incumbent LECs to evaluate whether, and to what extent, such revision to the rate structure would be more efficient than the structure currently in place.⁽⁸²⁵⁾ U S West supports the establishment of a call setup charge as a permissive rate structure, but cautions that the charge would require billing system changes, would affect different IXCs differently, and may be too small to merit a separate rate element.⁽⁸²⁶⁾

46. There is general agreement that LECs incur call setup costs for both completed calls and call attempts. Among commenters favoring a permissive or mandatory call setup charge, however, opinion is split as to whether the charge should be imposed on call attempts. Those parties favoring charges only for completed calls generally argue that this structure would (1) avoid the administrative burden and customer confusion associated with developing a tracking, metering and billing system for call attempts;⁽⁸²⁷⁾ and (2) deny incumbent LECs the incentive to increase revenues by blocking calls at their own switch.⁽⁸²⁸⁾ Those parties favoring charges for all call attempts generally argue that this structure would most closely reflect cost-causation principles.⁽⁸²⁹⁾

a. Peak and Off-Peak Pricing

47. Many commenters, including most IXCs, oppose the creation of either a permissive or a mandatory peak-rate structure, because the complexity of creating and implementing such a structure outweighs any benefits to be gained.⁽⁸³⁰⁾ These commenters generally argue that: (1) it is impossible to determine peak and off-peak hours with any degree of certainty because peak hours vary with region of the country, type of service, type of user, rate zone, technological advances, and other factors;⁽⁸³¹⁾ (2) peak pricing structures would not send efficient market signals, would disadvantage competitors, and would have a de minimis impact on usage patterns and incumbent LEC network design because less than 15% of RBOC traffic is interstate access;⁽⁸³²⁾ (3) no state commissions have established a peak pricing rate structure;⁽⁸³³⁾ (4) peak hours may continue to shift over time as competitors enter the market and as the use of telecommuting, the Internet, and other data services increase;⁽⁸³⁴⁾ and (5) necessary changes to carrier metering and billing systems may outweigh any benefits to be gained.⁽⁸³⁵⁾

48. Other commenters, including most incumbent LECs, support a rate structure under which LECs would be permitted, but not required, to price local switching on a peak rate basis. These commenters acknowledge the difficulties cited above, among others, but generally agree that, in principle, economic welfare benefits could be obtained from a peak rate structure by diverting traffic, and associated TS costs, from peak to non-peak hours.⁽⁸³⁶⁾ Accordingly, these commenters advocate a permissive approach under which incumbent LECs would have the ability to develop peak and off-peak pricing structures on an optional basis in response to local conditions and subject to the limitations of their billing systems.⁽⁸³⁷⁾ At least one commenter argues that such an approach would be consistent with our recent interconnection decisions.⁽⁸³⁸⁾

49. Only Excel supports establishment of a mandatory peak rate structure, arguing that such a structure would more accurately apportion costs among users and would more accurately reflect the incremental costs of additional network capacity during peak hours.⁽⁸³⁹⁾

C. Transport

1. Entrance Facilities and Direct-Trunked Transport

50. The majority of commenters supported our tentative conclusion that flat-rate charges are appropriate for entrance facilities and direct-trunked transport service.⁽⁸⁴⁰⁾ Those commenters addressing this subject agree that the costs of dedicated direct-trunked transport and entrance facilities are incurred on a flat-rate basis. Both PacTel and the California Commission note that, in California's Open Access Network Architecture and Development Proceeding, the parties reached consensus that costs of entrance facilities and direct-trunked transport should be recovered through flat-rate charges.⁽⁸⁴¹⁾ Several commenters assert that the costs of direct-trunked transport and entrance facilities vary with distance traversed and that rates for these facilities should be distance sensitive.⁽⁸⁴²⁾ TCI supports distance sensitive flat-rate charges for direct-trunked transport, although it argues in favor of flat rate charges for entrance facilities, apparently without a distance-sensitive component.⁽⁸⁴³⁾

51. Some parties advocate certain adjustments in the rate structure for direct-trunked transport and entrance facilities. U S West and Sprint both suggest that, as carriers expand their use of fiber-optic ring architecture, the current distance-sensitive charges for direct-trunked transport should be replaced with "per-ring" rates because ring architecture makes transport costs less distance sensitive in densely populated areas.⁽⁸⁴⁴⁾ U S West argues, therefore, that incumbent LECs should have the flexibility to restructure their rates to reflect this change.⁽⁸⁴⁵⁾ Ameritech agrees that the current rates for entrance facilities and direct-trunked transport are properly structured, but argues that carriers should have the flexibility to offer switched access customers new technologies, such as SONET, without obtaining a Part 69 waiver or passing a public interest test.⁽⁸⁴⁶⁾ SWBT asserts that tariff and rate structure distinctions between special access, direct-trunked transport, and entrance facilities should be eliminated because these distinctions cannot survive in a competitive environment and cause complex billing arrangements for shared use facilities.⁽⁸⁴⁷⁾ USTA proposes more sweeping change, arguing that the Commission forbear from regulating collocated direct-trunked transport because this service meets the requirements of Section 10 of the Communications Act.⁽⁸⁴⁸⁾

52. There is considerable division among commenters as to 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). MCI opposes such a differentiation for two reasons. Initially, MCI notes that, while the incumbent LECs claim they can achieve network savings by retaining control of CFAs, IXC provision of CFAs should save the LEC the costs of performing this function. Therefore, it is unclear whether costs should be greater or lower when the IXC performs the CFA. Secondly, MCI argues that, once the LEC enters the interexchange market, it could impute to itself a lower transport charge by providing the CFA to its interexchange subsidiary.⁽⁸⁴⁹⁾ SWBT offers two additional reasons why CFA control should not be the basis for rate differentiation: (1) CFA control responsibilities may vary among LECs; and (2) rate differentiation based on CFA control may become untenable with respect to newer technologies, such as SONET architecture and ATM, which rely less heavily on particular dedicated channels. Currently, SWBT states that CFA control may indicate whether a facility is dedicated or shared.⁽⁸⁵⁰⁾ ACTA also opposes pricing differentiation, arguing that the purchase of an incumbent LEC circuit is a simple business transaction and the purchasing IXC should be able to select where the purchased circuit resides.⁽⁸⁵¹⁾

53. TCI and the Washington Commission support giving the incumbent LECs the flexibility to differentiate direct-trunked transport rates based on whether the customer or the LEC performs CFA functions, as long as the LEC supports the differential with forward-looking cost data and, in the case of the Washington Commission, as long as it does not needlessly complicate the access tariff.⁽⁸⁵²⁾

2. Tandem-Switched Transport

a. Rate Structure

54. Except for AT&T, IXC commenters addressing the issue generally support the unitary rate structure and argue that the Commission should retain this pricing option.⁽⁸⁵³⁾ These commenters argue that the unitary rate structure should remain available because:

(1) access transport, as a service, has traditionally been offered on an end-to-end basis;⁽⁸⁵⁴⁾ (2) the unitary rate structure promotes full and fair interexchange competition by allowing IXCs time to prepare their networks for fully cost-based pricing;⁽⁸⁵⁵⁾ (3) the partitioned rate structure, if required, (a) could provide incentives for incumbent LECs to engage in inefficient network reconfiguration, because access customers have no control over incumbent LEC decisions on the location of tandems, but would be required to pay for access based on these decisions;⁽⁸⁵⁶⁾ and (b) would necessitate new rules regulating incumbent LEC tandem deployment decisions;⁽⁸⁵⁷⁾ (4) AT&T, by virtue of divestiture, inherited POPs in close proximity to a significant number of tandem switches and would therefore enjoy a significant legacy advantage over competitors;⁽⁸⁵⁸⁾ (5) "common" and "dedicated" circuits often travel on the same facilities and along the same transmission routes, making disparate rate structures inappropriate;⁽⁸⁵⁹⁾ (6) elimination of the unitary structure would raise the price of tandem-switched transport in relation to direct-trunked transport and would therefore discriminate against smaller IXCs;⁽⁸⁶⁰⁾ and (7) the unitary rate structure is the only structure consistent with the TSLRIC methodology of estimating costs.⁽⁸⁶¹⁾

55. TRA additionally argues that the current rate structure, which allows IXCs to choose between the three-part and the unitary rate structure, is most consistent with the principles that costs should be recovered in the way that they are incurred, and from the cost causer.⁽⁸⁶²⁾ Telco Communications Group requests that we explicitly allocate some common transport costs to dedicated transport rates because common transport facilities are sized to handle peak overflow loads from large carriers that use direct-trunked transport for most traffic.⁽⁸⁶³⁾

56. Sprint states that the Commission should retain the unitary rate structure because the three-part rate structure would give incumbent LECs the incentive to route traffic inefficiently by placing tandems far from IXC POPs.⁽⁸⁶⁴⁾ Sprint argues that the term "direct trunking" is a misnomer because modern "hub and spoke" or "ring" network architecture often causes direct trunked circuits to travel along the same transmission routes and facilities as tandem switched transport circuits.⁽⁸⁶⁵⁾ It would therefore be unfair to require users of tandem-switched transport to pay for the route through the tandem, while allowing direct-trunked transport users to pay based on airline miles between the EO and SWC.⁽⁸⁶⁶⁾ According to Sprint, the three-part rate structure would skew interexchange competition in favor of AT&T, which has sufficient traffic to justify direct trunking to individual EOs, and in favor of the BOCs, which could take advantage of their own direct trunking to many of their end offices.⁽⁸⁶⁷⁾ Sprint suggests that the Commission address the problem of underutilized circuits on the tandem-to-SWC route by allowing incumbent LECs to size trunk bundles between the two points to achieve a reasonable utilization factor.⁽⁸⁶⁸⁾

57. WorldCom states that the Commission should not revisit any of the transport rate structure issues, other than those remanded by the Court.⁽⁸⁶⁹⁾ WorldCom offers the following principles, however, if we do decide to reexamine these issues: First, the rate structure should treat dedicated and common transport consistently because both services use the same network facilities. Traffic on dedicated circuits and common circuits travels physically on the same large multiplexed transmission pipe. Routing, most frequently, is identical. Therefore, WorldCom states that it would be unreasonably discriminatory for the Commission to make detailed changes to the rate structure or pricing of tandem-switched transport without making parallel changes to the pricing of dedicated transport.⁽⁸⁷⁰⁾ Second, rate structure decisions should be based on the current forward-looking view of the interoffice network. Large capacity fiber optic facilities, including SONET rings, have made transmission costs less distance sensitive. Therefore, WorldCom states that the triangular, "pyramid" diagram the Commission included in the notice is outdated. Because routing is within the sole control of the incumbent LEC and may vary based on momentary traffic loads, the transport customer should pay for transport based on airline miles between the two end points. Pricing of a service on an other than end-to-end basis could penalize users of that service for decisions outside of their control.⁽⁸⁷¹⁾ Third, the Commission should use forward-looking cost methodologies in setting rates. Tandem switching rates based on fully allocated, embedded costs are in conflict with the Local Competition Order and with the price cap structure. Therefore, the Commission should reinitialize rates based either on a forward-looking cost study or on the proxy prices adopted in the Local Competition Order.⁽⁸⁷²⁾ In light of these three principles, WorldCom states that it favors retaining the unitary rate structure, and disagrees with arguments that tandem-switched transport is currently underpriced.⁽⁸⁷³⁾

58. Most incumbent LECs, AT&T, and some state commissions advocate elimination of the unitary rate structure for tandem-switched transport.⁽⁸⁷⁴⁾ These commenters generally argue that: (1) flat rates for the dedicated SWC-to-tandem link accurately reflect the manner in which the LEC incurs costs for this facility;⁽⁸⁷⁵⁾ (2) per-minute rates for the shared tandem-to-EO link correspond to the manner in which the LEC incurs the costs of that facility;⁽⁸⁷⁶⁾ (3) mileage charges based on the length of each specific link ordered by a transport customer will encourage carriers to order facilities that minimize routing distances;⁽⁸⁷⁷⁾ (5) the three-part rate structure will increase IXC incentives to order efficiently sized transport facilities, thereby increasing network efficiency, conserving trunk and switch capacity, and reducing the current level of underutilized facilities;⁽⁸⁷⁸⁾ (6) the unitary rate structure is not competitively neutral, but was designed to avoid significant changes in the costs of transport for small LECs vis-a-vis large ones;⁽⁸⁷⁹⁾ (7) the unitary rate structure prices tandem-switched transport below cost, thereby (a) creating a subsidy paid by large IXCs that use direct-trunked transport to small IXCs that use tandem-switched transport;⁽⁸⁸⁰⁾ and (b) disadvantaging competitive access providers (CAPs) because they cannot compete with the incumbent LEC's artificially low tandem-switched transport rates;⁽⁸⁸¹⁾ and (8) the unitary rate structure hurts incumbent LECs because the unrecovered costs of the excess mileage are contained in the TIC, making the incumbent LEC's usage-based switched access charges less competitive.⁽⁸⁸²⁾ AT&T additionally argues that rate shock will not be a problem if prices are set to TELRIC.⁽⁸⁸³⁾

59. In addition, SNET argues that AT&T's purported competitive advantage based on the locations of its inherited POPs has been mitigated substantially by the widespread availability of collocation and the presence of many alternative transport providers.⁽⁸⁸⁴⁾ Ameritech and U S West state that, even if the Commission mandates the three-part rate structure, it would be too costly to relocate tandems inefficiently to increase transport revenue. Instead, tandems are located to maximize overall network efficiency, generally by placing them near high concentrations of end users and carriers.⁽⁸⁸⁵⁾ Inefficient tandem placement would also affect the incumbent LEC's own routing of intraLATA toll and local traffic.⁽⁸⁸⁶⁾

60. CAPs and CLECs generally support the three-part rate structure, arguing that (1) distance-sensitive charges should be based on actual miles, rather than airline miles, reflecting actual LEC network efficiencies or inefficiencies;⁽⁸⁸⁷⁾ (2) the unitary rate structure is not cost-based and inhibits competition;⁽⁸⁸⁸⁾ and (3) the unitary rate structure discriminates against direct-trunked transport users by allowing tandem-switched transport users to purchase dedicated transport facilities in connection with tandem-switched transport at prices unavailable to others.⁽⁸⁸⁹⁾ In addition, Teleport states that, unlike direct-trunked transport, tandem-switched transport is not a single service and does not use a single transmission pathway. Users of tandem-switched transport pay two switching charges and should therefore pay the cost of reaching each switch.⁽⁸⁹⁰⁾

61. Some commenters state that, because tandem-switched transport facilities are sized to handle peak-load overflow traffic from large IXCs that otherwise use direct-trunked transport facilities, some costs of tandem-switched transport should properly be imposed on direct-trunked transport customers.⁽⁸⁹¹⁾ SWBT opposes this argument, noting that, such a service-specific charge would drive users of direct-trunked transport to alternate providers, driving up the rates for small IXCs that remain.⁽⁸⁹²⁾ SWBT supports recovery of some tandem-switching costs from a competitively neutral public policy element.⁽⁸⁹³⁾

62. TCI supports a rate structure that unbundles the components of tandem-switched transport and permits purchase of needed components from the lowest-cost supplier.⁽⁸⁹⁴⁾ TCI states that the costs of the dedicated SWC-to-tandem link are NTS, and should be recovered on a flat-rated basis.⁽⁸⁹⁵⁾ TCI states, however, that the costs of the common transport EO-to-tandem link vary, not with minutes of use, but with the trunk capacity attached to the tandem, sized as necessary to carry peak traffic levels.⁽⁸⁹⁶⁾ Therefore, the costs of this common transport should also be recovered as a flat rate, capacity-based charge tied to the proportion of dedicated transport the IXC has provisioned on the SWC-to-tandem link.⁽⁸⁹⁷⁾ TCI explains that this structure: (1) would be administratively more simple and efficient than the current structure; and (2) would reflect, more accurately than the current system, the costs of providing tandem-switched transport by automatically allocating to overflow users the costs of the peak capacity made necessary by the overflow traffic.⁽⁸⁹⁸⁾ TCI would base these charges on airline mileage between the EO and the SWC as a check on the incumbent LEC's ability to choose routing that either increases IXC costs, or discriminates between its own IXC affiliate and unaffiliated IXCs.⁽⁸⁹⁹⁾

63. With respect to the tandem switch itself, MCI supports establishment of a combination of flat-rated and usage sensitive charges, stating that the tandem switch and the local switch are not substantially different and therefore should have the same rate structure. Many commenters state that the dedicated trunk port on the SWC side of the tandem should be priced on a flat-rate basis and charged to the user of the dedicated trunk because these costs are incurred in an NTS manner.⁽⁹⁰⁰⁾ BellSouth disagrees with this position, however, stating that there are minimal NTS costs associated with tandem switching and arguing against mandatory disaggregation of tandem switching costs into NTS and TS components. BellSouth, instead, argues in favor of LEC flexibility to disaggregate as they wish.⁽⁹⁰¹⁾

64. For many of the same reasons as those opposing a peak and off-peak rate structure for the local switch, several commenters state that they oppose a mandatory peak rate structure for tandem-switched transport.⁽⁹⁰²⁾ These commenters primarily state that: (1) peak rate pricing would have a de minimis impact on the usage patterns and incumbent LEC network design decisions because less than 15% of the BOC interstate traffic is access;⁽⁹⁰³⁾ and (2) it would be impossible to determine peak and off-peak hours with any degree of certainty or consistency because peak hours vary with the region of the country, type of service, type of user, rate zone, and other factors.⁽⁹⁰⁴⁾

65. Several commenters suggest that LECs should have the flexibility to implement a peak rate structure on a permissive basis.⁽⁹⁰⁵⁾ The Texas Commission states that peak and off-peak pricing would allow the LEC to recover a portion of the larger tandem switching capacity necessitated by overflow traffic from large IXCs.⁽⁹⁰⁶⁾ The Georgia Commission indicates that the peak rate structure should be optional for both LECs and their customers, and that LECs should not be permitted to offer peak and off-peak pricing until after the proposals have received regulatory review and approval.⁽⁹⁰⁷⁾ Excel states that tandem switching services, like local switching, should be subject to peak and off-peak pricing.⁽⁹⁰⁸⁾

66. Teleport states that the Commission could achieve the economic efficiency benefits of a peak rate structure without resorting to time-of-day pricing by establishing a flat-rate pricing structure for the tandem switch, without disaggregating the costs into TS and NTS components. Teleport supports the establishment of flat-rated port charges as reflective of the way LECs incur the costs of dedicated tandem trunk ports. According to Teleport, however, the Commission should carefully examine the portion of tandem switching cost that is arguably TS to determine whether the costs of separate measurement and billing merit the development of separate rate elements for those costs. According to Teleport, tandem switch ports are purchased to provide the purchaser with the ability to place a certain amount of traffic on the switch at its peak period; a flat-rate tandem-switching charge tied to port capacity would therefore reflect the costs of the tandem switch, which is sized to handle peak load traffic.⁽⁹⁰⁹⁾

67. Several commenters request that we update our tandem switched transport rate structure to include the cost of appropriate multiplexing equipment used providing tandem-switched transport.⁽⁹¹⁰⁾

b. Rate Levels

68. Allocation of 80 percent of the tandem switching revenue requirement to the TIC. Both incumbent LECs and CAPs support reallocation from the TIC to tandem switching rates the 80% of tandem switching costs currently recovered through the TIC.⁽⁹¹¹⁾ Ameritech states that the Commission should accomplish this reallocation by increasing the price cap indices for tandem-switched transport to reflect the full amount of the tandem costs. Ameritech states that this action would be consistent with the Court's remand of the CompTel case.⁽⁹¹²⁾ Sprint, on the other hand, opposes allocating TIC costs to transport rates, but instead favors setting all rates for transport facilities at TELRIC-based prices within five years.⁽⁹¹³⁾

69. SS7 signalling costs. BellSouth states that tandem rates should be revised downward to reflect removal of the 20% of the CCS/SS7 charge that was assigned to the tandem and, at the same time, all CCS/SS7 costs should be assigned to new, signalling rate elements.⁽⁹¹⁴⁾

70. Overhead loadings on the tandem-switch. Cable & Wireless states that, in this proceeding, the Commission should equalize the overhead loading factors for all transport options by directing that the difference in transport rates is equal to the difference in the LRIC of each option (DS3, DS1, and TST). In doing so, the Commission would (1) ensure that all access customers pay the same dollar amount of overhead per unit of traffic; and (2) increase the competitive neutrality of the rate structure.⁽⁹¹⁵⁾ The Commission, in contrast, should not provide for an equal percentage of overhead per unit cost of transport because doing so would place small IXCs, which use proportionately more TST, at a disadvantage.⁽⁹¹⁶⁾

71. WorldCom also supports LEC cost studies that would be used to justify reinitialization of tandem switching rates.⁽⁹¹⁷⁾ WorldCom states that we should use the "lowest of the low" methodology in order to ensure that the incumbent LECs do not discriminate unreasonably in the allocation of overheads (or, for TSLRIC/TELRIC studies, the allocation of forward-looking common costs). Under this methodology, the Commission would require the incumbent LECs to demonstrate that the allocation of overhead loadings or common costs to the tandem switching rate is no greater than the allocation of overhead loadings or common costs to the comparable transport service to which the lowest amount of overhead or common costs have been allocated.⁽⁹¹⁸⁾ The Commission, in enforcing this requirement, could examine the allocation of overheads or common costs to both tandem switching an other specific transport services.⁽⁹¹⁹⁾

72. CompTel argues that the Commission should prescribe TSLRIC rates for all access services.⁽⁹²⁰⁾ Recognizing that a "flash-cut" to TSLRIC rates may be infeasible for all access charges, CompTel states that the Commission should establish priorities, prescribing TSLRIC rates first for those access elements that are least subject to the market discipline of competition. In allocating common costs, CompTel argues that the Commission should adopt a "reverse Ramsey" pricing method. Under this method, CompTel argues that we should allocate a relatively small portion of common costs to those access elements that are least subject to competitive market forces, while maintaining access rate elements that may be subject to competitive pressures at current levels for the present.⁽⁹²¹⁾

73. Use of weighted average DS3/DS1 rates and 9000 minutes of use per month assumption. AT&T and other commenters state that the Commission should set rates for tandem switching and tandem-switched transport transmission facilities at TELRIC levels established by state commissions in accordance with the Local Competition Order.⁽⁹²²⁾ These commenters state that use of TELRIC rate levels will make the benchmark DS3 to DS1 benchmark ratios unnecessary.⁽⁹²³⁾

74. Many commenters state that the Commission should no longer require carriers to assume 9000 minutes of use per month when setting per-minute rates for shared transport circuits.⁽⁹²⁴⁾ Some of these commenters favor the use of actual minutes of use.⁽⁹²⁵⁾ ALLTEL, for example, states that it estimates the usage of tandem-switched trunks at approximately 4000 MOU per month.⁽⁹²⁶⁾ U S West favors retaining the 9000 minute of use assumption, but permitting LECs to develop its own unique conversion factor if it so chooses.⁽⁹²⁷⁾ Sprint, in contrast, states that the 9000 MOU assumption is reasonably attainable because the use of tandem-to-EO circuits is largely within the LEC's control.⁽⁹²⁸⁾ If the LEC chooses to provision these facilities so as to obtain a lower utilization, the LEC's access customers should not bear the costs of this decision.⁽⁹²⁹⁾ Similarly, if the IXC wishes to order additional facilities, it should be permitted to do so at an additional cost.⁽⁹³⁰⁾

75. Relationship with market based/prescriptive approach. Sprint opposes any premature relaxation of the Commission's rate structure rules, arguing instead that the market-based approach gives incumbent LECs too much pricing flexibility too soon.⁽⁹³¹⁾ Sprint notes, however, that the Commission should permit density-based deaveraging of direct-trunked transport rates immediately.⁽⁹³²⁾ According to Sprint, because there is a much greater demand for special access in high-density areas than there is in low-density areas, direct-trunked transport rates, which are based on special access rates, understate the true cost of direct-trunked transport in less dense areas.⁽⁹³³⁾ Geographic deaveraging of these rates would allow LECs to establish cost-based rates in each density zone.⁽⁹³⁴⁾

D. Transport Interconnection Charge (TIC)

76. The issues presented by the existence of the TIC generated substantial comment from all segments of the telecommunications industry. The comments are organized below into three broad groups: (1) causes and possible reassignment of sums in the TIC; (2) approaches that rely on market forces to address any amounts remaining in the TIC after some amounts are reallocated; and (3) approaches that would eliminate or phase out some or all of the TIC.

1. Causes and possible reassignment of amounts in the TIC

77. General. USTA and incumbent LECs assert that, to the extent TIC costs can be identified and attributed to specific services, those costs should be recovered from those services.⁽⁹³⁵⁾ Minnesota Independent Coalition, however, argues that costs that may be easily identifiable and correctable for large LECs may not be for small LECs.⁽⁹³⁶⁾

78. Time Warner argues that the TIC was explicitly designed to make all IXCs pay for tandem-switched transport even though some IXCs only use the tandem switch for overflow traffic. According to Time Warner, the TIC distorts competition for switched transport service, and it should not be a surprise that little competition has developed there.⁽⁹³⁷⁾ Time Warner argues that the Commission must require that the costs associated with the TIC are paid by cost causers and recovered in the manner in which they are incurred, which will require substantial revision to the TIC. Accordingly, Time Warner argues that those costs that can be reasonably attributed to other elements must be so assigned, and that this approach is most consistent with CompTel v. FCC.⁽⁹³⁸⁾ TRA also supports the identification of cost misallocations and other practices that cause costs to be assigned to the TIC and reassigning such costs to various access services and other nonregulated activities, as appropriate.⁽⁹³⁹⁾

79. ALTS and ACSI contend that the Commission should quantify and eliminate all readily correctable cost misallocations in its current access tandem switching regime.⁽⁹⁴⁰⁾ Teleport also favors an approach in which obvious misallocated costs are reallocated. Teleport, however, would require incumbent LECs to produce for public review a complete report of the costs currently included in switched access and the proportion and type of costs assigned to the TIC. Until this report is analyzed, it will not be possible to identify whether the TIC contains truly "lost" costs, or, rather, costs that have "conveniently" been placed in the only switched access rate element immune from competition.⁽⁹⁴¹⁾

80. Some consumer groups and consumer advocates recommend identifying misallocated costs and moving them to the appropriate cost element.⁽⁹⁴²⁾ State Consumer Advocates believe that all remaining costs represent a portion of joint and common costs and should be recovered by increasing all of the transport rate elements.⁽⁹⁴³⁾

81. Several state commissions also agree that costs should be reallocated. The Washington Commission is in favor of eliminating the TIC and reassigning costs according to causation. The Washington Commission states that it has eliminated the state equivalent of the TIC, finding that there was no need for it once the company's other transport and switching rates were set to provide appropriate revenue levels.⁽⁹⁴⁴⁾ In a similar manner, the Illinois Commission argues that embedded costs currently recovered by the TIC should be reassigned to other rate elements to the extent cost causation can be established, and the incumbent LECs should be given any additional flexibility needed to raise prices within the price cap framework for those rate elements to which costs have been reassigned. The Illinois Commission believes that the entire TIC can be reallocated in this manner.⁽⁹⁴⁵⁾ The Georgia Commission states that the FCC must (1) verify the costs that have been loaded onto the TIC; (2) verify the amount of those costs that should be recoverable on a going-forward basis and ensure that the unrecovered amounts resulted purely from regulatory restriction, not competitive pressures; and (3) conduct any restructuring in order to establish cost-based rates that avoid anticompetitive pricing.⁽⁹⁴⁶⁾ The Ohio Commission argues that only after incumbent LECs have demonstrated the cost amounts currently in the TIC should any costs be reallocated to tandem switching. In addition, the Ohio Commission states that it is up to state commission to decide how the intrastate portions of TIC-related charges should be recovered.⁽⁹⁴⁷⁾

82. On the other hand, several parties argue that not all costs should be reallocated. Sprint, for example, argues that revenue requirements other than the TELRIC of tandem switching that are assigned to the TIC under current rules should be left in the TIC and phased out.⁽⁹⁴⁸⁾ WorldCom asserts that incumbent LEC allegations as to the "costs" of common transport recovered through the TIC are incorrect. WorldCom states that to truly reset transport rates based on costs would require a forward-looking cost study to reinitialize rates for both common and dedicated transport and that mere shifting of TIC costs to other rate elements is inadequate.⁽⁹⁴⁹⁾ WorldCom also argues that rates based on forward-looking costs will not be revenue neutral, and incumbent LECs should not be guaranteed recovery of all residual costs.⁽⁹⁵⁰⁾

83. Several parties address the possible relationship of the TIC to universal service. WITA argues that the TIC is an implicit support mechanism for rate-of-return LECs that should be included in the federal universal service support mechanism for rate-of-return LECs.⁽⁹⁵¹⁾ The Texas Public Utility Counsel argues that increased levels of universal service support should be used to offset the amount of the TIC that is earmarked for phase-out.⁽⁹⁵²⁾ Time Warner, on the other hand, argues that the Commission should not attempt to transfer costs currently recovered through the TIC to universal service because there is no evidence supporting such a decision. Such a decision would be inconsistent with the Joint Board's recommendation that universal service funding should be determined on a forward-looking cost basis.⁽⁹⁵³⁾

84. Several parties address the need to adjust PCIs and SBIs if reallocation of TIC costs are permitted or required. BellSouth and BA/NYNEX, for example, state that if the Commission authorizes reassignment of TIC costs, it must permit incumbent LECs to adjust the TIC SBI and other relevant SBIs to ensure they have an opportunity to recover the reassigned costs.⁽⁹⁵⁴⁾ In a similar vein, Aliant advocates exogenous cost increases for specific service categories in the trunking basket so that incumbent LECs can recover TIC costs to the extent the market permits.⁽⁹⁵⁵⁾

85. Tandem Switching Costs. USTA and the majority of the incumbent LECs assert that the tandem switching revenue requirement being recovered through the TIC should be reassigned and recovered through tandem switching rates.⁽⁹⁵⁶⁾ USTA estimates this component of the TIC to be $400 million, or 12.93% of total industry TIC revenues.⁽⁹⁵⁷⁾ Ameritech contends that this reassignment would be consistent with CompTel v. FCC and would allow incumbent LECs to increase their tandem switching rates to economically rational levels given available market substitutes.⁽⁹⁵⁸⁾ NECA states that the tandem-switching costs currently assigned to the TIC can be identified and could be assigned to the tandem-switching rate element, thereby reducing the TIC and increasing tandem-switching revenue for NECA traffic-sensitive pool members by $15.1 million.⁽⁹⁵⁹⁾

86. Cable & Wireless contends that 80 percent of the interstate tandem switching revenue requirement was allocated to the TIC, as distinguished from interstate tandem switching costs. Cable & Wireless asserts that state commissions have found that the incumbent LEC's LRIC of tandem switching is far below even the 20 percent rate that the Commission set and that it is therefore doubtful that any of the TIC should be allocated to tandem switching on a forward-looking cost basis.⁽⁹⁶⁰⁾ Cable & Wireless alleges that the tandem-switching revenue requirement consists, in large part, of overhead and subsidies placed on tandem switching during the "equal charge" era. Cable & Wireless asserts that the Commission should not ignore actual cost data showing tandem-switching costs to be far less than the revenue requirement indicates.⁽⁹⁶¹⁾

87. Sprint urges that the Commission not reassign the balance of the tandem switching revenue requirement from the TIC to the tandem switching rate element. It contends that a tandem switching rate that recouped the entire revenue requirement might reduce tandem switching revenues for incumbent LECs because these rates would be so high that the use of tandem switching would be uneconomic for IXCs. In addition, Sprint asserts that the existing tandem switching rates reflect a much higher than reasonable allocation of overhead costs. The tandem switching rate should, according to Sprint, be based on TELRIC costs and should be similar to today's tandem switching charges.⁽⁹⁶²⁾

88. SS7 costs. USTA and incumbent LECs contend that the Commission should identify the portion of the tandem revenue requirement that recovers the costs of SS7 signal transfer points ("STPs") and the costs of the links between service switching points ("SSPs") and STPs. These costs are associated with providing FGD service and are currently recovered as part of the TIC. USTA asserts that they should be recovered through existing SS7 rate elements.⁽⁹⁶³⁾ USTA estimates this component of the TIC to be $58.7 million, or 1.89 percent of total industry TIC revenues.⁽⁹⁶⁴⁾ BellSouth asserts that the FCC should remove from the TIC the portion of common channel signaling costs that are booked to Category 2 tandem switching and that these costs should be recovered through new rate elements.⁽⁹⁶⁵⁾ U S West argues that the costs associated with SS7 signalling should be recovered through transport charges.⁽⁹⁶⁶⁾

89. Tandem-Switched Transport Transmission Rate Setting. Most incumbent LECs support a modified tandem-switched transport transmission rate structure that includes: (1) assessment of the SWC-to-access tandem portion as dedicated transport (which includes the cost of DS3/DS1 multiplexing at the tandem office) measured from the SWC to the access tandem; (2) assessment of the access tandem-to-end office portion as tandem-switched transport measured from the access tandem to end office; and (3) the assessment of a multiplexer charge between the access tandem and end office. Incumbent LECs generally assert that the TIC includes the costs of the Commission having adopted a less efficient interim transport rate structure. USTA and incumbent LECs argue that the rates for tandem-switched transport transmission must be increased to reflect the costs of this revised rate structure, thereby shifting costs from the TIC.⁽⁹⁶⁷⁾ According to USTA, these changes will result in rates that more accurately capture a LEC's actual costs of providing tandem-switched transport service.⁽⁹⁶⁸⁾

90. Many incumbent LECs also argue that the 9000 MOU assumption should be eliminated in favor of actual MOU levels, contending that actual usage is far less than 9000 MOUs. Among the estimates of actual usage are: U S West, 5700;⁽⁹⁶⁹⁾ NECA, approximately 4500;⁽⁹⁷⁰⁾ GTE, 5300;⁽⁹⁷¹⁾ and ALLTEL, approximately 4000.⁽⁹⁷²⁾ NECA states that it would develop a MOU figure that more closely corresponds to the actual rural, low-usage characteristics of its traffic-sensitive pool members, and base its tariff rates on that figure.⁽⁹⁷³⁾ Minnesota Independent Coalition asserts that the assumed monthly usage of 9000 MOU per transport circuit is unrealistic for low volume, rural routes.⁽⁹⁷⁴⁾

91. WorldCom asserts that actual fill factors, in MOUs per month, on a given transmission facility, are irrelevant; rather, the fill factors that would represent efficient network deployment are far more relevant.⁽⁹⁷⁵⁾

92. Host-Remote Trunking Rate. USTA and incumbent LECs state that for service to a remote switch, the tandem-switched transport transmission fixed and per mile/per MOU charge applies for transport between the host and remote switch, but that only a portion of the host/remote revenue requirement is recovered through these rates. They state that the difference is included in the TIC. USTA argues that the costs specific to host/remote transport that are in the TIC should be included in the tandem-switched transport rates because those rate elements are currently applied to host/remote connections.⁽⁹⁷⁶⁾ USTA estimates this component of the TIC at $160.5 million, or 5.17 percent of total TIC revenues.⁽⁹⁷⁷⁾

93. NECA submits that incumbent LECs install host-remote facilities because these facilities are cheaper than installing a separate end office switch at the remote location. Because the host-remote transport facilities are not dedicated to any particular user, NECA contends that the costs should be removed from the TIC and assigned to the local switching element.⁽⁹⁷⁸⁾ NECA states that assigning these revenues, instead, to the costs of tandem-switched transport would disproportionately raise tandem switched transport rates.⁽⁹⁷⁹⁾

94. DS1/voice-grade multiplexer costs. USTA and incumbent LECs state that analog switches do not have direct DS1 interfaces and, as such, require a combination of trunk unit ports and a DS1/voice grade multiplexing function to take the traffic to the DS0 level to be switched. Incumbent LECs state that in the analog switching environment, the costs of multiplexing from the DS1 to DS0 level have been assigned primarily to transport, while in the digital switching environment, this function is incorporated in the switch and is assigned to local switching. They assert that the costs of these analog multiplexers were not included in the special access formulas used to derive switched transport rates and are thus included in the TIC. USTA contends that these analog multiplexer costs should be associated with the switching function and assigned to the Local Switching category.⁽⁹⁸⁰⁾ NECA states that assigning analog multiplexing costs to the local switching rate element would make the assignment of analog multiplexing costs consistent with the assignment of costs associated with this function in digital switches.⁽⁹⁸¹⁾ USTA indicates that analog switches account for approximately 25 percent of the RBOC lines in service.⁽⁹⁸²⁾ USTA estimates the "Analog End Office Trunk Switch Ports" component of the TIC at $138.4 million or 4.46 percent of total TIC revenues.⁽⁹⁸³⁾

95. Cable & Wireless asserts that the costs of analog multiplexers are imposed by direct-trunked transport customers; therefore the costs should be built into the direct-trunked transport rate elements, or a separate DS1:DS0 multiplexing element should be added for direct-trunk transport customers.⁽⁹⁸⁴⁾

96. Use of special access rates to establish Direct-Trunked Transport Rates. USTA and many incumbent LECs contend that the TIC results in large part from the fact that the transport rate restructure order repriced switched transport services based on special access high-cap rates despite the fact that, in the past, switched access and special access rates were derived very differently.⁽⁹⁸⁵⁾

97. USTA explains that the local transport equal charge rates were derived from a revenue requirement that was the result of the Commission's Part 36 and 69 cost allocation rules on investments and expenses. This mandated cost allocation process predominantly used general categorizing and averaging of costs across geographic areas, technologies, services, and jurisdictions.⁽⁹⁸⁶⁾ Plant investment was the primary driver because expenses generally followed the allocation of the plant. Because there were basically only two rate elements for switched local transport (the per-minute termination charge and the per-minute facility charge), the rates could deviate very little, if at all, from the rate levels resulting from the cost allocation rules. Special access rates, on the other hand, were more heavily based on a unit investment approach which more specifically identified the actual plant used for each service. The unit investments were then used as a basis for loading overheads. In addition, under the cost allocation process, high capacity facilities could be directly assigned to the special access category.⁽⁹⁸⁷⁾

98. USTA therefore asserts that when the transport rate restructure set switched transport rates based on special access rates, the TIC represented the difference in revenues between the two pricing schemes and the differences in the costing methodologies used for each service in the past. The TIC, therefore, represents the averaging of costs across technologies, geographies, services, and jurisdictions that were inherent in the old cost allocation rules that determined the equal charge rates.⁽⁹⁸⁸⁾ According to USTA, a detailed direct cost approach demonstrates that the cost allocation rules assign more investment to transport than is actually used in providing the service. The difference in costs is currently in the TIC, even though the costs are actually incurred to provide local services, intrastate services, and/or interstate services other than local transport.⁽⁹⁸⁹⁾ USTA estimates this "transport averaging, cost allocations, and cost recovery" component of the TIC at $1.16 billion, or 37.27 percent of the total TIC revenues.⁽⁹⁹⁰⁾

99. USTA and incumbent LECs argue that changes to this structure will require Joint Board action, and that until such action can be taken, these TIC components should be removed from the per-MOU TIC rate and should be bulk-billed to IXCs based on interstate revenues or minutes.⁽⁹⁹¹⁾

100. USTA alleges that part of the TIC also represents circuit equipment and cable and wire facilities serving longer haul traffic that have an embedded Part 36 cost many times greater than that based on a special access costing methodology. According to USTA, the cost of hauling traffic to scattered local switches in remote areas is much greater than that of hauling the same amount of traffic in larger cities at special access rates. The cost difference is part of the TIC.⁽⁹⁹²⁾ Citizens Utilities argues that circuit termination costs could be directly assigned for jurisdictional purposes, but that Part 36 requires that circuit equipment be allocated to categories based on average cost per termination.⁽⁹⁹³⁾ USTA estimates that the investment in interexchange cable and wire is $37.4 million, or 1.21 percent of the total TIC revenues.⁽⁹⁹⁴⁾

101. U S West contends that the cost of interexchange facilities per unit of traffic in sparsely populated areas is several times more than the cost of exchange facilities in densely populated areas. U S West argues that this is part of the reason why special access is less expensive per unit of traffic than transport, and accounts for most of the TIC not attributable to other factors listed in U S West's comments.⁽⁹⁹⁵⁾ NECA argues that many of its pool participants do not have high-capacity DS1 or DS3 special access services throughout their service areas because they have no customers that require these services. NECA submits that the areas without demand for DS1 or DS3 special access services have higher transport costs than those areas that do have these services. NECA suggests that the Commission discontinue its reliance on special-access transport rates as a surrogate for local transport costs; NECA would then develop cost-based transport rates and file them in access tariffs.⁽⁹⁹⁶⁾ Aliant asserts that a significant portion of the TIC results from the fact that special access is primarily an urban service while switched transport is primarily a rural service. Aliant states that approximately 77 percent of Aliant's DS1 special access revenue is located in Lincoln, Nebraska, while 79 percent of Aliant's tandem-switched transport and 58 percent of Aliant's DS1 direct-trunked transport revenue is located outside of Lincoln.⁽⁹⁹⁷⁾

102. Cable & Wireless argues that special access is generally less costly than direct-trunked transport because special access, unlike direct-trunked transport, generally is limited in use to low-cost urban areas. Cable & Wireless contends that the additional costs of direct-trunked transport should be removed from the TIC.⁽⁹⁹⁸⁾

103. Central Office Equipment Maintenance Expenses. USTA and incumbent LECs argue that the Part 36 and Part 69 rules overstate the assignment of COE maintenance expenses to the TIC.⁽⁹⁹⁹⁾ USTA states that by separating COE maintenance expenses on the basis of the combined COE investment, a mismatch occurs to the extent that the expenses associated with maintaining the investment are apportioned differently than the investment being maintained. This results in a portion of COE maintenance expense for local and operator switches being allocated in Part 69 to Common Line, Transport, and Special Access, where there is no switch investment to maintain.⁽¹⁰⁰⁰⁾ USTA estimates COE Maintenance Misallocations at $101.8 million, or 3.28 percent of the TIC.⁽¹⁰⁰¹⁾ According to USTA, a more cost-causative approach would be to separate the central office expenses based on the separation of the investment being maintained.⁽¹⁰⁰²⁾

104. To accomplish this modification, USTA proposes to modify sections 36.321 and 69.401(b).⁽¹⁰⁰³⁾ USTA states that COE switching expenses should be assigned to the Transport elements based on a relationship of interstate tandem switching investment assigned to the Transport element to total Part 69 interstate switching investment, with the remainder being assigned to local switching. According to USTA, COE operator expenses should be assigned to information, interexchange and operator transfer elements based on the relative relationships from assignment of the operator investment to these elements. By using the above-described approaches, USTA states that costs will be removed from the common line, access and transport elements and will be reassigned to the switching element.⁽¹⁰⁰⁴⁾ USTA claims, however, that these changes will require Joint Board action and, until such action can be taken, these TIC components should be removed from the per-MOU TIC rate and should be bulk-billed to IXCs based on interstate revenues or minutes.⁽¹⁰⁰⁵⁾

105. Cable & Wireless argues that, to the extent that these costs are not related to facilities-based transport, they should be moved out of the TIC and, to the extent that they are NTS, they should be recovered as part of the per-line or per-port local switching costs.⁽¹⁰⁰⁶⁾

106. Use of Circuit Terminations in Separating Costs Between Private Line and Message Services. USTA asserts that Part 36.126 assigns interexchange trunk investment to message joint, interstate private line, and intrastate private line categories and allocates these costs based on the average cost per circuit termination. USTA states that the costs in interexchange circuit equipment categories, except message joint, are jurisdictionally pure and could be directly assigned to jurisdictions if it were permitted by the Part 36 Rules. For the message joint investment classification, traffic usage factors determine the final jurisdictional allocation. USTA states that the distribution of costs to categories and jurisdictions based on direct identification would reduce the TIC by reassigning costs to intrastate and interstate.⁽¹⁰⁰⁷⁾ USTA estimates that the use of circuit Termination Counts misallocates $630.66 million to the TIC, or 20.33 percent of the TIC.⁽¹⁰⁰⁸⁾

107. Frederick & Warinner argues that differences in the definition of circuit terminations when allocating costs between switched and special access contribute to the TIC, resulting in costs being over-allocated to message trunking facilities and under-allocated to special access. Frederick & Warinner proposes an "equivalent termination count" be used for message circuit equipment in COE Category 4.23 in order to more appropriately reflect how CO transmission costs are incurred.⁽¹⁰⁰⁹⁾ Frederic & Warinner generated an "equivalent termination count" based on the ratio of tariffed rates. Using the ratio of NECA's DS1 channel termination rate to the DS0 channel termination rate gives a weighting of 5.2. According to Frederick & Warinner, changing terminations in this way would (1) allocate more costs to special access and less to switched access; (2) bring special access rates closer to those determined by LRIC cost studies; (3) reduce the message toll costs being allocated to various transport elements; and (4) increase the tandem-switched termination rate (using special access rates divided by assumed MOU), thereby reducing the revenue requirement to be collected in the TIC.⁽¹⁰¹⁰⁾

2. Market-Based Approaches

108. The incumbent LECs generally support continued recovery of all remaining sums in the TIC after reassigning any identifiable TIC costs to other services. USTA and incumbent LEC parties state that, to a large extent, the TIC reflects costs that the separations and access charge rules assign to interstate local transport.⁽¹⁰¹¹⁾ While USTA and incumbent LEC parties state that it is possible to identify the cause of only a portion of the costs included in the TIC,⁽¹⁰¹²⁾ this does not suggest that only a portion of the TIC should be recovered in a post-access reform environment.⁽¹⁰¹³⁾ Ameritech asserts that a large part of the TIC contributes to the incumbent LECs' ability to maintain affordable basic exchange rates.⁽¹⁰¹⁴⁾ Incumbent LEC parties assert that the TIC represents actual costs that have been assigned to the interstate jurisdiction, and that companies are entitled to recovery of the amount currently assigned to the TIC.⁽¹⁰¹⁵⁾ Evans et al. submits that rate-of-return LECs are recovering jurisdictionally interstate, actual transport costs under the current system, and that any changes to the rate structure must allow continued recovery of the actual, defined revenue requirement.⁽¹⁰¹⁶⁾ Roseville Tel. states that the remaining TIC costs result from Part 36 rules and should be reassigned to the Interstate Special Access, Interstate Local Switching and intrastate jurisdictions.⁽¹⁰¹⁷⁾

109. ALTS and ACSI argue that once readily-correctable misallocations are removed, market-based forces should be relied upon to reduce any remaining TIC.⁽¹⁰¹⁸⁾ Spectranet asserts that the need for a transition period applies as much to new entrants as it does for incumbent LECs because the immediate flash-cutting of access rates to LEC cost will undermine the basis upon which new entrants were planning to enter the local exchange business.⁽¹⁰¹⁹⁾

110. Several parties allege that a Federal-State Joint Board pursuant to section 410(c) is required before the TIC can be fully eliminated. NARUC states that solving the TIC issue requires Joint Board action prior to action by the FCC.⁽¹⁰²⁰⁾ USTA and incumbent LEC parties assert that many of the changes necessary to eliminate the TIC will require Joint Board action.⁽¹⁰²¹⁾ Frontier states that the FCC should promptly convene a Joint Board to address these issues on a schedule that coincides with the timetable for proposed phase-out of the TIC.⁽¹⁰²²⁾ Until such action can be taken, these incumbent LEC parties argue that the remaining TIC components should be removed from the per-MOU TIC rate and should be bulk-billed to IXCs based on interstate revenues or minutes.⁽¹⁰²³⁾ Ameritech asserts that the remainder of the TIC should be billed to interstate providers of telecommunications services in a competitively neutral manner on a flat-rate basis.⁽¹⁰²⁴⁾ Roseville Tel. asserts that the remaining portion of the TIC should be recovered through a "Separations Cost" rate element, at least until a Joint Board reforms the separations rules. Roseville Tel. states that this will allow recovery of properly-incurred costs by an explicit mechanism applied equally to all cost-causers (i.e., users of interstate access services).⁽¹⁰²⁵⁾ NECA and TDS contend that incumbent LECs should continue to collect the balance of the TIC through a smaller TIC-type charge or through alternative collection arrangement such as bulk-billing. They state that this charge would continue to be collected pending Joint Board action to change the separations rules.⁽¹⁰²⁶⁾

111. BA/NYNEX states that there are two interim solutions to sums remaining in the TIC pending separations changes. First, residual TIC amounts could be recovered from IXCs based on their proportionate share of LEC interstate access minutes. Second, LECs could recover any residual TIC on a per-presubscribed line basis to the IXCs. For price cap purposes, any TIC residual should be in the trunking basket and LECs should be allowed to target price cap reductions to this element. Pending separations changes, these mechanisms would be easy to administer, would not unduly burden the IXCs and would enable the LEC to reduce the amounts at issue through targeting of price cap reductions.⁽¹⁰²⁷⁾ BA/NYNEX asserts that the remaining costs recovered through the TIC are primarily NTS and, therefore, should be recovered through a flat-rate charge. According to BA/NYNEX, such flat rate charges would resemble the charges states have adopted for UNEs, would reduce the arbitrage problem, because incumbent LECs would no longer have to charge high per-minute rates compared to the rates for UNEs, and would, when combined with the rates for local telephone lines and the EUCL charge, come close to the UNE rates for local loops and switches in many instances.⁽¹⁰²⁸⁾

112. Several incumbent LECs propose specific mechanisms to recover any remaining TIC costs. U S West recommends that TIC costs that cannot be reassigned to other access rate elements, or are not reassigned pursuant to separations reform, be recovered, at least in part, through increased end user common line charges. U S West also suggests that we establish a separate fund similar to the universal service fund, with IXCs contributing to the fund on a flat-rate basis equal to their percentage share of switched access MOU. U S West further recommends revising the price cap rules to establish a formula for a flat-rated TIC.⁽¹⁰²⁹⁾ SWBT proposes establishing a "Public Policy" rate element containing the costs associated with providing transport facilities and services to low-volume, rural areas and a significant portion of tandem switching costs.⁽¹⁰³⁰⁾

113. In a similar vein, GTE proposes permitting incumbent LECs to recover any remaining TIC costs through a flat-rate "regulatory policy cost recovery" charge.⁽¹⁰³¹⁾ Under GTE's proposal, incumbent LECs would submit separations-based cost studies to the FCC showing the amount of marketing expense erroneously assigned to the interstate jurisdiction under existing FCC rules and residual TIC revenue requirement remaining after reallocation of specific costs to other rate elements.⁽¹⁰³²⁾ Under GTE's plan, incumbent LECs would make corresponding adjustments to their newly-created "Network Services basket" PCI to reflect removal of marketing expenses and reassignment of TIC costs to other access elements. GTE's regulatory policy cost charge would be assessed on a bulk-billed basis to all telecommunication carriers that purchase interstate switched access, transport and network facilities used to provide interstate services from incumbent LECs. GTE asserts that the method is fair because it charges all carriers using incumbent LEC networks.⁽¹⁰³³⁾ GTE submits that the regulatory policy charge should be capped at its initial value for one year, although an incumbent LEC would be permitted to charge less than the initial value. GTE argues that the regulatory policy charge should not be subject to price cap regulation because it is an explicit subsidy recovery and not representative of specific services provided to customers. Annual adjustments to the regulatory policy charge would be limited to the changes in costs allocated to the interstate jurisdiction that are being recovered by this charge.⁽¹⁰³⁴⁾

114. Teleport states that once the review of incumbent LEC switched access costs has been completed, the Commission will be able to determine what costs, if any, should remain in the TIC, and how any unrecovered costs can be recovered. Teleport recommends that any residual amounts be recovered through a uniform surcharge on all related rate elements subject to competition, which will ensure that the charges are cost based.⁽¹⁰³⁵⁾ Subsequently, Teleport clarified that it believed that the TIC should not be assessed on carriers that do not use incumbent LEC transport facilities.⁽¹⁰³⁶⁾ Sprint and Time Warner also recommend that the Commission preclude incumbent LECs from assessing the TIC on traffic that is carried to or from incumbent LEC end offices on the facilities of a competitor because that would require CAPs to pay for the costs of their competitors' services.⁽¹⁰³⁷⁾

115. Time Warner argues that the Commission should reject incumbent LEC proposals to establish a separate recovery mechanism, such as bulk billing, to preserve incumbent LEC revenue requirement recovery because they would reinstate the largely discredited rate base, rate-of-return regulatory structure and its associated harmful incentives.⁽¹⁰³⁸⁾

116. Several parties commented on pricing flexibility as a vehicle to address costs in the TIC. Aliant argues that after incumbent LECs shift TIC amounts into the appropriate existing or new rate elements, LECs should have the flexibility to shift any remaining TIC amounts into Transport and Tandem Switched zones, noting that this would allow the market to determine if these costs are recoverable.⁽¹⁰³⁹⁾ Cable & Wireless states that TIC deaveraging would be acceptable once the charge is purged of inappropriate costs, provided that deaveraging is based on differences in the remaining costs. Cable & Wireless argues that incumbent LECs should not be allowed to recover revenue via the TIC in order to ensure revenue-neutrality in a regulatory environment intended to be devoid of implicit subsidies.⁽¹⁰⁴⁰⁾ If deaveraging is permitted, Cable & Wireless contends that the Commission should ensure that all incumbent LECs deaverage in a consistent manner using geographic zones demarcated by actual cost differences, e.g., cost differences for an efficient local exchange provider using forward-looking technology. Cable & Wireless notes that every study area may not include all zone types, and there may be a need for more than three zones to minimize residual averaging within zones.⁽¹⁰⁴¹⁾ To the extent that direct-trunked transport rates understate the costs of transport in less-dense areas because they are based on special access rates in high-density areas, Sprint states that the Commission could allow density-based deaveraging of direct-trunked transport rates without the constraints that presently exist.⁽¹⁰⁴²⁾

117. TCA argues that incumbent LECs should be given greater flexibility to add rate elements or change rates as portions of the TIC are more clearly identified.⁽¹⁰⁴³⁾ On the other hand, TRA opposes giving the incumbent LECs any significant flexibility as part of any associated transition.⁽¹⁰⁴⁴⁾

3. Approaches that Eliminate or Phase Out the TIC

118. Several parties contend that the TIC should be eliminated totally, or that any TIC amounts remaining after making any reallocations warranted by the record should be eliminated. MCI contends that there is no reason for the TIC once access cost elements are set to recover economic cost.⁽¹⁰⁴⁵⁾ MCI argues that the TIC is an uneconomic, unnecessary, make-whole charge that should be eliminated. Moreover, MCI alleges that there is no basis for reallocating some of the TIC amount and renaming the rest the "public policy" rate element, which will force new entrants to pay an indefensible subsidy to their competitors.⁽¹⁰⁴⁶⁾ MCI argues that Part 36 allocates incumbent LEC expenditures, not costs. MCI suggests that it is likely incumbent LEC spending is not at the economically efficient level, given the current absence of effective competition and the price cap plan that does not effectively pass through to ratepayers changes in incumbent LEC costs. MCI states that the Hatfield model indicates that the incumbent LECs' spending is approximately $10 billion above their true costs.⁽¹⁰⁴⁷⁾ Furthermore, MCI contends that the Hatfield model shows that incumbent LECs are not charging less than cost to provide local service.⁽¹⁰⁴⁸⁾

119. AT&T recommends eliminating the TIC immediately, suggesting that phasing the TIC out over some period might be inconsistent with the court's mandate in CompTel v. FCC. AT&T also asserts that the 1996 Act requires access to be priced at TELRIC levels, and contends that anything other than an immediate elimination of the TIC would violate that requirement.⁽¹⁰⁴⁹⁾ AT&T also argues that the TIC should be eliminated immediately because: (1) the current per-minute TIC raises long distance rates above economic levels and restricts long distance usage, to the detriment of consumers ;⁽¹⁰⁵⁰⁾ (2) the 1996 Act requires the Commission to remove implicit subsidies from access, and to price access at TELRIC;⁽¹⁰⁵¹⁾ (3) the TIC is anticompetitive and inconsistent with the Act's competitive goals because (a) it guarantees incumbent LECs recovery of transport "costs," even when their networks are not used;⁽¹⁰⁵²⁾ and (b) it distorts competition by allowing incumbent LECs to price transport facilities below cost and thus below competitors' prices; and (4) the Court of Appeals has admonished the Commission to move expeditiously to a cost-based alternative or provide a reasoned explanation of why a departure from cost-based ratemaking is necessary, and no such justification exists here.⁽¹⁰⁵³⁾

120. CompTel asserts that the TIC should immediately be set to zero because by definition, it does not include any costs that will not be recovered by TSLRIC-based rates for other access elements.⁽¹⁰⁵⁴⁾ Similarly, LCI argues that access charges should be priced using TELRIC method, and that the TIC should be eliminated as a non cost-based residual revenue stream that is at odds with the movement to cost-based pricing.⁽¹⁰⁵⁵⁾ NCTA also argues that the TIC should be eliminated immediately.⁽¹⁰⁵⁶⁾ Telco Communications Group advocates reassigning the easily identifiable costs to facility-based elements and phasing out the balance of the TIC. The TIC allows the incumbent LECs to price access below cost and recover the shortfall, regardless of whether the incumbent LEC provides transport facilities to the carrier paying the TIC or not. As a result, Telco Communications Group says a collocated transport provider must meet or beat the incumbent LEC prices and pay the TIC as well.⁽¹⁰⁵⁷⁾ TRA contends that costs in excess of forward-looking economic costs should be eliminated.⁽¹⁰⁵⁸⁾

121. ACC Long Distance contends that the TIC should be eliminated over a well- defined period of no more